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The Costs Of Competition

( Originally Published 1939 )



The competitive system gives free rein to all types of enterprise, and it is assumed that in the long run the more efficient type will survive. Even though each part of the process of getting goods from the producer to the consumer may function quite efficiently in its own sphere, costs may be made larger by an overlapping and pyramiding of efforts. Apparently this is what has happened in many lines of trade. Manufacturers have felt that it was necessary for them to create a consumer demand for their product in order to bring pressure on wholesalers and retailers to carry their merchandise. With the growing emphasis placed by manufacturers in recent years on the establishment and promotion of their own national brands their selling and promotional expenses have risen sharply. Witness the estimated 60 per cent increase in selling costs of manufacturers since 1900, reported earlier in this chapter.

a. DUPLICATION OF SALES EFFORTS

Consumer goods leaving the producer's hands may either be sold directly to the retailer or pass through intermediaries. In the latter case the intermediary dealer or wholesaler also incurs substantial operating expenses. In many cases only half of the wholesale expense goes to pay for the essential physical functions of breaking bulk, storage, and delivery to retailers. The other half of it goes to pay for the effort of persuading the retailer to buy. In this way a second layer of selling costs is added to the goods.

Then the retailer, whether the merchandise is bought directly from the manufacturer or from some intermediary, adds his toll to the total of selling costs. It is difficult and often impossible to segregate the cost of performing the so-called "essential functions" from the expenses incurred as the result of "selling" effort. Judging from sample cost studies in manufacturers' distribution and in the wholesale and retail trades, however, at least 50 per cent of the total costs of distribution are accounted for by selling and promotional activities, in contrast to the physical task of handling, storing, and delivering goods.

This is not meant to imply that such duplication of effort is wholly undesirable. The creation of demand is an essential function and it is difficult to see how our present economy could get along without it. Granting that it is necessary, however, the duplication and pyramiding of selling effort has been carried so far in many cases as to involve real economic waste.

That economies can be effected by eliminating some of the selling activities along the line has already been shown. The discussion of food and drug distribution costs in Chapter 6 showed that both corporate chains and retailer-cooperatives were able to per-form the wholesaling function at lower costs than independent wholesalers. Their economies result from the fact that they do little or no "selling." It is also quite probable that the selling costs of most manufacturers supplying these large-scale organizations are relatively low. Obviously, exact information on this important question must await more realistic and careful cost analysis and allocation.

It is of immediate concern to consumers, however, that in the fields which they have invaded, the chains and retailer-cooperatives have brought lower prices resulting in part at least from a marked reduction in the combined costs of performing the wholesaling and retailing functions. The number of retail stores belonging to such integrated organizations is usually closely geared to the potential business in the area served. Thus each such retail outlet is able to enjoy a volume of business large enough to justify its existence and to insure relatively low operating expense. The same advantage is not enjoyed by vast numbers of so-called independent outlets.

b. MULTIPLICITY OF OUTLETS

The great duplication of facilities in retail trade must result in a higher total cost of distribution than if outlets were fewer. The high rate of mortality, which continues in good years and bad, indicates that too many firms are engaged in many retail trades. Hundreds of thousands of retailers do a pitifully small volume of business. Even in 1929 over two-fifths of all the retail stores in the United States had a sales volume of less than $33 a day. In 1935 about 60 per cent of all retail stores were in this class. Operating expenses for this group of little stores are much higher than those of larger establishments, if anything like reasonable compensation is allowed their proprietors.

Supplying these superfluous retail stores also makes for high distribution costs. Manufacturers and wholesalers obviously could operate more economically if their output could be handled exclusively by stores which do enough business to stock up with large orders, achieve a quick turnover by selling at a small margin of profit, and send in more large orders. It is obvious also that retailers could conduct their operations more economically. Fewer and larger stores would mean fewer and larger purchases and lower costs of physical handling and selling, as well as many collateral savings such as lower insurance and credit and collection costs.

But from the standpoint of consumers, it must be admitted that an ideal system of distribution from the point of view of distributors would have its drawbacks. If all stores were large they would necessarily have to be fewer and farther apart. But consumers want a system which enables them to supply many of their wants in stores which are easily accessible. While the average housewife on the outskirts of the city may go to the big shopping district for her major purchases, she does want a convenient store just around the corner. Here, as in many other phases of distribution, no sharp line can be drawn between real economies and those which would involve sacrifices in convenience on the part of consumers.

C. SERVICES RENDERED

Much of the cost of distribution attributed to competition comes from extra services extended to buyers. These services are often intangible and difficult to measure. They may be worth all they cost; but in many instances, if all the facts were known, they might well be classed as waste. We do not have the facts, however, to permit a statistical comparison between the costs and values of such services.

By greatly reducing services, costs can be cut substantially, and such savings have been made by many manufacturing, wholesaling, and retailing establishments. That such economies have not been more widespread is apparently due to the willingness of buyers to pay not only for merchandise, but for service and for freedom of choice in buying a wide range of products. Professor James L. Palmer of the University of Chicago lists some of the services which our marketing institutions might eliminate to cut the cost of distribution:

1. They might discontinue selling for credit.

2. They might eliminate free delivery service, reduce the frequency of delivery or narrow delivery zones.

3. They might carry fewer brands of merchandise, thus restricting buyer choice.

4. They might stock smaller quantities of merchandise and refuse to handle slow-selling items, thus forcing many buyers to wait for delivery of orders.

5. They might occupy low-rent locations, thus forcing buyers to go out of their way to make purchases.

6. They might operate on an eight-hour instead of an eleven-to-eighteenhour day, thus concentrating buying in shorter periods but also restricting service.

7. They might sell only in quantity, thus eliminating small-unit purchases.

8. They might locate only in large trading centers, thus inconveniencing people not living nearby.

9. They might confine themselves to staple merchandise instead of aggressively seeking out new merchandise and new styles, thus reducing obsolescence losses and mark-downs.

10. They might withdraw the returned goods privilege, thus reducing selling and handling costs and mark-downs.

11. They might reduce the number of salespeople, thus cutting labor cost but compelling customers to wait to be served.

Professor Palmer makes the guess that a retail store operating under these conditions could cut the cost of retailing in two-if it had any customers left. He can see no immediate prospect of material reduction in the cost of marketing except through restriction in services.

If consistent effort is made to discover the facts savings can undoubtedly be effected. However, as long as the distributor does not know what it costs to sell small accounts, fill small orders, grant credit, accept returned goods or grant allowances for this or that, just so long is he apt to excuse high costs. He thinks he is compelled to render such services because his competitors do. Thus he argues that they are merely a form of advertising or sales promotion. Such reasoning may be sound enough if he knows what the services really cost, but very few distributors do know what they cost. From the buyer's point of view it is too often true that buyers must pay for elaborate services whether they want them or not. To the buyer who does not require services it seems important to have the costs borne by those who benefit from them.

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