The Great A&P and the Struggle for Small Business in America (11 page)

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.’”
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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.
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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.
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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.
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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.”
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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.”
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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.”
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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.
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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.
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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.
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Grocery manufacturers were not enthusiastic about the explosive growth of the A&P Economy Store. One secret to the format’s success was that the Hartfords used their company’s size to demand special terms from suppliers: they asked manufacturers to ship goods directly to Great Atlantic & Pacific’s warehouses, without going through wholesalers, and to give it the standard wholesaler’s commission. This put the makers of brand-name products in a difficult spot, because Great Atlantic & Pacific was effectively paying less than other retailers. The makers of Campbell’s soups and Bon Ami cleanser voiced misgivings. The Cream of Wheat Company, purveyor of a popular breakfast cereal, agreed to sell to Great Atlantic & Pacific without using wholesalers, but insisted that A&P charge retail customers at least fourteen cents a package so as not to underprice the manufacturer’s smaller customers. When the A&P Economy Stores put Cream of Wheat on sale for twelve cents, the Cream of Wheat Company cut off supplies. Great Atlantic & Pacific sued, accusing the cereal company of illegally monopolizing trade by refusing to sell it Cream of Wheat.
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Judge Charles Hough handed the Hartfords a decisive legal defeat. The Cream of Wheat Company, he ruled in July 1915, was no monopolist, and was acting in a way that would promote competition among retailers. The true monopolist, the judge wrote, was the plaintiff, Great Atlantic & Pacific, which was using low prices to stifle competition by driving other grocers out of business. If the cereal company was forced to supply Great Atlantic & Pacific, “defendant and many retailers would be injured, and the microscopic benefit to a small portion of the public would last only until plaintiff was relieved from the competition of the 14 cent grocers, when it, too, would charge what the business would normally and naturally bear.” In the eyes of the law, low-price retailing had become a highly suspect enterprise.
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The Cream of Wheat case revealed a shift in public sentiment: price-fixing by manufacturers, once widely condemned, was now accepted. “The reaction against the punishment of price fixers is unmistakable,”
The New York Times
wrote, adding that “traders’ rights are having their day, as buyers’ rights had their day.” Yet neither the highly publicized congressional hearings on chain stores nor the lawsuit over Cream of Wheat seems to have had the slightest effect on Great Atlantic & Pacific’s business. On the contrary, business was so good that the Hartfords encountered a new sort of problem: they needed cash to expand.
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In more than half a century of involvement with the Great American Tea Company and the Great Atlantic & Pacific, George H. Hartford, so far as is known, had never borrowed a nickel. He had earned his equity in the firm by serving as George Gilman’s partner and then, after the founder’s death, by persuading Gilman’s heirs that their best hope of realizing a return from the tea companies was to put all of the common stock in his hands. The Gilman descendants had received $1.25 million of preferred stock paying a 6 percent annual dividend; from the Hartfords’ perspective, the attraction of preferred stock over borrowed money was that if business turned bad, the preferred dividend could be skipped. Starting in 1913, many Gilman family members decided to cash out, and by 1916 more than half the preferred stock had been redeemed.
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To raise the capital it needed, Great Atlantic & Pacific offered $3 million of bonds to a wildly enthusiastic public in June 1916. The five-year bonds paid 6 percent interest and were convertible into preferred stock paying a 7 percent dividend. The offering opened a window on the Hartfords’ closely held finances, revealing that Great Atlantic & Pacific had earned a healthy $1.8 million in the year ending February 1916 on assets of $10 million. Although investors were not informed at the time, sales for that year were $44 million, meaning that net profit was an impressive 4.1 percent of sales. In short, the Hartfords were running an extraordinarily profitable enterprise. Management forecast earnings of $2.5 million for 1917 and $3.5 million once the stores to be funded by bond issue were opened—a doubling of profits in just two years. In a stodgy industry, this was a remarkable growth story.
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