Is Distribution To Costly
( Originally Published 1939 )
Even with all the reservations and assumptions which have been made the answer to the question posed in the title of this book-"does distribution cost too much?"-is "yes." The research findings prove this in two ways. First they show many features of the distribution process which reveal opportunities for savings: duplication of sales efforts, multiplicity of sales outlets, excessive services, multitudes of brands, and unnecessary advertising-all caused by competitive conditions; unreasonable demands and misinformed buying on the part of consumers; and, among distributors them-selves, lack of a proper knowledge of costs, too great zeal for volume, poor management and planning, and unwise price policies. Second, the research findings show how newer distribution agencies, through economies of standardized and large-scale operation, have proven the inefficiency of those which they have displaced; and how other distributors have improved methods and lowered costs through a better understanding of their problems.
Taking the field of distribution as a whole the process undoubtedly costs too much. But how much too much is impossible to say. In other words we can say with confidence that there is waste in distribution, but we cannot reduce it to a percentage figure-as a whole, or in any of its parts. Nor can we say that distribution is more or less wasteful than production.
We can, however-even with limited statistics that we have-point out specifically many ways in which the costs of distribution can be reduced or its efficiency increased through improvements in the design and operation of the present mechanism. The following pages summarize the suggestions of the Committee.
Turning now to possibilities of improvement in distribution, there are three general areas where the problems of distribution costs should be attacked: first, consumer knowledge; second, efficient performance; third, legislative restrictions and regulations.
a. CONSUMER KNOWLEDGE
Under our present economic system the main directing source of all economic activity is expenditure by consumers. To the extent that their choices are irrational and uninformed, the system fails to reach its optimum performance. The variety of products now in the market, the importance of qualities not readily susceptible to sensory test, complications in service and convenience and the fact that consumers spend most of their time and energy as producers, all contribute toward making individual purchasing an inefficient process. Added to this is the incessant pressure of modern advertising-sometimes illuminating, but too often obscuring the facts which the consumer requires to enable him to buy intelligently.
But the problem of assisting consumers is not as simple as might at first appear. Until recently, at any rate, the great majority of them have not shown any great interest in becoming better in-formed. And there is always the danger of imposing uncertain and incompetent judgments upon them. Our recommendations in the field of better consumer information, therefore, are made with the uncomfortable realization that, so far, consumers have not made very effective use of the facilities already available. Even now, most of us can stretch our purchasing power considerably by more cautious and intelligent spending. Standard brands of toothpaste, shaving cream, and a multitude of other trade-marked commodities can often be bought for less money from a mail-order catalogue than in the corner drugstore, but this is inconvenient, involving as it does the annoyance of filling out an order blank and two or three days delay in waiting for delivery of his purchase.
There are a multitude of other examples-for instance, instalment buying. Goods bought on instalment frequently cost consumers from 12 to 18 per cent interest on their money-a cost which they could avoid if they were willing to lay aside enough each month and wait to buy an automobile at the end of the year, or to use some other form of credit. But this requires will power and means waiting, and the consumer wants his automobile now. Consumers could make greater use of the consumer services now provided by government departments and by various other agencies. Even without special aids, consumers could buy more intelligently and more cautiously than they do now, by comparing quality and cost from one store to another.
Even though consumers have thus far been slow to take advantage of buying aids, however, we believe that such aids should be greatly increased and that an intensified effort should be made by government and private agencies to stimulate their more effective use. We recommend the following specific policies:
(1) . The expansion and better coordination of government agencies to provide in adequate and popular form information which consumers need for more efficient buying.
We strongly support the tendency, already apparent, for governments-federal, state, and local-to establish agencies primarily concerned with consumer problems. The inauguration under the Department of Agriculture of the Consumers' Guide, which aims to inform consumers on methods of testing the qualities of products, is a step in the right direction. The Standards Section in the Department of Labor, which is continuing the work of assembling government standards and specifications on consumer goods commenced by the Consumers' Advisory Board of the NRA, can aid consumers in making a more intelligent choice. The work of these and other official agencies can never yield maximum returns, how-ever, until it is made more widely available in popular and understandable form.
(2) . Further progress in the elimination of fraud and misrepresentation in printed and verbal descriptions of products.
Although the federal government has taken increasing responsibility for the prevention of misrepresentation, and legislation to that end has recently been strengthened, the protection is not yet adequate. We urge strong support for and further strengthening of such laws.
Distributors themselves, if they want to, can also do a great deal along these lines without legislation; and some of them, through such agencies as Better Business Bureaus, have made commendable progress in this direction. We urge further action of this voluntary kind.
(3) The development of informational labeling.
We urge the extension, by voluntary action of business and by legislation of adequate descriptions of goods on the labels attached to them. Such descriptions should cover both the physical components of products which are capable of measurement, the grade or quality of the goods, and the components of their price-as suggested in the following recommendation.
(4) The establishment of a differentiated pricing system for retail goods.
We urge careful study of the feasibility of adoption of a pricing system that would clearly differentiate separate prices for each article according to the amount of services involved in its sale-such as credit, delivery, return privileges, etc. This would mean in practice that a purchase paid for by cash, carried out of the store by the buyer and not returned, would cost less than if any or all of these services were required. Whether they actually avail themselves of these services or not, consumers pay for them whenever they buy goods at a store which offers them. Since the consumer pays for such services he is inclined to demand them on the theory that he is entitled to all that he pays for. All of this increases the total volume of such services, and therefore their cost, and hence the price which the consumer must pay. If service costs were separately charged, it would probably reduce their volume. Such a practice would also permit those consumers who wanted to do so to eschew these services and get the advantage of lower prices. We recognize the difficulties of establishing a differentiated retail pricing system, however. Experience shows that the difficulties are especially serious-if not insuperable-when one retail store attempts to adopt the policy without the cooperation of its competitors.
The same principle of differential charging in accordance with the amount of service supplied and the distributive costs involved, is followed in many cases by manufacturers, and might well be widely applied to intermediary transactions between retailers and wholesalers.
(5). The wide extension for public use of the facilities of government and private agencies for testing and appraising consumer goods.
We urge that the kind of services so effectively performed for government buying by the United States Bureau of Standards be made widely available to consumers in the United States. This kind of testing service can and should be supplied by both government and private organizations.
We believe that the Bureau of Standards should make tests of leading products for specific qualities and that the results should be made public. At the present time the Bureau of Standards does test certain types of consumer goods, but the results of these tests do not become widely available to consumers.
We also recommend the extension and more effective use of voluntary, private, non-profit testing and reporting agencies. The record of such agencies is not perfect and there is serious question as to whether their present limited facilities permit them to do an adequate scientific job of appraising and rating consumers' goods. This is particularly true of complex fabricated products like auto-mobiles and radios, or articles in which style and taste are more important than physical qualities. But the principle behind these efforts is sound and should be encouraged. With sufficiently wide support from consumers these agencies would be able to get enough revenue to permit them to function more effectively.
(6). The further organization of consumer cooperatives and consumers' group buying agencies.
In spite of their spectacular success in Great Britain and other European countries the record of consumer cooperatives in the United States, as shown in the research report, is not impressive. Accounting for much less than one per cent of total retail sales, consumers' cooperatives are mostly small stores, dealing in staple products and operating in small communities. Although no wide statistical appraisal has been made of the relative cost, price, and service advantages of cooperatives in the United States, it is clear that inefficient management may easily wipe out the advantage to consumers in securing for themselves the profits of retail operation.
With sound management, however, cooperative ownership can offer much to the consumer, as has been demonstrated in the economical distribution of such products as milk, gasoline, and farm supplies. Cooperative enterprises, moreover, serve an important educational purpose in arousing the interest of consumers in the problems of economical buying; and their very existence may have a significant influence on the price policies of private distributors. We therefore urge the extension of consumer cooperatives.
A specialized form of consumer cooperation is found in various kinds of group buying organizations which are able to effect economies and secure lower prices for their members. Many large organizations, such as banks and insurance companies, for example, have fostered group buying organizations among their employees. These organizations, by concentrating purchases and by short-circuiting many of the costs involved in individual buying, have effected real economies for their members. Sometimes, however, the savings they achieve arise partly from what amounts to a subsidy offered by the free use of the purchasing facilities of the employing corporation. Sometimes, too, buying an article at wholesale involves no real saving in distribution cost. When the prospective purchaser of a radio or a refrigerator, for example, takes up the time of a department store salesman in examining different articles, and then places his order through his employer's purchasing department, re-tail distribution costs have not been eliminated, but merely shifted. When group buying organizations of consumers are able to consolidate the demands of individual buyers into large orders for specific products, however, real economies in distribution can be achieved, for large orders make possible lower operating costs.
(7) The extension and further development of courses on consumer problems in educational institutions.
We recommend the wide extension of courses in high schools and other educational institutions designed to promote better and more intelligent buying and to educate the consumer in the functions and problems of distribution. Much work of this kind is being done, but more could be done, particularly in connection with courses in chemistry and physics and home economics.
(8) The vigorous prosecution of federal family budget and expenditure studies.
We urge that the budget and expenditure investigations of the bureaus of Labor Statistics and Agricultural Economics be expanded. This program should, in the course of time, help to inform the consumer on the wisest distribution of his expenditures. Naturally the prosecution of these studies is closely related to the general consumer education functions of various government agencies.