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The Department of Defense (DoD) is seeking to reduce its infrastructure of bases and support activities in order to free up funds to replace aging weapon systems. One aspect of DoD's infrastructure that may merit review is its network of on-base grocery stores, department stores, and other shops that sell goods and services at below-market prices to active-duty, reserve, and retired military personnel. Despite the decline in the size of the military since the end of the Cold War, DoD remains one of the largest retailers in the United States. Its stores, with annual sales of more than $14 billion, employ 96,000 civilians--one for every 15 active-duty service members. What explains the size and scope of DoD's retail activities in the United States? Are government-run stores necessary to provide access to goods at military bases or to preserve military morale and cohesion? Are they more cost-effective than cash allowances as a way to attract and retain a high-quality force?

This Congressional Budget Office (CBO) study examines the social and budgetary costs and benefits of DoD's retail activities and various alternatives for their future. It was prepared in response to a joint request from Congressman John Kasich, Chairman of the House Committee on the Budget, and Congressman William Zeliff Jr., former Chairman of the Subcommittee on National Security, Foreign Affairs, and Criminal Justice of the House Committee on Government Reform and Oversight. In keeping with CBO's mandate to provide objective, impartial analysis, the study makes no recommendations.

Deborah Clay-Mendez of CBO's National Security Division wrote the study under the general supervision of Neil M. Singer and Cindy Williams. Earlier drafts benefited from reviews by Greg Hildebrandt of the Naval Post-Graduate School and John Donahue of the John F. Kennedy School of Government. The author gratefully acknowledges the research assistance provided by Shaun Black, Jofi Joseph, and Doug Taylor of CBO. She also thanks the numerous DoD and industry officials who responded, frequently at short notice, to questions and requests for data.

Christian Spoor edited the study. Cindy Cleveland produced drafts of the manuscript. Kathryn Quattrone, with assistance from Jill Sands, prepared the study for publication.
 

June E. O'Neill
Director
October 1997
 
 

SUMMARY

ONE - INTRODUCTION

• Challenges to DoD's Role in Retail Activities
• Objectives of This Analysis

TWO - THE COMMISSARY SYSTEM

• Questions About the Costs and Benefits of DoD Commissaries
• Commissary Patrons and Sales
• Past and Present Rationales for Commissaries
• Measuring Commissary Benefits
• Comparing Commissary Benefits with Costs
• Trends in Commissary Appropriations
• Issues Raised by the Commissary System

THREE - AN OVERVIEW OF DoD'S NONAPPROPRIATED-FUND ACTIVITIES

• The Scope of NAF Activities Within DoD
• Characteristics of NAFIs
• The Problem of Oversight and Control
• The Legal Status of NAFIs
• Issues Raised by the Status of NAFIs

FOUR - THE MILITARY EXCHANGE SYSTEM

• Exchange Patrons in the United States and the Benefits They Receive
• Exchange Patrons Overseas and the Benefits They Receive
• NAF Earnings: An Additional Benefit of Exchanges
• The Cost of Exchanges to DoD and Society
• Issues Raised by the Exchange System

FIVE - ALTERNATIVE STRATEGIES FOR DoD'S RETAIL ACTIVITIES

• Alternative 1: Follow DoD's Current Plan
• Alternative 2: Create a DoD Resale Authority
• Alternative 3: Rely on Private Contractors
• Alternative 4: Revise Incentives for DoD's Retail Activities
• The Future of DoD's Retail Role

APPENDIXES

A - The Deadweight Loss from Price Subsidies
B - Estimating the Nonbudgetary Costs of DoD's Retail Activities
C - The Statistical Relationship Between Costs and Sales for U.S. Commissaries
 

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