Inside The U.S. Navy’s $2.3 Billion Retail Business To Aid Military Servicemembers

[0:00] It's a place where you can shop Toys R Us, Bath and Body Works, Estee Lauder, Home Depot and [0:07] Tempur-Pedic all under one roof. And no, it's not a shopping mall or Walmart or Macy's. This [0:17] is the Navy Exchange. It's a chain of retail stores operated by the U.S. Navy for active duty [0:23] military members, veterans and their families. Some are small convenience stores called micro [0:28] markets and others are sprawling department stores. These shops, along with a chain of hotels [0:34] called Navy Lodges, are run by the Navy Exchange Service Command known as Nexcom. When someone [0:41] joins the military, you know, they raise their hand and they say, I'm going to serve and we say, hey, [0:46] we're going to take care of you. And one of these benefits is the Navy Exchange benefit. Products [0:51] are typically discounted and tax free. 100% of the store's profits goes back to sailors. If you come [0:57] here and buy a couple of big items, you know, you're saving $400, $500 if it adds up. But sales [1:02] have fallen. From fiscal 2021 to fiscal 2024, sales were down nearly 5% at a time when retail sales [1:10] overall were growing. That's proof the Navy Exchange stores have lost market share to bigger, [1:16] savvier competitors like Amazon and Walmart. Now the government is spending millions to win back [1:23] shoppers. We didn't start off saying we're going to create the store of the future, but we were two or [1:27] three projects in and realized that's in essence what we're doing. Anytime we've touched an area, [1:32] it's driving more sales. CNBC went to Virginia to get a first-hand look to see how the US Navy is [1:38] renovating its retail stores so it can better compete with Walmart, Amazon and Target. So far, [1:45] they say it's working. The retail world has always been competitive, but even more so as e-commerce [1:54] becomes faster and more convenient. Over the past five years, Amazon has scooped up more and more of [2:00] overall consumer spending. They have good things at the Exchange. I don't have a problem with what [2:04] they carry. I can find a variety of stuff here, but it's just the convenience. You know, Amazon's never [2:10] closed. I have an Amazon Prime membership. I shop at Costco. I'm a fan of Costco. We are never going to [2:17] fill 100% of the needs of a patron. We'd like to think we would, but that's almost an impossibility. [2:23] But what we want to do is whenever they need something, we want to be first or second in their [2:28] mind, preferably first. Sales have been on the decline for more than a decade, falling around 20% [2:35] between fiscal 2012 and 2024. That means its dividends, which feed military welfare programs, [2:42] are a fraction of what they were in the past. Dividends fell over 40% around the same time [2:47] period. That's where Melissa Gonzalez comes in. Her firm MG2 was hired by Nexcom to help it fix [2:54] its store so they can get back to growth as part of its Store of the Future initiative. [2:59] You know, they have a lot of unique challenges with the Navy Exchange. One, no two buildings are the [3:04] same. So it's really hard to standardize things that you would then roll out once you come up with a [3:08] concept because there's a lot of different scenarios with the architecture, with the geography, [3:12] with merchandising. But imagining we didn't have those differences, it was really thinking about [3:19] how do we think in modern day about how we convey value to the sailor. While the company has not yet [3:25] released its annual report for 2025, it says that the turnaround efforts are taking hold. Across the [3:31] entire business, sales were up at 25 compared to 24. Do you have how much? I can tell you retail was up [3:37] 3.2%. Nexcom is spending around a hundred million dollars to fix its stores, a significant portion [3:44] of which will be used to support Store of the Future projects. It's already spent around 20 million [3:49] dollars and plans to spend 80 more over the next three years. Do toys make more sense in your consumer [3:56] technology and sporting goods where maybe that's where the basketball is and the gaming is and how do [4:00] you bridge those things together? So we did try to step back and every time what does value look like, [4:06] but also what's the intuitive journey and do these current layouts speak to what's intuitive? [4:11] A big part of this turnaround is focusing on the retail fundamentals, right? We've got old, [4:16] outdated flooring over here. We've got old carpeting and that kind of subconsciously just makes it not a [4:22] great retail experience. It's not a place where people want to spend a lot of money. So as part of this [4:26] turnaround, they're fixing fundamentals, lighting, carpet, floors, signage, and you're also going to see a [4:33] lot more digital signage in some of these stores. What prompted this evolution and this moment to [4:38] kind of rethink the fleet? We have stores that range from a 200 square foot micro market to a 200,000 [4:43] square foot flagship that oftentimes our ability to introduce new product rapidly was challenging. [4:51] It took months to be able to do the planograms and to do the deliveries and get it through. [4:57] And so we started this really as a way to, how do we apply more flexibility to the model? [5:04] This is one of the stores that hasn't been renovated yet. And the consumer electronics [5:07] department is where you're going to see a lot of changes. As you can see behind me, you've got a [5:11] bunch of random TVs on the wall, a lot of dead space. And what they want to do is make sure that, [5:16] you know, customers know the branding, they know the specifications. This is a big ticket item. [5:20] And of course you also want to maximize that space. You have a lot of dead space there that's not [5:25] good merchandising. That's area where more product can go. But those challenges are already being [5:29] addressed. There's a test store. So everything that we ideated on through our renderings, they [5:34] were able to bring into that test store and see how it would perform and benchmark it over a store [5:39] that didn't have those changes. CNBC visited a store that's undergone extensive renovations in [5:44] Norfolk, Virginia, which is home to the world's largest naval complex. Actually, I've been a while [5:50] thing that came. It looked like they did some more organize more stuff around. It don't look like it's [5:57] too crowded sometimes, you know. It looked good. It looked nice. We had a we had a renovation project [6:02] down in the southeast that literally lasted about six years. We kind of took the store and we basically [6:09] deconstructed the whole thing and tried to reconstruct it. By the time we finished it, the market had sort of [6:15] moved on, right? The pace of retail is increasing every day. So instead of sort of a vertical redo, [6:22] we're saying, OK, let's pick a let's pick an area, whether it be essentials, beauty, right, electronics, [6:31] home. And let's try to modernize and and renovate and make that best in class. Before the renovations, [6:40] that was the grocery store. That was the department store. And here in this tunnel was the Bath and Body [6:45] Works section. So a little bit random. Now that things have been turned around, Bath and Body Works [6:50] is still here, but it's in a better location with better signage. And now sales for the brand are up [6:56] 40 percent. The new stores have improved the way individual brands are displayed, especially in [7:01] categories like jewelry and beauty. At unrenovated locations, brands are clustered and often undifferentiated. [7:08] And here you'll see we have Pandora. But then it's not till over there where you have Kendra Scott. [7:14] Then you have a charm bar over here. You have another brand here. So really kind of cleaning up [7:18] a back wall. So it feels a little bit more like these brand shops and these brand moments. [7:23] And so they can kind of go down that journey and intersect with each one of those brand moments. [7:27] They've added a lot more beauty section, which is really nice in different brands. [7:32] I talked about how we want to be able to move the fixtures around, move the walls around as the business [7:37] demands. But we also know that our patrons really love when we host special events. [7:42] And so this is one where we can move these fixtures. We can utilize our digital media. And we have held [7:50] events in here with 50 or 60 people after hours where we can bring in a beauty influencer. We can bring [7:58] in brands or we can do giveaways. We can do makeovers and just have an event for our patrons. [8:04] Still, it's not always the most convenient option. Its online storefront can be clunky. [8:10] Some items require customers to call in to place their order. And shoppers need military credentials [8:16] to log on. It's like through my husband. And so it's like this big rigmarole to try to get logged on. [8:22] It's kind of a pain. Its overall footprint is also much smaller than some of its competition. [8:27] We're about 20 minutes from here. There's a Walmart five minutes from our house. [8:30] So Walmart recently hit a one trillion dollar market cap, thanks in large part to its fast [8:37] growing e-commerce business. It's also invested billions to upgrade its stores in recent years. [8:43] Its stock has soared up around 165 percent over the past five years. The Navy Exchange publishes an [8:50] annual financial report, but doesn't report earnings quarterly like a publicly traded company. Its [8:57] performance also isn't driven by shareholder value. Well, at least not in the traditional stock market [9:03] sense. The reality is that folks like the ones you see walking through the hallway here in uniform, [9:09] they're our shareholders. 2025 was a bright spot for military recruitment. All active duty branches either [9:18] met or exceeded its goals. But enlistment has been a long term problem. Military applicant levels have been [9:24] declining for decades and retention is also a challenge. The total number of enlistees at entry [9:31] level pay grades declined around 9 percent between 2014 and 2024. And the Navy saw the largest percentage [9:38] drop of all the forces over that decade. The Navy Exchange is one of the many ways the military works to [9:45] retain soldiers. The shopping experience is tailored towards the needs of military members and their families. [9:51] This is a base that is more of a suburban base. There's a lot of families here. So we're going to have [9:57] more kids apparel here than we would in another base that's not that far away. And of course the discounts [10:03] and tax-free shopping experience are an added bonus. But the real purpose of these stores is to generate [10:09] profits that help sailors around the world. The money helps to fund MWR programs. That means morale, [10:17] welfare, and recreation. This includes things like access to a gym, discounted tickets to sporting [10:22] events and concerts, and internet access. And even just dining options when on base. This is especially [10:28] important to military members around the world where these benefits greatly improve their quality of life [10:33] when deployed overseas. How important is that for military families to make sure that sales are good [10:38] and you have profits coming out? No, no. I mean, the pressure is there. I feel it. It's not just about [10:43] the ROI, but we have stores in Poland and Romania that are literally in the middle of a cow pasture, [10:49] right? But we're there because there's 150 sailors who need support. We have stores like Hawaii or here at [10:56] Oceana where we're able to make a profit and kind of subsidize some of the lesser stores. And the company's [11:03] operations aren't just happening on land. Bianchi said that there are over 130 stores on aircraft [11:10] carrier ships. That store on that ship can do almost three or four million dollars a year. So it's big [11:17] business. However, its biggest stores, like the ones we visited near the military base in Virginia, [11:22] are more directly at odds with giants like Walmart, Target, and Amazon. If service members aren't shopping [11:28] at Navy exchange stores and profits and sales are falling as a result, that means less funding for [11:34] welfare benefits for Navy members. Then the whole model starts to fall apart. While Nexus nowhere near [11:40] the size of its larger competitors, it's still a more than $2 billion per year business with [11:45] millions of potential customers. Every dollar that the sailors or our patrons spend in our stores, [11:52] eventually, like a pachinko machine, it makes its way back to the base. Money comes in, we invest it, [12:00] we generate sales, we return the earnings back to the sailors, and then the cycle starts again. It's [12:07] the circle of life, yeah.