( Originally Published 1939 )
Super-markets in the grocery distribution field have been the most recent major development. Whether they will prove to be as important as the department store, the mail-order house, the chain store, and the voluntary chain, still remains to be seen. Super-markets of one form or another have been in operation for many years, but during the depression they experienced a rapid growth. Their history is somewhat like that of the chain stores. While chains reached a dominating position only in the postwar period, they had existed on a smaller scale for many years before that.
We lack an acceptable definition of the term super-market. The super-markets that captured the headlines in the early 1930's were known chiefly for their spectacular price advertising. Some of them used abandoned factories, warehouses, and garages not only be-cause of lower rents available, but to make, by the very lack of fixtures, an economy appeal. Often they gathered around their food departments a variety of other retail outlets, including drugs, hardware, radio, beauty shops, shoe repair shops, variety lines, cheaper wearing apparel lines, etc. In such cases the grocery department was used more or less as a loss leader to attract business to these other stores or departments. The latter were often leased to independent operators, rather than being owned and operated by the same management as that of the grocery departments.
More recently the tendency of super-markets has been to limit themselves largely to food, to improve the attractiveness of buildings and fixtures, to locate in congested areas (rather than on the outskirts as many of the early super-markets did) , and to appeal to consumers through lowered costs of distribution on staple products and well-known brands, rather than to act as dumping grounds for the surplus stocks of manufacturers who could not find a profitable market elsewhere.
Even though there is no definite agreement as to what a super-market is, it is possible to describe the chief characteristics which distinguish them from other types of retail food outlets-especially from the large so-called combination stores which handle a fairly complete line of food products. The most important of these characteristics are:
1. All the important types of food, including groceries, fresh meats, fresh fish, fresh fruits and vegetables, delicatessen items, bakery products, dairy products, cheese, and poultry products, are sold under a single roof. Furthermore, super-markets are departmentalized because of volume, to the point where customers are waited upon by separate sales people in each of the major departments in the store. This is the most important single distinguishing characteristic between a super-market and a large combination store. In practically all the latter, a single clerk will sell the customer almost anything in the store except fresh meat.
2. Super-markets usually, but not always, operate the grocery department on a self-service basis. This is one of the most important ways in which operating costs are cut to bring prices lower.
3. Super-markets usually, but not always, provide parking space for customers, either on the property owned by the supermarket or near it.
4. Super-markets usually do a volume of business which is larger than even the largest combination stores. It is impossible to set an absolute mini-mum volume for a super-market. In general, however, a store doing less than $5,000 a week on all products should not be classified as a super-market unless it unmistakably possesses the other characteristics de-scribed above.
Number of Super-Markets
How many super-markets there are at present is under sharp dispute. The Census of Distribution for 1929 reports a total of 489 grocery and combination stores (both chain and independent), each with a volume of $300,000 and over, representing 3.9 per cent of the total volume of business done by all grocery and combination stores. In 1935 the Census showed 479 stores of this size with the same proportion of the total volume 24 Those interested in the super-market claim there was a considerable increase in the number of large stores during 1936 and 1937. Although authoritative information is not available, in the judgment of persons thoroughly familiar with conditions in the grocery field, there were at the end of 1937 between 1,000 and 1,200 stores doing a sufficient volume of business and possessing characteristics to entitle them to be called super-markets. Growth during 1938 was rapid and it is safe to say there were between 2,000 and 2,500 super-markets in operation (having a volume of at least $5,000 per week) as a minimum at the end of that year.
Another phase of super-market growth which has caused con-fusion is the type of ownership and control. Many super-markets are genuinely independent stores. Others are being operated as volume outlets by wholesale grocers. Others are owned and operated by corporate chains, notably the Atlantic & Pacific, American, Kroger, and Safeway. Many super-markets, especially in southern California, are members of retailer-owned cooperatives. Still others are members of wholesaler-sponsored voluntary chains.
Any attempt to appraise the importance or forecast the future of the super-markets must take into account certain dynamic factors in distribution. In the first place, it is obvious that the large volume secured by a super-market can come only from drawing trade from a much larger area than is normally served by grocery stores. To induce consumers to travel regularly any considerable distance to purchase food involves a serious dislocation of normal food-buying habits. So far the super-markets have depended upon price as the means of inducing such changes in buying habits. They have tried to offer large enough savings to offset the time and in-convenience involved in visiting them, as well as the actual out-of-pocket cost, for most long-distance shopping is done by those who drive their own cars.
The energy and aggressiveness with which super-markets have established themselves has undoubtedly caught competing types of food outlets off their guard. The average independent retailer did not have the capital to finance rapid expansion. Only a few wholesale grocers were strongly enough entrenched to be able to antagonize their retail customers by opening competing supermarkets. The larger chains-complacent in the belief that they were invulnerable to anything but the competition of other chains -have been somewhat slow to recognize the threat of a new form of price competition offered by the super-market. In the last two years, however, the threat of chain store taxation has undoubtedly been a factor in the expansion of corporate chains into super-market operation.
It is inevitable that both chains and independents will look for ways to meet super-market competition. To the extent that they succeed they will make it more and more difficult for the super-markets to draw trade from the present wide areas. To maintain their position the super-markets will either have to increase advertising in order to maintain their volume or secure still further operating economies.
Even now there are signs that super-markets are finding it necessary to incur promotional and business-getting costs. This is narrowing the differentials between the costs and prices of super-markets and those of competing chains and independents. In this respect the super-market may be expected to go through the same cycle as did the department store. Competition for volume and the addition of services in the last twenty years has resulted in an increase in department store operating costs.
Another way in which competition with and between super-markets will develop is through the search-conscious or otherwise-for the optimum volume store. Many persons thoroughly familiar with retail operating costs believe that the most efficient food stores are those with a volume range of between $75,000 and $150,000, which is considerably less than the typical super-market volume. Stores in this volume range, it is believed, can reduce costs sufficiently to be competitively attractive to consumers in the immediate neighborhood, and thus cut into super-market volume that has come from distant consumers.
Some of the best informed men in the chain store business are of the opinion that the chains themselves have not yet reached the minimum possible operating costs, though they realize that to do so may involve far-reaching changes in present policies and methods of operation. If this belief is well founded, it is obvious that the corporate chains will be able to offer increasingly severe competition to the super-markets through narrowing of price differentials that now prevail.
Will They Dominate?
In short, the super-market has increased the pressure to lower distribution costs just as the chain store did to the independent retailer-wholesaler grocery distribution structure, and just as the department store and mail-order house did. If we could assume that super-markets would continue to grow as rapidly as they have in the last few years they might fulfill the expectations of their proponents and become the dominating factor in food distribution. But in view of the fact that competition has not yet fully caught up with them, it is likely that the rate of super-market growth will slow down and that we shall see a steady increase in the relative importance of all retail food outlets in the larger volume brackets. An important contributing factor to this trend will be, as it has been recently, the growth of the combination store which is able to supply a full range and variety of food needs.
One of the best informed authorities in the retail grocery field, who may favor the independent type of operation, has summarized the future possibilities of the super-markets as follows:
Some retailing and consumer trends are favorable to the comparatively large store. We shall see more large stores, at least for the present. We shall see many more self-service stores favorably located in residential areas with parking lots. In some areas chains will continue to build larger markets to avoid heavy chain store taxes. We shall see a continuance of the decentralization of food sales from downtown sections to residential locations. Apparently, we shall see a healthy growth of medium large markets attractively designed, well stocked, and well equipped. We shall see a constant improvement in the service features and consumer appeal of thou-sands of markets. We shall continue to have with us hundreds of large stores that grew up in the past, long before we thought of calling them super-markets.
In the popular imagination a middleman stands squarely between every producer and every retailer, exacting a toll on every article the consumer eventually buys. But a glance at the Flow Chart discussed in Chapter 3 shows that this is at once a distorted and an over-simplified picture of the role of intermediary or wholesale trade in distribution.
The middleman as an independent agency, it is true, is an important link between the producer and the retailer, but in many lines of trade the independent middleman is far from a necessity. More than $37 billion of the nearly $70 billion volume of goods sold by manufacturers, for example, went directly to other manufacturers, to retailers, or to ultimate buyers without the intervention of any middleman-even those owned by producers, retailers, or consumers. Thus less than half of the entire output of manufacturers in the United States passed through the channels of intermediary or wholesale trade.
On the other hand, the wholesale dealer is much more than a mere link between producer and retailer. Out of total intermediary sales of $69 billion, $16 billion consisted of goods sold to manufacturers. Another $16 billion worth went to other intermediaries, to be resold by them, and more than $8 billion of the intermediary volume were sold directly to terminal buyers. Only $27 billion worth, or considerably less than half of the total, was sold to retailers for ultimate distribution to consumers-the process popularly known as wholesaling.
The independent middleman is none the less a very important agency in the elaborate and complicated system that makes it possible for producers to sell their goods to distant and unknown buyers and for buyers to get what they want where and when they want it. To adjust far-flung supply to far-flung demand and to in-sure that goods made today will find a market months hence is a costly service. A single retailer may have on his shelves goods which originally came from hundreds or even thousands of separate factories. He has to depend on the wholesaler for most of his requirements. The wholesaler assembles from thousands of different sources goods from which the retailer may select his particular needs in quantities which he may readily buy.
The Necessity of the Intermediary Function
Every retailer would have to do business directly with the manufacturer of every article he carries in stock if it were not for the fact that the intermediary dealer performs this function for him. For example, a retail grocer handling from 1,200 to 3,000 items may select his merchandise from a typical wholesaler's inventory of between 10,000 and 20,000 items; a hardware dealer stocking from 3,000 to 8,000 separate items can choose from a jobber's stock of from 20,000 to 60,000 items; and an independent drug-gist who may carry as many as 12,000 articles may buy what he needs from a wholesaler who carries from 40,000 to 60,000 items 26
This intermediary function is an essential part of the nation's distributive system. If it were not performed by someone our economy in its present form could hardly exist. But this function does not have to be carried on by independent wholesalers or middle-men. As indicated above a large part of the output of our factories is sold direct to retailers. In these cases the intermediary function is performed by the manufacturer himself with his own staff. In many other instances the intermediary agency is set up as a separate concern, but owned entirely by the manufacturer, or by one or more large retailers, or by consumers through cooperatives.
A Picture of the Field
Among the important changes taking place in wholesale or intermediary distribution is an apparent trend away from the independent middleman. More and more the intermediary function is being taken over by manufacturers, retailers and consumers, either directly or through agencies they own and control. In the following pages an effort has been made to picture the field of intermediary trade and to measure recent changes in this field.
From the $69 billion level of 1929, the dollar volume of intermediary trade in the United States fell sharply during the depression to little more than $32 billion in 1933. This drastic shrinkage was due to the combined effect of falling prices and declining physical volume. The succeeding years have seen higher prices and increased volume, with sales totaling $37 billion in 1934, nearly $45 billion in 1935, an estimated $52 billion in 1936,27 and probably a substantially larger total in 1937. Thus the 1936 total was 24 per cent under the 1929 peak as compared with a 33 per cent decline for retail trade.
Relative Size of Intermediaries by Commodities
Of the $,44.7 billion intermediary sales volume in 1935, groceries and foods was the most important. This commodity group accounted for $8 billion, or 18 per cent of the total. Raw farm products amounting to $5.8 billion, or 13 per cent of the total, and farm products for consumption, with nearly $4 billion, or more than 8 per cent of the total, were next in importance. Petroleum products, dry goods, machinery and equipment, and automotive products followed in importance. Figure 10 shows the relative importance in terms of dollar sales and number of establishments of the twenty-two lines of intermediary distribution with one per cent or more of the total volume of sales in 1935. Differences in the average scale of operations in various lines are reflected by comparisons of the distribution of establishments with the distribution of sales. Thus grocery and food intermediaries, with only 12.5 per cent of all establishments did 18 per cent of the total dollar volume, whereas petroleum product dealers accounted for nearly 16 per cent of all establishments, but for less than 7 per cent of total dollar sales.
Types of Middlemen
It is even more important, of course, to classify intermediaries by types of business. The wholesale merchant, purchasing goods and maintaining stocks for resale, primarily to the retail trade, corresponds with the popular understanding of the term middle-man. There are many other kinds of intermediary distributors, however, each with his own characteristics. Intermediaries may be grouped as follows:
1. Independent distributors who take title to the goods, assume the risks of ownership, and sell them to the retail trade, taking their compensation in the form of profits. These are usually known as wholesalers.
2. Middlemen who do not take possession of the goods but act as agents or brokers, taking their compensation in the form of commissions or fees.
3. Wholesaling organizations set up as distinct operating units, but affiliated with either the producer or the ultimate distributor. Manufacturers' sales branches, most of the bulk-tank stations, chain store ware-houses, and cooperative marketing associations are included in this class.
4. Specialized intermediaries in certain commodity fields. These are assemblers and country buyers who operate in agricultural regions either independently or on a commission or salary basis and may be affiliated with the producer or ultimate distributor.
5. Manufacturers themselves, who often perform the functions of intermediaries directly and, insofar as they do, should be included in this list.
The Role of Manufacturers
Manufacturers as distributors enter into and cut across all the other patterns of distribution. They may engage in house-to-house selling, or sell by mail, or own and operate retail stores. Often they perform the entire function of the wholesaler, sometimes selling to all types of retailers and sometimes only to their own retail outlets. On the other hand, they may sell their entire output through independent intermediaries; they may deal with other manufacturers, producing largely on order; or they may combine two or more of these methods of distribution. They may employ one method for one of their products and other methods or combinations of methods, for others; or they may use different methods for different territories in merchandising the same product.
Although many manufacturers have given up their excursions into distribution and are now content merely to look for orders from intermediaries, the manufacturer's role in distribution is apparently becoming more and more important. Even when conventional wholesale channels are depended on for the actual physical distribution the manufacturer of branded goods often engages in costly national advertising and promotion to create a demand from the consumer which retailers and wholesalers cannot afford to ignore.
A manufacturer may criticize the wholesalers as being mere order-takers, not aggressive salesmen, by which he really means that they fail to push his product in preference to his competitor's. As the wholesaler sees it, however, he should be neutral so far as manufacturers are concerned and should push only those products which are most in demand-that is, to take orders via the retailer from the consuming public rather than from some particular producer. The wholesaler regards this attitude as not only fair to the public but helpful to the manufacturer. The latter is thus compelled to seek profits by adapting his product to the public taste rather than by aggressive promotion.
Of the various types of intermediaries the wholesaler group is by far the most important, both in terms of number of establishments and volume of trade. This group accounted for 39.5 per cent of the total sales of intermediary concerns in the United States in 1935. Manufacturers' sales branches handled 24.8 per cent of the total business, and agents and brokers, 19.9 per cent. Table 14 shows the way intermediary trade of the United States was divided among the various types of agencies in 1935 and 1929-in terms of the net sales and the per cent of total business of each type.
Shifts and Trends in Wholesale Trade
At one time the retail storekeeper depended almost entirely on the conventional wholesaler for the bulk of his merchandise requirements. Over a period of years, however, the conventional wholesaler has been losing ground, as evidenced by the failure of many long-established wholesale businesses. Contributory causes for this decline have been the rapid increase in chain store business and the consequent elimination of the traditional wholesaler's services, and the tendency of many manufacturers to expand their direct selling activities to department stores and other retail outlets.
Only in the past decade, however, have figures been available to measure the trends in wholesaling. In 1929, as shown in Table 14, total sales of conventional wholesale merchants (the largest group included under "wholesalers") accounted for 36.8 per cent of the total volume of intermediary trade, while the business passing through manufacturers' sales branches and chain store warehouses together accounted for 26.5 per cent. By 1935, although the whole-sale merchant still maintained his position as the most important branch of intermediary trade, his share had declined to 32.2 per cent while the other two groups controlled 29 per cent. While the sales branches of manufacturers sell to wholesalers to some extent, by far the largest percentage of their business is done with retailers or industrial establishments.
The shift away from the wholesale merchant shows marked differences among various kinds of trade. In dry goods, for example, the volume of business done by wholesale merchants declined over 60 per cent between 1929 and 1935 while manufacturers' sales branches dealing in the same line lost not quite 2 per cent in this same period; the total of intermediary trade in dry-goods showed a decrease of only 36 per cent. On the other hand, irrespective of the degree to which wholesalers in the grocery and clothing trades lost ground prior to 1929, since that date they have held a relatively stable proportion of the total intermediary trade. Table 15 gives in detail the figures showing the place of the whole-sale merchant in the intermediary trade of each of twenty-three different groups of commodities in 1929 and 1935.
Shifts in Distribution of Manufactured Goods
Further evidence of the shifts taking place in the distribution structure is found in the changes occurring in the distribution of manufactured goods. In general, they tend to confirm the trends discussed above. Manufacturers' direct sales to retailers, including chains, increased from 20 per cent of the total in 1929 to 22.9 per cent in 1935, while the volume passing through their own whole-sale branches rose from 18 per cent to 20.6 per cent. Sales to independent wholesalers and jobbers of all types, on the other hand, declined from 31.8 per cent of the total in 1929 to 27.3 per cent in 1935.
Here again wide variations appear among the different commodities in the channels employed. For example, the role of the wholesaler in the distribution of manufacturers' sales was drastically cut in 1935 as compared with 1929 in stone, clay, and glass products (from 50 to 19 per cent of their total sales) ; in iron and steel products (from 34 to 13 per cent) and in textiles (from 22 to 15 per cent) . On the other hand the proportion of the total sales of stone, glass, and clay manufactures made direct to retailers increased from 6 to 17 per cent and the proportion sold through their own wholesale branches increased from 5 to 28 per cent between 1929 and 1935. Iron and steel manufacturers sold 6 per cent of their total product through their own wholesale branches in 1929 and 21 per cent in 1935.
Caution must be used, however, in assuming from these figures that permanent changes have taken place in our distributive system. The fact that iron and steel manufacturers distributed a smaller proportion of their products through wholesalers in 1935, for example, may have been caused by a temporary shift in the demand for different kinds of iron and steel products which ordinarily are distributed in different ways.