Variety And Change In Distribution
( Originally Published 1939 )
Furthermore, it should be remembered that the consumer is not compelled to patronize the kind of store that offers the most elaborate and costly services. Free choice for the customer means not only a variety of products, but a wide range of services and prices. The department store offers him a large selection of articles under one roof and the advantages of a charge account and delivery service. But if he prefers a small establishment and the personal attention of the proprietor, he can patronize the specialty shop. On the other hand, if price is more important than convenience and personal service, the customer may save money by performing some of these services himself by making his purchase from a supermarket, a cash-and-carry store, or from a mail-order house.
In considering the distributive system itself, one cannot help but be impressed by the extraordinary variety which now exists in its institutions-variations between the large and the small, the urban and the local, the specialized and the general, the independent and the interlocking unit. The grocery super-market, the country general store, the automobile dealer, and the woman's specialty shop have little in common beyond the fact that they are all known as retailers. Furthermore, even with these institutions, there is variety in the number of channels through which goods flow, sometimes passing through many hands and sometimes short-circuiting completely by going directly from producer to consumer.
Within this complicated pattern continuous competition between different kinds of enterprises is causing a vast amount of shift and change. The whole system of distribution appears to be in a revolutionary state of flux. Not only is there a high turnover of individual enterprises, but countless experiments are going on with different methods of distribution, new types of enterprise, new arrangements of functions, and new methods of performance. During the short period of the last twenty years, the distributive pat-tern has greatly changed under the impact of such relatively new developments as chain stores and voluntary groups, instalment selling, and radio advertising. There is no evidence of slackening in this evolutionary process.
Mass Retailing and Its Advantages
Changes in the retail field have been especially striking. Some of these changes have been in the direction of offering more elaborate service and greater convenience to consumers, with the result that costs and prices have increased. Others have involved mass purchasing, more efficient procedures and the elimination of unnecessary or costly services, with the result that operating economies have been passed on to consumers in the form of lower prices. Which of these new forms can be said to represent real improvements over older ones cannot be decided unless one applies the simple test of survival and concludes that new methods and forms of retailing which survive are necessarily better than those they displace. From this point of view, of course, improvement often spells ruin for the individual firms or groups of firms. The public welfare was served by the introduction of taxicabs even though the horse hackmen were eventually wiped out.
The research findings suggest that certain forms of retail distribution can be said to be improvements in the sense of providing goods at lower prices and with greater operating efficiency. While our investigation could not cover the enormous field of comparative prices and costs of the various forms of retail outlets, the figures on relative growth raise a strong presumption in favor of the corporate chains, the big mail-order concerns, the newer super-markets, and certain types of voluntary group organizations.
One of the principal contributions offered by the chains so far as consumers are concerned is lower prices. They have been achieved partly by better methods of control and management, partly by elimination of certain services, such as free delivery and the stocking of as wide a variety of commodities and brands as those offered to customers by other types of retail distributors, and partly by concentrating their activity in urban areas and on a sufficient scale to get the economies of volume. In large part, of course, the lower chain prices have been made possible by the cost advantages of large-scale buying. In addition to the real economies of mass purchasing, the chains have also been accused of "improper" use of their bargaining strength in dealing with their suppliers.
Chains have centralized the costly activities of administration, accounting control and buying, all of which each independent merchant performs for himself. Although multi-plant operations can increase costs, the chains have eliminated many of the costs of duplication of effort. The chains have also introduced many improvements in store management, such as better selection, arrangement and display of goods, improved lighting, cleanliness, and refrigeration. Competition has forced the independent retailers, in turn, to adopt many of these improved methods of management, while the economies of large-scale purchases have been gained by the independents through the formation of voluntary group buying agencies. Thus the vigorous competition offered by this new form of retailing, while it has injured many individual independents, has brought widespread improvement of methods and lowering of costs and prices throughout retailing.
Trend Away from Independent Middlemen
At the same time that retail distribution patterns have been changing, important shifts have taken place in the relative position of agencies engaged in intermediary trade-an important link in the system whereby retailers and ultimate buyers are supplied with goods from thousands of different sources. The middleman's function must be performed by someone, either by the independent wholesaler, by various specialized types of agents, brokers, and assemblers, by the manufacturer himself, or by "captive" intermediaries controlled by retailers or manufacturers.
The trend in recent years seems to be away from the traditional independent middleman. The intermediary function is being taken over more and more by manufacturers, retailers, and to some ex-tent by consumers-either directly or through agencies they own or control. The independent wholesalers' share of intermediary trade decreased from 36.8 per cent in 1929 to 32.2 per cent in 1935, while other types of intermediaries gained during the period.
A comparison of operating costs suggests that one of the reasons for this shift away from the conventional wholesaler is lower costs. Intermediary trade as a whole showed expenses of 9.5 per cent of net sales in 1935 as against 13.2 per cent for "wholesale merchants." This meant that other agencies were performing intermediate functions more economically or that they were able to achieve lower costs by sharply limiting services and functions.
The research findings show that the essential wholesale functions of breaking bulk, storage, and delivery make up less than half the cost for many types of independent wholesalers. Selling and credit costs account for most of the remainder. To the extent that newer types of wholesalers set up by retailers or manufacturers can eliminate these latter functions and their costs, real savings and economies in intermediary distribution are possible. There will always be a need, of course, for service wholesalers to handle slow-moving items and to serve the small retailer who has to buy on credit; but this service should be made to bear its own cost.
e. ASSUMPTIONS UNDERLYING THE REPORT
It is not enough for our purpose merely to measure the costs and describe the character of the distributive system. But any attempt to make judgments about it runs into basic difficulties. There is no easy test to be applied. As we have seen, there is little evidence of a high general level of profits in this economic area. Nor does the fact that distribution costs frequently exceed production costs have any significance in itself except to show the relative economic importance of the two functions. The fact that it may cost five times as much to get cabbages into consumers' hands as it does to grow them originally, does not necessarily indicate that there are any legitimate grounds for complaint. In such a case, growing is relatively simple and inexpensive compared with transportation and marketing.
The main difficulty in determining whether excess cost or waste exist is that of establishing a workable criterion. The most satisfactory procedure might be to prepare a blueprint of the potential efficiency of an imaginary, perfectly functioning planned economy, and draw a contrast. On such a basis there is no doubt that the demonstrable waste of our present system would be tremendous. But would we want such an economy even if we could have it? Much of the waste that would appear on the basis of such a comparison must be regarded as the price paid for our particular type of economic system, which, waste and all, most of us prefer. We accept and adhere to certain social and political principles coming under the general terms of democracy and freedom of opportunity.
Free Choice versus Rationing
In the last analysis, however, it is these very principles which permit the establishment of a filling station on each of four corners of the crossroads. Here, the efficient use of resources clashes with freedom of opportunity. Another basic principle in the present system is that of freedom of choice for the consumer-as well as freedom for the use of all kinds of blandishments by those who are trying to persuade him to buy. Much of our present distribution cost, due to the "frivolous" demands of consumers and their resistance to standardization, must be charged against this principle.
Any basic evaluation of our distribution system must begin with consideration of the social desirability of a system based upon the individual's freedom of opportunity to waste. On the one hand, stand all the arguments for a planned and controlled society; on the other, faith in progress by trial and error with a maximum of individual freedom. We have not regarded the function of this Committee as one of trying to evaluate the kind of economic system we have. Such an approach would raise problems far beyond the area of distribution itself, although some of the most pertinent considerations appear in this wider area.
We have assumed in framing our recommendations that the people of the United States do not want an economy where all goods are rationed as they are in the army. We have assumed that what we want in this country is an economy which guarantees the greatest amount of individual freedom-consistent with the public welfare-to set up a business, to operate it, and even to fail if we cannot make a go of it. In so doing we want a minimum of interference from the government. But at the same time we recognize that absolute freedom in business is as impracticable as absolute freedom to erect any kind of building in a big city. With the growing complexity of our economic life a certain amount of government regulation and control has come to be accepted as no longer a subject worthy of debate.
The Committee's conclusions and recommendations are based, therefore, on three objectives which seem to be generally accepted as underlying "the American system" :
(a). Free choice for the consumer, with the inevitable costs which the consumer's demands for variety, immediacy and convenience necessitate;
(b) . Freedom of opportunity for the distributor, which means opportunity to develop new methods and techniques that will yield him a profit, but which also means-at least up to a certain point-the opportunity to fail and in doing so to injure his own and others' interests; and
(c) . A system of competition which, although not entirely free and untrammeled, should be regulated with two ends in view: (1) the promotion of the long-run interests of consumers and (2) the protection of the public interest; not merely to preserve the status quo or defend the position of particular groups of distributors.