The Costs In Retailing
( Originally Published 1939 )
RETAILING IS the most costly part of the distribution process. As shown in the preceding chapter, consumers paid about $12.6 billion for the services of retailers in 1929, or nearly a third of the entire cost of commodity distribution in that year. When this sum is compared with the total volume of retail sales-$49.2 billion-it is also clear that retailing costs more per dollar of sales than do the services of intermediary trade or the distributive services of manufacturers. The reasons for the high cost of retailing are obvious. Breaking up goods into small lots and making them available to 130 million people is obviously a far bigger job than the distribution of the same goods in much larger lots to a mere million and a half retailers, or in still larger lots to 177,000 wholesalers.
Even small retailers may have to buy as much as $100 worth of goods in a single order, but few retailers sell in any such amount. An extreme example of the small size of retail purchases is furnished by one large drugstore chain which reports confidentially that its average sale per customer amounts to twenty-two cents. This chain's trade may be dominated by sandwiches, sodas, cigarettes, chewing gum and other low-priced goods, but it would doubtless lose the trade in these items if it did not carry a rather full line of what the average American now expects to find in a drugstore.
That means a large inventory-stocks of thousands of varied commodities, many of which are rarely called for. If everybody preferred the same toothpaste, the same face powder, and the same brand of candy, and if everybody with a cold or a headache asked for the same remedy, a retail drugstore's task would be a simple one. But few, if any, retail stores have any such simple task.
Out of every $100 which customers paid to retailers in 1929, about $73, on the average, was paid by the retailer for the goods sold, and $25 or more went for his operating expenses. Of the latter sum more than $14 was paid out for wages, including an estimated remuneration for proprietors.' Of the remaining $11, rent accounted for more than $4 and the remainder of $7 went for light, fuel, supplies, interest, etc.
During the years following 1929, because of price reductions and shrinking physical volume, dollar sales fell off more rapidly than expenses so that by 1933 total operating costs had risen to more than $32 per $100 of sales. With the recovery in retail volume after the depression the expense ratio fell toward the 1929 level, and by 1935, when retail sales had reached the $33 billion mark (compared with the 1929 sales volume of $49 billion and the low point of $25 billion in 1933), operating costs amounted to $27.50 of every $100 worth of goods sold.
In this chapter an attempt is made to measure and examine in greater detail the principal elements of cost in retail distribution. Comparisons are made among retail stores handling different kinds of commodities, among stores of different operating types, and among stores of different size and in cities of different size. The influence of the chief factors affecting retailing expenses, such as wage costs and stock turnover, are also discussed.
1. COMPARISONS BY LINES OF TRADE
A comparison of the figures on operating costs of retailers in different lines of trade-grocery stores, automobile dealers, furniture stores, etc.-shows wide variations according to the kinds of goods sold. Expenses of restaurants, for example, amounted to fifty-two cents for every dollar of sales. General stores, at the other extreme, and automobile dealers, carried on their business with an operating expense of only sixteen cents on the sales dollar.
Between these two extremes were sixty-three other groups of retailers as classified by the Census.
Operating expenses expressed as a percentage of net sales are shown in Figure 12 for seventeen of the most important kinds of retail business, as well as for retail trade as a whole, in 1929 and 1935. The principal elements of operating expense-wages and rents-are also shown.
High and Low Costs
Food sold in a restaurant has to be cooked before it is served, and the high cost of running such an establishment is due to the fact that its function includes processing and serving as well as selling. The next highest costs are found in a typical luxury trade -jewelry-and the next in furniture and apparel in which style and service play a most important part and turnover is not very rapid because of the high unit price of the goods sold. Costs were lowest in general stores, most of which operate in small towns and country districts where rents and labor costs are less than in the cities.
Operating expenses were low, on the whole, in stores dealing in standardized basic necessities of low unit cost, such as groceries, where not much effort is involved in selling and servicing the customer. Selling articles of high unit cost, on the other hand, such as clothing and furniture, where the customer shops around extensively, takes a long time to make up his mind and then may require service and alteration, involves greater expense. But there are some exceptions to these tendencies. In spite of the high unit costs of their products, automobile dealers reported low operating expenses, perhaps because automobiles are highly standardized and are sold to a large extent by the national advertising of the manufacturers. Cigar stores, on the other hand, although they deal in standardized low-priced commodities, were not conspicuous for low expense ratios, partly because of high rental costs.
When total operating expense is subdivided into its principal components-salaries and wages, rents, and all other expenses-marked variations among different lines of trade also appear. Wages and salaries in every instance are the most important single item of cost, amounting to 15.5 per cent of net sales, or well over half the total operating expense of retail trade as a whole in 1935. Restaurants, as might be expected, showed the highest ratio of wage costs to net sales (24.9 per cent), followed by jewelry stores (22.2 per cent) and furniture stores (17.5 per cent). In these three trades wages amounted to nearly half of total operating costs. At the other extreme, wages amounted to less than 11 per cent of net sales in combination grocery and meat stores, general stores and motor vehicle outlets. But in each of these trades pay-rolls made up considerably more than half of the total expense of doing business in relation to sales they are influenced largely by changes in the dollar volume of sales. This is especially true when it is realized that many of the costs of doing business-like rent, interest, and even payrolls-cannot be adjusted quickly to the amount of business done. One would expect, therefore, that in a depression year like 1933 operating costs would be larger in relation to sales than in a boom year like 1929.
2. COMPARISONS BY TYPES OF STORES
The line of trade or kinds of goods sold by the retail unit is not the only factor affecting operating costs. The type of store is also important. Independents, chain stores, direct selling methods, mail-order concerns, etc., show varying costs in selling the same commodities. These variations are in many respects more significant and interesting than differences based on the kinds of goods sold, and they are of great current public interest because of the hue and cry over chain stores and other newer types of retailing.
a. ALL GROUPS COMPARED
Great care must be used in comparing the costs of different types of stores, however. If one type shows lower costs than an-other it does not necessarily follow that actual distribution has been accomplished at lower cost to the consumer. The consumer should expect to find lower prices at a self-service store than at a store where he has the aid of a salesman and the service of an organization willing to deliver the goods to his home on trial and to take them back if he finds them unsatisfactory. According to the distributor's cost sheets, the cost of selling in the first case would be far less than in the second-so much so, perhaps, as to account for the full difference in price. This does not mean that the one store is more or less efficient than the other, but merely that it per-forms less service than the other.
Whether this is an advantage to the consumer depends upon whether he can better afford to spend his own time and effort in serving himself. If so, self-service is the answer, but if he attaches considerable value to his own time and effort, it may not be. The ultimate test of efficiency is not found in the price tag, but in the relation between what the consumer pays and what he gets for his money in terms of goods and service.
Where a certain type of store attracts increasing consumer patronage, however, it may reasonably be inferred that it is meeting a demand and therefore giving relatively efficient service to its patrons. This holds true when services and costs are increasing or when lower costs are achieved by eliminating such services as credit accounts and delivery, which the patrons would often rather do without or perform for themselves, particularly in a declining market when competition is keen.
Independents' Costs Higher
In spite of all the attention centered in recent years on the growth of chains and other mass distribution types of retail operation, independently owned single stores still do nearly two-thirds of the total volume of retail business in the United States. Single in-dependent stores, on the average, had an operating expense ratio of 28.7 per cent of net sales in 1935, slightly higher than the 27.5 per cent ratio for retailing as a whole. Independently owned two-store and three-store units showed appreciably lower operating costs; but local branch systems had a 32.4 per cent expense ratio. Chain stores, as a group, showed lower cost ratios than independents. Sectional and national chains, which account for nearly a fifth of the total retail volume, had a ratio of only 24 per cent of net sales.
Of the other types of retailing, mail-order houses also had a low expense ratio (25.4 per cent), but not as low as specialized types such as commissaries, with 14.9 per cent. The highest cost-nearly forty-six cents out of each dollar of sales-was incurred by direct house-to-house selling, but this type of operation is not strictly comparable with other types of retailing since its cost undoubtedly includes a large part of the wholesaling function. Expense ratios for various types of retail stores and the relative importance of each type are shown.
In comparing Census figures on independents and chains, several points should be kept in mind. First, the chain expense figures include only the costs of operating the retail stores and a pro-rata (probably small) share of the expenses incurred in the central offices and warehouses which serve the stores. Since the latter per-form the same essential functions for the chain stores as a wholesale merchant does for independent retailers, chain warehouse expenses may properly be considered a part of wholesaling expense.
The central offices of the chains, however, perform some costly functions, such as administration, accounting control and buying, which appear in the expenses of the independents, but only to a small extent in the data for the chain retail store. The general average cost of operating chain retail units for all kinds of business in 1935 was 25 per cent. When all the expenses of chain central offices and warehouses are added, the total cost reached 27.2 per cent. Even this figure is somewhat under the average expense of the independents, which was 28.4 per cent in 1935.
In comparing costs of chains and independents it should also be realized that the typical chain store is located in centers large enough to assure a substantially larger volume than the average for independents and that it deals in the kind of goods which have a consistent and usually heavy turnover. The independents, on the other hand, include a widely dispersed and heterogeneous number of small outlets whose services, though expensive, may be essential. Furthermore the independents include not only well-organized stores with merchandising experience and trained management and personnel, but also many ventures on the part of people with no business experience, whose main reason for entering business may have been the mere lack of any other profitable employment.
Cost and Sales Variations, 1929–1935
Expense ratios for all kinds of retail stores, as we have seen, were higher in 1935 than in 1929, although not as high as they were in 1933. With very few exceptions, this was true whether the businesses were under chain or independent management, but differences in the degree to which sales volume declined and expenses increased are marked and significant.
The independents as a group suffered a severe loss of volume in 1933, and largely in consequence of this, a sharp rise in operating expense. Chain stores also lost in dollar volume and experienced increased costs, but to a much less marked degree. But by 1935 this trend was reversed, and the independents increased their sales and decreased operating expenses at a more rapid rate than the chains.
Between 1929 and 1935, however, the chains strengthened their position in the retailing field. With a loss of 23.2 per cent in dollar volume-as compared with a 36.3 per cent drop in sales for the independents-chain stores increased their share of total retail business from 20 per cent to 22.8 per cent. Expense ratios of the independents rose from 25.6 per cent of net sales in 1929 to 28.4 per cent in 1935, half again as much as the chains, which increased from 23.3 to 25 per cent.
Comparisons between independents and chains in different lines of trade are still more illuminating. Although chain organizations as a whole increased their share of the total business by 3 per cent between 1929 and 1935, the sectional and national organizations in particular made rapid strides by increasing their proportion from 12.5 per cent of all retail business in 1929 to over 19 per cent in 1935. Contrary to what might be expected, this gain in dollar volume and relative position was accompanied by an appreciable increase in their expense ratio. The two other principal types of chains, the local and manufacturer-controlled groups, lost ground in sales and experienced a much larger rise in the relative cost of doing business than did the sectional and national organizations.
Reasons for this general trend toward higher expenses are not entirely clear but mounting chain store taxes are probably at least partly responsible. It is significant that although sectional and national chains and single-store independents showed roughly comparable increases in expense ratios, this development accompanied a loss of nearly one-third in the dollar volume of the independents and an actual gain in business on the part of the chains.
Among other types, commissaries and company stores had low operating costs. This may not be significant, however, since these stores may be virtual monopolies and their prices (which are not reported) may be out of line with prices of other outlets. Such stores are under no compulsion to make profits since the commissary may be operated as a convenience rather than a business. Although commissaries had almost regained their 1929 volume by 1935, their operating costs went up considerably.
Direct house-to-house selling, on the other hand, was one-third greater in volume than in 1929, but was operating at only slightly lower cost. This business was even larger in 1933 before recovery got under way, reflecting the fact that the great numbers of people who go into business during times of widespread unemployment find house-to-house selling one of the easiest fields to enter.