The Likely Effects of Price Increases on Commissary Patronage: A Review of the Literature

The Defense Commissary Agency DeCA operates 245 commissaries worldwide, selling groceries at cost plus a fixed markup to cover capital costs for replacement and modernization. Operating costs of the commissaries are funded by an appropriation from the U.S. Department of Defense DoD totaling approximately 1.4 billion per year as of 2014. Largely due to this subsidization, commissaries can save military families and retirees an average of 30 percent when compared with retail supermarkets DeCA, 2014a. As such, many servicemembers view access to the commissary system as an important nonpay benefit and an integral part of their overall compensation package. In early 2014, DoD proposed cutting the annual subsidy to commissaries from 1.4 billion to 444 million. According to DoD, this change would result in an increase in the overall price level for nonisolated commissary stores and a decrease in savings, but commissary patrons should continue to enjoy savings on grocery purchases of about 10 percent or more DoD, 2014. Congress did not pass these cuts into law for the fiscal year FY 2015 budget, but an early draft of the FY 2016 budget proposal included a 25-percent cut to DeCA s budget Jowers, 2015. To determine the consequences of the predicted commissary price increase from the original proposal, the Office of the Under Secretary of Defense for Personnel and Readiness asked RAND to review how price increases have affected grocery retailers in the private sector and analyze how these results might translate into changes in sales and revenues for DeCA, as well as the secondary and nonmarket effects of a change in commissary pricing, and to suggest a strategy to gather the information needed to estimate the relevant effects more precisely. The economic literature from studies of grocery retailers in the private sector suggests that store choice depends on both the fixed and variable costs of shopping.