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Corporate Chain Stores

( Originally Published 1939 )



The chain store is by no means a recent development, even on the American continent. The Hudson's Bay Company, chartered in 1670, is probably the oldest chain system in America, but research has traced the idea far back in the dim past of Chinese history. The rapid increase of chain systems in recent times, however, has been of far-reaching importance to distribution and has had a profound influence on both consumers and dealers.

Comparison with Independents

Although less than one out of twelve of the 1.6 million retail stores in the United States in 1935 were owned by chain systems, chain stores handled nearly 23 per cent of the total retail sales volume in that year. In 1929, with nearly 10 per cent of retail stores under chain management, their proportion of the retail volume was only 20 per cent. Chain stores operating on a sectional or national basis (in contrast to the local or manufacturer-controlled types) showed a substantial increase in number of outlets between 1929 and 1935. They accounted for more than 19 per cent of the entire retail business of the country in the latter year, as compared with only 12.5 per cent in 1929. Local and manufacturer-controlled chains, on the other hand, lost ground between 1929 and 1935.

Chain stores have made the greatest headway in staple articles with a rapid sales turnover. Variety stores have so far been the most outstanding chain store development, having 90 per cent or more of the business in this field in both 1929 and 1935. The shoe and automobile-accessories trades have been marked by a recent rapid chain store growth until by 1935 they did half of the retail business in these lines. Chains have also been successful in groceries, cigars, and drugs. In the grocery field, which is the largest single class of business, chains controlled nearly 40 per cent of the trade in 1935, showing a gain in the combination grocery and meat trade since 1929,3 the year which many have regarded as the peak in chain store development. The relative stability of sales volume shown by the chains in the depression as compared with retail trade as a whole is undoubtedly due, in part at least, to their concentration on necessities such as foodstuffs, variety and drug items, as well as to the economies of large-scale buying.

Influence of the Chains

But the figures on their proportion of total retail sales fail to show the total influence of chain store policies on distribution practices all over the country. The chains inaugurated new methods of buying and selling and demonstrated new advantages and economies which woke up hundreds of thousands of independent merchants and their customers to the need for better shopkeeping and a speed-up in the flow of goods. In many a country village the presence of a modern, systematized chain store has jolted the local storekeeper out of his easy-going habits to the benefit of the whole community.

Although chain methods have their disadvantages, they have clearly demonstrated the benefits of mass buying under central supervision, careful stock control, rapid turnover, central ware-housing, intelligent display and store arrangement, standards of cleanliness and quality, effective use of part-time employees, systematic selection and training of the selling force and elimination of non-essential services. It was soon discovered that many of the advantages of the chains could be adopted or achieved under independent management by better cooperation between retailers, wholesalers, and producers. Economies were effected by other types of business operation which have made them better able to compete with the chains. Consumers as well as business interests have been at least partially influenced by the lower price levels of the chains to establish cooperative enterprises to cut the price spread between the production cost of goods and the ultimate selling price.

The Pros and Cons of Chains

Although the rise of chains has enlisted wide public patronage they are considered by many to be a social menace. By their rapid growth they have undoubtedly caused various painful business readjustments. The Federal Trade Commission's extensive investigation in this field raises some of the pros and cons of the chain store in American life. The Commission observed that chain operation resulted in certain advantages such "as those flowing from the integration of production and of wholesale and retail distribution, from the savings involved in avoiding credit and delivery service, and from the ability of chains to realize the benefits of large-scale advertising," and concluded that "to eliminate such advantages . . . would involve radical interference with the rights of private ownership and initiative, virtual abandonment of the competitive principle, and destruction of the public advantage represented by lower prices and lower cost of living."

One part of the chains' competitive advantage in lower selling prices the Commission thought should be cancelled by force of Federal law-discrimination in prices and terms by manufacturers against independents and in favor of chains, a practice accounting for a most substantial part of the chains' ability to undersell independents. . . . It was concluded that many of the low buying prices of the chains had little, if any relation to differences in quantity or cost of selling.

There has been some disagreement with the Commission's conclusions on this latter point, however. In an analysis of the findings, Charles F. Phillips of Colgate University denies that lower buying prices secured by the chains are a large factor in lowering their selling prices. Using the Commission's data, he points out that the success of the chains in reducing gross margins through more efficient management is much more important. In the grocery study, for instance, he contends that only 16.4 per cent of the independents' higher selling price can be traced to greater cost of merchandise while 83.6 per cent results from a larger gross mar-gin. In drugs, similarly, 91.2 per cent of the independents' higher price is due to higher gross margin, leaving but 8.8 per cent to be accounted for by higher cost of the merchandise handled.

Criticism of Chain Methods

The chief criticism of the bargaining methods used by chains to get special price concessions has come from manufacturers. Out of 129 manufacturers of grocery products interviewed in the Federal Trade Commission inquiry, 76 admitted that preferential treatment in some form had been given to chain systems. Of these, 33 stated positively that threats and coercion had been used by chain store companies to obtain these concessions and 23 of this group admitted that chain pressure had been successful. Among the forced concessions were: brokerage and freight allowances, lower prices, rebates, and advertising allowances.

Another common charge leveled at the chains is that they tend toward monopolistic control of certain kinds of business, at least in certain localities. While the chains have succeeded in forcing out competitors by selling at lower prices in many instances, the special inquiry uncovered no illegal instance of monopoly. The Commission concluded, however, that if the trend of the past decade or two should continue, a monopolistic situation in some lines would eventually result. This fear of undue power and monopoly is undoubtedly one cause for the wave of special chain store taxes. They have been advocated not so much as a source of revenue, as "to assist in the correcting of an unbalanced situation that has arisen in this country," in the words of one legislator.

At least twenty-two states have passed and put into effect laws taxing chain stores in an effort to protect the independent merchant and slow down the rate of chain store growth.

The Federal Trade Commission reported other unfair practices charged against chains: an extensive use by large chains of loss leader merchandise sold at prices below the average cost of doing business in such commodities and in some cases below the actual cost of the merchandise itself. Some ground was found also for the charge that among the chains there was more extensive short-weighing, and less extensive over-weighing of goods sold by weight, than among independents. However, the evidence collected on this point was far from convincing.

As for misleading advertising, with which chains have been charged, the Commission admitted that the chains had gained through the use of loss leaders in advertising, but could find no legal grounds on which to question their general advertising policies. Nor did the Commission regard the carrying of undersized or sub-standard packages, with which the chains had been charged, as an unfair practice. In most cases it was found that the sizes were definitely made smaller by manufacturers, to be sold at lower prices. A very limited study of canned vegetables and fruits showed that the chains' brands were as good or better than nationally advertised brands.

C. COOPERATIVE AND VOLUNTARY CHAINS

Two special types of retailers, particularly in the grocery field, have evolved as a direct result of chain store competition-the retailer-cooperative and the voluntary chain. These new types have grown fast in the past ten years.

The retailer-cooperative type resulted from the initiative of in-dependent retail merchants who combined into groups to get the advantages of large-scale buying-one of the competitive weapons of the corporate chain. At first many of these groups were merely loose affiliations without formal relationship. Nor did they have a central source of supply which could provide them with merchandise and perform the functions of storage and breaking of bulk. Within recent years, however, these groups-with central ware-houses and uniform merchandising-have assumed the outward characteristics of corporate chains.

The voluntary chains, of somewhat more recent origin, came into existence through the activity of wholesalers who established a particularly close relationship with certain selected retailer customers. In some cases this relationship is based on a contract, in others, on hardly more than an informal agreement. Here again, however, the recent tendency is for these groups to assume a definite form.

A common feature of both of these types is the independent ownership of the retail store. In the retailer-cooperative the whole-sale supply establishments are owned collectively by members of the group and in the voluntary chain the sponsoring wholesaler remains an independent entity. The aim in both cases is to bring about coordination of the wholesaling and retailing functions so as to compete more effectively with the corporate chain. While neither of these voluntary groups is standardized to the same ex-tent as the corporate chain they use many of the same methods. To a varying degree, and in various combinations, they use group advertising and promotion, private brands, uniform stock merchandising and control, suggested price lines, uniform store fronts, systems of display, and arrangement of stores, standards of cleanliness, and standards of accounting and granting of credit.

Estimates of Volume

So recently have cooperative and voluntary chains become important that comprehensive statistics have not yet been compiled. In 1929 there were 395 cooperative grocery chains of both types, with an estimated membership of 53,400 retail stores and a total volume between $600 million and $700 million. Although a large part of the business of the retailer-owned warehouses was with members, only a portion of the volume of the wholesaler-sponsored establishments consisted of sales to members. The Federal Trade Commission concluded that between two-thirds and three-fourths of the volume was represented by business with members?

By 1935, the number of cooperative warehouses and voluntary wholesalers maintaining such group relationships in the grocery trade had nearly doubled and the total wholesale volume was over $722 million!' No comparable figures on the number of store members in the 741 groups operating in 1935 are available; but, according to another source, there were in March 1936 slightly more than 100,000 retailers affiliated with wholesaler-sponsored or retailer-owned warehouses. In addition, over 5,600 retailers en-gaged in group-selling activities.

Both the sponsoring wholesalers and the retailer-owned ware-houses not only serve the members of these cooperative groups but also sell to other retailers. Retailer-owned warehouses in 1935 apparently sold slightly more than 91 per cent of their volume to their own members, but voluntary-group wholesalers who reported in detail sold only 39 per cent to members. The estimated total of purchases through these cooperative channels by member retailers in the grocery trade in 1935 was approximately $360 mil-lion, reflecting a retail volume of around $440 million.

Gains of Cooperative-Retailers

Then, too, the individual retail members of these cooperative groups did not confine their business to them but also bought from other unaffiliated sources. Although no reliable estimates are avail-able as to what proportion of the total retail grocery business is done by these cooperative-retailer groups the doubling in the number of their members and the apparent increase in volume of business leaves little doubt that they have gained ground rapidly since 1929, in contrast with the corporate grocery chains, which have just about held their own.

The ultimate to which this movement is likely to grow appears to be set by the number of stores of sufficient size to be included in any group or cooperative scheme. If it is true that 100,000 food retailers were affiliated with either wholesaler-sponsored or retailer-owned warehouses in 1935, the movement probably already includes a large proportion of the stores buying enough merchandise to make cooperation profitable. In 1935 the Census showed only 157,500 food stores with an annual volume of $10,000 or more.

The cooperative movement in the drug trade is almost entirely of the retailer-cooperative type, commonly known as mutuals. As in the early efforts in the grocery field, members merely buy as a group, with a minimum of services or warehousing. Up to 1929 the movement had a regular but slow growth, and even now few of the policies and methods used by the corporate chains, such as uniform store features, managerial services, etc., have been adopted. In 1929, twenty-four mutuals, with a total membership of 6,041 independent drugstores, reported to the Federal Trade Commission; only sixteen reported sales, amounting to less than $25 million, and practically all to chain members." By 1935 the number of drug mutuals had increased to thirty-one, with total sales of nearly $35 million. If a mutual wholesaler is defined as one transacting over half of its business with members or under a cooperative arrangement, there were only twenty organizations of this type„

Food "voluntaries" have not only established their success in their original spheres, but have constantly reached out for greater prestige and power. Imitating national and sectional corporate chains, they have associated with other voluntaries to build up national or territorial chains. In March 1936 there were 438 of these groups of voluntaries enumerated. Approximately 38 per cent of the retail stores belonging to voluntaries were affiliated with larger organizations for merchandising purposes. The percentage of local outlets connected with national or territorial groups is increased to slightly more than 51 by adding the retail stores belonging to voluntary groups which had some contact with one another through buying organizations. Obviously, voluntaries have passed the experimental stage. They have proven definitely successful in combating chain store competition. Organized cooperatively, independent stores have been able to seize many of the advantages of chain operation and at the same time to retain their own advantage in escaping chain store taxes and maintaining greater flexibility in prices, hours, and special services to consumers.

d. CONSUMER COOPERATIVES

Cooperative societies of consumers formed for the purpose of buying and distributing commodities and taking the profits themselves have long existed in the United States. They have never played an important part in our distribution system, however, and until recently have not attracted much attention. In many parts of Europe, on the other hand, consumer cooperation has not only developed into the biggest kind of big business, but has had a vast influence on political and social thinking, usually in close association with labor unions and sometimes with labor parties.

Some American cooperatives have been conspicuously successful; but many of these have been established by immigrants from Europe who brought with them not only the formulas but the habits and the ideology of the cooperative movement. Their traditions generally led back to Rochdale, England, where a small group of impoverished weavers in 1844 succeeded in establishing a little cooperative store, so suited to their needs and to the times that its formula was rapidly adopted in other English communities, and then in other countries.

The Rochdale Principles

The now famous "Rochdale principles" were, in brief:

1. Unrestricted membership and democratic control. This was effected by giving every member an equal vote, regardless of the number of shares to which he had subscribed, by making the price of each share very low and by permitting even this to be paid for in instalments.

2. The sale of goods at prevailing market prices, all profits to be returned at frequent intervals to the member-customers according to the extent of their purchases, not to stockholders according to the extent of their holdings. The purpose of this was to avoid the antagonism of private business, and price-wars, by which merchants with superior capital had been able to undersell and crush many previous cooperative societies and, with competition out of the way, to raise their prices once more.

3. Cash sales, to enable the society to make the fullest possible use of its necessarily limited capital.

One reason, at least, why American workers did not take readily to consumer cooperation was that they did not have to. There was poverty in the United States; but the standard of living here was almost constantly rising. The poor in this "Land of Opportunity," did not feel doomed to lives of poverty. However inequitably wealth might seem to be distributed this was not a land where conditions were so bad that the masses could be persuaded their only hope lay in supplanting the profit system with some kind of cooperative commonwealth. The overwhelming majority had entirely different hopes, and their hopes were fortified by economic realities.

If Americans did not like their jobs they could become independent farmers; and even after the free lands were all taken up and the farmers themselves ceased to be independent, there were always great new developments-new mines to be opened, new railroads to be laid and great new industries, not only with new jobs but new kinds of jobs and new and promising careers.

The depression in the early 1930's brought a different attitude. But it did not produce quite the mood which resulted in the Rochdale movement. That movement was born of the desperation of workers determined to protect themselves against capitalists who seemed to be making profits out of their misery. Whatever the cause of the depression, it was obviously not a condition out of which American capitalists were making profits. The depression resulted in a decided growth of consumer cooperatives and a great deal of excited talk about them. But when one looks at the figures, they do not bulk large among the figures of retail distribution as a whole.

Volume of Cooperative Business

Although no complete census of the cooperative movement has yet been undertaken the Bureau of Labor Statistics has made several surveys, the latest of which covered the year 1936.14 Consumers' cooperation has taken many other forms than the buying of commodities, including the group purchase of medical care, housing, electricity, insurance, banking, and telephone service. However, the best known form of cooperative in this country is the retail store handling groceries and general merchandise. Many other types of commodities, including farm supplies, hardware, paints, electrical appliances, clothing, furniture, milk, coal, gasoline, oil, and tires are also distributed through cooperative enterprises.

About 1,900 of these retail cooperatives have banded together to get the advantages of group purchases by establishing twenty regional wholesale associations, and eighteen of these wholesale federations have formed two "super-wholesales" in order to ex-tend the advantages of large-scale buying. Cooperative wholesaling has become well established and has grown rapidly in recent years. Regional wholesale cooperatives reported sales in excess of $40 million in 1936-a gain of 24 per cent over the preceding year. Practically all of them enlarged their scope during the year by adding new lines of goods. An increasing number of oil associations are adding food and household supplies to the petroleum products and automobile tires already handled. Besides providing warehousing and bulk stations, a number engage in manufacturing operations and provide educational and auditing services for their members. By the end of 1938 there were twenty-two regional "wholesales" compared with twenty in 1936 and two joint or interregional groups were organized by the regional associations to distribute, respectively, women's clothing and farm machinery. The volume of the cooperative wholesale associations was reported to have reached a total of $53 million in 1937.

Growth of Consumers' Cooperatives

Although constituting only a negligible fraction of total retail trade of the country in 1936, consumers' cooperatives have expanded rapidly since the depth of the depression. Membership in consumers' retail cooperatives increased 7.2 per cent from 1935 to 1936 and sales volume expanded by 16 per cent. From 1934 to 1936 cooperative retail stores increased sales by 38 per cent and petroleum associations, by 51 per cent; while wholesale associations formed by consumers' cooperatives increased their sales volume by nearly 86 per cent.

A picture of trends in retail cooperation during the twelve-year period ending in 1936 is given in Figure 9. Sales of both retail stores and petroleum associations increased steadily during the years of general prosperity ending in 1929, but petroleum associations showed a much more rapid gain. After 1929 sales volume declined to a low point in 1933, since which there has been a marked recovery. Petroleum associations again fared better than retail stores, suffering a smaller depression loss and experiencing a much stronger recovery. Patronage refunds were well maintained, being 30 per cent larger in 1936 than in 1929 in the case of retail stores, in spite of a lower volume of business, and 74 per cent above the 1929 level in the case of petroleum associations. Since patronage refunds are paid out of profits, this record would seem to indicate that consumer cooperatives have been able to keep firm control of operating costs since 1929.

Small Scale of Cooperatives

Although cooperative retailing in the United States appears in a variety of forms and locations, a large proportion of it is carried on in the North Central states. The petroleum associations are found almost wholly in the Mississippi Valley section. Most of the retail cooperatives are small organizations operating in small communities. The typical consumers' cooperative had from 100 to 250 members in 1936; nearly 37 per cent of all associations fell in this group. The average membership of store associations was 219, and of petroleum associations, 335, and less than 4 per cent of all retail cooperatives had 1,000 or more members, which in Great Britain would be considered a fair-sized association.

Analysis of store associations and their members by the Bureau of Labor Statistics showed that "more than three-fourths of the associations, over three-fifths of the membership, and nearly three-fourths of the business done in 1936 was in places with a population of 5,000 or less. Of the whole group of distributive associations, 48 per cent fell in the sales range of $25,000 to $100,000," while share capital reported to the Bureau averaged less than $15,000 per association, and "45 per cent had a net worth of less than $10,000, and another 30.2 per cent had a net worth of from $10,000 to $25,000." Nearly half (47 per cent) of the distributive associations were employing from one to three workers at the end of 1936.

Future Outlook for Consumer Cooperation

Whether the cooperative movement in the United States is likely to grow rapidly in the future is not clear. After nearly a century since the establishment of the first store, the total volume done by retail cooperatives is still less than one per cent of total retail sales. Thus far at least the consumer cooperative movement holds out no great promise to its sponsors nor does it offer, except in a few localities, any serious threat to its competitors. Expansion of the movement in the future, as in the past, will depend upon the extent to 'which cooperatives are able to compete with existing distributive organizations. The history of both European and American cooperatives shows that social aims alone are not sufficient to insure their permanent growth. They must also be able to maintain low costs of operation and thus produce savings for their members, and there is evidence, especially in the retailing of farm supplies and petroleum products, that many cooperatives have been able to do this.

Over 70 per cent of cooperative retail organizations covered by the Bureau survey reported net savings on their 1936 operations, while 7 per cent sustained losses. Only 38 per cent of the store associations and 63 per cent of the petroleum associations distributed savings in the form of patronage refunds to their members. These ranged from 2 to 6 per cent of sales for most of the stores, while most petroleum associations paid refunds of 5 to 6 per cent and 10 to 11 per cent. The average amount refunded to member-buyers was $13.42 for the year in the case of retail stores, and $13.87 for petroleum association members

A good augury for the future of consumers' cooperation is the emphasis the organized cooperative groups are placing on the education of members and employees, and on better auditing and ac-counting systems. They are developing centralized services to pro-vide advice on merchandising methods and store planning, technical training for managers and clerks, an auditing service, and laboratory tests of the quality of goods. The Bureau of Labor Statistics found a sounder development of consumers' cooperation in 1936 than at any time since it began to study the movement in 1918. But it also found that many independent and isolated associations were far below the general level of the federated groups in business management and financial and operating stability.

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