DOD 

COMMISSARIES 

AND EXCHANGES

Plan and Additional 

Information Needed

on Cost Savings and 

Metrics for DOD

Efforts to Achieve 

Budget Neutrality

Accessible Version

Revised November 14, 2016 to correct pages 17-18 (Recommendations for Executive 

Action). The corrected section should read: 'As DOD assesses potential cost savings 

under the Defense Resale Business Optimization Board or through other cost savings 

initiatives identified, we recommend that the Secretary of Defense, with assistance as 

necessary from the Director and Chief Executive Officer of the Defense Commissary 

Agency, the Director and Chief Executive Officer of the Army and Air Force Exchange 

Service, the Chief Executive Officer of the Navy Exchange Service Command, and the 

Marine Corps Exchange, take the following three actions'.

Report to Congressional Committees

November 2016

GAO-17-38

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-17-38, a report to 

congressional committees

November 2016

DOD COMMISSARIES AND EXCHANGES

Plan and Additional Information Needed on Cost 

Savings and Metrics for DOD Efforts to Achieve 

Budget Neutrality

What GAO Found

The Department of Defense’s (DOD) May 2016 report on commissaries and 

exchanges does not provide a plan for achieving budget neutrality, which DOD 

interprets as ending the use of appropriated funding for commissaries and 

exchanges by October 2018. The report states that DOD will not be able to 

achieve budget neutrality, but does not provide detailed information on why 

budget neutrality is not possible. According to the report, DOD cannot achieve 

budget neutrality without reducing patron benefits; however, the report does not 

include cost estimates, assumptions, or specific details about trade-offs or 

limitations that would clarify DOD’s conclusion that budget neutrality is not 

possible. Instead, DOD’s report states that DOD expects to achieve an estimated 

$2 billion in reductions over a 5- year period from fiscal year 2017 through fiscal 

year 2021. However, the report does not include any assumptions, a 

methodology, or specific time frames related to cost savings initiatives that would 

lead to the $2 billion savings. According to DOD officials, the cost savings 

amount was an arbitrary estimate, and they did not develop details on the steps 

they would take to achieve $2 billion in savings. Without information to support 

DOD’s conclusion related to achieving budget neutrality and a plan for achieving 

an alternative reduction in cost savings, the department lacks the assurance that 

its cost savings target is an accurate and achievable cost savings estimate, and 

decisionmakers cannot evaluate the effectiveness of DOD’s efforts to achieve 

cost savings without reducing patron benefits.

GAO’s analysis found that DOD’s report fully addresses three of the seven 

mandated elements and partially addresses the remaining four. Although DOD’s 

report discusses the seven mandated elements, GAO found that including 

additional information would have made the report more consistent with relevant 

generally accepted research standards and would have made the report more 

useful to decision makers. For example, the report did not fully include 

information about assumptions and anticipated cost savings associated with 

establishing common business processes at commissaries and the exchanges. 

According to DOD officials, DOD is in the early stages of developing efforts that 

could include an estimated cost savings target, and DOD did not have time to 

include additional information in the report.

In addition, GAO found that DOD’s report discusses the three mandated 

benchmarks for customer satisfaction, quality of products, and patron savings 

but does not define specific metrics for each of the benchmarks. For example, 

DOD has not defined customer satisfaction relative to maintaining a “high level” 

of satisfaction or determined what results would qualify as meeting that 

benchmark. In another example, DOD has not determined whether the 

commissaries and exchanges are to use the last available savings rate or the 

average savings rate over the past 5 years as the metric for a sustained patron 

savings rate. Without specific metrics to assess the mandated requirements 

related to customer satisfaction, product quality, and patron savings, DOD 

cannot effectively assess its performance in meeting the benchmarks for 

View GAO-17-38. For more information, success.

contact Brian J. Lepore at (202) 512-4523 or 

leporeb@gao.gov.

Why GAO Did This Study

Given budget constraints, DOD is 

reviewing opportunities for efficiencies 

in its commissaries and exchanges, 

which provide reduced- price groceries 

and services for the military 

community. In fiscal year 2015, $1.3 

billion in appropriated funds were used 

for DOD commissaries and exchanges. 

The National Defense Authorization 

Act for Fiscal Year 2016 mandated that 

DOD report on its plan for budget 

neutrality, and included a provision for 

GAO to assess DOD’s report.

GAO evaluated the extent to which 

DOD’s report (1) includes a plan to 

achieve budget neutrality and (2) 

addresses seven mandated elements 

and three mandated benchmarks to 

ensure the maintenance of customer 

satisfaction, quality of products, and 

savings that commissary and 

exchange patrons are to realize.

GAO compared DOD’s report with the 

mandated elements and benchmarks, 

generally accepted research 

standards, and federal internal control 

standards, and interviewed DOD 

officials.

What GAO Recommends

GAO recommends that DOD provide 

information to Congress to support its

conclusion about budget neutrality; 

develop a plan for achieving alternative 

reductions to appropriations; and 

identify specific metrics for customer 

satisfaction, product quality, and 

savings. DOD concurred with GAO’s 

recommendations. 
Letter 1

Page i GAO-17-38 DOD Commissaries and Exchanges

Background 4

DOD’s Report Does Not Include a Plan to Achieve Budget 

Neutrality 6

DOD’s Report Fully Addresses Some but Not All of the Mandated 

Elements, Does Not Include Some Information Consistent with 

Generally Accepted Research Standards, and Discusses the 

Three Benchmarks 9

Conclusions 17

Recommendations for Executive Action 17

Agency Comments and Our Evaluation 18

Appendix I: Comments from the Department of Defense 20

Appendix II: GAO Contact and Staff Acknowledgments 28

GAO Contact 28

Staff Acknowledgments 28

Appendix III: Accessible Data 29

Agency Comment Letter 29

Customer Satisfaction: .......................................................37

Maintaining High-Quality Products .....................................38

Sustainment of Patron Savings: .........................................38

Table

Table 1: Our Assessment of the Extent to Which DOD’s Report on 

Achieving Budget Neutrality Addresses the Mandate 

Elements and Includes Information About Generally 

Accepted Research Standards 11

Customer Satisfaction: .......................................................37

Maintaining High-Quality Products .....................................38

Sustainment of Patron Savings: .........................................38

Figure

Figure 1: Overall Savings Rates as Reported by the 

Commissaries and Exchanges During Fiscal Year 2010-

15 16

Customer Satisfaction: .......................................................37

Contents
Maintaining High-Quality Products .....................................38

Sustainment of Patron Savings: .........................................38

Page ii GAO-17-38 DOD Commissaries and Exchanges
Abbreviations

Page iii GAO-17-38 DOD Commissaries and Exchanges

DeCA Defense Commissary Agency 

DOD Department of Defense

MWR Morale, Welfare, and Recreation

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Page 1 GAO-17-38 DOD Commissaries and Exchanges

441 G St. N.W.

Washington, DC 20548

November 9, 2016

The Honorable John McCain

Chairman

The Honorable Jack Reed 

Ranking Member

Committee on Armed Services 

United States Senate

The Honorable Mac Thornberry 

Chairman

The Honorable Adam Smith 

Ranking Member

Committee on Armed Services 

House of Representatives

The Department of Defense (DOD) operates commissary and exchange 

systems for servicemembers, retirees and their families to provide 

reduced-priced groceries, household goods and services.1 However, the 

long-term fiscal challenges facing the United States and recent budgetary 

constraints have created new incentives for DOD to assess its approach 

for managing the commissaries and exchanges. Congress identified $1.3 

billion in fiscal year 2015 to help fund the operations of the commissaries2

but has expressed interest in reducing the resources spent on them.3

Congress also identified about $0.2 billion in fiscal year 2015 to help fund 

transportation costs of the military services’ exchanges, although the 

exchanges rely primarily on revenue from sales to sustain their 

 

1 The commissaries provide reduced-priced groceries and household goods to military 

personnel, retirees, and their families. The exchanges also provide retail goods and 

services as well as some groceries similar to the commissaries.

2 The Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, appropriated $1.7 

billion for the Defense Working Capital Fund. The Joint Explanatory Statement 

accompanying the Consolidated Appropriations Act, 2016, indicated that $1.4 billion of 

that amount was for the Defense Commissary Agency (DeCA) in fiscal year 2016.

3

10 U.S.C. § 2483(b) requires that appropriated funds be used to cover the expenses of 

operating commissary stores and central product processing facilities of the defense 

commissary system. In fiscal year 2015, DeCA’s total annual sales were about $5.5 

billion.

Letter
operations.

Page 2 GAO-17-38 DOD Commissaries and Exchanges

4

In February 2016, in an effort to identify efficiencies at 

commissaries and exchanges, DOD established the Defense Resale 

Business Optimization Board to help implement reforms within and 

among the commissary and exchange systems.

There have been recent studies that recommended changes to the 

commissaries and exchanges through reform, consolidation, and the use 

of private sector practices, partly because private sector establishments 

provide similar retail services.5 Section 651 of the National Defense 

Authorization Act for Fiscal Year 2016 mandated DOD to provide a 

comprehensive plan to achieve “budget neutrality,” which DOD 

interpreted as ending the use of appropriated funding for commissaries 

and the military exchange system, by October 1, 2018.6 The mandate 

required DOD to include seven specific elements in its plan and ensure 

that the plan met three benchmarks to maintain certain benefits provided 

by the commissaries and exchanges. Additionally, section 651 authorizes 

DOD to conduct pilot programs to evaluate the feasibility and advisability 

of processes and methods for achieving budget neutrality, and establish 

specific measurable benchmarks regarding the maintenance of certain 

benefits. Section 651 also includes a provision for us to assess DOD’s 

report. We evaluated the extent to which DOD’s report (1) includes a plan 

to achieve budget neutrality, and (2) addresses the mandated elements in 

achieving budget neutrality and benchmarks to ensure the maintenance 

of customer satisfaction, quality of products, and savings that commissary 

and exchange patrons are to realize.

To evaluate whether DOD’s report included a plan to achieve budget 

neutrality, we reviewed information, including explanations related to 

budget neutrality and cost savings targets, provided in DOD’s report.7 We 

assessed the information and data against federal standards for internal 

control, which call among other things for an agency to have quality 

 

4

In fiscal year 2015, the exchanges’ total annual sales were about $9 billion. See 10 

U.S.C. § 2643(b). 

5 Boston Consulting Group, Military Resale Study, July 10, 2015 and Military 

Compensation and Retirement Modernization Commission (2015).

6 Pub. L. No. 114-92, § 651 (2015).

7 U.S. Department of Defense (DOD), Report on Plan to Obtain Budget Neutrality for the 

Defense Commissary System and the Military Exchange System, May 2016.
information to communicate with external parties and have relevant and 

reliable information to help management make informed decisions.

Page 3 GAO-17-38 DOD Commissaries and Exchanges

8 We 

also reviewed relevant information in the report compared with the best 

practices in project management related to the establishment of goals 

and time frames.9 We obtained documentary and testimonial evidence 

from DOD officials to determine the scope and status of cost savings and 

efficiency-related efforts and what actions, if any, DOD has taken as a 

result of the efforts.

To evaluate the extent to which DOD’s report addressed the mandated 

elements in its plan to achieve budget neutrality by October 2018 and the 

benchmarks to ensure the maintenance of customer satisfaction, quality 

of products, and savings that commissary and exchange patrons are to 

realize, we compared DOD’s report with the elements and benchmarks 

listed in section 651 of the National Defense Authorization Act for Fiscal 

Year 2016. To determine the extent to which DOD’s report addresses the 

elements in a plan required by the mandate, we developed a scorecard 

methodology based on the mandate’s requirements which enabled us to 

compare DOD’s report to those requirements. We considered an element 

to be “addressed” if DOD provided evidence that it addressed all aspects 

of the mandate in its report. We considered the element to be “partially 

addressed” if DOD provided evidence that it had addressed some 

aspects of the mandated element, and “not included” if DOD did not 

address any aspect of the element in its report. We also assessed the 

extent to which DOD’s report is consistent with relevant generally

accepted research standards for the development of a report, such as 

regarding the design of the report, including having baseline data, and a 

clear presentation of results that could be useful to decision makers.10 In 

 

8 GAO, Standards for Internal Control in the Federal Government, GAO-14-704G

(Washington, D.C., September 2014).

9 Project Management Institute, The Standard for Program Management © (Newtown 

Square, PA: 2006). 

10 Relevant generally accepted research standards are described in our 2006 report. See 

GAO, Defense Transportation: Study Limitations Raise Questions about the Adequacy 

and Completeness of the Mobility Capabilities Study and Report, GAO-06-938 

(Washington, DC: Sept. 20, 2006). We developed these standards by identifying and 

reviewing frequently occurring research standards in the research literature and DOD 

guidance (relevant for defense reviews such as DOD’s report on budget neutrality) that 

define a quality or complete report. 
addition, to assess the extent to which DOD’s report addresses mandated 

benchmarks to ensure the maintenance of customer satisfaction, quality 

of products, and savings that commissary and exchange patrons are to 

realize, we reviewed DOD’s report for information on these benchmarks. 

We also reviewed documents and methodologies supporting the 

information provided in the report, such as surveys used by commissaries 

and exchanges to track customer satisfaction and the quality of 

products.

Page 4 GAO-17-38 DOD Commissaries and Exchanges

11 To guide our assessment of mandated benchmarks, we 

identified generally accepted research standards for developing and 

completely identifying metrics and baseline data. We interviewed DOD 

officials at commissaries and the exchanges to understand DOD’s efforts 

to address mandated reporting elements and use surveys.

We conducted this performance audit from May 2016 to November 2016 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

DOD’s commissary and exchange systems are made up of the Defense 

Commissary Agency (DeCA) which manages DOD’s commissaries, the 

Army and Air Force Exchange Service, the Navy Exchange, and the 

Marine Corps Exchange. The commissaries provide reduced-price 

groceries and household goods to military personnel, retirees, and their 

families at over 200 stores worldwide. The exchanges also provide retail 

goods and services as well as some groceries similar to the 

commissaries at over 2,500 locations worldwide. Exchanges manage 

stores that sell clothing, furniture, military uniforms, packaged food, 

household goods, and appliances, as well as manage barber and beauty 

shops, florists, and provision of financial services.

 

11 An assessment of the quality of the data collected by the surveys was outside the 

scope of our review.

Background

Overview of Commissary 

and Exchange Systems
Although commissaries and exchanges provide some similar products as 

grocery and retail outlets in both the commercial and military setting, they 

operate under different business models. In addition, commissaries 

operate as entities funded through appropriations, while exchanges 

generally operate as non-appropriated fund entities. Specifically, 

commissary operating expenses are funded by appropriations.

Page 5 GAO-17-38 DOD Commissaries and Exchanges

12 DeCA 

received $1.3 billion in appropriated funds in fiscal year 2015. DeCA is 

required under law to establish the sales price at product cost,13 plus a 5 

percent surcharge worldwide at the point of sale.14 In fiscal year 2015, 

DeCA’s annual sales for its commissaries were approximately $5.5 billion.

As non-appropriated fund entities, the exchanges primarily rely on sales 

revenue to sustain operations and purchase products to be sold. The 

exchanges also received approximately $0.2 billion in congressional 

appropriations in fiscal year 2015 to help fund transportation costs to ship 

goods to overseas and remote locations as required by law.15 In fiscal 

year 2015, the exchanges’ annual sales totaled to about $11 billion. 

According to DOD’s report, as non-appropriated fund entities, the 

exchanges have greater latitude regarding their workforce and have 

greater financial and management control than commissaries.

According to DeCA and exchange officials, in addition to the reduced 

price goods and services that are required by law, the commissaries and 

exchanges provide other benefits to servicemembers, retirees and their 

families. For example, these officials said that DeCA and the exchanges 

provide employment preference to veterans, military spouses, and military 

family members, providing additional income for families and career 

 

12 10 U.S.C. § 2483(b).

13 DOD is required to establish the prices at commissaries at a level that will recoup the 

actual product cost, and the price is to be adjusted to cover the cost of first destination 

commercial transportation within the United States, and the actual or estimated cost of 

shrinkage, spoilage and pilferage. 10 U.S.C. § 2484(e).

14 Section 2484(d) of Title 10 of the United States Code requires the application of the 5 

percent uniform sales price surcharge on all sales at commissaries. DeCA can only use 

surcharge funds for specific types of activities, such as commissary construction, 

equipment, repair, software and maintenance. See 10 U.S.C. § 2484(h). See also DOD 

Directive DODI 1330.17, DOD Commissary Program (June 18, 2014).

15 See 10 U.S.C. § 2643(b).

Benefits That 

Commissaries and 

Exchanges Provide
opportunities during frequent military-mandated transfers. DOD’s report, 

which was released in May 2016, listed multiple additional benefits 

provided by DeCA and the exchanges, including support for small 

businesses, environmental stewardship, scholarships, and school lunch 

programs. For example, in 2015, DeCA helped expand employment 

opportunities to Wounded Warriors.

In addition, according to DOD policy, the exchanges also make dividend 

contributions to the associated service’s Morale, Welfare, and Recreation 

(MWR) activities, which provide quality-of-life benefits to military members 

and their families through a variety of recreation opportunities and 

community support programs. In fiscal year 2015, the exchanges 

generated about $259 million in dividends that supplemented MWR funds 

used to support the military community. The exchanges also support 

military communities in other ways. For example, Navy Exchange officials 

stated that, in July 2016, the Navy Exchange System provided goods and 

helped set up activities for the homecoming of the Truman Carrier Strike 

group after an extended deployment.

DOD’s report states that DOD will not be able to achieve budget 

neutrality, or fully eliminate the use of appropriated funds for the 

commissaries and exchanges, but does not provide detailed information 

supporting its conclusion that budget neutrality is not possible. Instead, 

DOD’s report states that it expects to achieve an estimated $2 billion in 

reductions over a 5-year period. This estimated reduction would be equal 

to an average of $400 million per year from fiscal year 2017 through fiscal 

year 2021, compared with about a $7 billion appropriation over the same 

period.

Page 6 GAO-17-38 DOD Commissaries and Exchanges

16 However, the report’s $2 billion cost savings target is not 

supported by data and information. For example, the report does not 

include assumptions, a methodology or time frames related to the cost 

savings initiatives that would lead to the $2 billion in cost savings.

DOD did not provide a plan to achieve budget neutrality by October 2018 

as mandated because according to the report, DOD cannot achieve 

budget neutrality without reducing savings to patrons or other benefits 

 

16 About $7 billion over a five-year period is based on the assumption that the Defense 

Commissary Agency (DeCA) continues receiving about $1.3 billion in appropriations 

annually. 

DOD’s Report Does 

Not Include a Plan to 

Achieve Budget 

Neutrality
provided by commissaries and exchanges. For example, the report stated 

that drastic changes, such as store closures and price increases, would 

have to be implemented if DOD were required to achieve budget 

neutrality. However, DOD did not provide additional information about 

potential steps to reach budget neutrality, such as cost estimates and 

assumptions, or include specific details about trade-offs, constraints and 

limitations to achieving budget neutrality such as reductions in benefits.

Instead of providing a plan, DOD estimated a $2 billion reduction over a 

5-year period, which would fall short of achieving budget neutrality by 

about $5 billion. DOD officials told us the cost savings amount was an 

arbitrary estimate, and that therefore DOD did not develop details on 

steps it would take to achieve the $2 billion in savings. DOD officials 

could not explain the assumptions, methodology, data, specific time 

frames or DOD efforts that would lead to the $2 billion in savings. For 

example, DOD officials stated that the department could not provide 

precise cost savings estimates until DeCA had implemented the pricing 

pilot programs.

Page 7 GAO-17-38 DOD Commissaries and Exchanges

17 However, the report did not provide additional 

information that the pricing pilots would lead to cost savings. Additionally, 

DOD officials told us that as the Defense Resale Business Optimization 

Board reviews cost saving options and conducts pilot programs, it 

expects to identify an alternate estimate for cost savings and efficiencies, 

but has not yet developed these targets or time frames for achieving 

them.18

According to best practices in project management, the establishment of 

clear, achievable objectives and time frames can help ensure successful 

 

17 Section 651(e) of the National Defense Authorization Act for 2016 authorizes DOD to 

conduct one or more pilot programs to evaluate the feasibility and advisability of 

processes and methods for achieving budget neutrality in the delivery of commissary and 

exchange benefits. The report describes piloting two different pricing options, such as 

private labeling and variable pricing that will help DeCA achieve efficiencies. Private label 

items are products generally intended to be comparable to and sometimes less expensive 

than name branded products and are commonly referred to as store brands. Variable 

pricing allows retailers to price goods to cover operating costs and capital expenditures 

and generate a profit.

18 Under Section 651, DOD is authorized to establish pilot programs for commissaries and 

exchanges that may help DOD achieve budget neutrality.
project completion.

Page 8 GAO-17-38 DOD Commissaries and Exchanges

19 Additional information that clarifies reasons why 

DOD cannot achieve budget neutrality, and includes a plan with goals 

and time frames related to the cost savings target, could help provide 

DOD additional assurance that it is pursuing efforts to improve efficiency 

and reduce the amount of appropriated funds used without a reduction in 

benefits. In addition, federal standards for internal control emphasize the 

need for federal agencies to establish plans to help ensure that goals and 

objectives can be met, including compliance with applicable laws and 

regulations. Further, according to federal standards for internal control, 

management should have quality information to communicate with 

external parties to help achieve its objectives and management should 

have relevant data from reliable internal and external sources that are 

reasonably free from error and bias and faithfully represent what they 

purport to represent. Without additional information to support DOD’s 

conclusion that DOD cannot achieve budget neutrality and a plan with 

targets and goals related to DOD’s efforts to reach an alternative 

reduction in cost savings, the department lacks assurance that its cost 

savings target is a feasible and accurate cost saving estimate, and 

decisionmakers cannot evaluate the effectiveness of DOD’s efforts in 

achieving cost savings without reducing patron benefits.

 

19 Project Management Institute, The Standard for Program Management © (Newtown 

Square, PA: 2006). 
Section 651 of the National Defense Authorization Act for Fiscal Year 

2016 mandated DOD to provide a report on a plan to achieve budget 

neutrality that includes seven mandated elements while meeting three 

benchmarks for maintaining patron benefits.

Page 9 GAO-17-38 DOD Commissaries and Exchanges

20 Our analysis found that 

DOD’s report meets the statutory requirement by addressing three of the 

seven mandated elements and partially addresses the remaining four. 

However, for four of the elements, we found that DOD did not include 

information on its planned steps to achieve estimated reductions that 

would make the report consistent with generally accepted research 

standards that define a quality or clear and complete study. In addition, 

we found that DOD’s report discusses the three mandated benchmarks 

by stating that the commissaries and exchanges use surveys to track 

customer satisfaction and the quality of products, and have annual patron 

savings rates.21

DOD’s report fully addresses three of the seven mandated elements and 

partially addresses the remaining four. DOD’s report includes descriptions

of (1) how DOD engaged with major grocery retailers, (2) the impact of 

changes in the commissary and exchange operations on MWR, and (3) 

recommendations for legislative actions to support efforts to achieve 

budget neutrality. For example, regarding engaging with major grocery 

retailers, DOD’s report stated that DOD contacted 10 major grocery 

retailers and found that three of them were interested in privatization. The 

report further stated that—for those three retailers—DOD requested 

further information regarding aspects of privatized commissaries the 

retailers would be willing to operate and under what conditions. 

Regarding recommendations for legislative action, the report noted that 

DOD requested permanent authority to implement variable pricing at 

 

20 National Defense Authorization Act for Fiscal Year 2016, Pub. L. No. 114-92, § 651 

(2015). 

21 While we reviewed the surveys for content, an assessment of the quality of the data 

collected by the surveys was outside the scope of this review. 

DOD’s Report Fully 

Addresses Some but 

Not All of the 

Mandated Elements, 

Does Not Include 

Some Information 

Consistent with 

Generally Accepted 

Research Standards, 

and Discusses the 

Three Benchmarks

DOD Report Partially 

Addressed Four of the 

Seven Mandated 

Elements
commissaries. DOD also requested the conversion of commissaries to a 

non-appropriated fund entity.

Page 10 GAO-17-38 DOD Commissaries and Exchanges

22

However, DOD’s report partially addressed four mandated elements 

related to the description of changes to the commissary and exchange 

systems to obtain budget neutrality, including (1) the establishment of 

common business processes at DeCA and exchanges; (2) the 

privatization of commissaries and exchanges; (3) description of the 

impact of closure of commissaries; and (4) the analysis of different pricing 

options at commissaries. The report describes all of the four mandated 

elements but does not include information on how each of these elements 

will allow DOD to obtain budget neutrality.

In addition to assessing whether DOD’s report met the statutory 

requirements, we evaluated whether DOD’s report was consistent with 

generally accepted research standards that outline key attributes 

associated with the design, execution, and presentation of research that 

produce sound and complete reports in a clear manner, that are useful to 

decision makers. Although DOD included information about each of the 

mandated elements, we found that DOD did not include information on its 

planned steps to achieve estimated reductions in four of the seven 

mandated elements. Based on relevant generally accepted research 

standards, DOD did not fully provide information on assumptions and 

baseline information, and the results were incomplete or unclear, making 

it difficult to convey how the mandated elements would help DOD reduce 

appropriations. According to DOD officials, the department is in the early 

stages of developing efforts to achieve cost savings and efficiencies 

through the Defense Resale Business Optimization Board but has not yet 

fully developed or completed these efforts. Table 1 describes our 

assessment of the extent to which DOD’s report addresses the mandated 

elements and includes information consistent with relevant generally 

accepted research standards.

 

22 According to DOD’s report, DOD requested a legislative proposal to convert 

commissaries to a non-appropriated fund entity if the pricing pilots prove to be successful. 

Variable pricing allows retailers to price goods to cover operating costs and capital 

expenditures and generate a profit.
Table 1: Our Assessment of the Extent to Which DOD’s Report on Achieving Budget Neutrality Addresses the Mandate 

Page 11 GAO-17-38 DOD Commissaries and Exchanges

Elements and Includes Information About Generally Accepted Research Standards

Required element Our assessment of DOD’s Report 

Description of the engagement of major 

commercial grocery retailers to determine 

their willingness to provide eligible 

beneficiaries with discount savings on 

groceries and certain household goods.

· Describes DOD’s outreach to ten major private sector grocery retailers to determine 

their willingness to discuss their interest in operating privatized commissaries.

· Relevant generally accepted research standards require findings and results to be 

presented in a clear manner. DOD’s report provided a clear description of findings 

related to the engagement of major grocery retailers. For example, DOD’s report

stated that, once DOD receives a request of information from commercial grocery 

retailer, it might consider developing a privatization plan. DOD, however, did not 

commit to developing such a plan absent expressions of interest from such retailers, 

nor did it provide any goals for time frames for pursing this effort.

Description of the impact of any 

modifications described in the report on 

Morale, Welfare, and Recreation (MWR) 

quality-of-life programs.

· Describes changes at commissaries and the exchanges that can impact the MWR 

programs. For example, the report explains that privatization or closure of 

commissaries could create risks for MWR programs by reducing foot traffic at 

exchange stores.

· Relevant generally accepted research standards require findings and results to be 

presented in a clear manner. DOD’s report provided a clear and relevant description 

of findings, including the identification of various DOD initiatives that are currently 

proposed, such as the expanded online shopping benefit for veterans, which can 

benefit the MWR programs.

Recommendations for legislative action that 

DOD considers appropriate to achieve 

budget neutrality by October 1, 2018.

· Relevant generally accepted research standards require findings and conclusions to 

be presented in a clear, comprehensive manner. DOD’s report fully explains the 

different legislative proposals. For example, the report identifies several legislative 

proposals that would help reduce appropriations at commissaries and the 

exchanges, including request for permanent authority to implement variable pricing 

at commissaries and conversion of commissaries to a non-appropriated fund entity.a

Description of any changes to the 

establishment of common business 

processes at the Defense Commissary 

Agency’s (DeCA) commissaries and at the 

exchanges that DOD considers appropriate 

to obtain budget neutrality.

· Describes challenges related to the consolidation between DeCA’s commissaries 

and the exchanges and discusses the benefits of consolidating some processes, 

such as back office systems, without the merger of DeCA’s commissaries and the 

exchanges. DOD’s report concludes that the consolidation of DeCA’s commissaries 

and the exchanges and exchanges would not enhance benefits or improve costeffectiveness without the disruption of current command structures.

· Relevant generally accepted research standards note that assumptions should be 

explicitly identified to understand the context of the report’s results. However, DOD’s 

report does not provide additional information about assumptions or the anticipated 

savings associated with changes to the establishment of common business 

processes. For example, the report did not include additional information from the 

Boston Consulting Group and Military Compensation and Retirement Modernization 

Commission that recommended the consolidation of back office systems that would 

provide savings totaling between $215 million and $325 million, which could help 

reduce appropriations and address the mandate.
Page 12 GAO-17-38 DOD Commissaries and Exchanges

Required element Our assessment of DOD’s Report 

Description of any changes to the 

privatization of commissaries and 

exchanges, in whole or in part, that DOD 

considers appropriate to obtain budget 

neutrality.

· Describes the risks and challenges with privatization of commissaries in whole or in 

part. For example, DOD’s report estimates that privatization of larger commissaries 

would increase the price of goods by 20 percent and could reduce patron benefits.

· Relevant generally accepted research standards note that assumptions should be 

explicitly identified to understand the context of the report’s results and a 

methodology should be consistent with the report’s objective. However, DOD’s 

report does not include information about the assumptions, or provide 

documentation and methodology related to changes that may lead to privatization of 

commissaries and exchanges. For example, the report does not clarify whether the 

20 percent price increase is associated with privatizing all commissaries in the 

United States or privatizing only larger stateside stores. The report also does not 

include information about potential cost savings associated with privatization.

Description of the impact of closure of 

commissaries in locations in close proximity 

to other commissaries or in locations where 

commercial alternatives may be available 

as DOD considers appropriate to obtain 

budget neutrality.

· Describes the risks associated with closing commissaries in the United States and 

keeping overseas stores open, including negatively impacting traffic at exchanges 

co-located with commissaries.

· Relevant generally accepted research standards note that assumptions should be 

explicitly identified to understand the context of the report’s results and a 

methodology should be consistent with the report’s objective. However, the report 

concludes that fully eliminating appropriated funding cannot be achieved through 

store closures but it does not describe the risks, assumptions, documentation, and 

methodology used to support claims that prices would increase with closures.

Analysis of different pricing options to 

improve or enhance the delivery of 

commissary and exchange benefits to 

obtain budget neutrality.

· Describes two pricing pilot programs that DOD plans to implement at the 

commissaries, which the report explains will allow DeCA to achieve the long- term 

goals of reducing appropriations while maintaining the benefit.

· Relevant generally accepted research standards note that baseline data and 

information used to support a report should be included to understand the context of 

the report’s objective. Relevant research standards also require that results be 

presented in a complete and accurate manner. However, DOD’s report did not 

provide time frames or cost saving estimates related to variable pricing pilots that 

could help DOD obtain budget neutrality or reduce appropriations.

Source: GAO analysis of Department of Defense (DOD) information. | GAO-17-38

a

Variable pricing allows retailers to price goods to cover operating costs and capital expenditures and 

to generate a profit.

According to DOD officials, for some efforts that are already being 

considered, DOD officials told us that they did not include some 

information in the report to support their conclusions because they have 

not had time to verify the information. We found that additional 

information on these seven elements in a comprehensive plan would 

assist DOD to assess the potential impact on reducing appropriations. 

Because DOD’s report was prepared in response to a one-time, 

nonrecurring mandate, we are not making any recommendations to 

amend the report or provide additional detail on the mandated elements.
In addition to requiring that DOD to submit a report setting forth a 

comprehensive plan to achieve by October 1, 2018, budget neutrality in 

the delivery of commissary and exchange benefits, section 651 required 

DOD’s report to ensure the (1) maintenance of high levels of customer 

satisfaction in the delivery of commissary and exchange benefits; (2) 

provision of high-quality products; and (3) sustainment of discount 

savings to eligible beneficiaries. In addition, section 651 authorizes DOD 

to conduct pilot programs to evaluate the feasibility and advisability of 

processes and methods for achieving budget neutrality, and requires that 

DOD measure success with regards to specific metrics.

Page 13 GAO-17-38 DOD Commissaries and Exchanges

23 Although the 

report discusses the three benchmarks for customer satisfaction, quality 

of products, and patron savings, the report does not define specific 

metrics to measure each of the benchmarks.

Customer Satisfaction Surveys. According to DOD’s report, DOD 

conducts several surveys to determine customer satisfaction:

· For both commissaries and exchanges, DOD contracts with an 

outside research firm to conduct the American Customer Satisfaction 

Index survey annually. The American Customer Satisfaction Index 

survey produces one overall score for the retailer, which provides a 

high-level score for customer satisfaction and can be compared 

across the exchange system and with commercial counterparts in 

grocery, department and discount stores. The index also includes 

scores in eight areas, such as customer expectations, perceived 

overall quality and customer satisfaction.

· The commissaries conduct the Commissary Customer Service Survey 

annually. The Commissary Customer Service Survey includes a 

question directing customers to rate their level of satisfaction, and 

also includes questions on commissary performance related to shelf 

stock levels, the convenience of store hours, store cleanliness, the 

quality of fresh meat and produce, and other performance elements.

· Each exchange conducts a separate Customer Satisfaction Index 

survey, which is intended to gather actionable information specific to 

 

23 Under section 651, DOD is authorized to establish pilot programs for commissaries and 

exchanges that may help DOD achieve budget neutrality. Specifically, the Secretary is to 

establish specific, measurable benchmarks for success related to customer satisfaction, 

quality of products and patron savings, while achieving budget neutrality under the pilot 

program. 

DOD Report Discusses 

the Three Benchmarks for 

Customer Satisfaction, 

Quality of Products, and 

Patron Savings, but Does 

Not Define Metrics to 

Measure its Success
each exchange. The Navy Exchange and the Army and Air Force 

Exchange Service both also use web-based surveys, which provide 

continuous feedback throughout the year.

Page 14 GAO-17-38 DOD Commissaries and Exchanges

24 The surveys used by the 

exchanges ask direct questions on customer satisfaction, as well as 

questions on various elements of the shopping experience that might 

enhance satisfaction. For example, the Navy Exchange Customer 

Satisfaction Index survey includes several questions on the level of a 

customer’s satisfaction, as well as questions about other aspects of 

the exchange that could contribute to overall satisfaction, including 

store environment, store signs, and associate knowledge. In addition, 

the survey asks customers about their satisfaction with other services 

they utilize on the installation, such as the barber shop and flower 

shop. The Army and Air Force Exchange survey asks for the 

customer’s level of overall satisfaction, as well as several other 

questions, such as store cleanliness, associate friendliness, and 

product availability in-store and on the exchange’s website.

Although DOD has information from surveys on customer satisfaction, 

DOD’s report does not contain a specific metric regarding customer 

satisfaction in part because commissary and exchange officials told us 

that they had not been previously required to establish specific metrics for 

customer satisfaction and therefore had not yet determined what metric 

would indicate high levels of customer satisfaction. DOD officials stated 

that commissaries and exchanges are working on developing specific 

metrics, but according to DOD officials it is unclear how “high level” is 

defined or what results would qualify as meeting that metric. For example, 

exchange officials stated that they considered the metric for success to 

be the maintenance or improvement of current levels of customer 

satisfaction as a baseline. The Army and Air Force Exchange received 

Customer Satisfaction Index scores of 76, 77, 78, 79, 80, and 90 out of 

100 for fiscal years 2010 through 2015, respectively. However, it is 

unclear whether the baseline of customer satisfaction would be the last 

collected result, a score of 90 in fiscal year 2015, or as an average of 

prior years, such as the average score of 80 over fiscal years 2010 

through 2015.

Product Quality Surveys. The exchanges’ Customer Satisfaction Index 

surveys and the Commissary Customer Service Survey provide customer 

 

24 The Marine Corps Exchange did not provide separate web-based surveys. 
ratings on product quality. For example, Customer Satisfaction Index 

surveys used by the exchanges include questions on merchandise 

quality. The Army and Air Force Exchange Service conduct quality 

assurance testing on its merchandise for key features, such as the 

durability and strength of the products. Additionally, the commissaries ask 

patrons to rate the quality and selection of produce, meat, delicatessen 

items, and bakery items.

However, while the commissaries and exchanges have these measures 

to gauge product quality, it is unclear what metrics or baseline data will be 

used to ensure the provision of high-quality products. For example, DOD

has not determined whether it will measure the maintenance of highquality products based on survey responses on product quality or quality 

assurance testing results. In addition, DOD’s report acknowledges the 

difficulty of measuring the quality of products and suggests using results 

from customer satisfaction surveys utilized by the commissaries and 

exchanges as an indirect measure. According to DOD officials, the 

commissaries and exchanges did not develop specific metrics for highquality products because the commissaries and exchanges had not been 

previously required to establish specific metrics for product quality, and 

therefore had not yet determined what metric would indicate high levels of 

high-quality products.

Patron Savings Rates. For fiscal year 2015, the savings rate for patrons 

shopping at exchanges compared with the savings rate for patrons 

shopping at retail stores was an average of 23.17 percent across all the 

three exchanges. DeCA reported a savings rate of 29 percent for fiscal 

year 2015, and we have ongoing work that is assessing the savings 

methodologies used by DeCA.

Page 15 GAO-17-38 DOD Commissaries and Exchanges

25 Figure 1 shows the overall savings rates 

reported by commissaries and exchanges for the fiscal year 2010-15 time 

frame.

 

25 Additionally, the Boston Consulting Group issued a report that found commissary 

savings rates ranged between 5 percent and 25 percent for a sample of 51 commissaries.

Boston Consulting Group, Military Resale Study, July 10, 2015. 
Figure 1: Overall Savings Rates as Reported by the Commissaries and Exchanges During Fiscal Year 2010-15

Page 16 GAO-17-38 DOD Commissaries and Exchanges

aResults from Army and Air Force Exchange and from the fiscal year 2010 Marine Corps savings rate 

are from fall surveys.

While commissaries and exchanges have annual patron savings rates, 

DOD’s report did not define the savings metric that will be used to set a 

specific metric and ensure the savings rate is sustained. For example, it is 

unclear whether the Army and Air Force Exchange Service will choose to 

use the last available savings rate, 21.61 percent in fall 2015, or the 

average savings rate over the past 5 years, 23.09 percent, as the metric 

for maintaining a savings rate.26

Generally accepted research standards include guidelines related to 

developing and completely identifying metrics and baseline data as well 

as relevant data limitations. For example, the analytical baseline should 

be fully identified and used consistently throughout the study, and 

baseline data and other data used to support the analysis should be 

verified and validated. According to DOD officials, the Defense Resale 

Business Optimization Board is working to develop metrics but they have 

 

26 We have ongoing work that is assessing the savings methodologies used by DeCA. 
not yet been established. However, DOD’s report did not include time 

frames or additional information about the steps the department is taking 

to develop metrics. Without identifying specific metrics to determine 

whether the requirement has been fulfilled, DeCA and the exchanges 

cannot effectively assess their performance in maintaining customer 

satisfaction, product quality, and patron savings.

Given the challenging fiscal environment, identifying potential 

opportunities for efficiencies and cost savings in commissaries and 

exchanges can help DOD manage programs in the face of potential 

budget reductions. Although DOD’s report states that DOD will not be 

able to achieve budget neutrality, the report lacks additional detailed 

information about potential trade-offs, constraints and limitations to 

achieving budget neutrality. In addition, DOD stated in its May 2016 

report to Congress that it can achieve an estimated $2 billion in cost 

savings over a 5-year period, but the department did not provide 

information on its steps to achieve the cost savings. In addition, DOD’s 

report does not fully address all of the mandated reporting elements,

instead only partially addressing four of the seven elements. DOD does 

not outline specific metrics, as required for pilot programs authorized 

under section 651, to maintain high levels of customer satisfaction, quality 

of products, and patron savings within the commissaries and exchanges. 

As DOD moves forward with pilot programs, DOD will need specific 

metrics to meet the requirements of section 651. However, the report 

does not provide additional information for decision makers in Congress 

to evaluate how DOD will achieve its estimated reductions in 5 years. In 

the absence of detailed information to support its conclusion that it cannot 

achieve budget neutrality, the department lacks assurance that its cost 

savings target is an accurate and achievable estimate, as well as a plan 

with a methodology, cost estimates and specific time frames, 

decisionmakers cannot evaluate whether the implementation of DOD’s 

efforts are effective in achieving its estimated cost savings without 

impacting patrons.

As DOD assesses potential cost savings under the Defense Resale 

Business Optimization Board or through other cost savings initiatives 

identified, we recommend that the Secretary of Defense, with assistance 

as necessary from the Director and Chief Executive Officer of the 

Defense Commissary Agency, the Director and Chief Executive Officer of 

the Army and Air Force Exchange Service, the Chief Executive Officer of 

Page 17 GAO-17-38 DOD Commissaries and Exchanges

Conclusions

Recommendations for 

Executive Action
the Navy Exchange Service Command, and the Marine Corps Exchange,

take the following three actions:

· Provide information to Congress that includes data, assumptions, and 

methodology supporting DOD’s conclusion for not achieving budget 

neutrality; 

· Develop a plan with assumptions, a methodology, cost estimates, and 

specific time frames for achieving alternative reductions to 

appropriations, to support DOD’s efforts to ensure that DOD’s cost 

savings target is feasible and accurate; and

· As DOD conducts pilot programs, identify specific metrics to 

determine whether DOD has fulfilled the mandated requirement to 

maintain high levels of customer satisfaction, the provision of highquality products, and the sustainment of patron savings.

In written comments on a draft of this report, DOD concurred with our 

three recommendations. DOD’s comments are summarized below and 

reprinted in their entirety in appendix I.

In its response to our first recommendation to provide information to 

Congress that includes data, assumptions, and methodology to support 

its conclusion for not achieving budget neutrality, DOD provided the 

recommended information. For example, DOD states that elimination of 

appropriations for secondary transportation costs would require the 

exchanges to recoup their costs by either adding transportation costs into 

the price of goods, removing some or all American goods from overseas 

inventories in favor of local products, or absorbing the transportation 

costs as operating costs among other information. 

DOD also concurred with our second recommendation to develop a plan 

with assumptions, methodology, cost estimates and specific timeframes 

for achieving alternative reductions to appropriations, to support efforts to 

ensure that the cost savings target is feasible and accurate. In its letter, 

DOD provided information about how the estimated $2 billion cost 

savings target was developed, although it states that the basis of the 

savings estimate and associated recommended actions have not been 

piloted. DOD states that the Defense Resale Business Optimization 

Board was chartered to develop a plan, and as the Board approves 

initiatives for piloting the plan DOD expects to provide more specific 

information to Congress. 

Page 18 GAO-17-38 DOD Commissaries and Exchanges

Agency Comments 

and Our Evaluation
Finally, DOD concurred with our third recommendation to identify certain 

performance metrics as it conducts pilot programs. In its comments, DOD 

outlined its process for measuring customer satisfaction, maintaining 

high-quality products, and provided more information about forthcoming 

changes in its savings methodology. DOD further stated that it will provide 

more detailed information about specific metrics for its pilot programs in 

its report to the Armed Services Committees.

We are sending copies of this report to the appropriate congressional 

committees, the Secretary of Defense, the Under Secretary of Defense 

for Personnel and Readiness, the Deputy Chief Management Officer, the 

Director and Chief Executive Officer of the Defense Commissary Agency, 

the Director and Chief Executive Officer of the Army and Air Force 

Exchange Service, the Chief Executive Officer of the Navy Exchange 

Service Command, and Marine Corps Exchange. In addition, the report is 

available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact 

me at (202) 512-4523 or leporeb@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. GAO staff who made key contributions to this report 

are listed in appendix II.

Brian J. Lepore, Director

Defense Capabilities and Management

Page 19 GAO-17-38 DOD Commissaries and Exchanges
Appendix I: Comments from the Department of 

Defense

Page 20 GAO-17-38 DOD Commissaries and Exchanges

Appendix I: Comments from the Department 

of Defense
Appendix I: Comments from the Department of 

Defense

Page 21 GAO-17-38 DOD Commissaries and Exchanges
Appendix I: Comments from the Department of 

Defense

Page 22 GAO-17-38 DOD Commissaries and Exchanges
Appendix I: Comments from the Department of

Defense

Page 23 GAO-17-38 DOD Commissaries and Exchanges
Appendix I: Comments from the Department of 

Defense

Page 24 GAO-17-38 DOD Commissaries and Exchanges
Appendix I: Comments from the Department of 

Defense

Page 25 GAO-17-38 DOD Commissaries and Exchanges
Appendix I: Comments from the Department of 

Defense

Page 26 GAO-17-38 DOD Commissaries and Exchanges
Appendix I: Comments from the Department of 

Defense

Page 27 GAO-17-38 DOD Commissaries and Exchanges
Appendix II: GAO Contact and Staff 

Acknowledgments

Brian J. Lepore, (202) 512-4523 or leporeb@gao.gov

In addition to the individual named above, key contributors to this report 

were Gina Hoffman (Assistant Director), Pedro Almoguera, Mae Jones, 

Amie Lesser, Camille Pease, Ophelia Robinson, Sabrina C. Streagle, Yee 

Wong, and Elizabeth Wood.

Page 28 GAO-17-38 DOD Commissaries and Exchanges

Appendix II: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments
Appendix III: Accessible Data

Page 29 GAO-17-38 DOD Commissaries and Exchanges

Mr. Brian Lepore

Director, Defense Capabilities Management

U.S. Government Accountability Office 441 G Street, NW

Washington, DC 20548

NOV. 7 2016

Dear Mr. Lepore:

This is the Department of Defense (DoD) response to the Government 

Accountability Office (GAO) Draft Report, GA0-17-38, "DOD 

COMMISSARIES AND EXCHANGES: Plan and Additional Information 

Needed on Cost Savings and Metrics for DOD Efforts to Achieve Budget 

Neutrality," dated September 21, 2016 (GAO Code 100903).

We appreciate the GAO's review and analysis of the Secretary of 

Defense's May 24, 2016, "Report on Plan to Obtain Budget Neutrality for 

the Defense Commissary System and the Military Exchange System," 

which was required by section 651(a) of the National Defense 

Authorization Act for Fiscal Year 2016, P.L. 114-92.

We also appreciate the GAO report's explicit recognition of the impact of 

the constraints under which these reports were prepared. The DoD 

report represented an early stage in the evolution of a complex excursion 

into ''unchartered territory," a complete restructuring of the highlylegislated defense commissary system. In addition, the compressed time 

schedule, not only for the completion of the Department's report but also 

for GAO's own review, prevented the Department from being very 

detailed at that time about the initiatives, assumptions, or anticipated 

Appendix III: Accessible Data

(100903)

Agency Comment 

Letter

Comments from the 

Department of Defense

Page 1
Appendix III: Accessible Data

savings associated with potential changes that may be proposed in years 

to come.

The Department established the Defense Resale Business Optimization 

Board to develop and evaluate potential reforms and proposed pilot 

projects to determine the extent to which they might reduce the 

Department's use of appropriated funding for the defense resale 

ecosystem.

Our efforts in this direction will be guided by the Congressional mandate 

to sustain the current level of commissary and exchange customer 

satisfaction, product quality, and patron savings.

The Department is providing the enclosed official written comments for 

inclusion in the report.

Peter Levine

Performing the Duties of the Under Secretary of Defense for Personnel 

and Readiness

Enclosure: As stated

GAO DRAFT REPORT DATED SEPTEMBER 21, 2016 GA0-17-38 (GAO 

CODE 100903)

"DOD COMMISSARIES AND EXCHANGES: PLAN AND ADDITIONAL 

INFORMATION NEEDED ON COST SAVINGS AND METRICS FOR 

DOD EFFORTS TO ACHIEVE BUDGET NEUTRALITY"

DEPARTMENT OF DEFENSE COMMENTS TO THE GAO 

RECOMMENDATION

RECOMMENDATION 1:

The GAO recommends that the Secretary of Defense, with assistance as 

necessary from the Director and Chief Executive Officer of the Defense 

Commissary Agency, the Director and Chief Executive Officer of the Army 

and Air Force Exchange Service, the Chief Executive Officer of the Navy 

Exchange Service Command, and Marine Corps Exchange, provide 

information to Congress that includes data, assumptions, and 

methodology supporting its conclusion for not achieving budget neutrality.

Page 30 GAO-17-38 DOD Commissaries and Exchanges

Page 2
Appendix III: Accessible Data

DoD RESPONSE: Concur. 

The following information expands upon the material presented in the 

DoD report and should satisfy this recommendation.

Section 651 of the National Defense Authorization Act for Fiscal Year 

(FY) 2016 (P.L. 114-92) does not define "budget neutrality." The 

Department has interpreted the term to mean that, while Congress 

viewed the defense resale system as an important non-pay benefit for 

military members and their families, it simultaneously desired to provide 

that same benefit at no cost to the taxpayers beginning in FY 2018. The 

Department's assumption that Congress views the commissary benefit as 

an important non-pay benefit is based on several factors: demonstrated 

Congressional level of interest in the defense resale system; the repeated 

restoration by Congress of appropriations reduced by the Department in 

the President's budgets for FY 2013, FY 2014, and FY 2015; and 

Congressional support for maintaining the same levels of savings and 

service provided by the Defense Resale Enterprise as subsidized by 

appropriations.

As cited in the Military Compensation and Retirement Modernization 

Commission's report, "in 2013, the commissaries received $1.4 billion in 

appropriated funding (APF), of which $152 million was spent on second 

destination transportation costs for transporting U.S. goods overseas. 

That same year, the exchanges received approximately $397 million in 

APF. This amount included $170 million for contingency support, 

covering expenses associated with the transportation of merchandise 

from warehouses to remote exchange sites, incremental inventory 

variances above the noncontingency average, danger pay, deployment 

bonuses, overtime, and foreign post differentials for deployed associates. 

Also included were $179 million for second destination transportation, and 

$47 million for direct and indirect exchange operating costs, including a 

limited number of active-duty military personnel, military travel, and 

utilities for authorized overseas locations and a limited number of 

[Continental United States] CONUS remote and isolated locations." The 

purposes, amounts, and legislative constraints have not substantively 

changed since the Department provided this information to the

Commission.

Concerning appropriations for the defense exchange system ($397 million 

in FY 2013), it should be noted that the exchange system consists of 

several separate nonappropriated fund entities. Consequently, the 

Page 31 GAO-17-38 DOD Commissaries and Exchanges
Appendix III: Accessible Data

exchange system funds the majority of operations through the sales of 

goods

and services at a profit and without imposing a sales tax. A portion ($170 

million) of their minimal appropriated funding directly supports military 

members performing military missions in contingency operations and 

therefore is not likely to be eliminated completely. The second 

destination transportation (SDT) funding ($179 million) enables the 

defense exchange system to provide goods familiar to the military 

members and their families at locations outside of the CONUS at no 

additional cost to them. The exchange system already works to minimize 

its SDT requirements so that these centrally-managed appropriations may 

be applied to other SDT needs within the respective military services. 

Ifthe SDT appropriation to the defense exchange system were eliminated, 

the exchanges (as profit/loss -based retail businesses) would have three 

options for recouping the costs:

· Add the transportation costs into the price of the goods, thereby 

reducing the savings benefit to the military members and families 

outside CONUS;

· Remove some or all of the American goods from overseas inventories 

in favor of local products that might not be equivalent to the American 

goods, thereby affecting the quality as perceived by the military 

members and families overseas; or

· Absorb the transportation costs as an operating expense, thereby 

reducing net earnings.

The first two options would likely reduce sales based on price inelasticity 

and/or lower comparable pricing for like products on the local economy or 

through eCommerce sites (such as Amazon). For all of the options, any 

reductions to the exchange's net earnings (i.e., profits) directly reduce 

contributions to the military services' morale, welfare, and recreation 

(MWR) programs as well as funding for the exchanges' recapitalization 

programs.

The elimination of appropriated funding to the Defense Resale Enterprise 

would therefore diminish vital support for military missions and result in 

higher prices, lower quality or reduced availability of American products, 

and reduced support for MWR programs.

The Department has requested legislative authority to reduce the 

appropriated fund subsidy for second destination travel as efficiencies are 

identified and implemented to achieve savings in the Exchanges without 

Page 32 GAO-17-38 DOD Commissaries and Exchanges

Page 3
Appendix III: Accessible Data

reducing the MWR benefit. As these savings initiatives are fleshed out, 

the Department will provide additional information to Congress with 

regard to data, assumptions, and methodology .

Pursuant to 10 U.S.C. 2481(a), the defense commissary system operates 

separately from the defense exchange system. Whereas the exchange 

system operates predominantly with nonappropriated funds and 

generates its own revenue, 10 U.S.C. 2483 requires, with limited 

exceptions, the use of APFs appropriated each fiscal year to cover 

commissary system operating expenses. 10 U.S.C. 2484 establishes the 

merchandise categories that commissary stores may sell and provides 

that, with certain exceptions, the sales price of each item sold in the 

commissary shall recoup the actual product cost of the item. Additionally, 

a 5 percent surcharge is applied to the established sales price of 

commissary items sold.

Within the Defense Commissary Agency (DeCA) working capital fund 

(WCF), there are two activity groups: commissary resale stocks, which is 

a revolving fund consisting of revenues from the sale of the products by 

the commissary stores; and commissary operations, which funds the 

operating costs of commissaries, areas, and headquarters activities. The 

second WCF activity group's primary revenue source is the annual direct 

appropriation for the Defense WCFs, which

in turn is apportioned to the DeCA WCF. DeCA's Surcharge Collections 

Trust Fund, which is a Treasury General Fund and not a Defense WCF, 

funds certain capital requirements and is primarily funded from the abovereferenced five percent surcharge applied to commissary items sold. The 

uses of the Surcharge Trust Fund are established in 10 U.S.C. 2484(h). 

[Source: DeCA FY 2015 Annual Financial Report]

Breaking down the $1.4 billion in direct annual appropriations for the 

defense commissary system, approximately $152 million is for SDT of 

American grocery products to locations outside of the United States. 

Eliminating this support for the commissaries would have many of the 

same impacts as noted above for the exchange system, although here 

the focus is clearly more on pricing and product quality as perceived by 

the commissary patron, rather than on profit and MWR contribution. The 

remainder of the $1.4 billion funds the operating expenses of the 

commissary stores.

No other grocery or retail operation is financed in this manner. The 

Department's assessment that budget neutrality is not possible is based 

Page 33 GAO-17-38 DOD Commissaries and Exchanges

Page 4
Appendix III: Accessible Data

on comparative analysis. Profit and loss entities (such as the defense 

exchange systems and commercial grocers) fund their operating costs 

out of gross profits (i.e., net sales minus cost of goods sold). The defense 

commissary system does not generate any gross profits, due to the 

mandated pricing model.

Budget neutrality for the commissaries can only be achieved by adjusting 

two levers: net sales and/or operating expenses.

· For DeCA to cover the $1.4 billion in operating costs through variable 

pricing, prices across the board would need to be increased by about 

25.5% to generate the gross profit necessary. This would not meet 

the requirement to provide the same levels of savings. Increased 

pricing would also drive higher out-of-pocket expenses for patrons 

through the surcharge. This percentage increase is based on $6.9 

billion in net sales minus $5.5 billion in cost of goods sold with the 

result of $1.4 billion in gross profits.

· For DeCA to cover the $1.4 billion subsidy loss, it would have to 

eliminate all costs for operating commissary stores, areas, and 

headquarters. As stated earlier, 10 U.S.C. 2483 requires that, with 

certain exceptions, APFs shall fund the operations of DeCA and the 

Defense commissary system. Consequently, the budgetary resources 

in the DeCA WCF that pay commissary system employees are 

entirely dependent on the annual direct appropriations for Defense 

WCFs. Practically speaking, it would be impossible to eliminate the 

labor costs (approximately $700 million per year) and still operate the 

commissary system. The elimination of all operating costs would 

require the closure of the commissary system, which would not meet 

the requirement to provide the same levels of customer satisfaction, 

product quality, and patron savings.

The Department is committed to pursuing additional revenue sources and

efficiencies in its operation of the commissary system, in order to reduce 

the reliance on APF support. However, there does not appear to be a 

viable way to eliminate all $1.4 billion in APF support to the defense 

commissary system (and $0.4 billion of APF support to the exchanges) 

while still maintaining customer satisfaction, product quality, and patron 

savings to the military members and families. The Department's 

preliminary estimate of potential savings is based on a report by the 

Boston Consulting Group, dated July 2015. The Department is 

committed to developing

Page 34 GAO-17-38 DOD Commissaries and Exchanges
Appendix III: Accessible Data

business case analyses to support specific reform proposals. As these 

business case analyses are developed, the Department will provide 

additional information to Congress with regard to data, assumptions, and 

methodology.

RECOMMENDATION 2: 

The GAO recommends that the Secretary of Defense, with assistance as 

necessary from the Director and Chief Executive Officer of the Defense 

Commissary Agency, the Director and Chief Executive Officer of the Army 

and Air Force Exchange Service, the Chief Executive Officer of the Navy 

Exchange Service Command, and Marine Corps Exchange, develop a 

plan with assumptions, a methodology, cost estimates, and specific 

timeframes for achieving alternative reductions to appropriations, to 

support DOD's efforts to ensure that its cost savings target is feasible and 

accurate.

DoD RESPONSE: Concur. 

The following information expands upon the material presented in the 

Department of Defense (DoD) report and provides an outline of the 

Department's approach for the way ahead. Specific proposals for 

initiatives, pilot programs, and other program enhancements will be 

accompanied by the required information in sufficient detail to permit the 

Department's analysis and informed decisions.

The chief executives of the defense commissary and exchange systems 

and the Department of Defense Deputy Chief Management Officer 

worked collaboratively throughout 2015 to develop a budget proposal that 

would achieve savings in the Defense Resale Enterprise while 

maintaining customer savings and service. The result was a budget 

reduction over FY 2017-FY 2021 of $2.13 billion. The plan that formed 

this proposal was based almost exclusively on recommendations and 

estimates provided by the Boston Consulting Group (BCG) in a study it 

conducted for the Department. The Department has not implemented the 

recommendations contained in the BCG report, but those 

recommendations represented the best basis for developing a potentially 

achievable budget reduction .

In 2016, the Defense Resale Business Optimization Board was chartered 

to develop an executable plan, which may or may not include all of the 

initiatives identified for the budget proposal. The Board's current pipeline 

of executable initiatives reflects achievable savings based on 

Page 35 GAO-17-38 DOD Commissaries and Exchanges

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Appendix III: Accessible Data

assumptions, requirements, cost estimates, mission impacts, and 

timeframes. This pipeline is updated as the Board identifies, analyzes, 

and approves business cases for each optimization, and as the individual 

resale systems can absorb and execute change without overly disrupting 

business operations and patrons.

As it proposes specific program adjustments, pilot programs, and similar 

initiatives, the Department will include the required information in 

sufficient detail to assist in its analysis and decision processes.

RECOMMENDATION 3: 

The GAO recommends that the Secretary of Defense, with assistance as 

necessary from the Director and Chief Executive Officer of the Defense 

Commissary Agency, the Director and Chief Executive Officer of the Army 

and Air Force Exchange Service, the Chief Executive Officer of the Navy 

Exchange Service Command, and Marine Corps Exchange, as DOD 

conducts pilot programs, identify specific metrics to determine whether 

the organization has fulfilled the mandated requirement to maintain high 

levels of customer satisfaction, the provision of high-quality products, and 

sustainment of patron savings.

DoD RESPONSE: Concur. 

The following information expands upon the material presented in the 

Department of Defense (DoD) report and should satisfy this 

recommendation. Initial metrics and their related processes have already 

been identified, and baselines have been established.

Savings, dividends, and capital expenditure metrics will be based on the 

5-year trailing average of the most recent reports and audited financial 

statements; customer satisfaction will be based on the most recent year 

survey. Target ranges for each metric will be specified for each pilot 

program as it is developed.

Pursuant to section 651(e)(5)(A) of the National Defense Authorization 

Act (NDAA) for Fiscal Year (FY) 2016 (P.L. 114-92), if the Department 

conducts a pilot program pursuant to section 651, the Secretary of 

Defense shall, not later than 30 days before commencing the pilot 

program, submit a report to the Committees on Armed Services of the 

Senate and the House of Representatives that includes a description of 

the pilot program and the provisions, if any, of chapter 147 of title 10, U.S. 

Code, that will be waived in the conduct of the pilot program. At this time 

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the Department anticipates only conducting pilot programs for the 

commissary system. The Department will comply with the requirements of 

section 651 prior to commencing any pilot program and provide a report 

to Congress that describes at a minimum: parameters of the pilot 

program, operational criteria, assumptions, savings expectations, and 

measurement metrics.

Those metrics will maintain high levels of customer satisfaction, provide 

high-quality products, and sustain patron savings, as defined below:

Customer Satisfaction: 

The Defense Commissary Agency (DeCA) will continue to measure 

customer satisfaction through the combination of their internal instrument, 

the Commissary Customer Service Survey (CCSS), and their external 

instrument, the American Customer Satisfaction Index (ACSI).

The CCSS is a comprehensive internal survey conducted annually by 

DeCA at all commissaries. Planning for the CCSS starts in May of each 

year. Survey administration is conducted in July/August. The initial 

report is complete by the end of the fiscal year to coincide with end of 

fiscal year reporting. All reports are complete by December of each year. 

The effort includes approximately 20,000 completed surveys each year. 

The response rate is typically near 90%. Its primary purpose is to identify 

potential improvement opportunities and gain information about our 

customers and their shopping behavior. The CCSS uses a rating scale 

from "1" to "5", with "1" being "poor" and "5" being "excellent." These 

numerical scores are converted to letter grades. The overall CCSS 

score is the average of these ratings, weighted by commissary sales. 

Using the green, yellow, red balanced scorecard approach, an "A" (4.5 or 

better) is green, "B'' (4.20 - 4.49) is yellow, and "C" (below 4.20) is red.

The ACSI is an independent scientific effort-an outside source of 

customer satisfaction data for commissaries, exchanges, and private 

sector industry. The index is an economic indicator that measures 

customer satisfaction based on customer surveys and the application of 

sophisticated econometric modeling. DoD survey participants are 

selected randomly from a list of commissary eligible personnel provided 

by the Defense Manpower Data Center. Selected personnel are then 

screened so that only those who qualify as "customers" are surveyed 

about their expectations and satisfaction with store merchandise, 

products, services, and prices. ACSI uses econometric modeling to 

analyze customer satisfaction and produce a customer satisfaction index 

Page 37 GAO-17-38 DOD Commissaries and Exchanges
Appendix III: Accessible Data

referred to as the ACSI. The ACSI is designed so that DeCA results can 

be compared to major commercial supermarket chains as well as other 

industries that report ACSI results.

DeCA's goal is to meet or exceed the industry average. Using the green, 

yellow, red balanced scorecard approach, a green is achieved when 

DeCA's score equals or exceeds the industry average; a yellow when the 

score is within two points below that average; and a red when the score is 

more than two points below the industry average.

Maintaining High-Quality Products

With the advent of a broad range of branded products in the United 

States, measuring "high- quality" products is extremely difficult. 

Essentially those branded products which do not measure up to customer 

expectations, don't survive in the American marketplace. That is true for 

the commissary as well, with non-performing products quickly being 

deleted from the commissary assortment. Except for random weight 

products (meat, produce, dairy, and deli) the commissary sells and plans 

to continue selling brand name products, but will add a line of private 

label products. Today, private label products are controlled within the 

marketplace and fall into three categories-value brand, brand name 

equivalent, and premium brand . While the commissary assortment will 

be expanded to include a private label or store brand offering, that 

acquisition will be for brand name equivalent private label products. 

DeCA will continue to use the CCSS survey, some of whose 14 questions 

deal with quality of non-branded random weight products using the same 

green, yellow, red balanced scorecard measurement described under 

"customer satisfaction" above.

Sustainment of Patron Savings:

Pursuant to section 651(e)(3) of the NDAA for FY 2016, the Department 

is establishing a new baseline for commissary patron savings. The new 

baseline will identify:

· A savings level for each U.S. commissary

· A savings level at least monthly

· A savings level that measures a representative market list of items

· A savings level that incorporates pricing of local competitors

To meet these objectives, DeCA has developed a methodology with three 

parts:

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1. A manual market basket shop component of up to 1,400 Stock 

Keeping Units (SKUs) that reflect products patrons normally 

purchase. This comparison will be conducted at the commissary as 

well as selected commercial stores in the vicinity of the commissary. 

The market basket data obtained will be used to calculate a 

commissary savings level as compared to commercial stores around 

each commissary. Each U.S. Commissary will be manually shopped 

once a year, at a rate of approximately 45 stores per quarter. The 

commissary savings levels collected each quarter will be combined 

via a sales weighted average to derive an overall manual approach 

savings metric.

2. A data-driven component with the largest possible range of items and 

competitors to ensure comprehensiveness by comparing the prices of 

all scannable products that DeCA

carries (about 38,000 SKUs) to a database of average national prices. 

The data component, calculated on a monthly basis, will be used to 

monitor trends in savings.

3. An adjustment outside of the Continental United States (CONUS) to 

account for overseas cost of living differences by applying the 

Defense Travel Management Office Cost of Living Index to the 

CONUS savings calculation. The primary inputs to the overseas 

approach are the U.S. savings levels for the East and West coasts, 

and the cost ofliving allowance index for each overseas location.

The overall U.S. savings level is a combination of the data-driven 

calculation, which only measures scannable items in the near term, and 

the manual approach calculation, which measures both scannable items 

and fresh products. Conducted monthly, but reported quarterly, 

measurements will compute an average patron savings for the U.S. and 

for each of seven regional areas within the U.S. Using the green, yellow, 

red balanced scorecard approach, a green is achieved when DeCA's 

average U.S. score equals the baseline established as a prerequisite to 

conducting any pilot program; a yellow when the score is within one 

percent below that baseline; and a red when the score exceeds two 

percent below the baseline average.

As previously noted, therefore, the metrics and their related processes 

have already been identified, and baselines have been established. 

Savings, dividends, and capital expenditure metrics will be based on the 

5-year trailing average of the most recent reports and audited financial 

statements; customer satisfaction will be based on the most recent year 

survey. Target ranges for each metric will be specified for each pilot 

Page 39 GAO-17-38 DOD Commissaries and Exchanges

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program as it is developed and included in the required report to the 

Armed Services Committees. The additional information provided here 

should be sufficient to satisfy the Department's obligation under this 

recommendation and allow this item to be closed.

Page 40 GAO-17-38 DOD Commissaries and Exchanges
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