How The Navy Exchange Is Fighting To Win Back Shoppers From Amazon And Walmart

The Navy Exchange, operated by the US Navy's Nexcom, is a retail chain offering discounted, tax-free goods to active-duty military personnel, veterans, and their families. These stores, ranging from small micro-markets to large department stores, along with Navy Lodges, are part of a benefit designed to support those who serve. A unique aspect of the Navy Exchange is that 100% of its profits are reinvested into sailors' welfare programs, funding initiatives like morale, welfare, and recreation (MWR) services such as gyms, discounted event tickets, and internet access, which are crucial for improving the quality of life for military members, especially when deployed overseas. Despite offering significant savings and essential services, the Navy Exchange has faced declining sales. From fiscal 2021 to 2024, sales dropped by nearly 5%, and over a longer period, between fiscal 2012 and 2024, sales fell by approximately 20%. This decline, occurring while overall retail sales were growing, indicates a loss of market share to powerful competitors like Amazon and Walmart. Consequently, the dividends that fund military welfare programs have also seen a substantial decrease, falling by over 40% during the same period. In response to these challenges, the government is investing millions to revitalize the Navy Exchange. Nexcom has embarked on a "store of the future" initiative, aiming to modernize its retail spaces to better compete in the evolving retail landscape, where e-commerce offers increasing speed and convenience. CNBC visited Navy Exchange stores in Virginia to observe these renovations firsthand. The strategy involves a significant investment of around $100 million, with approximately $20 million already spent and $80 million planned over the next three years to support these "store of the future" projects. The renovation efforts are tackling fundamental retail issues, such as updating outdated flooring, carpeting, lighting, and signage. A key focus is enhancing the customer journey and creating a more intuitive shopping experience. This includes rethinking store layouts, for example, by placing toys near consumer technology and sporting goods, and improving the visual merchandising to maximize space and clearly present product information. A significant challenge in standardizing store renovations is the unique architecture and geographical diversity of Navy Exchange locations, meaning no two buildings are identical. Despite these complexities, the initiative aims to convey value to sailors in a modern context. Early results from these turnaround efforts are showing promise, with reported sales increases of 25% in test stores compared to the previous year, outperforming the general retail sector's 3.2% growth. The "store of the future" initiative also addresses the agility needed in retail. Previously, introducing new products could take months due to lengthy planogram and delivery processes. The new model emphasizes flexibility, allowing for the repositioning of fixtures and walls to adapt to business demands and to host special events, such as in-store beauty demonstrations or giveaways. Specific examples of improvements include the relocation and enhanced display of brands like Bath and Body Works, which has seen a 40% sales increase after renovations. In categories like jewelry and beauty, brands are now clustered more effectively, creating "brand shops" and "brand moments" for shoppers. The consumer electronics department is also being transformed from a disarray of random displays to a more organized and informative space, maximizing the utilization of large-ticket item displays. However, challenges remain. The Navy Exchange's online storefront can be clunky, requiring military credentials to log in and sometimes necessitating phone orders for certain items. The overall physical footprint is also smaller than major competitors like Walmart, which has achieved a $1 trillion market cap partly due to its e-commerce success and extensive store upgrades. The Navy Exchange's performance is not driven by shareholder value in the traditional sense; instead, its "shareholders" are the service members themselves. The decline in military enlistment, a long-term problem exacerbated by challenges in retention, makes the Navy Exchange's role in supporting military members even more critical. By providing tailored shopping experiences, discounts, and tax-free purchases, the Navy Exchange aims to retain service members and their families. The fundamental purpose of these stores remains to generate profits that directly benefit sailors globally. This funding is vital for MWR programs, enhancing the lives of military personnel. The operation is extensive, with over 130 stores on aircraft carrier ships, some generating millions annually. While smaller stores in remote locations might operate at a loss, they are supported by profits from larger, more profitable stores, creating a self-sustaining model. Ultimately, the Navy Exchange operates on a cyclical model: money is invested, sales are generated, earnings are returned to sailors, and this process fuels further investment. The success of this model is directly tied to service members shopping at these stores, ensuring continued funding for welfare benefits and reinforcing the entire support system for the military community.