Conclusions And Recommendations Of The Committee On Distribution
( Originally Published 1939 )
1. CONCLUSIONS AND ASSUMPTIONS
FIRMLY ROOTED in the minds of many people is the conviction that distribution costs too much and that its wastes and inefficiencies are chiefly responsible for the high prices which consumers have to pay. What seem to be evidences of waste abound in every direction. In the judgment of many critics, there are "too many" retail stores; "too much" advertising and high-pressure merchandising; "too many" similar products among which the consumer must make his choice; "too much" duplication of facilities and services. The mark-up or price spread between what the farmer or producer receives for his goods and what the consumer has to pay appears to be "too high" and to reflect unnecessary waste or excessive distributive profits, or both. To the consumer it seems unreasonable that he should be denied the economies arising from a steady and often spectacular lowering in the cost of making goods, by the rising cost of distributing them.
a. DISTRIBUTION COSTS AND PROFITS
Before trying to decide whether distribution costs too much, it is important to know how much it costs, what services it comprises, and where the money the consumer pays for distribution goes. It is of some significance to know the price spreads or mark-ups for individual articles, but these vary widely according to the nature of the products and methods used, and at best furnish only a rough indication of the costs involved. In addition to the costs of specific operations it is important to measure the total amount paid by consumers for all distributive services. Distribution commences with the storage of raw materials and their transportation from mines and farms to factories, where they are processed and fabricated into finished products, continues with the sale and resale, shipment and re-shipment of goods through the channels of intermediary and wholesale trade, and ends with the final sale and de-livery of finished articles to the tens of millions of household consumers and hundreds of thousands of consuming institutions in the United States.
The Large Totals
Taking the year 1929 as a basis-when a larger volume of goods was produced, distributed and consumed in the United States than in any other year before or since-the research staff has estimated that the total amount paid by household consumers and other terminal buyers for finished goods in that year was nearly $66 billion. This is what the finished goods bought in that year cost the buyers. It is not, of course, the same thing as the total costs incurred by producers and distributors including their profits. To get such a figure adjustments would have to be made for inventory changes, depreciation charges and net losses.
How much of this $66 billion was paid for making the goods, and how much for distributing them? Answering this question involved a considerable amount of estimating on the basis of inadequate statistical data, but available evidence seems to indicate that slightly more than $27 billion out of the total of nearly $66 billion was the cost of producing goods and somewhat less than $39 billion was the cost of distributing them. Of this latter sum nearly $13 billion was paid for retail distribution, about $7 billion was the cost of intermediary trade, somewhat less than $9 billion represented transportation costs, another $1 billion was accounted for by national advertising, instalment selling and other charges, and a little more than $9 billion was the cost of distribution incurred by manufacturers, exclusive of national advertising.
How much significance should be attached to the fact that about 59 cents out of the consumer's dollar goes for the services of distribution and only 41 cents for the services of production-that it costs considerably more on the average to distribute goods than it does to make them? To many persons this fact in itself appears scandalous. Actually it does little more than measure the area in which possible economies in distribution may be sought and possible wastes eliminated. It provides no evidence that distribution is a more wasteful and inefficient process than production.
Are Profits High?
Certainly there is little evidence of general high profits being made in the field of distribution considered as a whole. Some firms, it is true, and some of the newer branches of distribution, have been conspicuously profitable. But for every outstandingly successful and profitable organization there are many that barely break even and some which operate at a loss, even in good years. In relatively prosperous 1936, for example, half of all the trading or distributing corporations in the United States showed a loss on the year's operations. Taking into account both the unprofitable and profitable, the net profits of the entire group of corporations en-gaged in trade amounted to little more than 2 per cent on their sales. For every one of the 149,805 trading corporations reporting to the Treasury, the Census shows there are perhaps ten individuals and partnerships in the field of distribution. These are smaller on the average, and probably less successful than the corporations. Considering the fact that published figures on distributors' profits are probably somewhat over-weighted with the larger and more successful firms, the research staff estimated that the elimination of the net profits of distribution all along the line from primary producer to consumer would result in an average saving of no more than three cents out of every dollar paid by consumers for finished goods.
It is safe to conclude, therefore, that if distribution does cost too much it is not primarily because of "profiteering" but for other reasons. As a matter of fact the research findings show that most of what distributive agencies receive for their services in getting goods into the hands of buyers is represented by payments of wages and salaries. A large part of what the consumer pays for the wholesale and retail processes goes for wages and salaries of workers directly employed by distributive agencies. And most of the remainder, paid for rent and maintenance, heating, light and power, taxes, supplies, etc., also finds its way into the payrolls of the agencies supplying these services.
It must be remembered that distributors have little or no control over many of the ultimate or real costs of distribution. Taxes paid by distributors-as well as by the general public-go to sup-port government activities, such as those of the Federal Trade Commission, the Department of Commerce and various state and local agencies, which are concerned with the promotion or regulation of distributive agencies and operations. Consumers themselves bear part of the costs of distribution involved in the time and energy they spend in shopping for goods.
So far as distributors are concerned, however, it is clear that if distribution costs are to be reduced, the largest economies will have to come from savings in expense, which means chiefly payments for services rendered to their customers directly or indirectly by persons employed by distributive agencies. Obviously reduction of distribution costs by drastic cutting of wages and salaries is not administratively possible, socially desirable, nor politically practicable. Hence if the cost of distribution is to be reduced economies must be gained either by eliminating functions and services now offered by distributors or by performing these functions more economically and efficiently.