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Distributors All Alcoholic Beverages for Resale on Military 
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GAO-10-563R: 

United States Government Accountability Office: 
Washington, DC 20548: 

May 28, 2010: 

The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate: 

The Honorable Ike Skelton:
Chairman:
The Honorable Howard P. McKeon:
Ranking Member:
Committee on Armed Services:
House of Representatives: 

Subject: Defense Infrastructure: Impact of Purchasing from Local 
Distributors All Alcoholic Beverages for Resale on Military 
Installations on Guam: 

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.[Footnote 1] 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[Footnote 2]. 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 (a copy of section 652 is provided in 
enclosure I of this report).[Footnote 3] 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").[Footnote 4] This requirement was not reenacted in the 
Department of Defense Appropriations Act, 2009,[Footnote 5] and 
currently there is no local purchase requirement on Guam.[Footnote 6] 
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. 

To determine the actions DOD took to comply with the local purchase 
requirement, we obtained and reviewed documentation and interviewed 
DOD officials and local distributors about the steps taken by NEXCOM 
and AAFES to purchase alcoholic beverages from local distributors. We 
also obtained and analyzed documents from NEXCOM and AAFES related to 
the establishment of alcoholic beverage retail prices under the 
requirement. We reviewed applicable legal and departmental guidance, 
including DOD instructions and directives, and compared them with 
methods used by NEXCOM and AAFES to purchase alcoholic beverages and 
set retail prices on Guam.[Footnote 7] To determine the impact of the 
local purchase requirement on wholesale and retail prices, we compared 
wholesale and retail prices before the imposition of the local 
purchase requirement with those under the requirement. To review DOD's 
process for setting retail prices, we obtained and reviewed price 
surveys performed by NEXCOM and traced wholesale costs to price quotes 
provided by local distributors. However, retail prices were adjusted 
at exchanges to reflect the local purchase requirement for only a 1-
month period at the end of fiscal year 2008, so we could not project 
how wholesale or retail prices would be impacted if the local purchase 
requirement were to be reimposed since experiences under such a 
limited period of time cannot be projected over time. We also could 
not identify the overall impact to Morale, Welfare, and Recreation 
funding because this limited amount of sales data does not show a 
significant impact on such funding, though it might show impacts over 
time if the local purchase requirement were to be in effect for a 
longer period. To identify the perspectives of exchange officials 
regarding the imposition of the local purchase requirement, we 
interviewed officials from NEXCOM and AAFES headquarters. 

We conducted this performance audit from October 2009 through May 
2010, 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. 

Summary: 

The local purchase requirement, which prohibited DOD from using funds 
appropriated by the Department of Defense Appropriations Act, 
2008[Footnote 8] 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. 

In commenting on this report, DOD stated that it concurred with the 
report. DOD also provided technical comments, which we incorporated as 
appropriate into this report. DOD's comments are reprinted in 
enclosure IV. 

Background: 

DOD exchanges include groupings of businesses and services that 
provide primary retailer locations for nongrocery merchandise and 
services on military installations.[Footnote 9] DOD policy states that 
the exchanges form an integral part of the nonpay compensation system 
for active duty personnel and have the dual mission of providing (1) 
authorized patrons, such as service members and their families, with 
merchandise and services necessary for their health, comfort, and 
convenience; and (2) a source of funding for the military services' 
Morale, Welfare, and Recreation programs. In Guam, NEXCOM operates 
exchange activities on Naval Base Guam and AAFES operates exchange 
activities on Andersen Air Force Base. 

Although NEXCOM and AAFES run their exchanges independently on Guam, 
NEXCOM provides warehousing and distribution support to AAFES, 
including the supply and shipment of alcoholic beverages and other 
merchandise. NEXCOM purchases all alcoholic beverages directly from 
manufacturers and distributors for retail sale in military exchanges 
and package stores on Guam, including AAFES exchanges and the package 
store on Andersen Air Force Base. AAFES places orders for alcoholic 
beverages with NEXCOM rather than purchasing alcoholic beverages from 
manufacturers and distributors. NEXCOM operates a distribution center 
in Agana, Guam that sells and distributes alcoholic beverages directly 
to the exchanges and package stores.[Footnote 10] 

Military exchanges and Morale, Welfare, and Recreation programs are 
nonappropriated fund activities that are supported primarily with 
revenue generated from the retail sale of merchandise and services, 
but appropriated funds are used to pay certain administrative and 
support costs of the exchanges.[Footnote 11] In addition to helping 
support the operation of the exchanges, revenue from the exchanges 
provides a source of funding for Morale, Welfare, and Recreation 
programs. On October 1, 2009, Andersen Air Force Base became part of 
Joint Region Marianas with Naval Base Guam.[Footnote 12] As such, the 
Navy currently provides funding support for Morale, Welfare, and 
Recreation programs at Andersen Air Force Base and Naval Base 
Guam.[Footnote 13] The Office of the Commander, Navy Installations 
Command is the Navy office responsible for overall operation of 
Morale, Welfare, and Recreation programs within the Navy. Portions of 
the profits generated from the resale of products by an installation's 
exchange activities--including alcoholic beverages--are used to 
support Morale, Welfare, and Recreation programs at that installation. 
NEXCOM receives 30 percent of such profits, while the Office of the 
Commander, Navy Installations Command receives the remaining 70 
percent. The Office of the Commander, Navy Installations Command 
distributes 25 percent of an installation's net profits, taken out of 
its 70 percent share of overall profits, to the Navy region where the 
installation is located. The remaining amount is used to fund Navy-
wide Morale, Welfare, and Recreation programs. Figure 1 illustrates 
how Morale, Welfare, and Recreation funds are distributed. 

Figure 1: Office of the Commander, Navy Installations Command 
Distribution of Funding Morale, Welfare, and Recreation Programs: 

[Refer to PDF for image: illustration] 

Exchange Net Profits: 100 Percent: 

Morale, Welfare, and Recreation Navy Central Fund: 70 percent share; 
- Local Payout to Region: 25 percent share (of net profits) if local 
exchange is profitable. 

Navy Exchange and Services Command: 30 percent share; Used for 
construction and renovations of facilities and for improvements to 
information systems equipment. 

Source: Office of the Commander, Navy Installations Command. 

[End of figure] 

DOD Instruction 1330.21 states that when purchasing alcohol for 
resale, subject to certain exceptions, alcoholic beverages shall be 
purchased by the exchanges from the most competitive source and 
distributed in the most economical manner. Under the local purchase 
requirement, NEXCOM and AAFES could still purchase alcoholic beverages 
from the most competitive local source, but were limited to the best 
price offered by local distributors. DOD Instruction 1330.09 provides 
general guidance regarding the pricing of merchandise, stating that 
merchandise sold through exchanges should be priced in a substantially 
uniform manner at the lowest practicable level consistent with the 
mission to provide authorized patrons with articles necessary for 
their health, comfort, and convenience. Retail prices for alcoholic 
beverages are subject to this guidance. While DOD Instruction 1330.09 
does not provide any specific guidance for setting retail prices for 
malt beverages or wine products, it does provide that distilled 
spirits sold outside the United States and the District of Columbia 
shall be priced within the range of prices established for exchange 
stores located in the United States unless the same alcoholic 
beverages are sold locally for less. According to this instruction, 
when distilled spirits are available locally for less than exchange 
prices, then the exchanges may set retail prices for those products at 
10 percent less than the best local shelf price. 

Actions Taken by DOD to Address the Local Purchase Requirement: 

NEXCOM and AAFES collaborated with alcoholic beverage manufacturers 
and local distributors over a period of 9 months to implement the 
local purchase requirement contained in the Department of Defense 
Appropriations Act, 2008 (a copy of the local purchase requirement 
from the act is included in enclosure II of this report). The local 
purchase requirement, which prohibited DOD from using funds 
appropriated by that Act 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, Fiscal Year 2008 was signed 
into law. However, according to DOD officials, due to the time it took 
to complete the collaboration process, the exchanges did not begin to 
purchase alcoholic beverages solely from local distributors until 
September 2, 2008. On this date, all alcoholic beverage retail prices 
were adjusted at Guam military exchanges to reflect new wholesale 
costs associated with the local purchase requirement. During the 
period between November 13, 2007 and September 2, 2008, DOD expended 
fiscal year 2008 appropriated funds in support of the exchanges. 

NEXCOM and AAFES officials stated that they were not aware of the 
forthcoming local purchase requirement contained in the Department of 
Defense Appropriations Act, 2008 until after the passage of the act. 
Therefore, no planning was done to prepare for the transition. Through 
a series of meetings and correspondence that took place from December 
2007 to August 2008, NEXCOM, AAFES, alcoholic beverage manufacturers, 
and Guam local distributors collaborated to perform the steps 
necessary to implement the new requirement. Table 1 provides a 
timeline of key events related to transitioning to the purchase of 
alcoholic beverages solely from local Guam distributors. 

Table 1: Timeline of Key Events to Transition to Local Purchase 
Requirement: 

Date: November 13, 2007; 
Key events: Department of Defense Appropriations Act, 2008 was signed 
into law. 

Date: November 26, 2007; 
Key events: NEXCOM became aware of the local purchase requirement. 

Date: December 11, 2007; 
Key events: NEXCOM and AAFES met to begin to develop a joint 
transition strategy. 

Date: January 30, 2008; 
Key events: NEXCOM, AAFES, and alcoholic beverage manufacturers met to 
discuss the new requirement. NEXCOM and AAFES requested that the 
manufacturers already supplying alcoholic beverages for retail sale at 
military installations on Guam provide contact information on various 
local distributors who held distribution rights for the manufacturers' 
products on Guam. According to NEXCOM and AAFES officials, due to 
licensing agreements with the manufacturers, local distributors held 
the rights to distribute certain alcoholic beverage products on Guam, 
thereby requiring NEXCOM and AAFES to secure such products from those 
distributors. 

Date: March 7, 2008; 
Key events: NEXCOM and AAFES received all of the contact information 
from the manufacturers. NEXCOM and AAFES personnel then provided local 
distributors with current NEXCOM warehouse stock assortments, and 
requested that the local distributors send them a list of products 
that the distributors could provide along with accompanying wholesale 
price quotes for each product. 

Date: April 28/29, 2008; 
Key events: NEXCOM and AAFES personnel met with local distributors to 
discuss wholesale prices, local retail prices, stock assortments, 
warehouse capabilities, electronic data interchange abilities, and 
payment terms. According to AAFES officials, this was the earliest 
date that all local distributors were able to meet. 

Date: May 31, 2008; 
Key events: Military installations on Guam sent their forecasted 
alcoholic beverage requirements to local distributors in order to get 
updated stock assortments price quotes. 

Date: June - July 30, 2008; 
Key events: NEXCOM officials said that the stock lists and price 
quotes they received from the local distributors were not on time, 
were missing data and/or required revisions. As such, a second request 
for stock lists and price quotes was sent out in July 2008. 

Date: July 1, 2008; 
Key events: Last shipment date of alcoholic beverages sent from the 
United States to the NEXCOM distribution center on Guam. 

Date: July - August, 2008; 
Key events: Guam distributors submitted pricing, terms, and conditions 
to NEXCOM and AAFES. AAFES and NEXCOM then worked with local 
distributors to develop and refine retail business agreements to 
secure alcoholic beverages. An AAFES official indicated that by July 
31, 2008 half of the local distributors had not properly filled out or 
returned the retail business agreements. 

Date: September 2, 2008; 
Key events: NEXCOM and AAFES increased retail prices for all alcoholic 
beverages to reflect new wholesale costs under the local purchase 
requirement. Exchanges started to obtain alcoholic beverages from 
local distributors. 

Source: GAO analysis of information provided by NEXCOM and AAFES. 

[End of table] 

On September 2, 2008, alcoholic beverage retail prices were adjusted 
at Guam military exchanges to reflect new wholesale costs associated 
with the local purchase requirement. However, NEXCOM and AAFES 
officials as well as local distributors indicated that although 
product prices had increased, in some cases, the exchanges had not 
ordered alcoholic beverages from local distributors as some products 
were still in stock. NEXCOM and AAFES officials explained that this 
date allowed time for local distributors to increase their product 
supply to support the new military requirements on Guam; allowed time 
for the local on-hand inventory of alcoholic beverages at NEXCOM's 
distribution center to be depleted; made it easier for military stores 
to change price data to reflect new wholesale costs at one time in 
their information systems; and was the best way to manage customer 
expectations as it provided a one-time increase in all alcohol product 
prices and minimized potential disruption of product availability. 
Four of the five local distributors that we contacted noted that they 
would require lead time to start supplying alcoholic beverages to the 
military exchanges. However, this lead time varied depending on the 
distributor. For instance, one local distributor indicated that it 
would need 45 days, while another noted that it would require 3 to 6 
months, and one indicated that the amount of lead time needed would 
depend on the type of product ordered by the exchanges. Another 
distributor commented that the time frame leading up to the September 
2, 2008, date to begin purchasing from local vendors was realistic. 

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.[Footnote 14] 
Notwithstanding section 8073, for 9 of the 10 months the requirement 
was in effect in fiscal year 2008 NEXCOM and AAFES did not purchase 
all of their alcoholic beverages for resale locally and DOD continued 
to use appropriated funds to support them. 

The Department of Defense Appropriations Act, 2009, which became law 
on September 30, 2008, did not include a local purchase requirement 
for Guam. Therefore, because the local purchase requirement was no 
longer in effect, on October 1, 2008, NEXCOM and AAFES started to 
purchase alcoholic beverages from other sources, including directly 
from the manufacturer, consistent with previous practices. 

Impact of the Local Purchase Price Requirement on Wholesale and Retail 
Prices: 

Following the imposition of the local purchase requirement on Guam, 
both wholesale and retail prices of alcoholic beverages noticeably 
increased while the number of products available to customers 
decreased. The exchanges set retail prices for alcoholic beverages on 
Guam using price surveys of the local civilian market that are 
performed on a monthly basis in conjunction with supplier wholesale 
price quotes and exchange prices in the United States. If wholesale 
prices of alcoholic beverages were to increase, then retail prices on 
the military installations could also increase. 

Overall, wholesale prices for alcoholic beverages purchased from local 
distributors were higher than those prior to the local purchase 
requirement. DOD instruction 1330.21 provides that the exchanges 
shall, subject to certain exceptions, purchase alcoholic beverages for 
resale from the most competitive source for all categories of 
alcoholic beverages--malt beverages, wine products, and distilled 
spirits.[Footnote 15] However, the instruction does not provide 
additional specific requirements for the purchase of alcoholic 
beverages for resale at overseas military installations. In the 
absence of such requirements, NEXCOM and AAFES officials told us that 
they purchase alcoholic beverages from the most competitive source and 
indicated that purchasing them directly from the manufacturer is the 
least expensive method in securing alcoholic beverages for retail sale 
at military installations on Guam. According to NEXCOM and AAFES 
officials, seeking the most competitive wholesale price is in line 
with the mission of the military exchange system in maintaining 
customer service and generating earnings as a source of funding for 
military Morale, Welfare, and Recreation programs. This process of 
purchasing alcoholic beverages from the most competitive source is 
different for military installations in the United States where 
certain types of alcohol must be made from a source within the state 
in which the military installation is located. Enclosure III provides 
information on alcoholic beverage wholesale and retail pricing 
requirements for DOD locations in the continental United States; 
Alaska and Hawaii; overseas locations; and Guam with and without the 
local purchase requirement. Under the local purchase requirement, 
NEXCOM and AAFES could still purchase alcoholic beverages from the 
most competitive local source, but were limited to the best price 
offered by local distributors, essentially restricting the pool of 
suppliers who could compete for NEXCOM's business. 

Retail prices for alcoholic beverages generally increased under the 
local purchase requirement. DOD guidance regarding the pricing of 
alcoholic beverages at exchanges permits some flexibility in how 
retail prices are set at military installations located overseas. DOD 
Instruction 1330.09 provides guidance for setting retail prices for 
alcoholic beverages in the exchange system.[Footnote 16] Although the 
instruction does not provide specific requirements for how malt 
beverages and wine products should be priced, it does require that 
distilled spirits sold outside of the United States be priced within 
the range of prices established for military exchanges located in the 
United States, unless the same products are available locally for 
less.[Footnote 17] If prices for distilled spirits are less expensive 
in the local market, then the exchanges may sell the same products for 
10 percent less than the best local shelf price. NEXCOM and AAFES 
officials indicated that without specific requirements or instructions 
on how to set retail prices for malt beverages and wine products, they 
ordinarily apply the same pricing requirements that are used for 
distilled spirits. 

Following the imposition of the local purchase requirement, NEXCOM and 
AAFES factored in the increase in wholesale costs, as reflected in the 
local distributors' price quotes, when setting retail prices for all 
alcoholic beverages. NEXCOM officials indicated that wholesale costs 
provided by local distributors were generally higher than wholesale 
costs prior to the local purchase requirement. In addition to the 
distributors' price quotes, NEXCOM and AAFES personnel performed price 
surveys of certain alcoholic beverage products sold in the local 
civilian market on Guam, and reviewed price surveys performed in the 
continental United States to help set retail prices that were based on 
higher wholesale costs and consistent with local retail prices. During 
the period when the local purchase requirement was implemented, NEXCOM 
and AAFES officials indicated that retail prices were raised to an 
amount that offset increased wholesale costs while still being 
maintained at the lowest practicable level to ensure customer service 
and continuing support for Morale, Welfare, and Recreation programs. 
Table 2 provides information on the change in the wholesale and retail 
prices and selection of alcoholic beverages under the local purchase 
requirement. 

Table 2: Change in the Wholesale and Retail Prices and Selection of 
Alcoholic Beverages under the Local Purchase Requirement: 

Malt beverages: 
Percentage change in wholesale costs under the local purchase 
requirement: 77%; 
Percentage change in retail prices under the local purchase 
requirement: 39%; 
Number of products available before local purchase requirement: 44; 
Number of same products available under the local purchase 
requirement: 35; 
Percentage of products that were not available under local purchase 
requirement: -20%. 

Wine products: 
Percentage change in wholesale costs under the local purchase 
requirement: 52; 
Percentage change in retail prices under the local purchase 
requirement: 46%; 
Number of products available before local purchase requirement: 249; 
Number of same products available under the local purchase 
requirement: 193; 
Percentage of products that were not available under local purchase 
requirement: -22%. 

Distilled spirits: 
Percentage change in wholesale costs under the local purchase 
requirement: 37; 
Percentage change in retail prices under the local purchase 
requirement: 21%; 
Number of products available before local purchase requirement: 177; 
Number of same products available under the local purchase 
requirement: 77; 
Percentage of products that were not available under local purchase 
requirement: -57%. 

Overall: 
Percentage change in wholesale costs under the local purchase 
requirement: 46%; 
Percentage change in retail prices under the local purchase 
requirement: 32%; 
Number of products available before local purchase requirement: 470; 
Number of same products available under the local purchase 
requirement: 305; 
Percentage of products that were not available under local purchase 
requirement: -35%. 

Source: GAO analysis of NEXCOM data. 

Note: Products excluded from our analysis of wholesale and retail 
price changes include products unavailable to the exchanges during the 
imposition of the local purchase requirement and the same products 
carried by local distributors but in different sizes. 

[End of table] 

As shown in table 2, overall wholesale costs for alcoholic beverages 
increased by approximately 46 percent based on an average of all 
alcoholic beverage items for sale on Guam. Wholesale costs are based 
on price quotes supplied to NEXCOM from local distributors. NEXCOM and 
AAFES officials stated that a number of factors could have contributed 
to higher wholesale costs as reflected in the price quotes, including 
higher shipping costs or local government alcohol taxes.[Footnote 18] 
However, they also noted that NEXCOM and AAFES do not audit the cost 
elements (such as profit margin or shipping costs) that make up local 
distributors' wholesale price quotes. Under the local purchase 
requirement, the average wholesale cost for a 6-pack of beer or other 
malt beverages increased by $2 or 88 percent, and the average 
wholesale cost for a 30-pack case of beer increased by $8 or 92 
percent. The increase in wholesale costs contributed to overall higher 
retail prices. For example, the average retail price for a 6-pack of 
beer or other malt beverages increased by $2 or 46 percent, and the 
average retail price for a 30-pack case of beer increased by about $7 
or 44 percent. Although retail prices increased for most items, they 
decreased for five distilled spirits products and a single wine 
product. 

As local distributors were asked to quote existing product lines and 
sizes offered by NEXCOM and AAFES, the total number and size of 
alcoholic beverage products offered by the military exchanges on Guam 
decreased by 165 items, or approximately 35 percent, due to the 
unavailability of the same product and size selection from local 
distributors. The greatest impact was on the number of distilled 
spirits products offered, which decreased by 100 items. However, in 
several instances, local distributors carried the same product but in 
different sizes. For example, local distributors carried the same type 
of vodka that the military exchanges carried, although in smaller 
sizes. Therefore, if the local purchase requirement would have 
continued, the exchanges would have had the option to obtain 
additional products in different size selections. 

Impact of the Local Purchase Price Requirement on Morale, Welfare, and 
Recreation Funding: 

Alcoholic beverage retail prices reflected the local purchase 
requirement for only one month as the exchanges raised the retail 
prices on September 2, 2008 to account for the increase in wholesale 
costs from purchasing locally, and the local purchase requirement was 
not reenacted in the Department of Defense Appropriations Act, 2009. 
As such, it is difficult to fully determine the impact the local 
purchase requirement had on funding for Morale, Welfare, and 
Recreation programs on Guam. On September 2, 2008, the exchanges 
increased retail prices for all alcoholic beverages to reflect new 
wholesale costs associated with the local purchase requirement. These 
retail prices were in effect for only 1 month because the local 
purchase requirement was not reenacted for the following fiscal year. 
The exchanges subsequently returned to their previous purchase 
processes and sources on October 1, 2008, thereby limiting the 
potential impact the local purchase requirement had on funds generated 
for Morale, Welfare, and Recreation programs. Although AAFES uses data 
from alcoholic beverage product sales to help determine funding for 
Morale, Welfare, and Recreation programs, sales volume fluctuated 
throughout the year making it difficult to isolate the impact caused 
solely by the local purchase requirement. For example, AAFES retail 
sales data indicates that alcoholic beverage sales actually increased 
by about 9.5 percent (from $187,370 to $205,241) during September 
2008, which was during the time the local purchase requirement was in 
effect, but declined in October 2008 by about 27 percent (from 
$205,241 to $149,113).[Footnote 19] In addition, NEXCOM does not 
calculate the amount of net profit an exchange earns for individual 
merchandise categories such as alcoholic beverages. Therefore, we 
could not determine or project the impact of the local purchase 
requirement on funding for Morale, Welfare, and Recreation programs 
due to the lack of substantial data. 

Perspectives of Exchange Officials on the Impact of the Local Purchase 
Requirement: 

According to NEXCOM and AAFES officials, based on the experiences in 
fiscal year 2008, reimposing a local purchase requirement would 
negatively impact the military community on Guam because retail prices 
would increase while the number of products available for sale would 
decrease. The officials noted that service members and their families 
would be directly affected because they are the primary patrons of the 
military exchanges on Guam. Moreover, the increase in prices resulting 
from the imposition of a local purchase requirement could likely 
reduce the amount of funds generated for Morale, Welfare, and 
Recreation programs. For example, maintaining retail prices at the 
lowest practicable level while wholesale costs are increasing could 
result in less revenue collected for Morale, Welfare, and Recreation 
programs. An increase in retail prices of alcoholic beverages may also 
decrease sales, thereby reducing funds collected for such programs. 
However, NEXCOM and AAFES officials stated that the impact on Morale, 
Welfare, and Recreation funds during fiscal year 2008 was negligible 
because increases in wholesale costs and retail prices of alcoholic 
beverages under local purchase requirement were only in effect for 1 
month. Nonetheless, these officials also indicated that reimposing a 
local purchase requirement could potentially reduce the amount of 
funds generated for Morale, Welfare, and Recreation programs, because 
they believe increases in retail prices for alcoholic beverages would 
potentially reduce sales. 

Agency Comments: 

We provided a draft of this report to DOD for review and comment. In 
response, DOD concurred with the report. DOD also provided technical 
comments, which we incorporated as appropriate into this report. DOD's 
comments are reprinted in their entirety in enclosure IV. 

We are sending copies of this report to the appropriate congressional 
committees. We are also sending copies to the Secretary of Defense; 
the Secretaries of the Army, the Navy, and the Air Force; the 
Commandant of the Marine Corps; and the Director of the Office of 
Management and Budget. This report also is available at no charge on 
our Web site at [hyperlink, 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 major 
contributions to this report are listed in enclosure V. 

Signed by: 

Brian J. Lepore:
Director, Defense Capabilities and Management: 

[End of section] 

Enclosure I: 

Section 652 of the National Defense Authorization Act, 2010[Footnote 
20] 

Report On Impact Of Purchasing From Local Distributors All Alcoholic 
Beverages For Resale On Military Installations On Guam. 

(a) Report Required.--Not later than 180 days after the date of the 
enactment of this Act, the Comptroller General shall submit to the 
Committees on Armed Services of the Senate and the House of 
Representatives a report evaluating the impact of reimposing the 
requirement, effective for fiscal year 2008 pursuant to section 8073 
of the Department of Defense Appropriations Act, 2008 (division A of 
Public Law 110-116; 121 Stat. 1331) but not extended for fiscal year 
2009, that all alcoholic beverages intended for resale on military 
installations on Guam be purchased from local sources. 

(b) Elements.--The report required by subsection (a) shall include the 
following: 

(1) The concerns of nonappropriated funds activities over the one-year 
imposition of the local-purchase requirement and the impact the 
requirement had on alcohol resale prices. 

(2) The stated justification for any change in the price of alcoholic 
beverages for resale on military installations on Guam. 

(3) The actions of the nonappropriated fund activities in complying 
with the local purchase requirements for resale of alcoholic beverages 
and their purchase of such affected products before and after the 
effective date of the provision of law referred to in subsection (a). 

(4) The extent to which nonappropriated funds activities on military 
installations on Guam are implementing the applicable Department of 
Defense instruction and the methods used to determine the resale price 
of alcoholic beverages. 

[End of section] 

Enclosure II: 

Section 8073 of the Department of Defense Appropriations Act, 2008 
[Footnote 21] 

None of the funds appropriated by this Act shall be used for the 
support of any nonappropriated funds activity of the Department of 
Defense that procures malt beverages and wine with nonappropriated 
funds for resale (including such alcoholic beverages sold by the 
drink) on a military installation located in the United States unless 
such malt beverages and wine are procured within that State, or in the 
case of the District of Columbia, within the District of Columbia, in 
which the military installation is located: Provided, That in a case 
in which the military installation is located in more than one State, 
purchases may be made in any State in which the installation is 
located: Provided further, That such local procurement requirements 
for malt beverages and wine shall apply to all alcoholic beverages 
only for military installations in States which are not contiguous 
with another State and Guam: Provided further, That alcoholic 
beverages other than wine and malt beverages, in contiguous States and 
the District of Columbia shall be procured from the most competitive 
source, price and other factors considered. 

[End of section] 

Enclosure III: 

DOD Requirements Related to the Wholesale Purchase and Retail Pricing 
of Alcoholic Beverages: 

Department of Defense (DOD) guidance categorizes Guam as an overseas 
location with regard to the buying and selling of alcoholic beverages. 
[Footnote 22] DOD Instruction 1330.21 provides guidance for procuring 
alcoholic beverages for resale. It permits the exchanges to purchase 
all categories of alcoholic beverages--malt beverages, wine products, 
and distilled spirits--from the most competitive source for overseas 
locations. DOD Instruction 1330.09 provides pricing guidance for 
alcoholic beverages. For locations outside the United States, the 
exchanges are required to sell distilled spirits at prices within the 
range of prices established for military exchanges located in the 
United States, unless the same products are available locally for 
less. If local prices are cheaper for distilled spirits, then the 
exchanges may sell the same products for 10 percent less than the best 
local shelf price. With regard to malt beverage and wine products, 
they are subject to the general requirement that exchange goods be 
priced at the lowest practicable level that is consistent with the 
mission of the exchanges to provide patrons with goods and services 
necessary for their health, comfort, and convenience. This does not 
require the exchanges to sell malt beverage and wine products at a 
specific price. Table 3 provides information on the requirements 
related to the wholesale purchase and retail pricing of alcoholic 
beverages. 

Table 3: DOD Requirements Related to the Wholesale Purchase and Retail 
Pricing of Alcoholic Beverages: 

Malt Beverages: Wholesale purchase; 
Continental United States (contiguous 48 states): Purchased from and 
delivered by a source within the state in which the military 
installation is located. If an installation is located in more than 
one state, then the procurement source may be from any state in which 
the installation is located; 
Alaska and Hawaii: Purchased from and delivered by a source within the 
state in which the military installation is located; 
Overseas: Purchased from the most competitive source. Distributed in 
the most economical manner, price, and all other matters 
considered.[A]; 
Guam--local purchase requirement (fiscal year 2008): Purchased from 
and delivered by a source within Guam; 
Guam--no local purchase requirement: Purchased from the most 
competitive source. Distributed in the most economical manner, price, 
and all other matters considered. 

Malt Beverages: Retail pricing: 
Continental United States (contiguous 48 states): Priced in a 
substantially uniform manner at the lowest practicable level that is 
consistent with the mission of the exchanges to provide patrons with 
goods and services necessary for their health, comfort, and 
convenience; 
Alaska and Hawaii: Priced in a substantially uniform manner at the 
lowest practicable level that is consistent with the mission of the 
exchanges to provide patrons with goods and services necessary for 
their health, comfort, and convenience; 
Overseas: Priced in a substantially uniform manner at the lowest 
practicable level that is consistent with the mission of the exchanges 
to provide patrons with goods and services necessary for their health, 
comfort, and convenience; 
Guam--local purchase requirement (fiscal year 2008): Priced in a 
substantially uniform manner at the lowest practicable level that is 
consistent with the mission of the exchanges to provide patrons with 
goods and services necessary for their health, comfort, and 
convenience; 
Guam--no local purchase requirement: Priced in a substantially uniform 
manner at the lowest practicable level that is consistent with the 
mission of the exchanges to provide patrons with goods and services 
necessary for their health, comfort, and convenience. 

Wine products: Wholesale purchase: 
Continental United States (contiguous 48 states): Purchased from and 
delivered by a source within the state in which the military 
installation is located. If an installation is located in more than 
one state, then the procurement source may be from any state in which 
the installation is located; 
Alaska and Hawaii: Purchased from and delivered by a source within the 
state in which the military installation is located; 
Overseas: Purchased from the most competitive source. Distributed in 
the most economical manner, price, and all other matters considered. 
Overseas exchanges and package stores must stock an equitable 
selection of U.S. wines as compared to local wines; 
Guam--local purchase requirement (fiscal year 2008): Purchased from 
and delivered by a source within Guam. Overseas exchanges and package 
stores must stock an equitable selection of U.S. wines as compared to 
local wines; 
Guam--no local purchase requirement: Purchased from the most 
competitive source. Distributed in the most economical manner, price, 
and all other matters considered. Overseas exchanges and package 
stores must stock an equitable selection of U.S. wines as compared to 
local wines. 

Wine products: Retail pricing; 
Continental United States (contiguous 48 states): Priced in a 
substantially uniform manner at the lowest practicable level that is 
consistent with the mission of the exchanges to provide patrons with 
goods and services necessary for their health, comfort, and 
convenience; 
Alaska and Hawaii: Priced in a substantially uniform manner at the 
lowest practicable level that is consistent with the mission of the 
exchanges to provide patrons with goods and services necessary for 
their health, comfort, and convenience; 
Overseas: Priced in a substantially uniform manner at the lowest 
practicable level that is consistent with the mission of the exchanges 
to provide patrons with goods and services necessary for their health, 
comfort, and convenience; 
Guam--local purchase requirement (fiscal year 2008): Priced in a 
substantially uniform manner at the lowest practicable level that is 
consistent with the mission of the exchanges to provide patrons with 
goods and services necessary for their health, comfort, and 
convenience; 
Guam--no local purchase requirement: Priced in a substantially uniform 
manner at the lowest practicable level that is consistent with the 
mission of the exchanges to provide patrons with goods and services 
necessary for their health, comfort, and convenience. 

Distilled spirits: Wholesale purchase; 
Continental United States (contiguous 48 states): Purchased from the 
most competitive source. Distributed in the most economical manner, 
price, and all other matters considered; 
Alaska and Hawaii: Purchased from and delivered by a source within the 
state in which the military installation is located; 
Overseas: Purchased from the most competitive source. Distributed in 
the most economical manner, price, and all other matters considered; 
Guam--local purchase requirement (fiscal year 2008): Purchased from 
and delivered by a source within Guam; 
Guam--no local purchase requirement: Purchased from the most 
competitive source. Distributed in the most economical manner, price, 
and all other matters considered. 

Distilled spirits: Retail pricing; 
Continental United States (contiguous 48 states): Prices discounted no 
more than 10 percent less than best local shelf price in Alcohol 
Beverage Control states and 5 percent less in non-Alcohol Beverage 
Control states; 
Alaska and Hawaii: Prices discounted no more than 10 percent less than 
best local shelf price in Alcohol Beverage Control states and 5 
percent less in non-Alcohol Beverage Control states; 
Overseas: Prices within the range of exchanges located in the United 
States. If same product is sold locally for less, then spirits may be 
sold for 10 percent less than the best local shelf price; 
Guam--local purchase requirement (fiscal year 2008): Prices within the 
range of exchanges located in the United States. If same product is 
sold locally for less, then spirits may be sold for 10 percent less 
than the best local shelf price; 
Guam--no local purchase requirement: Prices within the range of 
exchanges located in the United States. If same product is sold 
locally for less, then spirits may be sold for 10 percent less than 
the best local shelf price. 

[A] The most economical method of distributing distilled spirits to 
stores shall be found by considering all components of distribution 
costs incurred in distributing beverages to stores including all 
management, logistics, administration, depreciation, utilities, 
inventory carrying, handling, and distribution costs. 

[B] Alcohol Beverage Control states are those states that have a state 
monopoly over the wholesaling and retailing of alcoholic beverages. 

Source: Department of Defense Instruction 1330.21, Armed Services 
Exchange Regulations (July 14, 2005); Department of Defense 
Instruction 1330.09, Armed Services Exchange Policy (Dec. 7, 2005). 

[End of table] 

[End of section] 

Enclosure IV: Comments for the Department of Defense: 

Office Of The Under Secretary Of Defense: 
Personnel And Readiness: 
4000 Defense Pentagon: 
Washington, D.C. 20301-4000 

May 17, 2010: 

Mr. Brian J. Lepore: 
Director, Defense Capabilities and Management: 
U.S. Government Accountability Office: 
441 G Street. N.W. 
Washington, DC 20548: 

Dear Mr. Lepore: 

This is the Department of Defense (DoD) response to the GAO Draft 
Report GAO-10-563R, "Defense Infrastructure: Impact of Purchasing from 
Local Distributors All Alcoholic Beverages for Resale on Military 
Installations on Guam," dated April 21, 2010 (GAO Code 351433). DoD 
concurs with the overall report and has no additional comments. 

Thank you for the opportunity to comment. 

Sincerely, 

Signed by: 

Virginia S. Penrod: 
Acting Deputy Under Secretary of Defense (Military Community and 
Family Policy): 

[End of section] 

Enclosure V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

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

Staff Acknowledgments: 

In addition to the contact named above, Harold Reich, Assistant 
Director; Grace Coleman; Josh Margraf; Heather May; John Van Schaik; 
and Michael Willems made key contributions to this report. 

[End of section] 

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Defense Infrastructure: Guam Needs Timely Information from DOD to Meet 
Challenges in Planning and Financing Off-Base Projects and Programs to 
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November 13, 2009. 

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High-Level Leadership Needed to Help Guam Address Challenges Caused by 
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Defense Infrastructure: Opportunity to Improve the Timeliness of 
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Defense Infrastructure: High-Level Leadership Needed to Help 
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Defense Logistics: Navy Needs to Develop and Implement a Plan to 
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Defense Infrastructure: Planning Efforts for the Proposed Military 
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to Be Addressed. GAO-08-722T. Washington, D.C.: May 1, 2008. 

[End of section] 

Footnotes: 

[1] For the purposes of this report, alcoholic beverages refer to 
packaged alcoholic beverages sold by the military exchanges and not 
beverages by the glass. Alcoholic beverages sold by DOD are placed in 
three categories: (1) malt beverages such as beer and ale; (2) wine 
products; and (3) distilled spirits such as liquor. 

[2] Military package stores are stores which predominantly carry 
alcoholic beverages in unopened containers for consumption at a 
location other than the place of sale. 

[3] Pub. L No. 111-84, § 652 (2009). 

[4] Pub. L. No. 110-116, § 8073 (2007). 

[5] Pub. L. No. 110-329, § 8070 (2008). 

[6] The Department of Defense Appropriations Act, 2010, Pub. L. No. 
111-118, § 8070 (2009). 

[7] Department of Defense Instruction 1330.21, Armed Services Exchange 
Regulations (Jul. 14, 2005); Department of Defense Instruction 
1330.09, Armed Services Exchange Policy (Dec. 7, 2005). 

[8] Pub. L. No. 110-116, § 8073 (2007). 

[9] DOD exchange activities on Guam include retail stores, military 
package stores, convenience stores, and gas stations. 

[10] In addition to the cost of the merchandise, NEXCOM also charges 
AAFES a service fee equal to 6.95 percent of the cost of merchandise 
for distribution center costs, such as warehousing and handling 
inventory. 

[11] A table summarizing which costs may be covered using appropriated 
funds is provided at Enclosure 4 of Department of Defense Instruction 
1015.15, Establishment, Management, and Control of Nonappropriated 
Fund Instrumentalities and Financial Management of Supporting 
Resources (Oct. 31, 2007, incorporating administrative change Mar. 20, 
2008). 

[12] The 2005 Base Realignment and Closure Commission final report 
noted that in areas where the military services operate separate 
installations that share a common boundary or were in close proximity, 
there was a significant opportunity to reduce duplication and costs by 
consolidating installations, known as "Joint Basing." For more 
information on joint basing, see GAO, Defense Infrastructure: DOD 
Needs to Periodically Review Support Standards and Costs at Joint 
Bases and Better Inform Congress of Facility Sustainment Needs, 
[hyperlink, http://www.gao.gov/products/GAO-09-336] (Washington, D.C.: 
March 30, 2009). 

[13] During the time of the local purchase requirement, Morale, 
Welfare, and Recreation programs at Andersen Air Force Base were 
funded from revenue generated by AAFES exchange operations at Andersen 
Air Force Base. AAFES tracks revenue from alcoholic beverage sales 
separately from other merchandise categories because it is Air Force 
policy that such revenue be treated as a supplemental dividend for 
Morale, Welfare, and Recreation programs on the installation in which 
the sales were made. AAFES officials indicated that around 2 to 2.5 
percent overall alcoholic beverage revenue is deducted by AAFES for 
capital improvements. The Air Force still uses this process to 
distribute revenue from alcoholic beverage sales at locations other 
than Guam which are not joint bases. The Navy has agreed that Andersen 
Air Force Base will continue to receive funding for Morale, Welfare, 
and Recreation programs using this method for three years following 
the creation of Joint Region Marianas. After which, the Office of the 
Commander, Navy Installations Command will start using its own method 
to distribute funds. 

[14] Pub. L. No. 110-116, § 8073 (2007). 

[15] DODI 1330.21, § E5.8 (Jul. 14, 2005). 

[16] NEXCOM and AAFES exchanges generally have similar retail prices 
for alcoholic beverages. However, each exchange activity has 
discretion to mark down retail prices for aged or damaged merchandise. 

[17] DODI 1330.09, § 4.10.2 (Dec. 7, 2005). 

[18] DOD activities are not subject to local taxes. Thus, having 
alcoholic beverages handled by the exchanges from wholesale through 
retail sales conveys a price advantage to the consumer since local 
taxes are not included in the shelf price, but are included and 
factored into the shelf price when private sector wholesalers are part 
of the supply chain. 

[19] Exchanges also experienced similar sales for the same months 
during 2007, a period during which the local purchase requirement was 
not in effect. For instance, alcoholic beverage sales increased in 
September 2007 by approximately 11.4 percent (from $152,201 to 
$169,551), but declined in October 2007 by approximately 22 percent 
(from $169,551 to $132,471). 

[20] Pub. L No. 111-84, § 652 (2009). 

[21] Pub. L. No. 110-116, § 8073 (2007). 

[22] Overseas locations are defined as areas other than the 50 states 
and the District of Columbia. 

[End of section] 

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