Defense Infrastructure
Impact of Purchasing from Local Distributors All Alcoholic Beverages for Resale on Military Installations on Guam Gao ID: GAO-10-563R May 28, 2010The 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.
GAO-10-563R, Defense Infrastructure: Impact of Purchasing from Local Distributors All Alcoholic Beverages for Resale on Military Installations on Guam
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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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U.S. Insular Areas: Opportunities Exist to Improve Interior's Grant
Oversight and Reduce the Potential for Mismanagement. GAO-10-347.
Washington, D.C.: March 16, 2010.
Defense Infrastructure: Guam Needs Timely Information from DOD to Meet
Challenges in Planning and Financing Off-Base Projects and Programs to
Support a Larger Military Presence. GAO-10-90R. Washington, D.C.:
November 13, 2009.
Defense Infrastructure: DOD Needs to Provide Updated Labor
Requirements to Help Guam Adequately Develop Its Labor Force for the
Military Buildup. GAO-10-72. Washington, D.C.: October 14, 2009.
Defense Infrastructure: Planning Challenges Could Increase Risks for
DOD in Providing Utility Services When Needed to Support the Military
Buildup on Guam. GAO-09-653. Washington, D.C.: June 30, 2009.
High-Level Leadership Needed to Help Guam Address Challenges Caused by
DOD-Related Growth. GAO-09-500R. Washington, D.C.: April 9, 2009.
Defense Infrastructure: Opportunity to Improve the Timeliness of
Future Overseas Planning Reports and Factors Affecting the Master
Planning Effort for the Military Buildup on Guam. GAO-08-1005.
Washington, D.C.: September 17, 2008.
Defense Infrastructure: High-Level Leadership Needed to Help
Communities Address Challenges Caused by DOD-Related Growth. GAO-08-
665. Washington, D.C.: June 17, 2008.
Defense Logistics: Navy Needs to Develop and Implement a Plan to
Ensure That Voyage Repairs Are Available to Ships Operating near Guam
when Needed. GAO-08-427. Washington, D.C.: May 12, 2008.
Defense Infrastructure: Planning Efforts for the Proposed Military
Buildup on Guam Are in Their Initial Stages, with Many Challenges Yet
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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