Commissaries and Exchanges: DOD and Congress Need More Reliable Information on Expected Savings and Costs of Consolidating the Defense Resale Organizations
Released: 2020-04-30T00:00:00

Letter

Background

In June 2018, DOD’s Chief Management Officer established the Community Services Reform Task Force to perform a business case analysis to determine whether consolidating the defense resale organizations would result in efficiencies. The task force conducted its work from July 2018 through November 2018, during which it collected financial and other data from the four resale organizations and conducted workshops with subject matter experts from the resale organizations. In November 2018, the military departments were given an opportunity to review the business case analysis, provide comments, and indicate whether they concurred with the analysis.

In its business case analysis, the task force recommended consolidating the four defense resale organizations into a single organization. The task force stated that consolidation would eliminate duplication that currently exists across the resale organizations and increase the competitiveness, or financial viability, of defense resale, which has seen sales declines in recent years. Specifically, the task force recommended that a single chief executive officer or director be responsible for leading the organization and report to a single board of directors. The task force also recommended that separate leadership positions for commissary operations and exchange operations be established, and that a chief administrative officer manage the business functions that are common to the current resale organizations, such as information technology (IT), human resources, marketing, and finances. Figure 1 shows the task force’s recommended organizational chart for the consolidated resale organizations.

The task force estimated that the time frame for consolidating the four defense resale organizations would be 5 years for implementation, and that consolidation would result in “net savings” (i.e., estimated savings minus estimated costs) ranging from about $690 million to $1.3 billion during the first 5 years, followed by annual net savings of approximately $390 million to $670 million every year thereafter. Specifically:

Estimated savings: The task force estimated that consolidating the four defense resale organizations would result in savings in three areas: (1) reduction of the cost of goods sold in the commissaries and the exchanges; (2) reduction of the cost of goods and services that are not sold but are necessary for operating stores (e.g., plastic shopping bags and custodial services); and (3) reduction of payroll costs by eliminating redundant personnel. According to the task force, consolidation would result in estimated savings of $1.4 billion to $2.1 billion over the first 5 years, followed by annual savings of $470 million to $750 million.

Estimated costs: The task force estimated that consolidating the defense resale organizations would result in costs from four areas: (1) development of new, common IT systems; (2) severance pay for separating employees and retention bonuses to incentivize employees to remain; (3) operation of a transformation management office, supported by private contractors, to implement the consolidation; and (4) costs to convert DeCA to a non-appropriated fund organization. According to the task force, consolidation would result in estimated costs of $700 million to $810 million over the first 5 years, followed by annual costs of $80 million.

DOD’s Chief Management Officer in March 2019 and the Deputy Secretary of Defense in August 2019 both approved the results of the business case analysis and directed that plans be made for consolidation, pending congressional action to remove the statutory prohibition on consolidating the commissary and exchange systems.

DOD’s Business Case Analysis Supporting Defense Resale Consolidation May Not Provide Reliable Savings and Cost Estimates

The task force may have overestimated the expected savings from reducing the “cost of goods sold” (i.e., the cost of purchasing products that are resold in commissaries or exchanges) and underestimated the expected costs from IT consolidation and headquarters relocation.

DOD’s Task Force May Have Overestimated the Expected Savings to Be Achieved from Reducing the Cost of Goods Sold

The task force estimated that most of the savings (i.e., about 70 percent annually) to be achieved from consolidating the four defense resale organizations would result from reducing the cost of goods sold. According to the task force’s business case analysis, retailers often pay different costs for identical products, and mergers are an opportunity for retailers to compare costs across a larger combined organization and make decisions that maximize savings. In the case of a consolidated defense resale organization, the task force stated in its business case analysis that savings could be achieved by implementing what the task force called category management reforms and by obtaining the lowest cost for identical products sold by both commissaries and exchanges. Task force officials added that one board of directors and one chief executive officer overseeing the consolidated resale organization would be more likely to achieve savings than the current, individual boards of directors and chief executive officers of the resale organizations.

GAO-18-151SP.

DeCA and one or more exchange organization, or

Two or more of the exchange organizations (and not DeCA).

In addition to overlap in identical products sold, task force officials told us that savings from category management reforms are dependent, in part, on the amount of overlap in vendors that sell products to the resale organizations. Specifically, task force officials stated that there are opportunities to reduce cost of goods sold through negotiations with vendors that sell items to both DeCA and the exchange organizations. For example, task force officials stated that the consolidated organization could negotiate better prices with a vendor that sells family-size items to DeCA and single-size items to the exchange organizations, even though those items are not identical.

Industry Benchmarks The industry benchmarks used by the task force are based on proprietary data gathered and owned by Boston Consulting Group based on its experience working with mergers and category management reforms in the private sector retail industry. These benchmarks were presented as a percentage of cost of goods sold; specifically, the task force estimated that savings from obtaining the lowest cost for identical items were from 1 to 1.5 percent of the cost of goods sold, and savings from category management efforts were from 2.5 to 4 percent of the cost of goods sold. We did not review and evaluate the underlying data that were used to develop the proprietary benchmarks.

Based on this information, the task force calculated the estimated savings that would result from reducing the cost of goods sold by multiplying the total cost of goods sold for all four resale organizations in fiscal year 2017 ($9.5 billion) by industry benchmarks developed by Boston Consulting Group (see sidebar for more information on these benchmarks). This calculation showed an estimated annual savings of $329 million to $517 million from reducing the cost of goods sold.

However, additional information from the task force suggests this savings estimate may be overstated because there is limited overlap in the products DeCA sells (i.e., groceries and household goods) and the products the exchange organizations sell (i.e., goods and services similar to retail stores). According to the task force, about $2.2 billion of DeCA’s cost of goods sold in fiscal year 2017 were for products also sold by at least one of the exchange organizations, which is equivalent to about 23 percent of the total cost of goods sold for the four resale organizations. This differs from the data provided in the business case analysis, which stated that 62 percent of the total cost of goods sold was for identical products sold by two or more resale organizations; however, that figure also includes products sold by two or more exchange organizations and not DeCA (we further discuss product overlap among the exchange organizations below). Given the more limited product overlap between DeCA and the exchange organizations, it is unclear whether using the total cost of goods sold for all four resale organizations as the basis for estimating savings was appropriate.

Additionally, the business case analysis did not fully identify the amount of vendor overlap that exists between DeCA and the three exchange organizations, but the data that were provided in the business case analysis suggest that limited vendor overlap exists. Specifically, the business case analysis provided data for 10 vendors that sell to the defense resale organizations, but those vendors represent less than 20 percent of the cost of goods sold to DeCA and the exchange organizations in fiscal year 2017. Further, only 5 of the 10 vendors identified in the business case analysis sold goods to both DeCA and the exchange organizations, and their cost of goods sold accounted for about 10 percent ($972 million) of the total cost of goods sold for the four resale organizations ($9.5 billion). Based on these data, the extent of vendor overlap between DeCA and the exchange organizations—and, as a result, how much can be saved through category management reforms by consolidating DeCA and the exchange organizations—is unclear.

Although the task force stressed the importance of a conservative estimate in both its business case analysis and in meetings with us, our assessment of the assumptions and methodology for estimating savings from the cost of goods sold found that a more conservative approach could have been used to better ensure estimated savings were not overstated. For example, one method could have been to multiply the benchmarks by the cost of goods sold for just the three exchange organizations (about $5.5 billion in fiscal year 2017, per the task force), as data provided by the task force indicate that about 67 percent of the cost of goods sold for the exchange organizations in fiscal year 2017 were for identical products sold by at least two exchange organizations. Another method, which task force officials suggested after we shared our concerns about their methodology, could have been to multiply the benchmarks by the cost of goods sold for the exchange organizations, plus the portion of DeCA’s cost of goods sold that overlaps with at least one exchange organization (about $2.2 billion in fiscal year 2017, per the task force). Either method would be more conservative than the one adopted in the business case analysis and would yield a savings estimate that is about 20 to 40 percent lower, but would be more consistent with the task force’s assertion that consolidation savings are dependent on the amount of overlap among the merging organizations.

DOD policy states that an economic analysis should base its analysis of benefits on facts and data whenever possible. Additionally, our Assessment Methodology for Economic Analysis states that an economic analysis should examine the effects of an action by considering relevant alternatives and justifying what the world would be like under each alternative; describe and justify the analytical choices, assumptions, and data used; and assess how plausible adjustments to each important analytical choice and assumption affect the estimates of savings.

Ensuring that the estimates for cost of goods savings are accurate is particularly important, as they account for approximately 70 percent of the task force’s overall savings estimate from consolidation. However, the task force did not fully identify and analyze in its business case analysis how many identical products are sold by both DeCA and the exchange organizations or how many vendors sell products to both DeCA and the exchange organizations. According to task force officials, they did not provide data on product overlap between DeCA and the exchange organizations because it would not change their savings methodology or estimate, and they did not provide more information on vendor overlap because of the proprietary nature of that data. However, the amount of product and vendor overlap that exists across the four resale organizations will have a direct effect on the amount of savings to be achieved from consolidation, as acknowledged by the task force.

Without the task force reassessing the approach it used to estimate savings from the cost of goods sold and, if necessary, making adjustments to those estimates, decision makers in DOD and Congress may lack confidence in the reliability of the task force’s savings estimates in the business case analysis and will not have complete information as they consider defense resale consolidation.

DOD’s Task Force May Have Underestimated the Expected Costs of Consolidating the Four Defense Resale Organizations

Based on our analysis of the business case analysis, we found that DOD’s task force may have underestimated the expected costs of consolidating the four defense resale organizations in two areas: (1) the development of new, common IT systems and (2) the location of a new headquarters for the consolidated organization.

Task Force May Have Underestimated the Cost of Consolidating Defense Resale Organizations’ IT Systems

The task force estimated in its business case analysis that most of the costs (i.e., about 50 percent annually) of consolidating the four defense resale organizations will result from developing new, common IT systems to support the consolidated organization. In the business case analysis, the task force stated that it worked with the four resale organizations to calculate a cost estimate of $292 million to $352 million for developing five types of IT systems that are needed for the consolidated organization: merchandising, store inventory management, financial management and general ledger, transportation and logistics, and ecommerce.

According to the business case analysis, the task force’s cost estimates for developing new, common IT systems for the consolidated organization were to be based on data provided by the resale organizations on recent or projected costs for replacing similar systems or performing major upgrades to existing systems, when available. For example, the task force’s estimate for the merchandising system was approximately $115 million, which the business case analysis stated is based on a $35 million estimate provided by AAFES, a $23.5 million estimate provided by NEXCOM, a $15 million estimate provided by MCCS, and a $41 million estimate provided by DeCA.

However, the task force’s cost estimate for IT consolidation may be understated because it is based, in part, on less expensive minor IT system upgrades and partial replacements, according to the resale organizations. Based on our analysis of information provided to us by the resale organizations, about $140 million (about 40 percent) of the overall IT cost estimate was based on what the resale organizations described as minor upgrades or partial replacements.

Specifically, while MCCS confirmed the cost estimates attributed to them in the business case analysis were for total IT system replacement costs, the other three resale organizations—AAFES, NEXCOM, and DeCA— disagreed with the task force’s characterization that all the data used to calculate IT system estimates represented costs for replacements or major upgrades. AAFES told us that the cost estimates cited in the business case analysis for its merchandising, financial management and general ledger, and transportation and logistics systems reflected minor upgrades of specific modules within the overall systems, and the cost to replace or upgrade the entire system would be significantly higher. NEXCOM stated that the cost estimates for upgrading its merchandising, store inventory management, and financial management and general ledger systems were for minor upgrades, not replacements or major upgrades, as stated by the task force. DeCA told us that the estimate for replacing its store inventory management system only represented 1 year of costs, even though DeCA plans to incur replacement costs through at least 2022.

According to the task force, the task force and the resale organizations agreed on the methodology for estimating IT costs, and the subject matter experts from the resale organizations provided the cost data used in the business case analysis. However, based on information provided by the resale organizations, it appears that the task force may not have always based its cost estimate on replacement or major upgrade costs— consistent with the key assumption that new IT systems would be developed for the consolidated resale organization—but, rather, used minor upgrade or partial replacement costs in some cases. Specifically, task force officials told us they believed the estimates provided by the resale organizations were too high to be minor upgrades or partial replacements, based on their understanding of IT requirements for resale operations.

Further, task force officials stated that their overall IT cost estimate was likely overstated, not understated. For example, they stated that their estimate is higher than what is typically spent for a private sector consolidation of similar size. However, the task force stated that it did not use private sector IT cost estimates in its business case analysis because it determined that public sector IT costs would likely be higher than private sector IT costs. Additionally, task force officials told us that some planned spending on existing IT systems by the four resale organizations would not be necessary as a result of consolidation. However, the business case analysis does not quantify how much future spending could be reduced or factor those reductions into the IT cost estimate.

According to the GAO Cost Estimating and Assessment Guide, cost estimates are developed based on assumptions that are defined to establish the baseline conditions the estimate will be built from. Additionally, our Assessment Methodology for Economic Analysis states that an economic analysis should define an appropriate baseline that represents the best assessment of what the world would be like under that alternative. Thus, estimating costs that reflect the baseline conditions is a key step in developing a sound cost estimate.

Additionally, we have previously reported that federal IT investments frequently fail or incur cost overruns and schedule slippages. As such, high-quality data are imperative for ensuring proper management and oversight of IT investments. The task force’s IT cost estimate is particularly important, as it represents about 50 percent of the total estimated costs for defense resale consolidation. Until the task force consults with the resale organizations to reassess the methodology for estimating IT costs, decision makers in DOD and Congress may not have a reliable and complete understanding of the estimated costs for the implementation of new, common IT systems, which is information DOD and Congress need as they consider defense resale consolidation.

DOD’s Task Force Did Not Provide a Cost Estimate for Relocating the Four Defense Resale Organizations to a New Headquarters Location

According to the task force, there would be costs associated with relocating AAFES, NEXCOM, MCCS, and DeCA to a new headquarters location, to include relocating existing personnel, hiring new personnel, and obtaining real estate. Although no relocation options were presented in the business case analysis, task force officials told us there are multiple options for where to locate the headquarters of a consolidated resale organization. One option cited by the task force would be to create a new headquarters in the Washington, DC, area, which would be the most expensive option, as it would likely involve acquiring new real estate and hiring personnel in a high-cost region. Another option cited by the task force would be to locate all exchange operations and staff at the existing AAFES headquarters in Dallas, TX, and maintain commissary operations and staff at the existing DeCA headquarters at Fort Lee, VA. This option would likely be less expensive, as personnel and available real estate are already present at both locations. In January 2020, task force officials also told us that an even less expensive option they might consider is maintaining commissary and exchange headquarters staff at their current locations, but having personnel work for the consolidated organization, rather than for DeCA or the exchange organizations.

Despite the potential for relocation costs, the task force did not include a range of cost estimates for different relocation options in its business case analysis. According to task force officials, relocation cost estimates were not included because the headquarters location has not been chosen, and costs will vary widely depending on the chosen location. While actual relocation costs will depend on the chosen headquarters location, this fact does not prevent the task force from presenting a range of cost estimates in advance of that decision being made. Task force officials also said that including relocation cost estimates would not have changed the conclusion of the business case analysis. However, without a range of relocation cost estimates, we were unable to assess the effect of relocation costs on the conclusion of the business case analysis.

DOD policy states that an economic analysis should quantify the costs associated with each alternative under consideration whenever possible so that they may be included in the economic analysis calculation. Additionally, our Assessment Methodology for Economic Analysis states that an economic analysis should quantify the important costs, where feasible, to inform decision makers about the economic effects of a proposed action. Without developing and providing a range of relocation cost estimates from the least expensive option to the most expensive, decision makers in DOD and Congress will not be fully informed about the costs of consolidation, which is necessary information for deciding whether to consolidate the four defense resale organizations.

Military Departments Officially Concurred with the Business Case Analysis, but DOD Did Not Share Their Accompanying Comments with Congress

The military departments officially concurred with the task force’s business case analysis for consolidating the four defense resale organizations. However, the military departments also provided written comments that detailed concerns with fundamental aspects of the business case analysis, to include: the use of proprietary industry benchmarks; estimated savings, costs, and timeline of the consolidation; and the proposed governance structure for the new resale organization. In an April 2019 report to Congress that summarized the business case analysis, DOD stated that the military departments agreed with the consolidation. However, the report did not disclose the military departments’ comments and concerns on the business case analysis, which are relevant as Congress considers defense resale consolidation.

In their written comments, the military departments either stated concerns about the consolidation or included critical comments from the exchange organizations—all of which opposed the consolidation. Specifically:

The Army concurred with the business case analysis but noted that funding for morale, welfare, and recreation programs must be preserved or increased as a result of the consolidation. In addition, the Army’s comment letter included as an attachment written comments from AAFES, which expressed opposition to the consolidation and detailed concerns with the business case analysis. For example, AAFES stated that the business case analysis relied on unverifiable, proprietary industry benchmarks that overstated the benefits of consolidation, underestimated the costs and time to consolidate, and did not account for recent efforts by the resale organizations to reduce costs by collaborating on a purchasing alliance.

The Air Force also concurred with the business case analysis, but noted in its comments that mergers and acquisitions have historically cost more, taken longer, and saved less than originally expected. As a result, the Air Force recommended that a phased implementation plan be followed to guard against financial risk. The Air Force also stated that morale, welfare, and recreation funding currently provided by the exchanges should be maintained while opportunities are examined to reduce the need for appropriated funding.

The Navy initially non-concurred with the business case analysis in December 2018. In its comment letter, the Navy stated that the task force’s analysis was flawed beyond repair and included comments from NEXCOM and MCCS that also opposed consolidation. For example, the exchanges’ comments stated that the expected cost savings were overstated, that potential inefficiencies from consolidation were not discussed, and that the resale organizations could achieve cost savings through greater collaboration without the need for consolidation. NEXCOM and MCCS also stated concern that the task force’s savings projection relied heavily on unverifiable industry benchmarks. In addition, MCCS expressed concern that consolidation could result in unexpected costs from separating exchange operations from the rest of MCCS operations, which also include the Marine Corps’ morale, welfare, and recreation and family programs. In January 2019, the Navy changed its position to concur subject to several significant comments and clarifications, and attached a letter detailing comments and concerns similar to those it submitted with its original non-concurrence in December 2018.

Officials from the resale organizations further articulated their concerns about the business case analysis when they met with us. For example, resale officials told us they are concerned that savings are overstated, that costs are understated, and that the proprietary benchmarks used by the task force are unverifiable or may not be applicable to the public sector. Exchange officials also stated that they are worried about the effect of consolidation on morale, welfare, and recreation funding generated by the exchanges. Specifically, exchange officials are concerned that exchange revenue currently used for morale, welfare, and recreation programs could be used to pay for consolidation expenses or to reduce the amount of appropriated funds allocated to the commissaries.

Despite the concerns detailed in the comments from the military departments and resale organizations, DOD did not include them in its April 2019 report to Congress summarizing the results of the business case analysis. The National Defense Authorization Act for Fiscal Year 2019 required DOD to include in its report the recommendations of the Secretaries of the military departments regarding the plan to consolidate the defense resale organizations. When we asked the task force why DOD did not provide Congress with the comments and concerns cited by the military departments and the resale organizations, officials stated that they were advised by DOD’s Office of General Counsel not to include the comments because they contained information that may have disclosed DOD’s deliberative process.

Task force officials also stated that the savings, cost, and timeline estimates in the business case analysis were conservative, and that the proprietary industry benchmarks are based on years of experience by Boston Consulting Group and similar to those cited by prior studies. Regarding the purchasing alliance formed by the resale organizations to reduce their cost of goods sold, task force officials stated they do not believe such efforts to reduce costs will be sustained without a single chief executive officer and board of directors to ensure those efforts continued, as recommended in the business case analysis. Finally, the task force stated in the business case analysis that any savings achieved from consolidation could be used to increase morale, welfare, and recreation funding or reduce appropriations used to fund DeCA, and that decisions on how to allocate savings will be made by the proposed board of directors.

According to task force officials, some of the concerns articulated by the military departments and the exchanges could be motivated by a general opposition to consolidation. However, without a more complete reporting of the military departments’ perspectives on consolidation and the task force’s response to those comments, Congress may be unaware of the views various organizations within DOD have regarding the business case analysis, which is relevant information as Congress considers defense resale consolidation. Moreover, fully reporting the comments and concerns could strengthen trust and collaboration among the task force, military departments, and resale organizations on any future resale reforms.

Conclusions

Four defense resale organizations currently operate about 240 commissaries (operated by DeCA) and 2,500 exchange facilities (operated by AAFES, NEXCOM, and MCCS) worldwide to provide reduced-priced groceries and retail goods and services to DOD servicemembers, their families, and retirees. DeCA operations are funded in part by appropriations, which have totaled approximately $1.3 billion in recent years. By law the commissary and exchange organizations must be operated separately. In November 2018, a DOD task force completed a business case analysis and concluded that consolidating the four defense resale organizations into a single organization would result in several hundred million dollars in annual cost savings. However, we found that the task force’s projected savings from reducing the cost of goods sold may be overestimated, and that projected costs for IT development and headquarters relocation may be underestimated. Further, while the military departments concurred with the task force’s recommendation to consolidate, DOD did not fully share their comments and concerns about the business case analysis with Congress. DOD’s proposed consolidation will cost several hundred million dollars, take years to implement, and involve multiple DOD organizations. Given the cost and complexity of the proposed defense resale consolidation, DOD can ensure that Congress has the reliable information it needs to consider consolidation by reviewing and updating savings and cost estimates and sharing comments and concerns from the military departments.

Recommendations for Executive Action

We are making the following four recommendations to DOD.

The Secretary of Defense should ensure that the DOD Chief Management Officer direct the task force to reassess its approach to estimating savings from cost of goods sold—to include reassessing its use of the cost of goods sold for all four defense resale organizations rather than, for example, just for the three exchange organizations—and make any necessary adjustments to its savings estimates for consolidation and provide that updated information to Congress. (Recommendation 1)

The Secretary of Defense should ensure that the DOD Chief Management Officer direct the task force, in consultation with the resale organizations, to reassess its methodology for estimating IT costs of consolidation, and make any necessary adjustments to its range of IT cost estimates and provide that updated information to Congress. (Recommendation 2)

The Secretary of Defense should ensure that the DOD Chief Management Officer direct the task force to develop a range of cost estimates for relocating the defense resale organizations, and adjust its range of cost estimates for consolidation and provide that updated information to Congress. (Recommendation 3)

The Secretary of Defense should ensure that the DOD Chief Management Officer provide additional written information to Congress on the comments and concerns from the military departments and resale organizations on the task force’s November 2018 business case analysis, as well as the task force’s response to those comments and concerns. (Recommendation 4)

Agency Comments and Our Evaluation

We provided a draft of this product to DOD for review and comment. In its comments, reproduced in appendix III and summarized below, DOD concurred with the first three recommendations and did not concur with the fourth recommendation. DOD also provided technical comments, which we incorporated as appropriate.

DOD stated in its letter that it continues to firmly believe that consolidation of above-store operations of DeCA and the military exchanges is the right path forward and that it intends to move forward with this effort. DOD also requested that we consider the first three recommendations as implemented, based on information provided in the letter and as detailed below.

Regarding the first recommendation for the task force to reassess its approach to estimating savings from cost of goods sold—to include reassessing its use of cost of goods sold by all four defense resale organizations rather than, for example, just the three exchange organizations—and make any necessary adjustments to its savings estimates for consolidation and provide that updated information to Congress, DOD stated that it had reassessed its approach and found that there is significant overlap and, therefore, savings opportunity in products sold by DeCA and the exchanges. DOD also provided revised savings estimates that exclude DeCA’s cost of goods sold from its methodology that show net savings ranging from $309 million to $739 million in the first 5 years of consolidation, followed by $255 million to $457 million per year thereafter. These figures are about 44 percent to 55 percent lower than the business case analysis’s estimate for the first 5 years and about 32 to 35 percent lower per year thereafter. By providing these revised savings estimates, we believe that DOD has addressed the intent of the recommendation.

With regard to the second recommendation for the task force to reassess its methodology for estimating IT costs of consolidation, and make any necessary adjustments to its range of IT cost estimates and provide that updated information to Congress, DOD stated that the task force followed up with AAFES, NEXCOM, and DeCA to get an update on the cost estimates these entities expressed concern about to us. However, according to DOD, those resale organizations were unable to provide alternate data to use in place of the numbers in the business case analysis. DOD further stated in its letter that because no alternative data were provided, the department will continue to use the estimate in the business case analysis and will reengage with the resale organizations to develop more detailed IT design plans and make any necessary updates to the IT cost estimates as integration planning moves forward. As DOD develops its more detailed IT design plans and associated cost estimates, we will follow up with the department, including the resale organizations, to determine whether this recommendation has been addressed.

In commenting on the third recommendation for the task force to develop a range of cost estimates for relocating the defense resale organizations, and adjust its range of cost estimates for consolidation and provide that updated information to Congress, DOD provided three possible courses of action, along with corresponding cost estimates. These possible courses of action, from least expensive to most expensive, are: (1) maintain operations at all four existing locations (no cost); (2) maintain commissary operations at DeCA headquarters, perform all exchange functions at AAFES headquarters, and close the NEXCOM and MCCS headquarters (one-time costs of $5.5 million and recurring annual costs of $1.3 million); and (3) create a new headquarters to perform all commissary and exchange operations near Washington, D.C. (one-time costs of $19.6 million and recurring annual costs of $19.7 million). DOD stated that consolidation would still result in financial benefits, even if the department chooses the most costly of these courses of action. By providing these cost estimates, we believe that DOD has addressed the intent of the recommendation.

While we have determined that DOD has met the intent of the first and third recommendations, we also note that, in its comment letter, the department questioned some aspects of our analysis and conclusions regarding the first three recommendations. We stand by our analysis and conclusions and offer the following response:

DOD stated in its comment letter that modifying the business case analysis’s approach to cost of goods savings would result in an incorrect use of benchmarks and go against industry best practice. For example, DOD stated that estimating savings by using the cost of goods sold for just the three exchange organizations, or for the three exchange organizations plus a portion of DeCA, would be flawed. However, as noted in our report, the latter method was recommended to us by task force officials when we raised concerns about the accuracy of the task force’s savings estimates in the business case analysis. In addition, multiplying the benchmarks by the cost of goods sold for the exchange organizations, as opposed to for all four resale organizations, would be more consistent with the assertion in the business case analysis that consolidation savings are dependent on the overlap among the merging organizations.

DOD questioned the accuracy of some of our figures in the report by providing different data on product and vendor overlap between DeCA and the exchange organizations. However, this information was not included in the task force’s business case analysis or offered to us during the course of our audit. In addition, when we asked for supporting documentation that would allow us to validate the new figures, DOD did not provide any.

DOD stated in its comments that excluding all or including only a portion of DeCA’s cost of goods sold implies that there is no opportunity to achieve savings between DeCA and the exchanges. Our report does not make this assertion, but rather offers a methodology that would result in a more conservative savings estimate, consistent with the data presented in the business case analysis and provided by task force officials, to better ensure that estimated savings were not overstated.

As noted above, DOD did not concur with the fourth recommendation for the department’s Chief Management Officer to provide additional written information to Congress on the comments and concerns from the military departments and resale organizations on the task force’s November 2018 business case analysis, as well as on the task force’s response to those comments and concerns. DOD stated in its written response to our report that the department considered all the comments submitted in its decision-making process and that all of the military department secretariats agreed with above-store consolidation, despite their comments on the business case analysis. DOD further stated that the military department comments regarding the business case analysis were shared with congressional committee professional staff, and DOD suggested in its letter that this recommendation be closed.

However, DOD’s written response did not provide information on which comments were shared, whether those comments were communicated in writing or orally, or which committee or committees received information on the comments. In their written comments on the business case analysis, the military departments detailed concerns with fundamental aspects of the analysis, to include: the use of proprietary industry benchmarks; estimated savings, costs, and timeline of consolidation; and the proposed governance structure for the new resale organization. We continue to believe that implementing this recommendation would help ensure that Congress has the full information it needs as it considers defense resale consolidation and would also help strengthen trust and collaboration among the various DOD stakeholders involved in defense resale, particularly given their role in any consolidation, should one occur. We will follow up with DOD as part of our regular recommendation follow- up process.

We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; and the Secretaries of the Army, Air Force, and Navy. In addition, the report is available at no charge on our website at https://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-2775 or FieldE1@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 IV.

Appendix I: Prior GAO Work on Commissaries and Exchanges

The National Defense Authorization Act for Fiscal Year 2016 mandated that the Department of Defense (DOD) report on DOD’s plan to achieve budget neutrality for commissaries and exchanges—which DOD interpreted as ending the use of appropriated funding—and included a provision for us to assess DOD’s report. In November 2016, we found that DOD’s May 2016 report did not provide a plan for achieving budget neutrality. DOD reported that it would not be able to eliminate fully the use of appropriated funds for defense resale, but the department did not provide detailed information supporting that conclusion. Instead, the report stated that DOD expected to achieve $2 billion in cost savings over a 5-year period from fiscal year 2017 through fiscal year 2021. However, we found that the report did not include any assumptions, methodology, or specific time frames related to initiatives that would lead to these savings. We recommended that DOD provide information to Congress to support its conclusion about budget neutrality and develop a plan for achieving reductions to defense resale appropriations. DOD concurred with our recommendations, but as of February 2020 had not addressed them.

In March 2017, we reported on DOD’s commissary operations, including the extent to which the Defense Commissary Agency (DeCA) had assurance that it was maintaining the desired savings rate for its customers. DeCA’s desired savings rate—which at the time of our March 2017 report was 30 percent and is now 23.7 percent—shows how much a customer can expect to save on grocery purchases at a commissary in comparison to purchases at other local grocery stores. We found that DeCA lacked reasonable assurance that it was maintaining its desired savings rate for commissary customers because of weaknesses in its methodology for calculating the savings rate. For example, the methodology did not use a random sample of overseas commissaries or account for seasonal and geographic variations in item prices. We also found that DeCA’s business model departed from practices generally employed by commercial grocery stores. For example, DeCA did not assess the contribution of the sale of each product to a given store’s total sales in determining which products to sell, and it had not conducted cost- benefit analyses for its use of stocking and custodial service contracts or product distribution options across all commissaries. We recommended that DOD (1) address limitations identified in its savings rate methodology; (2) develop a plan with objectives, goals, and time frames to improve efficiency in product management; and (3) conduct comprehensive cost-benefit analyses for service contracts and distribution options. As of February 2020, DOD had addressed the first two recommendations but had not addressed the third recommendation.

Appendix II: Assessment of the Department of Defense’s (DOD) Business Case Analysis on Defense Resale Consolidation

We assessed DOD’s business case analysis on consolidating the four defense resale organizations against the five key elements of an economic analysis, as described in our Assessment Methodology for Economic Analysis (see table 1).

Appendix III: Comments from the Department of Defense

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact Staff Acknowledgments

Elizabeth A. Field, (202) 512-2775 or fielde1@gao.gov In addition to the contact named above, Suzanne Perkins (Assistant Director), Geoffrey Peck (Analyst-in-Charge), Pedro Almoguera, Noah Gerber, Mae Jones, Matthew Kienzle, Amie Lesser, Felicia Lopez, and Jeanne Sung made key contributions to this report.