In 1912, John Hartford decided that Great Atlantic & Pacific needed a new approach to running grocery stores. Company lore has it that he was fed up with the high cost of premiums and trading stamps, but there was more to the story than that.
Food was a much-debated subject in 1912. Rising food prices were a major issue in that year’s presidential campaign, and were tracked closely by the newspapers and the government’s Bureau of Labor Statistics. Sanitary concerns were widespread even after the Pure Food and Drug Act of 1906 authorized the government to ban unsafe ingredients; in 1911, New York City inspectors condemned one hundred tons of poultry and nearly two hundred tons of fish on sale in public markets. The discovery of “vitamins”—a name first applied in 1912 to the substances that became known as vitamin A, vitamin B1, and vitamin C—helped fuel a new public consciousness about nutrition, and the typical American diet, heavy on fats and carbohydrates, was found wanting.4
Most of all, the food distribution system itself was seen as an embarrassment. Scientific management was taking firm hold in manufacturing and in the popular imagination; in 1911, American Magazine, one of the most widely circulated publications of the time, serialized “The Principles of Scientific Management” by the famed industrial engineer Frederick Winslow Taylor for a popular audience. By contrast with industry, the process of getting food from farm to table seemed hugely inefficient. Tens of thousands of peddlers eked out precarious livings selling eggs and melons door-to-door. Large quantities of produce and milk simply went to waste. Local prices of fruits, vegetables, and eggs could fluctuate wildly, collapsing as a trainload of new merchandise glutted the market and then soaring as producers responded to the low prices by sending their goods elsewhere. By one estimate, wholesaling and retailing costs accounted for nearly half of New Yorkers’ food outlays, with food that sold for $350 million a year at New York rail terminals costing consumers $645 million at the city’s grocery stores. The issues were so widely debated that the august American Academy of Political and Social Science devoted an entire issue of its Annals to “reducing the cost of food distribution,” and the new Harvard Business School, established in 1908, began a series of studies of retail efficiency.5
Other grocery chains had taken the lead in applying scientific management by standardizing stores and abandoning costly practices such as credit and delivery. John convinced his reluctant father and brother to try something similar. In 1912, they opened an unmarked store in an unprepossessing, two-story structure at 797 West Side Avenue in Jersey City, two miles from the company’s headquarters. At a time when most grocery stores were small, the new store was even smaller, just twenty feet wide and thirty feet deep. The furnishings were simple, only a few shelves and counters and a small ice refrigerator for butter, lard, and eggs; George Gilman’s glittering chandeliers, red-painted pagodas, and Chinese wall hangings were banished. Unlike Great Atlantic & Pacific’s other stores, the experimental store offered no credit, no premiums, and no trading stamps. There was no telephone, so customers could not call in orders for delivery. The manager, the sole employee, locked the door when he went to lunch. The company’s total investment, including inventory, came to only $2,500. The small investment and minimal labor expense permitted low markups, so the store could offer very attractive prices. The first Economy Store did not advertise, lest customers demand Economy Store prices in the regular store nearby. With no promotion beyond low prices, shoppers came in droves.6
As was the case with almost everything else they did, the Hartfords were not innovators when it came to low-price retailing. Their strength was figuring out how to turn others’ innovations into profitable strategies. Their 1912 test in Jersey City showed, unsurprisingly, that a store with limited hours and a small stock of merchandise sold fewer groceries than the average Great Atlantic & Pacific outlet. But it also revealed an important lesson: lower costs could lead to a higher return on investment. The Hartfords concluded that if they opened many locations, the new format could propel both higher profits and faster growth. They called the design the A&P Economy Store, putting the initials A&P on a store’s nameplate for the first time. The acronym stuck; henceforth, customers would think of the place where they did their shopping as “the A&P.” With George L. keeping a close eye on costs, the Hartfords plunged in, against the resistance of most of their supervisors. In 1913, they opened 175 Economy Stores, more than 5 each week. In 1914, another 408 Economy Stores opened up, including 100 in Boston alone, giving Great Atlantic & Pacific the large local market share it had lacked. By 1915, when the company opened 864 more Economy Stores, the low-price banner accounted for more than half of total sales.7
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The birth of the Economy Store coincided with an important political shift, for it was in 1912 that chain retailing first surfaced as a national political issue. Chains, which originated in the tea trade, were expanding across the retail sector. Some 257 sizable retail chains were operating in the United States in 1910, nearly five times as many as in 1900. The F. W. Woolworth Company was created in a 1911 merger of six “5 & 10 Cent” dry-goods chains that operated 596 stores in forty-eight states; the company was so profitable that it was about to occupy the tallest building in the world, paid for entirely in cash. The United Cigar Stores Company, organized in 1901 and closely tied to the tobacco trust that controlled cigar and cigarette production, had more than 900 stores by 1913. The growth of pharmacy chains showed that chains could penetrate even a field in which highly trained specialists were needed to manufacture and dispense the goods.8
Independent retailers and wholesalers tried to hobble the chains by discouraging manufacturers from dealing with them. In 1909, they convinced the Kellogg Toasted Corn Flake Company to abandon discounting. Henceforth, Kellogg would offer no volume discounts to chains such as Great Atlantic & Pacific. Instead, it would sell its cereal to wholesalers only at $2.50 per case of thirty-six boxes, less a 2 percent discount for cash payment. The wholesalers had to agree to sell to all retailers, regardless of size, for $2.80 per case. Retailers, in turn, were obligated to sell the cornflakes at ten cents per box. This system meant that a case of cornflakes sold by Kellogg for $2.45, including the cash discount, would bring $3.60 at retail, a 47 percent markup. “The one-case price is exactly the same as the 1,000-case price,” a Kellogg official insisted, explaining that lowering prices for big customers would “demoralize trade.” The courts, however, rejected most efforts to fix prices. In 1908, the U.S. Supreme Court ruled that a publisher could not tell a retailer what price to charge for a book. In 1911, it ruled directly that a manufacturer that tried to set the retail price of its products violated antitrust law.9
Their losses on the legal front pushed independent retailers and their wholesale suppliers into the national political arena. An anti-chain measure came before Congress for the first time in 1912, prohibiting premiums and trading stamps in connection with the sale of tobacco. This bill was important to independent cigar-store owners, but it was of little interest to other retailers and had no serious chance of passage. Separately, small-town clothing and hardware dealers sought to rein in the parcel-post service, established that same year, but both this proposal and merchants’ petitions that mail-order retailers be required to pay local taxes wherever they sold their goods were so contrary to the interests of small-town shoppers that they fell on deaf ears. Complaining that chain stores were selling goods too cheaply was not an approach calculated to earn sympathy from the consuming public, so the organizations representing independent merchants adroitly rephrased their complaint. Their objection, they said, was not to chains or low prices but to “unfair competition.” The practice on which they focused was price discrimination.10
Price discrimination means that the seller of a product charges different prices to some buyers than to others. Despite a name suggestive of untoward dealings, it is a common business practice. In economic terms, price discrimination often makes perfect sense: selling ten thousand cans of tomato sauce
to a single customer will almost always cost a food manufacturer less per can than selling a hundred cans, and price discrimination allows the customer with the larger order to capture part of the manufacturer’s saving by obtaining a lower price. But to the owners of small businesses and the residents of small towns, price discrimination was a pernicious practice that would leave them forever at a disadvantage. When these interests, forming a loose coalition known as the populists, won federal regulation of the railroad industry in 1887, they secured a strict ban on discrimination. The law required railroads to publish their rates for carrying each commodity, and to charge the same price per ton, barrel, or cubic foot to every customer. The independent merchants’ dream was to achieve a similar result in the distribution system, so that the smallest grocery store could purchase its stock at the same cost as the Great Atlantic & Pacific. As the secretary of the National Association of Retail Grocers explained, “The general working rules should be, ‘A fair price and the same to everybody.’”11
In 1912, the independents won the support of the Democratic presidential nominee, Woodrow Wilson. Corporate power was a major issue in the campaign. The incumbent Republican, William Howard Taft, and his predecessor, Theodore Roosevelt, both had attacked the trusts dominating such sectors as oil and steel, and both were running in 1912 on platforms calling for stricter regulation of trusts and monopolies. Wilson, the governor of New Jersey and a prominent political scientist, had been voicing his suspicion of big business for two decades and favored breaking up monopolies, not regulating them. He was an unabashed critic of unfair competition and price discrimination. If price discrimination could be stopped, Wilson asserted, “then you have free America, and I for my part am willing to stop there and see who has the best brains.” Splitting the Republican vote, Wilson became the first Democratic president since 1897.12
Wilson’s inauguration in March 1913, closely followed by a third Supreme Court decision barring manufacturers from setting retail prices for their products, fueled the backlash against the chains. Wholesalers and independent retailers responded to the court’s ruling by creating a joint lobbying organization, the American Fair-Trade League, to seek laws against price-cutting. They received the backing of one of the nation’s most prominent legal scholars, the Boston attorney Louis D. Brandeis, soon to become a Supreme Court justice himself. Brandeis had made his career as an outspoken critic of big corporations. “The evil results of price-cutting are far-reaching,” he asserted in the prestigious Harper’s Weekly. The future justice would not even concede a lasting benefit to the consumer. “The consumer’s gain from price-cutting is only sporadic and temporary.” Unless a manufacturer is able to avoid discounting the price of its product, Brandeis argued, it will have to lower quality in order to preserve its profits, leaving consumers unable to buy the high-value articles they desire.13
The American Fair-Trade League’s program was introduced into Congress by Raymond B. Stevens, a New Hampshire Democrat. The Stevens bill provided that the “producer, grower, manufacturer, or owner” of a trademark or brand had the right “to prescribe the sole, uniform price” at which its product could be sold at wholesale and retail. To benefit from the law, the manufacturer would have to print the retail price on each package and file that price with the government’s Bureau of Corporations. It would then have to sell its product to wholesalers or retailers at a uniform price, with no rebates or volume discounts. Retailers could depart from the retail price set by the manufacturer only if they were closing the business or filing for bankruptcy or if the goods had been damaged.14
The Stevens bill sparked a year of congressional hearings. The Chicago grocer S. Westerfeld endorsed it because he thought it would put an end to “the method of the retail octopuses, the damnable method of killing competition through price cutting.” Ralphs Grocery Company, the largest food chain in California, opposed the bill by analogy: “When a play comes to a theatre no one has the right to tell another that every seat in the house should be the same price.” Spokesmen for organizations as diverse as the Connecticut Piano Dealers’ Association, the New Orleans Retail Merchants’ Bureau, and the watchmaker Robert H. Ingersoll & Brother paraded through the ornate room of the Committee on Interstate and Foreign Commerce and bombarded legislators with letters and telegrams. Brandeis put in an appearance as well, urging the committee to ban quantity discounts and to allow manufacturers to set retail prices, lest price-cutting destroy business. Stopping price-cutting, Brandeis argued tortuously, would actually benefit consumers by allowing them to shop more confidently: “In order that the public may be free buyers there must be removed from the mind of the potential purchaser the thought that probably at some other store he could get that same article for less money.”15
The climactic witness in these proceedings was an obscure young man named Max Zimmerman. Zimmerman, twenty-five, was a reporter for Printers’ Ink, the weekly bible of the advertising industry. From September through December 1914, Zimmerman and his colleague Charles Hurd called attention to the rapid growth of chain stores in a spectacular series of articles. At the time, government statisticians collected almost no data about retailing and none at all about chains. Zimmerman and Hurd made it their business to fill that void. To universal shock, they discovered more than twenty-five hundred retail chains operating a total of thirty thousand stores. In Philadelphia, by their estimates, chains accounted for one-fourth of all grocery stores, in Chicago and New York for a sixth of all tobacco stores. In the drugstore field, chains were fewer but expanding fast. When they tried to investigate individual chains, Zimmerman and Hurd ran up against a brick wall. Most of the chains were privately held and released no information about sales or profits. Great Atlantic & Pacific was among the most secretive. “From the fact that it is continuously expanding, it is believed to be very prosperous,” they wrote. “It is not a rabid price-cutter and does business along rather conservative, although progressive, lines.”16
Zimmerman and Hurd’s articles expounded at length on the reasons for chains’ success. Some related to better management. In the grocery field, they pointed out, chain stores typically stocked fewer items than the average grocery and turned their stock twice as fast, so they had to finance fewer unsold items sitting on shelves. If the chains had their own warehouses, they could stash their inventory on low-cost warehouse shelves and make more profitable use of the costlier space at retail locations. They noted that food chains’ purchasing costs were 15–20 percent below those of independents, highlighting the importance of price discrimination by manufacturers. Most important of all, food chains were willing to accept lower profit margins than independents. They laid many of the chains’ advantages at the feet of incompetent independent merchants: “Where the chain’s steam roller counts is where the ignorant or panic-stricken independent throws himself down in front of it to be promptly flattened out.”17
But when Zimmerman came before the House Committee on Interstate and Foreign Commerce, he made clear that chain stores’ growth relied on more than good management. He told of chains cutting prices in a particular store to unprofitable levels to drive out an independent, and of merchants who rejected token buyout offers from chains only to have the chain move in next door or even convince the landlord to let it occupy the independent store’s space. While chains brought clear benefits to consumers, Zimmerman thought, they could abuse competition unless the government set limits. This was the problem the advocates of independent grocers complained of. Their solution was to allow manufacturers to require all retailers to charge a single price for a product, as Kellogg had done with its cornflakes.18
After dozens of hearings, the independent retailers and wholesalers who wanted to make price-fixing legal were sent away empty-handed. The House Committee on Interstate and Foreign Commerce refused to endorse their bill: support for small stores in their struggles against the chains was too weak, and the inefficiency of independent retailing was simply too obvious. Yet there were clear signs of
a shift in the political and intellectual winds. Congress enacted two major changes in antitrust law in the autumn of 1914. In September, it created the Federal Trade Commission (FTC) to address “unfair methods of competition” and “deceptive practices,” both of which were made illegal. The following month, the Clayton Antitrust Act outlawed price discrimination when the effect “may be to substantially lessen competition or tend to create a monopoly.” The Clayton Act did little damage to chain stores, because it specifically permitted sellers to charge differing prices based on quality or quantity, but it did raise the prospect that in some cases price discrimination could break the law.19
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The Great Atlantic & Pacific Tea Company, by far the largest chain in the grocery field, was notable by its absence from the chain-store debate. The Hartfords did not believe in lobbying. The company raised no complaints in the press and sent no one to testify during the months of hearings on the bill to ban price discrimination. The legislative archives give no indication that the Hartfords contacted any member of Congress about the issue. Instead, the company launched its first national marketing initiative. In January 1915, while the congressional committee was still taking testimony, A&P stores around the country invited boys and girls to compete for prizes by selling coffee door-to-door. In Macon, Georgia, the child selling the most would earn $3,000 in gold. In Fort Worth, Texas, the top seventy sellers would win prizes as large as $500, with any boy or girl selling at least $20 of coffee receiving a watch or a camera. Everywhere, the contest was announced in newspaper articles casting the A&P store in a favorable light—a timely antidote to the criticism of chain stores emanating from Capitol Hill.20
The Great A&P and the Struggle for Small Business in America Page 8
