ALA Webinar-Commissary Privatization and Retail Initiatives

• WASHINGTON

RECORDING AVAILABLE FOR ALA MEMBERS HERE

With a government shutdown a possibility, and commissary privatization back on the table, there is much to talk about in the world of military resale.

The American Logistics Association (ALA) is laser focused on these and other issues impacting the military marketplace, and its latest webinar on Sept. 26 dealt with these issues and others in its one-hour format.

Once again hosted by ALA President Steve Rossetti, the webinar gave attendees insight into what was happening and what could happen in this marketplace during the foreseeable future.

MAIN TOPICS

GOVERNMENT SHUTDOWN

“There is a lot of concern surrounding the shutdown,” Rossetti said. “We put out a communication this week citing existing policy that says that commissaries and exchanges would remain open in the event of a shutdown which would take place on Oct. 1.

“The way it sets up is the Defense Commissary Agency (DeCA) is funded through appropriations. It has a reserve fund called the working capital fund, and these funds are like money in the bank. The policy was made several years ago that DeCA would be able to access the excess working capital funds to keep their operations financed during a shutdown.

“Right now, our guesstimate is that there may be 50-to-60 days worth of cash in the working capital funds that would allow them to sustain operations, and under existing policy, commissaries will remain open.”

For the rest of base support, Rossetti told attendees, “The exchange operations will remain unimpeded because they are largely funded through non-appropriated funds.

“However, there are some Morale, Welfare and Recreation (MWR) positions that are reimbursed with appropriations, and those positions may be affected, but in the core retail side of the house, no.

“And when you look at dining facilities and other food facilities on base, there is something called ‘The Feed and Forage Act,’ that allows the government to continue to feed military personnel during any kind of extraordinary event.”

“NEW TWIST”

With that said, the ALA president noted that ALA recently received a memorandum from the Office of Management and Budget (OMB) that he said, “kind of put a new twist on everything.

“The OMB is saying that they are not necessarily going to furlough people during a shutdown; their agencies may be asked to do research on how they could do a reduction in force in the event of a shutdown. So instead of furloughing people, they essentially are going to be firing them. Then, OMB and the government would selectively hire people back when the appropriations started flowing again … but they might not hire everybody back.

“This is a twist, this is unusual. Usually what happens during a shutdown is that federal workers are furloughed — they stay at home, they are not paid — but by law, when the government appropriations start flowing again, they are made whole, they get their back pay for the days that they did not work.”

However, Rossetti told attendees with this twist in play, “That could change; some people could lose their jobs and face the prospect of getting rehired or not getting rehired, and if they are furloughed, the expectation would be that they would get paid, but that is not certain at this point.

“I don’t want to alarm people, but the default position right now is what they existing policy is, and that is that furloughed people would get paid.

“FAST-MOVING TRAIN”

“This is a fast-moving train, and OMB is driving this train … we have gone through a lot of convulsions with the federal work force associated with the Department of Government Efficiency (DOGE) and other federal workforce initiatives out of the Office of Personnel Management (OPM), Labor and the Department of War (DoW) and so forth, but this is a new twist to that, and I think it will have significant implications if OMB shifts its position as a signal in having a reduction in force.”

Rossetti said the other aspect of this situation is that OMB has restricted transfers.

“Right now, the plan and the policy and the practice is allow appropriations to flow to the commissary system out of the working capital fund in the event of a shutdown, but on this language on transfers, we are going to be monitoring that very closely,” he stated.

“I have been in touch with the people at the capitol, in the administration, to express our concerns that the working capital funds continue to flow to the commissaries and that they continue to stay open,” he said.

As for overseas commissaries, the ALA president said that these stores would remain open in the event of a government shutdown, and U.S. stores were in question, “but that was settled several years ago.”

CURRENT POLICY

Rossetti said that at least right now, as policy stands, “largely all the resale programs on base will remain open, and if there is any change to that, we will be sure to let you know.

“But we did want to signal to you that there could be some changes coming, but at least right now, the position of keeping things open is going to remain intact.”

PRIVATIZATION

Rossetti said that he has been involved with base operations, both at the capitol and in the administration, and now, in industry for some time, and he has insight into privatization, “and how it plays out.

“Right now, the way that the system is structured, the retail programs on military bases represent the best of government and the best of industry coming together for the best people in the world, and that has held true in the past, and it holds true going forward.

“Right now, we are essentially a public/private partnership, between the government and the private sector, to make things work for our military personnel.”

MAJOR SHIFT

Looking at the commissaries, “In 1994, there was a major shift in commissary operations, not only with the creation of DeCA but all in inventory, which used to be funded by government, and that was transferred to distributors in the 1994-to-1996 timeframe, where distribution is now a private-sector function.

“We have manufacturer representatives, these folks work in the stores, they actually perform a lot of vital services, and the value of these services is estimated at more than $500 million as year to augment commissary operations.

“Of course, everything from source to shelf is virtually a private-sector operation already. Once the products are manufactured by the private sector, they are distributed by the private sector, and even the shelf-stocking folks are private-sector people who are reimbursed with appropriations, and we have a lot of shelf-stocking people who stock shelves at industry’s expense.”

He continued, “Source to shelf is largely outsourced. There are certain functions that are performed in the commissary agency that are inherently governmental as it is across government … contracting decisions, for example.

COMMISSARY “WORKS”

“The operation of the stores … we have a world-class workforce in DeCA, north of 13,000 people that are working in the commissaries.

“During the pandemic, the commissaries shined, the system functioned, everything clicked … people got fed, regardless of where they were in the world. We had dedicated commissary employees come into our stores, in the early days of the pandemic, people didn’t know the risks, grocers shut down, but commissaries stayed open, products kept flowing, and the system delivered.”

Rossetti told attendees that it is due to this “wonderful mix” of private and public sector capabilities that came together “to make sure that it worked.”

He noted, “Just last year, the DoW sent a report to Congress on the exchange and commissary programs. There were concerns by the appropriations committees that the using this system, were people were able to be fed during a catastrophic event, which could be a nuclear or biological event, a pandemic, a war, and kind of contamination event in overseas areas that would threaten our military personnel and families.

“What the report to the appropriations committees basically said was that commissaries and exchanges were an integral part making sure that the right stuff got to the right people at the right time, and that continues to hold true.”

“HOW CRITICAL SYSTEM IS”

As this Request For Information (RFI) was tendered, “Policymakers need to carefully consider — and we will do everything we can to remind them — of how critical this system is, the existing system,” Rossetti told attendees.

The RFI came out during the week of Sept. 22, and he said that it contains “a lot of significant elements.”

However, he added, “Right now, the Department is not making any decisions on privatization. They are out there surveying the landscape in the commercial marketplace to see what kind of interest there might be and alternative ways to delivering the commissary benefit.

“They are probably going to the equity markets — we don’t know what the exact distribution was — and I believe they are doing this because they have cited a $2.5 billion capital requirement that the commissaries have — and I know this is near and dear to DeCA Director John Hall to get agency facilities modernized, and to do everything they can to get that done now, and maybe they are looking for some creative ways to get a cash infusion to modernize facilities.”

The ALA president told attendees that another element of this “is if you peel back the onion a little bit on the RFI, there is a possibility that off-base grocers or retailers could provide discounts.

“That is significant, because a lot of people already shop off base, but many people shop on base. By offering this discount, a lot of them already offer discounts, but they don’t offer anything near the 23.7 percent in savings, that is Congressionally mandated and the 25 percent savings in practice that DeCA provides to its patrons every day, but they do provide discounts for employees and so forth.

“I think the notion is, ‘Do you have the capability to provide discounts to military personnel, beyond what you already provide?’”

Rossetti said the other aspect of this, “which is different from things in the past,” is that the RFI “doesn’t foreclose the possibility that a contractor that operates the stores can receive a level of appropriations.

“Right now, the commissary appropriation is about $1.5 billion, and it has been supported by the House and Senate appropriations and authorization committees for fiscal 2026 … the RFI only addresses U.S. stores, if that U.S. appropriation is $700-800-900 million, whatever that figure may be, that slice that just applies to U.S., then would the offeror or industry be able to provide the commissary benefit at a level less than that $700-800-900 million?

“They have not foreclosed the possibility of appropriations, and that is a departure from earlier privatization initiatives that have been considered.”

FOOD SECURITY

Discussing overseas versus U.S. stores, Rossetti noted that food security plays into all of this.

“Food security has two elements,” he stated. “One is the availability and affordability of food for our military personnel, families and veterans, but the other — which was underscored during the pandemic — is making sure that we have a secure pipeline in the event of emergencies for our military folks.

“When you look at how our distribution is set up in the U.S., we have distributors that service the West Coast stores, the Central U.S. and East stores, but those East and West Coast distributors service overseas areas, East Coast, Europe and Southwest Asia and West Coast, the Pacific Region, but they also service U.S. stores.

“One thing that we would emphasize to policymakers is that when you carve out just the U.S. for outsourcing, do you run a risk of casting the overseas remote stores adrift? That has to be a major consideration for policymakers because DoW Secretary Pete Hegseth and his entire team has emphasized the war-fighting capability of the Department as a top priority, and we agree, but we think that the exchanges and commissaries are essential to mission support and this war-fighting capability.”

“MORE THAN A STORE”

Rossetti noted that ALA’s new Military Commerce magazine emphasized this point in its first issue.

“That was our first area of emphasis,” Rossetti stated. “We had a publisher’s note in that publication that stated that exchanges and commissaries are ‘more than a store,’ all of the things that this system does to enhance the mission.

“This relates to the RFI in the sense that when you pull things out of base operations, for outsourcing, you have to be very careful when you do that because it destroys the operating synergy at the military bases, it has an effect on the supply chain, it has major reverberations across the board that we are going to ask policymakers to mindful of as they evaluate the input that they get from this RFI.”

HOUSING PRIVATIZATION PROJECT

The ALA president outlined to attendees two other major privatization projects within the government.

“The big one on privatization has been the initiative on housing,” he said. “That started in 1996. I was working in Congress when that started, I was working on the committee, I remember the deliberations on that issue, but essentially, what the government said at the time was that there was about a $20-billion capital shortfall that the Department had to modernize housing, and that was in 1996 dollars.

“They went to the private sector, the equity markets, the real estate markets, to find out if they had the capability to come in and contract to operating housing, modernize housing, provide a capital infusion, and so forth.

“The private sector did. Right now, there are about 90 contacts out there for housing, a lot of them are LLCs, they are operating virtually all housing in the U.S. which has been privatized, the housing on overseas bases and adjacent to overseas bases is government operated.”

He continued, “The housing is financed through a lot of different sources, the big source being the basic allowance for housing that is provided to military personnel and their families in addition to their pay. They will pay their rent to the provider, the real estate company that has the contract to provide the private housing.

“There is an infusion of funds from the government. I think last year, it was about $900 million that the government is providing to underwrite the cost of private housing and to augment some of the capital requirement that needed to be met in that outsourcing.”

He said the private sector looks at privatization in two aspects. “One is coming in and operating with the government a function, like housing, but then it is a big real estate thing too.

“On the housing side, they use a long-term lease, and there are negotiations between the government and the private sector over guarantees, and it is a classical real estate calculation by the private sector.”

He continued, “There is a whole group of companies that have grown up around the military housing privatization initiative, and they are represented by an association, they have quite an active lobby, they do provide a conduit for getting private sector money to meet the capital requirements of the Department.”

Rossetti noted that there have been issues with privatized housing. “Just a couple of years ago, there were major issues raised about the condition of some of the housing that prompted Congress to implement a housing ‘bill of rights,’ he stated. “But the housing initiative is fully underway, and it is operating all housing in the U.S.

“There have been some IG reports, there have been some GAO reports on housing, and we are going to be taking a long look at that because there may be some red flags or warning signs that we can go over that we can put across to the government to avoid some of these things as they venture into outsourcing the grocery system.”

LODGING PRIVATIZATION PROJECT

“The Army has privatized all of its lodging operations, and that only applies to the U.S., and the Air Force is considering a similar track through their base lodging privatization initiatives,” Rossetti said.

“It is interesting that when the issue of privatizing Navy and Marine Corps lodges was raised a couple of years ago in the Defense Authorization bills, the cost of outsourcing the Navy and Marine Corps lodges was expected to cost over $5 billion over 10 years, $500 million, in direct spending impact on the Department were this lodging be outsourced.

“It is a real estate play as well, the people who are playing in this are major real estate companies. They are signing leases with the government in the case of the Army privatization initiative. The GAO has offered reports that raises some concerns on the Army privatization initiative. The Department of War has done considerable studies on privatization of lodging, coming to the conclusion that the current way of providing lodging as a non-appropriated fund activity of the federal government is the optimum way of delivering the lodging benefit and lodging capabilities.”

“SCORING”

However, Rossetti stated that there was “some concern in some sectors” about this mission-support aspect of lodging and it is outsourced, “what are the impacts?”

He said a key aspect of privatization and outsourcing is “scoring, in a sense that when the government moves to outsource and sign contracts and obligate federal money — whether it is basic allowance for housing or temporary lodging allowances, or in the case of food, operations on military bases, basic allowance for subsistence — any time there is an impact on federal spending, the Congressional Budget Office, in its deliberations over the Defense bill, will ‘score’ the impact.

“When that original housing privatization came up, it was a little looser than it has been since, and some of the costs associated with privatization initiatives forced changing of the scoring rules, some of the costs are coming to the forefront that weren’t considered when these original decisions were made.

“HYPER-COMPETITIVE SYSTEM”

As for the commissary RFI, Rossetti noted to attendees that this is going out to a “hyper-competitive system.

“Right now, the state of play in U.S. grocery is really heated up. There are several players in this system, Walmart being the biggest. The figures I saw stated that 60 percent of Walmart’s business is grocery, I think they have more than 35 percent of the U.S. grocery market.

“Close behind them is Costco, Target, and then you have a number of other major grocery chains, Kroger, Albertson’s and so forth, and a number of regional grocery chains.”

Rossetti said that margins are tight in this business, “and the way we look at how the private sector might look at this because of the hyper-competition at play in the grocery business to get a leg up on their competition.

“On the other hand, because it is such a tight business, and the savings levels that the Department is seeking in any privatization scenario, are far higher, 23.7 percent, and even higher, at 25 percent, that DeCA is achieving.

“We can expect that there will be some interest from some regional players, some interest from organizations that, like some of these housing privatization organizations, consortiums that are put together to meet the requirement … we’ll see.”

The replies to the commissary RFI are due on Oct. 21, and Rossetti said, “We have a pretty good picture of how this thing is shaping up. I believe all of these responses will be assimilated by an organization and then rendered to the Department of War in some form of a report, where the Department can make judgments on how they want to proceed in delivering the commissary benefit.”

Rossetti told attendees ALA will be providing a lot of input in this process, “because we have very good familiarity with the infrastructure and the current delivery mechanism for groceries to our military people.”

HOUSE AND SENATE

The House and Senate are currently raising issues on privatization of the commissaries.

The ALA president said that in both fiscal 2024 and fiscal 2025, “There were strong statements supporting the commissary benefit by the appropriation committees and the authorization committees, non-partisan, both sides of the aisle, and it is quite remarkable at the level of support Congress has provided to our programs.

“In the fiscal 2026 bill, what happened is that the Senate came up with language in their version of the bill, asking for a table-top exercise, a review by a Federally Funded Research and Development Company that would take a look and do a simulation of outsourcing commissaries and what the impacts would be.

“The Senate is asking for that process to get underway, but the are not asking for the results of that process until Jan. 1, 2027.”

On the House side, Rossetti told attendees, “There were some concerns, they want to put up some guard rails on any privatization move, and those guidelines are designed to protect patrons and protect the integrity of the current system as used to deliver the benefit.

“Both sides of the aisle are expressing strong concerns about any move to further privatize operations of the commissary program.”

CLOSING REMARKS

Rossetti told attendees, “ALA is here if you need information on anything that we have discussed in this webinar.

“We will continue to monitor the shut down in real time; probably on Monday, Oct. 29, we will put out the state of play on any shutdown, and especially that key component of whether or not OMB is going to treat this shutdown differently from shutdowns in the past.”

On the privatization issue, he stated, “That key aspect of DeCA being able to have the flexibility to use working capital funds is going to be our area of emphasis going forward over the next couple of days. We will be working with policymakers to make sure that the government does the right thing and that DeCA, during the shutdown, is allowed to operate unimpeded.

“We have your back. We are going to be working this outsourcing initiative. We know that many of you have invested heavily in your businesses, many of you have invested heavily in your careers in the current structure, and we are very concerned and sensitive to what you have invested.

“We are also very sensitive and concerned about the thousands of DeCA employees that have invested their lives and livelihoods into taking care of our military families.”

Rossetti said ALA would do its own “scoring” of the commissary privatization initiative, highlighting additional cost areas that the Department may not be considering when it makes this move.

He stated that this industry provides “heavy support” to the current structure of public/private balance, “and what we have right now works very well.”

Rossetti continued, “We are going to do all we can to make sure that any alternative of delivering this benefit doesn’t detract from the Defense mission, that it protects the current method of supplying systems, and if there are aspects that come out of the RFI that need to be considered, we are going to keep an open mind, but our first and primary interest is to ensure that the interests of our membership are well represented by ALA and the board of directors of the association.

“This is your association, it is for and about the members, and if your interests are threatened, we take that very personally.”