The Great A&P and the Struggle for Small Business in America

by Marc Levinson

  A&P’s century-long record of growth was due not to mergers or cartels but to astute management. John Hartford’s success in putting others’ innovative ideas to use in the stodgy field of food retailing dovetailed with his brother’s insistence that the company maintain a solid financial footing. But in a country that took competition for granted, the Hartfords’ sharp competitive elbows ultimately got them into trouble. As A&P flourished, America’s understanding of itself as a free-market economy came into conflict with an equally potent myth, one that places small business at the core of a democratic society.

  Small business, in the public dialogue, is venerated as the wellspring of innovation and economic dynamism, the boundless source of job creation, and a bulwark against the overwhelming power of large institutions. Entrepreneurs who built giant businesses out of sweat and smart ideas, from Thomas Edison to Bill Gates, are important cultural icons, and the venture capitalists who back start-up companies are heroes in their own right. As Attorney General J. Howard McGrath asserted in 1950, “The continued existence of healthy independent business enterprises is essential to a democratic society.”3

  To portray entrepreneurship as the engine of economic dynamism and innovation is to paint an imagined landscape. Most small businesses neither grow nor innovate. Like Walter and Bertha Abbott’s Little Corner Store, they provide livelihoods and, in many cases, a degree of financial independence to the proprietor. To the extent that they are located in small towns with few other sources of economic activity, they provide customers for local merchants, lawyers, and insurance agents. But undercapitalized small businesses, wholly reliant on the proprietors’ abilities, have no economic magic. The magic comes from the relative handful of enterprises, whether small or large, that grow by introducing successful products, finding new ways of doing business, and putting new technologies to use. It is these changes that bring higher productivity, the bedrock of higher living standards.4

  The Hartfords performed such magic in ways that seem, at first blush, quite unremarkable. George L. Hartford was in no sense an innovator; had he been running the company on his own, he would have been happy with higher profits, slower expansion, and a traditional approach to food retailing. George’s insistent focus on detailed operating data from every store, warehouse, and factory was critical to controlling expenses, but it would not have enabled A&P to stand out from the retail crowd. Fortunately for their company, his brother and partner, John, had an extraordinary talent for latching on to new ideas and applying them to the grocery trade. This was no modest accomplishment. A corner store’s method of displaying canned goods was of no interest; to be useful to A&P, ideas had to be replicable, so they could be employed in dozens of warehouses or thousands of stores. Just as Henry Ford standardized auto production, the brothers pushed to standardize stores and later bakeries to minimize the amount of capital investment per dollar of sales. They used their size to demand, and often win, price discounts from suppliers. They cut out middlemen simply by refusing to deal with them or pay their commissions. They integrated vertically by using their vast retail network to assemble a steady flow of orders for their factories, avoiding the ups and downs that played havoc with manufacturers’ production schedules. These practices, unexceptional in the twenty-first century, brought opprobrium and political and legal retaliation in the twentieth—instigated by small businesses that summoned the power of the state to protect them from competition.

  In truth, the abuse of market power by big business is a perpetual problem in a capitalist economy. Businesses engage in bare-knuckle conduct on a daily basis, whether by forming cartels, monopolizing access to critical inputs, or forcing customers to buy unwanted products in order to obtain the ones they really desire. The line between aggressive competition and anticompetitive behavior can be a thin one; a company that demands a sharp price cut from a supplier, to take one example, may be promoting competition if it is one of many potential purchasers of that supplier’s products but quashing competition if the supplier has few other markets. Given that businesses have strong incentives to find ways to keep input costs low and the prices they charge customers high, there is no alternative to legal oversight: in a market economy, maintaining competition is a basic governmental responsibility.

  In the chain-store wars, though, the federal government and many states intervened not to promote competition but to crush it. Their interest was not in encouraging low retail prices to the benefit of consumers, but precisely the opposite: they wanted to keep prices high so that an inefficient distribution system could survive. The competition enforcers were sheep in wolves’ clothing, pretending to be tough on big business to benefit the common man while in fact forcing the common man to pay more than necessary for his groceries in order to keep small businesses rolling in profit.

  What is striking about the decades of attacks on A&P is how little economic analysis lay behind the legislation and the lawsuits. In its criminal complaint in 1943 and again in its civil antitrust suit in 1949, the federal government repeatedly raised the prospect that A&P would underprice competing retailers, force them out of business, and then, having established itself as a monopoly, raise prices to consumers. In some areas of the economy, such a concern might have been plausible; had the leading aluminum manufacturer used money-losing prices to force its rivals from the market at a time when high tariffs precluded imports, it might have been able to use its monopoly status to sustain high prices for years or decades. In food retailing, on the other hand, there was little chance that A&P could control the nation’s supply of tea or tomatoes, and opening a store was so easy that had A&P succeeded in pushing up prices, new competitors would have appeared overnight. Perhaps the risk of long-lasting market domination would have been higher in a small town where A&P had a crushing market share—but in all its years of investigating A&P, the federal government raised few concerns about anticompetitive conduct at the local level.

  The same lack of economic logic pervaded the government’s relentless attacks against the Atlantic Commission Company, A&P’s produce brokerage. The Justice Department’s antitrust division made much of the fact that Atlantic Commission was both a buyer of produce for A&P’s stores and a wholesaler selling to grocers that competed with A&P. In his verdict at the Danville trial, Judge Lindley found that Atlantic Commission had an “inconsistent legal position,” charging artificially high prices when acting as a wholesaler to bolster A&P’s profits. Had Atlantic Commission dominated the produce market nationally, in any particular location, or in any single commodity, its dual role might in fact have been problematic. In reality, however, Atlantic Commission’s share of the nation’s wholesale produce sales, by dollar value, never exceeded 12 percent and in most years was under 10 percent. With such a small market share, Atlantic Commission would have been hard-pressed to force other grocers to pay excessive prices for low-quality produce, as the government asserted; any grocer who thought Atlantic Commission was overcharging for apples could have bought apples elsewhere. The government’s contention that A&P was such a large buyer of produce that it could manipulate prices was based not on evidence about price patterns in any city or any product but on complaints from growers that it paid less than they wanted, or less on one day than on another. A logically rigorous explanation of how Atlantic Commission’s dual role allowed it to overcharge consumers or other grocers is nowhere in the trial testimony or the government’s pleadings.5

  And what of the endless attacks on A&P’s vertical integration? According to the federal government’s trustbusters as well as the authors of state “fair trade” laws requiring minimum markups, A&P’s ownership of factories, warehouses, and transport fleets gave it an unfair advantage: it could accept minimal profits in its stores because of the money it earned from manufacturing and from brokerage and advertising commissions paid by other manufacturers. Here again, though, the unfairness is hard to find when exposed to economic scrutiny. A&P’s manufacturing plants earned money because the compan
y learned to use the flow of orders from its stores to run the plants steadily at full capacity, reducing the waste that comes from expensive factory equipment that is not fully utilized. This was a cost advantage that most other food manufacturers did not have. And A&P’s strategic use of its own manufacturing and distribution abilities to demand cost reductions from suppliers also squeezed out wasteful practices, such as the payment of commissions to brokers whose services provided no benefit. The economic gains from vertical integration were very real and very large.6

  The parties injured by A&P’s revolutionary approach to the grocery trade, then, were businesses, not consumers—and especially businesses that profited from the inefficiencies the Hartfords systematically sought to wring out of food distribution. The gains to American families from a more efficient food supply chain represented losses to many wholesalers, retailers, and manufacturers that had thrived in the days of relatively isolated local markets but could not survive the changes in transportation, communication, and manufacturing processes that, after World War I, made it feasible to sell groceries on a national scale. The investigations, fair-trade laws, chain-store taxes, and antitrust suits aimed at A&P all served to prolong the lives of businesses that had become obsolete. A&P’s antagonists included Republicans as well as Democrats, politicians whose views ranged from socialist to ultraconservative, chambers of commerce as well as organized labor. Support for independent shopkeepers in their battles against Wall Street crossed all political boundaries, and never mind that the Hartfords had nothing to do with Wall Street.

  A&P was only the most visible example of government efforts to limit competition in the U.S. economy. Later, especially on the political right, Franklin Roosevelt’s New Deal would come to emblemize the heavy hand of government regulation of business, but the A&P story shows such claims to be fallacious: efforts to rein in chain retailers were embraced by the presidential administrations of the Democrat Woodrow Wilson, remembered as a social progressive, and the Republican Calvin Coolidge, recalled as a rock-ribbed conservative, long before the New Deal took root in Washington. While many restrictions to protect small merchants faded away as Americans learned to love discount shopping in the 1950s and 1960s, others remained in place far longer, endorsed by politicians of diverse ideologies, with their purpose hidden from view.

  Retailing is far from the only sector in which capitalists have prevailed upon government to limit competition. The United States is unique among major countries in having literally thousands of banks, in good part because a variety of government supports and restraints on competition kept small banks in business: as late as 1990, Illinois limited banks to no more than five offices, so small-town bankers would not have to go head-to-head against their big-city cousins. New-car dealers, often pillars of the local business establishment, exist thanks to state laws that prohibit vehicle manufacturers from selling directly to consumers, thus forcing the manufacturers to sell through independent dealers—a fact conveniently ignored when, in 2009, a political uproar ensued after the bankrupt auto manufacturers General Motors and Chrysler revoked the franchises of dealers they deemed unprofitably small. In most states, brewers, vintners, and distillers may not distribute alcoholic beverages except with the intermediation of a wholesaler; in 2010, alcoholic beverage distributors in Washington beat back a ballot measure that would have devalued their franchises by allowing retailers to purchase wine and beer directly from manufacturers. In Louisiana, prospective florists must pass a licensing exam that makes it hard for newcomers to enter the field, and a similar requirement applies to would-be window glass installers in Connecticut.7

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  By the lights of many twenty-first-century consumers, the Hartfords’ achievements may seem anything but praiseworthy. Neither George nor John had the slightest fondness for the family farmer or for local distinctiveness. They played a major role in industrializing and homogenizing the food sector such that prepackaged products with heavy doses of preservatives became standard fare. Their constant demands on suppliers favored large food processors with nationwide scope, destroying the jobs of tens of thousands of bakers, canners, and cheese makers who turned out unique products on a far smaller scale. They achieved unprecedented cost saving in produce distribution, but in so doing adopted standardized varieties shipped long distances from factory farms instead of fresh fruits and vegetables grown nearby. They made food, once the most local of industries, into a sector dominated by huge corporations that respected neither the diversity of nature nor the needs of small communities for which food was a vital part of the economic base.8

  Chain-store taxes, anti-discounting laws, and laws such as the Robinson-Patman Act, all crafted to keep shoppers from benefiting from the efficiencies created by big businesses, effectively taxed consumers so that small, inefficient wholesalers and retailers could survive. The consumers most affected, inevitably, were the least affluent. During the Great Depression, roughly half the urban families in the United States spent one-third or more of their incomes on food. Various studies undertaken in the late 1920s and early 1930s showed chain grocers’ prices to be 6 to 15 percent below those in independent stores. Forcing up chain grocers’ prices to the level of independents’ prices created a heavy burden on low-income households, potentially raising their cost of living by 2 to 5 percent.9

  The spread of supermarkets and the industrialization of food production were good news for families of modest means. They enabled the average American to consume 10 percent more food in 1950 than in 1930, with poorer households showing startling improvements in the quality of their diets (Table 5). American families ate better at far lower cost than ever before, in part because they had to pay much less to move their food from farm to table. The rise of the food chains was especially important to African-Americans. While the Hartford brothers were no more egalitarian with respect to race than most other Americans of their era, a disproportionate number of their stores were in older urban areas occupied by working-class blacks during World War II and the years thereafter, providing reasonable prices to shoppers who otherwise faced extremely high food bills from independent inner-city stores.10

  Look further, and there are striking parallels between the objections to A&P in the first half of the twentieth century and those raised against Walmart in the twenty-first. Walmart was widely accused of destroying the trade of small-town merchants; similar charges were raised against A&P from 1869 into the 1950s. Walmart’s relentless squeeze on suppliers mirrors that attributed to A&P as early as 1915; it was A&P, not Walmart, that pioneered the practice of carefully dissecting manufacturers’ costs to determine what prices they should receive for their products. Walmart’s paternalistic management methods and vociferous resistance to labor unions had their parallels in A&P’s aversion to unions before 1938, when it changed its tune in return for union support in defeating anti-chain legislation. Even the claims that Walmart’s insistence on shaving costs led inexorably to the sale of dangerous and unsafe products echoed complaints raised eight decades earlier that A&P kept prices down by selling short weights of chicken and inferior grades of canned goods. Walmart’s competitors, like A&P’s many years before, sought to slow the retail giant’s growth by tapping into public anxieties arising from the disruption of familiar ways, the loss of local uniqueness, the vulnerability to distant economic forces. Even Walmart’s astute use of public relations and advertising to overcome opposition to new stores and to counter criticism of its business practices followed in the footsteps of Carl Byoir’s efforts on behalf of A&P, starting in 1937.11

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  Together, George L. and John A. Hartford worked at the Great Atlantic & Pacific Tea Company for 144 years. When George L. came to work with his father in 1880, tins of fish were still welded shut one at a time by skilled can makers, baking powders consisted largely of ineffective starches, and soaps and breakfast foods were produced by thousands of tiny firms unknown beyond their hometowns. By the time of his death, in 1957, big busin
esses dominated everything. A handful of beef and pork processors controlled the meat trade nationwide. Makers of branded foods had consolidated, as had manufacturers of toiletries and housekeeping products, in order to shave warehousing and delivery costs and command better advertising deals from national television networks. The seven biggest retail grocery chains sold one-fourth of all the food in the entire country. Mr. George and Mr. John did as much as anyone to turn the personal routines of local commerce into an impersonal series of anonymous transactions, in which shoppers rarely think of the people who supply their daily needs.

  For seven decades, the collective and complementary strengths of George L. and John A. Hartford allowed their company to respond deftly to rapid changes in economic conditions, competitive circumstances, and consumer tastes. But as much as they deserve full credit for A&P’s stunning rise and its prolonged ascendancy, they also bear responsibility for its rapid collapse. The values they prized in their managers—experience, loyalty, and adherence to company rules—made for an organization that was highly competent, but not highly adaptable. Again and again, John A. Hartford intervened personally to persuade his reluctant executives to try new ideas. The Economy Store, the installation of meat counters, and the shift to supermarkets all faced foot-dragging by managers who were happy doing things the old way. Yet for all that resistance, John and his brother stood by their men. They recruited new blood into the executive ranks only once, when the belated realization that A&P faced a potentially lethal threat from the anti-chain movement led them to hire John’s personal lawyer as chief counsel and to engage Carl Byoir for public relations advice. The company never headhunted executive talent from its competitors, from other retailers, or from other industries. If they thought A&P had anything to learn from outsiders, the brothers were extremely reluctant to say so.