Defense Infrastructure:

Impact of Purchasing from Local Distributors All Alcoholic Beverages for Resale on Military Installations on Guam

GAO-10-563R: Published: May 28, 2010. Publicly Released: May 28, 2010.

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The military exchange services purchase alcoholic beverages for resale on military installations as part of their mission to provide quality goods and services at competitive low prices to their customers--primarily military service members and their families. The revenue generated from the retail sale of products, including alcoholic beverages, supports most of the operating costs of the exchanges and military package stores as well as Morale, Welfare, and Recreation programs. Such programs generally provide for the physical, cultural, and social needs of service members and their families, and include fitness centers, child development services, libraries, and recreation centers. As primarily self-supporting enterprises, military exchanges and package stores are funded predominantly with nonappropriated funds, such as cash and other assets generated through business operations and sales to Department of Defense (DOD) authorized patrons, but certain administrative and support costs of the exchanges are paid by DOD using appropriated funds. In Guam, the Navy Exchange Service Command (NEXCOM) operates exchange activities on Naval Base Guam and the Army and Air Force Exchange Service (AAFES) operates exchange activities on Andersen Air Force Base. Section 652 of the National Defense Authorization Act for Fiscal Year 2010 required us to evaluate the impact of reimposing a requirement that DOD not provide support funds to exchanges unless they purchase all alcoholic beverages intended for resale on military installations on Guam from local distributors. Section 8073 of the Department of Defense Appropriations Act, 2008 required that no funds appropriated by that act be used to support nonappropriated fund activities that did not use local distributors when making wholesale purchases of alcoholic beverages for resale at military installations on Guam during fiscal year 2008 (hereafter "local purchase requirement"). This requirement was not reenacted in the Department of Defense Appropriations Act, 2009, and currently there is no local purchase requirement on Guam. This report examines the (1) actions taken by DOD to address the local purchase requirement; (2) impact of the fiscal year 2008 local purchase requirement on wholesale and retail prices; (3) impact of the local purchase requirement on funding for Morale, Welfare, and Recreation programs; and (4) perspectives of NEXCOM and AAFES on the imposition of the local purchase requirement.

The local purchase requirement, which prohibited DOD from using funds appropriated by the Department of Defense Appropriations Act, 2008 to support nonappropriated fund activities unless they purchased alcoholic beverages for resale on Guam from local distributors, went into effect on November 13, 2007, when the Department of Defense Appropriations Act for Fiscal Year 2008 was signed into law. However, DOD officials indicated that the exchanges did not begin to purchase alcoholic beverages solely from local distributors until September 2, 2008. The exchanges agreed with local distributors to complete the transition to the local purchase requirement and start purchasing all alcoholic beverages solely from local sources on this date. Following the implementation of the local purchase requirement, both wholesale and retail prices of alcoholic beverages noticeably increased while the number of previously available products decreased. The exchanges adjusted retail prices for alcoholic beverages to account for the increase in wholesale costs. However, these prices were in effect for only 1 month because the local purchase requirement was not re-enacted for fiscal year 2009, and currently there is no local purchase requirement on Guam. As such, we could not isolate the impact that the increase in retail prices had on funding for Morale, Welfare, and Recreation programs because of the limited data from 1 month of sales. NEXCOM and AAFES officials anticipated that reimposing a local purchase requirement would negatively impact the military community because, based on the prior experience, retail prices would increase, while the selection of products available for sale would decrease. Moreover, the officials noted that an increase in alcoholic beverage retail prices due to a local purchase requirement could potentially reduce funding for Morale, Welfare, and Recreation programs because of a resulting decrease in sales.

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