National Defense:

Pilot Project to Expand Merchandise Sold in Commissary Stores Will Likely Have a Negligible Impact on the Exchange Dividend

GAO-06-256R: Published: Dec 22, 2005. Publicly Released: Dec 22, 2005.

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The Department of Defense (DOD) has three military exchanges--the Army and Air Force Exchange Service, the Navy Exchange, and the Marine Corps Exchange--that operate retail and other specialty stores. During fiscal years 2000 through 2004, the three exchanges provided more than $300 million annually, an average of 55 to 70 percent of their profits, in the form of a dividend to support the military services' morale, welfare, and recreation programs. DOD, through the Defense Commissary Agency (DeCA), also operates commissaries that sell groceries and authorized household products at the lowest practical price, charging patrons only for the cost of goods sold plus a 5 percent surcharge. The funds generated by the surcharge are used to construct new and modernize existing commissaries. The Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 authorized the Secretary of Defense to conduct a pilot project involving the sale of film, one-time use cameras, and telephone cards in not less than 10 commissary stores for a period selected by the Secretary, but not less than 6 months. Previously, these items had only been sold by the exchanges. Concerns were expressed by some associated with the exchanges that allowing the commissary stores to sell these items could adversely affect the exchange dividend, which could reduce the funding for the military services' morale, welfare, and recreation programs. The legislation also included a requirement that we examine that issue. In response to the 2005 act, we determined (1) the status of the pilot project to sell film, one-time use cameras, and telephone cards in select commissaries; and (2) the potential impact that the pilot project could have on the exchange dividend.

Officials from the three exchanges and DeCA signed a memorandum in November 2005 agreeing to institute a pilot project to sell film, one-time use cameras, and telephone cards at 10 commissaries in the continental United States. DOD implemented the pilot project at one location in November 2005 and plans to implement it at the other nine locations in December 2005. The pilot project is scheduled to last for 2 years. As designed, the pilot project is a test of convenience. The commissaries will purchase the selected film, one-time use cameras, and telephone cards from the exchanges at the exchanges' retail price and sell the items at the same price as the exchanges. The commissaries will receive a management fee equal to 2 percent of the sale price of the items to offset the costs for handling the pilot project items and will not collect a surcharge on these items. The pilot project should have a negligible impact on the exchange dividend because of the design of the pilot project and the small percentage of sales from film, one-time use cameras, and telephone cards. The commissaries will purchase all pilot project items from the exchanges, less a 2 percent management fee. Further, based on our analysis of the exchanges' sales data, the sale of all film, one-time use cameras, and telephone cards comprise a very small percentage (less than 1 percent from fiscal years 2003 through 2005) of annual total exchange sales, and the pilot project calls for only selling 8 varieties of these items at 10 locations. Moreover, the exchanges would continue to sell the items at their locations throughout the pilot project. Based on fiscal year 2004 sales and dividend data, we determined that the fiscal year 2004 exchange dividend would have decreased by about $600,000, or 0.2 percent, if all sales of all varieties of these items were made at the commissaries. Our estimate represents a worst case scenario because it includes the sale of all film, one-time use cameras, and telephone cards, rather than the eight items selected for the pilot project; assumes that all sales of film, one-time use cameras, and telephone cards would occur at the commissaries instead of the exchanges; and assumes that the sales of these items remain the same as when they were only sold in the exchanges.

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