Some Reasons For High Costs
( Originally Published 1939 )
NEITHER DISTRIBUTION nor any other part of the economic system operates perfectly. Both the need and the opportunity to improve the efficiency and lower the costs of distribution undoubtedly exist, but the same generalization could be made about the whole gamut of activities for which the consumer pays. Whether distribution is more inefficient, or takes too large a part of the consumer's dollar in comparison with other parts of the economic machine, however, is not clear. Certainly the results of this study fail to support the common assertion that costly and wasteful distribution processes alone are responsible for high living costs.
The costs of distribution come largely from the performance of essential functions in providing time and place utilities. The mere physical task of collecting, storing, transporting, selling, and finally delivering finished goods is a gigantic undertaking. While the costs of performing these tasks have probably increased over the past years, that fact alone does not necessarily prove waste. These in-creased costs may pay for increased services or for expanded functions. Also there may have been merely a shifting of functions and services from what we term production to distribution. Costs may be increased as a result of the normal working of the competitive system or through the growth in the demands of consumers.
It is clear that distribution today does a vastly bigger job than it did fifty years ago. Higher marketing costs are largely due to fundamental changes in our economic organization such as the concentration of manufacturing in specialized areas, the urbanization of the population, the transfer of many production operations from the home to the factory, the development of a great variety of new products, smaller packaging, more frequent retail buying and other features of a more specialized and more complex economic life.
Furthermore, distribution, as we know it today-whether it "should" do so or not-does undertake to create demand, to mold it and to attach it to brands and dealers. Because distribution is not distribution in the narrow sense, because it is so largely devoted to influencing demand and because the art of influencing demand has developed so rapidly during the last half century distribution has had to shoulder more expense than it otherwise would. Probably there has been as much discovery, as much change, as much innovation in the field of distribution as in production. But most of the ingenuity has been expended to a different end. Inasmuch as it has proved possible to influence and control consumer choice it has often been profitable to spend money in creating demand by advertising and promotion rather than through the reduction of prices.
It must be remembered, however, that the creation of this new and larger demand has helped to bring to the mass of the people an unprecedented array of physical comforts and conveniences. More and better goods have been made available to a vastly greater number of people at a price which the mass of consumers can afford to pay. Real wealth measured in the physical volume of goods produced and distributed increased more than nine times between 1870 and 1930, while the population little more than trebled. As a result millions of families have today conveniences which were unheard of seventy years ago.
This has come about partly through lower prices achieved largely by reducing costs of production. But lower production costs would often have been impossible without more effective distribution. A prominent food manufacturer reports that with greatly expanded markets the selling prices of his twelve most important products showed a decline of about 30 per cent between 1929 and 1938-in comparison with a drop of only 15 per cent in the index of all wholesale food prices and a drop of only 12 per cent in the total compensation received by employees the country over.'
In the six years between 1931 and 1937, the number of electric ranges in a certain utility company's territory increased from six or seven thousand to some forty thousand-all the result of selective selling. In the last ten years the price of electric refrigerators has been reduced from between $400 and $500 to an average of less than $200. Had there been a good electric refrigerator in 1920 it would have cost the consumer about $63 a year for electricity to use it. In 1937 it cost only about $12 or $14 a year for electricity to operate an infinitely better one. Even during the depression years of 1931–1937 the increased use of residential electricity enabled the company to cut the average cost of electricity in homes by practically 30 per cent. The average residential customer increased his use of electricity for labor-saving devices by almost 40 per cent, yet his annual payments to the company at the end of the period were not much larger than they were in 1931. Obviously these lower costs and lower prices could not have been achieved without greatly increased consumption.
Many more examples could be given of the way in which consumers have benefited by the economic system which has been evolved. On the other hand there is considerable evidence to prove that close attention to possibilities of lowering distribution as well as production costs would result in still greater benefits. The task which faces American business is to preserve the economies of mass production by preventing the added cost of mass distribution from cancelling them out.
Criticisms of High Costs
Criticisms of the marketing structure are by no means limited to economists and students. Hard-headed industrialists and others en-gaged in practical business are increasingly calling attention to the urgent need of attacking the problems of distribution. The January 10, 1938 issue of Domestic Commerce, published by the Department of Commerce, contains two pertinent quotations illustrating this attitude:
The facts point clearly to the logical future of American industry-namely, a bold and vigorous selective volume production along scientific management lines-scientific management let us clearly understand, applied not alone to factory but to finance and marketing and distribution as well . . . there is no question but that prices of manufactured goods must go down . . . the profits in American industry must be looked for . . . in a narrow buyer's market, in specialization, research, highly developed executive management, volume at low unit profit, close management of costs and inventories, automatic production, and an organization skillfully adjusted to the market . . . and it is the principles of scientific management which today impressively corroborate the idea that the marketing function must assume supreme command. . . . As a result of scientific management in production, including, of course, scientific development of machinery and equipment, statistics indicate that unit costs of production were reduced between 1900 and 1930 some 30 per cent, while in individual operations unit costs were frequently halved or quartered. In selling, on the other hand, costs have been rising. A survey of selling costs indicates an increase of some 60 per cent in the cost of marketing by manufacturers between the same years 1900 to 1930.
There is a tremendous opportunity to recover thousands of dollars that are now being wasted in inefficiencies in our marketing structure by the application of distribution engineering to the marketing structure and I believe also that one of the greatest chances for making big savings of all that exist in the field of distribution, exists in advertising.
Among the most common criticisms of the present distribution system is that it supports an excessive number of outlets and offers too many services and that excessive advertising and sales efforts put a needlessly heavy burden on the consumer's pocketbook. To answer these charges it would be necessary-but in the light of our present knowledge often impossible-to determine how many are too many and how much is too much. And then there would remain the problem of discovering what effects a reduction in this excess would have on the various persons affected.
Among these, clearly, the consumer's interest is paramount, for distribution should exist solely to satisfy his wants. How would the consumer's interest best be served? The answer is not clear. The price he pays must be weighed against the services he wants, the conveniences he enjoys and the range of choice he gets.
It must be remembered also that the apparent existence of an excess is a fundamental characteristic of competition. Granting that this often results in the waste of resources and human effort it is nevertheless the means whereby costs and prices are reduced. Then too, for every commodity which has found its way into common use there may be many which have failed to find their way. The time and money spent on such unprofitable promotion must also be paid by the ultimate consumer.
Such adventuring involves not only large costs but frequently wastes. It involves the right to try and fail. Many studies of distribution have overlooked this basic feature of the American economy. Our resources are such that we obviously have the capacity to develop not merely security and a "decent standard of living," but wholly new and presumably more desirable ways of living. But no one can know in advance just what these ways will be. They can be discovered only by trial and error.
Net Balance Incalculable
No one can know definitely whether or not the net results of the distribution system which we have today leave the balance on the asset side. But it must be granted that competitive selling and mod-ern promotional devices have created a market for the goods which industry has turned out through mass production methods. And the low costs achieved through mass production could never have been realized had it not been for the creation of mass demand and the added expenditures which had to be made to stimulate that demand. But it must be remembered that while competition in the technique of production almost inevitably reduces costs, competition in distribution often increases them.
While it is impossible to give any simple and final answer to the question "does distribution cost too much?", it is possible, and useful, to examine those aspects of the present distribution mechanism which seem needlessly wasteful. We may not be able to measure just how inefficient they are; but action to improve the defective parts does not depend on any such measurement. And to point them out may lead others to examine them more closely.
In this chapter, therefore, an attempt has been made briefly to indicate some features of our distribution system which appear to be too costly-and to give what figures are available to measure them. Some of these costs are due to the very nature of a competitive economy. But to say that they arise from competition does not mean that they cannot be cut without scrapping the system. There are other costs resulting from inefficiencies of management and still others for which consumers themselves are to blame.