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Chain Stores Versus Independents

( Originally Published 1939 )



The most significant cost comparisons are between various types of stores selling similar articles. It is more illuminating to compare operating costs of different types of stores dealing in foods, such as single-store independents, retailer-cooperatives, voluntary or corporate chains, or super-markets, than to compare expenses of food stores with those of furniture stores. Real comparability, of course, would require that a whole series of conditions be care-fully established. Among the more important factors affecting costs are the kind and quality of services rendered by the store, the size of the business and the size of the city.

In this section a comparison is made of the trends in sales and operating expenses of chains with all other types of stores in twelve selected kinds of business. Since all other types are overwhelmingly independently owned the data really provide a comparison of chains and independents. Expense ratios and changes in net sales in 1929 and 1935 for chains and all other stores for these twelve lines of trade are shown.

Of the twelve kinds of business, chains operated at a lower cost than independents in half of them and at a higher cost in the other half. They had the greatest advantage in groceries, where the chain store expense ratio was 16 per cent of net sales as against 23 per cent for all other stores, and in department stores, with a ratio of about 25 per cent as compared with 32 per cent for independents. Other stores had the largest lead in the case of jewelry, with an expense ratio of 41 per cent as compared with 49 per cent for the chains, and in restaurants, with a ratio 5 per cent lower than the chains.

Trends of Sales and Costs

Comparisons of 1935 expense ratios with those for 1929 in relation to changes in the volume of business done by the chains and other stores in these years reveals an interesting picture of the ebb and flow of competition in sales and costs.

In the grocery business, for example, independent stores in-creased their share of the business at the expense of the chains, but only slightly narrowed the spread in operating expenses. When the volume of the two classifications-groceries without meats and combination stores-is combined for both years, it appears that independents and chains each experienced a sales decline of about 14 per cent. Grouping of the two classes is necessary because of the marked extent to which grocery stores have added meat departments and thus shifted in classification since 1929.

Operating expense ratios of chains in the department store field were 7.5 per cent less than those of the independents in 1935. These lower expenses may be due largely to differences in the kind of goods and services offered. The independent department stores, however, like the chains, depend largely upon mass demand, not upon the exclusive trade. If the masses indicate that they would rather forego special services than to pay for them the chain department store may well become an increasingly serious threat to the independent.

While sales of independent department stores declined by more than a third between 1929 and 1935, the volume done by chains increased by nearly 23 per cent. Even so, their operating expense ratios increased slightly, though not as much as the independents'. The catalog business of mail-order houses, significantly, involved operating costs almost as large as the chain department stores.

Expense ratios were reduced from 1929 to 1935 in only four of the twelve lines of trade shown in Table 17, and in every case these gains were made by the chains. The chains gained in relative sales position and actually reduced their expense ratios in the women's ready-to-wear and shoe and drug businesses, while the independents in each case registered an increase in expenses. In furniture, a comparatively unimportant chain field, the chains lost in sales slightly more than the independents, and while still out of line in costs, succeeded in somewhat reducing them. The independents, however, have gained a striking advantage in filling station costs since 1929, when they were exactly on a par with the chains. While chain costs rose from 24 per cent to 30 per cent of sales, the costs of independents increased to only a little more than 25 per cent. In the meantime the chains suffered a loss in volume of about 30 per cent, while the independents gained to just about the same extent. This undoubtedly reflects the fact that chains in this field have been selling or leasing their retail outlets to independent operators. This tendency-evident to a less extent in other lines-is partly responsible for relative changes in sales volume from 1929 to 1935.

3. COMPARISONS BY SIZE OF CITY AND STORE

Both the size of the retail store and the size of the community in which it is located seem to affect operating costs. These relationships cannot be measured with detailed accuracy on the basis of existing Census data. But fragmentary studies appear to justify the conclusion that, disregarding the size of the store, the small town concerns have lower costs than those in the larger cities. On the other hand, if the size of the town be disregarded the cost of doing business seems to decrease as the size of store increases-at least up to a certain point.

Census data on operating expenses for stores in cities of different size are available only for 1929, and these reports group all cities of more than 30,000 population in one classification. Operating expenses by kind of business and average annual sales per store in three city-size groups.

Because a large proportion of small town stores are operated by proprietors and non-salaried members of the family, two expense ratios are shown: one including, and the other excluding, proprietors' compensation, as shown in the Census. The inclusion of "imputed proprietors' compensation" narrows the spread of operating expense ratios, particularly between the small communities and the middle-size brackets, but it does not change the general conclusion that operating expense ratios are lower in the smaller cities. This is true in all lines of trade shown in the chart, with only minor exceptions, and in spite of the fact that the smaller average sales volume of small town stores would be expected to result in higher costs. In two related kinds of business-the food group and restaurants and eating places-proprietors' services are so important that inclusion of their imputed compensation raises operating expenses in the smallest city-size stores above the figures for the middle group.

On the whole it seems clear that in cities of over 30,000 population the cost of doing business is greater than in the smaller communities. Whether this expense continues to rise steadily within the 30,000-and-over population group (which accounts for about 60 per cent of all retail sales), or reaches a maximum at a certain size of city and then declines, cannot be answered conclusively by Census data.

Special studies of operating expenses in department and hardware stores presented in subsequent sections of this chapter, how-ever, tend to confirm the conclusion that expense ratios continue to rise as the size of city increases. A survey of 1936 operating expenses of 514 retail drugstores' also shows a tendency toward higher expense ratios in the largest cities, particularly as compared with the small towns. Stores of various size-groups, ranging from less than $10,000 average annual sales to over $50,000, had expense ratios in towns under 5,000 population from as high as 32 per cent for the smallest stores to as low as 22 per cent for the largest. In cities of over 100,000 population expense ratios of the smallest stores were 34 per cent, and of the largest, 27 per cent. The Dun & Bradstreet 1937 Retail Survey showed a similar, but less pronounced tendency, with drugstore operating expenses of about 27 per cent in cities under 20,000 as compared with 29 per cent or more in cities over 100,000.

Expenses of combination grocery and meat stores in the Louisville-Cincinnati area in 1929, according to a special Census survey,' were somewhat larger in the largest cities (over 100,000 population) than in the small towns (under 5,000), but the margin was slight-between 1 and 2 per cent of net sales.

Obviously the cost advantage of the smaller communities is by no means universal among all lines of trade, nor is it always a marked advantage. Lower costs in the smaller cities are probably due almost entirely to lower wage rates and lower rental and real estate costs.

Small Stores Most Costly

Cost variations as related to size of store are not clearly established. Except for the fact that the small one-man independent store-when reasonable wages are imputed to the proprietor-shows a very high cost ratio as compared with all other size-classes, there is no convincing evidence of a general tendency for costs to decrease progressively as store-size increases.

Size of business is apparently only one factor affecting the cost ratio, which appears to vary widely for the same size and type of business according to location by size of city. A glance at Table 18 will show this range for a number of different types of stores.

These figures are based on a limited sample and include only stores under independent management but they appear to offer evidence that for most businesses there is no uniform or continuous drop in cost ratios as the size of business increases. The Lilly survey of drugstores shows similar fluctuations although it is again clear that the smallest establishments have higher costs than the middle-size and larger stores .

Definite trends have been noted, however, in a few lines of trade for which special studies have been made. In the retail hardware survey discussed later in the chapter operating expenses were found to decrease steadily as the size of business increased. But here again, size of city was shown to have an important effect on expense ratios, since in every store size-class the costs of doing business were greater in the larger cities than in smaller towns. In contrast, department stores show increased cost ratios in the larger-size businesses, with the lowest costs appearing in the smallest stores. Here again the fact that the larger stores are usually in large cities undoubtedly has an important influence on costs. The Census survey of combination food stores previously quoted shows a sharp drop between stores with less than $10,000 sales and stores of the next largest size-class, and some tendency for a further slight decline with increased sales volume up to $100,000.6 For the largest stores, however-those selling more than $100,000 annually-the expense ratio increased sharply. These figures suggest that there may be an optimum size for different lines of retail trade for which operating expenses are lower than for either the largest or the smaller stores. Final conclusions on this point, as well as other aspects of the relation between store-size and expense, must await more comprehensive and representative data. Even when this be-comes available it seems probable that the relation between size and expense will show wide variations for different kinds of stores and business locations.

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