* * *
The brothers may have controlled A&P’s shares, but turning their huge company required Herculean effort. John visited division-level management meetings to talk up supermarkets. At the December 1937 meeting of division presidents, John “emphasized the importance of doing this quickly,” and George said he was “completely convinced that the rapid carrying out of the program outlined by Mr. John is the only salvation of the business.” The gears began to mesh. From 1929 through 1936, A&P had closed an average of 356 stores per year, a small fraction of the number that were losing money. In 1937 and 1938 combined, more than 4,000 older stores were closed down, and 750 supermarkets were opened. The new stores all had meat, produce, and dairy departments and far more shelf space than the combination stores. Wide aisles allowed shoppers to take advantage of another innovation of the 1930s, the shopping cart, in which a large volume of purchases could be wheeled directly to the shopper’s car in the parking lot adjoining the store.8
Supermarkets offered economies of scale in almost every area of store operations. The bigger, the better: labor costs, restocking costs, store rental, and administrative costs all were much lower, relative to sales, in large supermarkets than in small ones (Table 2). In the largest supermarkets, operating costs were barely half those of traditional A&P stores. Supermarkets allowed A&P to capture economies of scale—and the company’s sheer size permitted it to capture those scale economies in a very big way. The sole exception was advertising expense: because big stores drew customers from a large geographic area, they required much heavier spending on circulars and newspaper advertisements to spread the word about their low prices and special sales.
John Hartford pushed his company into supermarkets for the most traditional of business reasons, retaining customers and rebuilding market share. But there was an important side benefit. By 1937, more than half the states imposed chain-store taxes, almost all of which were based on the number of stores owned by a chain. Replacing several small stores with a single supermarket let A&P markedly reduce its taxes. A&P’s store count, which hovered around fifteen thousand in the mid-1930s, fell 27 percent between February 1936 and February 1939, shrinking its tax bill accordingly. The state chain-store taxes, meant to shelter small grocers and wholesalers against the depredations of giant chains, gave chains such as A&P an added incentive to shift to large stores that would provide even tougher competition for mom and pop.9
* * *
For Wright Patman, the enactment of his bill against price discrimination in June 1936 was not an end but a beginning. Fighting for the independent businessman was to prove rewarding, personally as well as politically, and it would occupy the Texas congressman for the next decade.
A few weeks after the Robinson-Patman bill became law, Patman signed a contract with the Thomas Brady Speakers’ Bureau, which sent him on tour in the fall of 1937. The congressman traveled the country, speaking to civic associations and small-business groups from coast to coast. The trip was a triumph—until word leaked out that McKesson & Robbins, a drug wholesaler, had paid part of the cost. McKesson supplied drugs to independent pharmacies and therefore had a direct interest in legislation that protected independent druggists against pharmacy chains. Patman later denied allegations that McKesson had paid him $18,000 and bought him a new car; his speaking fees, he claimed, were only $4,000.10
What Patman did not disclose, and what was never revealed, was that he had done far more for McKesson than give speeches. He introduced the company’s president, F. Donald Coster, to Jesse Jones, then head of the Reconstruction Finance Corporation, a powerful federal lending agency, in 1937, and tried unsuccessfully to arrange a meeting between Coster and President Roosevelt in March 1938. Coster, well-known in business circles, was a man of substantial wealth, owner of a 133-foot yacht and of a twenty-room house in Fairfield, Connecticut, where he attended the local Methodist church. But there were a few things about his patron that Patman almost certainly did not know. Even as McKesson & Robbins was financing the anti-chain campaign and positioning itself as the protector of independent retailers, the company was secretly assembling a retail drug chain of its own. Also, Coster was not his sponsor’s real name. As Philip Musica, he had a background as a smuggler, bootlegger, and gunrunner with a federal bribery conviction on his record. He would shortly come under federal investigation for looting his company along with his brothers, who, it turned out, also were serving as McKesson executives under assumed names. After the fraud was unveiled, Coster-Musica committed suicide in December 1938.11
None of this caused Patman much damage back in his northeastern Texas district. The region was one of the poorest parts of the country, and getting poorer. The eleven counties in the First Congressional District would collectively lose 53,300 residents between 1930 and 1960, with three consecutive decennial censuses showing population decline. Hughes Springs, Patman’s hometown, had 1,000 residents in 1929, but only 767 in 1940. As tenants fled drought-stricken farms and as small towns withered, resentment of distant forces making it hard for a man to earn a living ran very strong. Martin Dies, the Democratic congressman from a district adjoining Patman’s, explained this feeling eloquently in 1937: “If a man undertakes to go into the grocery business, there is hovering above him the shadow of the Great A&P.” Although A&P controlled one-fifth of the grocery business in Texarkana, Patman’s constituents shared the views of most Americans, as revealed in a Fortune magazine survey: most households bought their food at chain grocery stores but also favored restricting them. The chain-store issue was one Patman could ride.12
The passage of the Robinson-Patman Act immediately unleashed a new round of political warfare. Patman told supporters that he had two other bills in mind. One would prohibit manufacturers from engaging in retailing, so large merchants could not circumvent Robinson-Patman’s restrictions on volume discounts by running their own factories. His other idea was to force wholesalers and distributors selling in towns where they did not pay local taxes to pay a federal tax instead. This, Patman argued, “would remove a discrimination against local merchants in favor of absentee distributors.”13
A&P, though, was not sitting idle. At the start of 1936, in the midst of the battle over the Robinson-Patman Act, John A. Hartford had taken what by A&P’s standards was a truly radical step. He appointed an outsider, Caruthers Ewing, as the firm’s general counsel. Ewing, then sixty-five, had been on the verge of retirement after a prominent career as a corporate lawyer in Memphis and New York. He had long been John Hartford’s personal attorney, but he owed nothing to the company. Quite unlike every other top executive—the man he replaced as general counsel was John Hartford’s cousin and an employee since the turn of the century—Ewing had not spent his entire career at A&P. John had decided he had been passive too long in the face of political attack, and he wanted Ewing to test the limits of the new law.14
First, Ewing sought to find a way around the ban on retailers accepting brokerage commissions. In July 1936, headquarters informed its regional brokerage offices that they would henceforth be known as field buying offices and should no longer accept commissions from food processors and other suppliers. However, as the field offices were saving suppliers the expense of using outside brokers, they could insist—according to A&P’s interpretation of Robinson-Patman—that A&P deserved lower prices than competitors because its account cost the suppliers less to service. One month later, in August, A&P required suppliers to sign two amendments to its standard contract. One committed the supplier to pay A&P a 6 percent advertising commission, in return for which A&P accepted only a general obligation to advertise the supplier’s products. The other specified that A&P would receive a 5 percent volume discount. Both forms required the manufacturer to certify that it was not engaging in illegal price discrimination by avowing “its willingness to make the same agreement as is hereby made with any other purchaser similarly situated and on proportionately equal terms.”15
* * *
Ewi
ng’s approach seemed to allow A&P to protect the low purchasing costs that let it sell groceries so cheaply. Its open flaunting of the law, though, provoked the Federal Trade Commission to start an investigation, which upheld A&P’s new policies on advertising allowances and quantity discounts but objected to A&P’s insistence on payments in lieu of brokerage commissions. The FTC soon discovered that the R. J. Peacock Canning Company in Lubec, Maine, gave A&P a 3 percent discount from list price on sardines and that A&P’s bakery division purchased Fleischmann’s yeast at fourteen cents a pound while smaller bakers paid twenty-five cents. These favorable prices were the result not of advertising allowances or quantity discounts but of A&P’s demand that suppliers charge it less than their list price. Suppliers that refused price concessions went on the “unsatisfactory list.” After Stokely Brothers, a canner, announced on August 31 that it would no longer pay brokerage allowances or other rebates, A&P canceled options to buy more than ten thousand cases of tomato soup. For A&P, these tactics were intended to hold prices down and protect its position as America’s biggest grocer, but to the Federal Trade Commission they looked suspicious. In January 1937, the commission charged A&P and some of its suppliers with violating the Robinson-Patman Act. No longer passive, A&P fired back defiantly, declaring publicly that the Robinson-Patman Act was unconstitutional.16
Even as A&P came under legal attack, another piece of anti-chain legislation was moving through the U.S. Senate. The Miller-Tydings Act was crafted to overturn the Supreme Court’s old rulings that manufacturers’ attempts to fix retail prices violated antitrust law. Miller-Tydings permitted each state to allow the maker of a branded or trademarked product to require its customers to agree to charge at least the specified minimum retail price, thereby assuring small merchants they could not be undersold by chains. Roosevelt opposed the bill at the request of the Federal Trade Commission, but support in Congress was strong, and the House majority leader, Sam Rayburn, convinced the president not to stand in the way. Miller-Tydings, though, offered little to independent grocers: coffee processors and vegetable canners could not set retail prices by contract, because their wholesale prices fluctuated constantly as commodity markets moved. Patman tried to add something for the grocers, coupling Miller-Tydings with a heavy tax on chain stores in the District of Columbia, where A&P was a leading grocer. That plan passed the House but failed in the Senate, which approved the Miller-Tydings Act in August 1937.17
The anti-chain forces were swarming state capitols as well. In 1935, a group called the Anti-monopoly League, which claimed to represent eighty thousand independent merchants, announced its intention to drive chain retailers out of California. The league pushed two bills through the legislature in Sacramento. One was a steep tax on chain stores. Any company with nine or more stores in the state faced a tax of $500 per store, nearly half the profits of the average A&P. The other new law, the Unfair Trade Practices Act, prohibited retailers from selling any item below cost, including an imputed share of the cost of doing business, and also required any chain to charge uniform prices throughout the state save for differences attributable to transport costs. Quite aside from the fact that competitive conditions in San Diego might be very different from those in Eureka, nearly seven hundred miles to the north, assuring uniform pricing was almost impossible for a food chain: the wholesale prices of many foodstuffs fluctuated frequently due to changing commodity prices, and a retail grocer violated the law every time it failed to change an item’s price in all of its California stores at the same moment.18
Unlike in other states, retailers in California, led by Safeway, the state’s largest grocery chain, mounted a sweeping counterattack. They went to court to overturn the Unfair Trade Practices Act, winning an injunction in early 1936. To fight the chain-store tax, they decided on a different course. California’s constitution provided an opportunity for voters to reject any state law by referendum. By September 1935, pro-chain forces collected the requisite 116,487 signatures to put the chain-store tax on the November 1936 ballot, giving them fourteen months to organize support. Their vehicle was the newly formed California Chain Stores Association, with sixty-five member chains. The association hired an advertising agency, Lord & Thomas, to run the campaign. The Lord & Thomas strategy was to show the advantages of chains while avoiding attacks on independent shopkeepers. Chain-store managers were directed to join local civic groups to counter charges that chain stores had no interest in their communities. Advertisements discussed the chains’ role in providing a better life for average families and described the many small chains based in California. Educational tours took housewives through chain-store warehouses and factories.
Opportunity fell into the chains’ lap when the California Canning Peach Growers asked the Chain Stores Association for help unloading a surplus of peaches. Food chains, including A&P, which had 104 California stores, undertook a nationwide campaign to convince Americans to eat more peaches. The campaign led to legislative hearings on the connection between chain stores and farm prices, allowing an A&P executive to explain how his company played the role “of a coordinating factor between the producer and the American consumer.” Similar campaigns for beef and dried fruit followed, helping the chains collect important friends in California’s huge agricultural industry. Then scandal hit the anti-chain campaign, when it was revealed that its chief fund-raiser kept 40 percent of everything he collected from mom-and-pop merchants across the state. Just ahead of the vote, Lord & Thomas shifted from promoting the virtues of chain stores to direct attacks on the tax, calling it “a Tax on You.” The slogan worked: majorities in fifty-seven of the state’s fifty-eight counties voted to repeal the tax, demonstrating that on this controversial and emotional subject, public opinion was ripe to be molded.19
California offered the first evidence that the anti-chain crusaders were overreaching. More such evidence came from Oklahoma, where independent merchants failed to collect enough signatures to obtain a referendum on the most onerous tax plan yet, imposing an annual tax of $7,500 on each store over seventy-five owned by a single chain. Yet in most of the country, the anti-chain fervor remained strong. Kentucky, where A&P had 178 stores, passed an unfair trade practices law similar to California’s in 1936. The Food and Grocery Conference Committee, an organization of grocery manufacturers, wholesalers, and retailers, tried to stave off more draconian legislation in other states by endorsing a “model” state law to require a minimum 6 percent markup on all grocery products, a proposal that would have hurt A&P. In 1937, bills to restrict price-cutting by retailers were debated in twenty states. Legislatures in four additional states—Georgia, Montana, South Dakota, and Tennessee—adopted taxes on chain stores, while Minnesota required retailers to sell all merchandise for at least 10 percent above the manufacturer’s or wholesaler’s list price. In Florida, one house of the state legislature overwhelmingly approved a bill prohibiting chain stores altogether.20
Most worrying to A&P, anti-chain-store sentiment was spreading to the highly urbanized states of the Northeast, where shoppers had been patronizing chain grocery stores for three decades. In June 1937, Pennsylvania’s governor, George Earle, signed a bill imposing a tax of $500 per store on any company with more than five hundred stores in the state. A&P, with two thousand Pennsylvania stores, faced a tax bill of $1.05 million a year and promptly closed eighty stores that, it claimed, the tax rendered unprofitable. Even in New York, where A&P was based and where it was far and away the largest grocer, the company had been threatened with the loss of its milk license for selling milk too cheaply in 1936. By 1937, a chain-store tax bill was thought to have a serious chance in the coming year’s legislature. This represented a dangerous threat, because New York, home to twenty-four hundred A&P stores in early 1937, accounted for one-sixth of A&P’s pretax profits.21
George L. Hartford’s attitude was unchanged: he thought the company should ignore the controversy and concentrate on selling groceries. But with the business under mounting assault,
John Hartford understood A&P could no longer remain aloof from politics. In the winter of 1937, Waddill Catchings, a well-known New York investment banker and economist, invited John to the Cloud Club, the elite luncheon club near the top of the Chrysler Building, to make the acquaintance of Carl Byoir.22
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Byoir, forty-eight years old in 1937, had already enjoyed a long and colorful career by the time he met John Hartford. He first made his mark in 1911, while attending Columbia University Law School, when he bought the American rights to the works of the Italian educator Maria Montessori and introduced the Montessori method into the United States. After selling advertising for the Hearst newspapers, he served on President Wilson’s Committee on Public Information during World War I, distributing propaganda films and creating a front group, the League of Oppressed Nations, to support the Allies’ cause. He attended the Paris Peace Conference to tout Wilson’s peace plan. The Committee on Public Information brought Byoir into close contact with Edward Bernays, one of the early practitioners of public relations. After the war, Byoir represented Thomas Masaryk, the president of newly independent Czechoslovakia; joined with Bernays on a campaign for Lithuanian independence; and represented the developer of the Biltmore Hotel in Coral Gables, Florida. In 1928, he visited Havana because he heard that the climate would be good for his sinus problems. He soon bought two English-language newspapers, made friends with politicians, and developed a lucrative specialty working with Americans seeking to invest in Cuba. “When their business gets down to brass tacks, they ‘see Byoir,’ who now almost amounts to President Machado’s Department of Commerce,” reported Time, presumably at Byoir’s behest.23
The Great A&P and the Struggle for Small Business in America Page 21
