The Independent Fights Back
JULY 01, 1958 by JULIAN H. HANDLER
Mr. Handler is an editor and author on food marketing and merchandising.
Two decades ago, the friends of the independent food merchant were ready to serve as his pallbearers. The corporate chains were making such tremendous growth that proposed legislation to tax them to their death seemed to be the independent’s last hope. The plan failed and the independent was left to stand or fall on his own merits in the battle for survival under free competition.
What has happened since is startling indeed, in view of the tremendous odds that were then seen as stacked against the man who wanted to operate his own grocery market down the street from one owned by a big corporation with the comparatively limitless financial resources that could run him out of business.
Yet today, as the result of resourceful leadership and progressive action at all levels, the independent food merchant still accounts for the lion’s share of total grocery store sales, more than 60 per cent of the total.
This accomplishment has been effected through a revolution-within-a-revolution in marketing. Fundamental, comprehensive, and dynamic changes have completely altered the nature of the American food distribution field during the last 20 years. New efficiencies, with self-service in the forefront, have sharply reduced gross margins. Merchandising has taken on new forms. Attractive and sanitary packaging has replaced the cracker barrel and the tub of butter. No longer must the housewife go from grocery store to bakery to meat store to dairy to fruit store in order to purchase all her family’s food needs. The supermarket has become the mecca for convenient one-stop shopping.
The change has been so complete that most of us have forgotten what grocery marketing was like not too many years ago. The scope of this revolution in distribution can perhaps best be grasped by visualizing the average food store of a quarter-century ago and recalling how it operated, while you stand in the middle of a supermarket — "one of the miracles of America," in the words of a visiting monarch last year.
Competing with Chain Stores
The emergence of the independent as an efficient and successful businessman under these totally new conditions constitutes the revolution-within-a -revolution that has equal significance in its social and economic aspects. To appreciate fully the extent of the climb of the independent from near-oblivion, it is only necessary to examine marketing conditions as they existed in 1938.
The chains had been gaining an increasing proportion of the total business in many retail fields. They had many natural advantages of bigness. They commanded great total buying power that could be wielded to effect favorable purchases. This, plus efficiencies in operations that stemmed from their size, enabled the chain stores to offer measurably lower prices. Their corporate resources opened the way to the most desirable locations and financed the building of attractive markets. The chains could advertise economically since each ad served many stores; to the independent, comparable advertising for his one store was out of reach. Competent headquarters personnel for the chain could specialize in each phase of market operation, providing a team of experts that could not be matched by the lone wolf.
These built-in competitive advantages of the chain appeared to be insurmountable for the independent. Since the small merchant was regarded as basically important to the American economy, and since his position seemed politically exploitative, a campaign was started to turn the tide.
Tax legislation was introduced in many states and ultimately in Congress. The intent of the federal bill was unmistakable. If it were enacted, the A & P, which then had 12,000 stores in 40 states, would have been required to pay a tax of $471,000,000 out of its earnings that year of $9,000,000. The Kroger Co., with 4,000 markets in 19 states, would have faced a bill of $71,000,000 though it earned only $3,700,000. The friends of the independent showed their belief that the only way they could keep him alive was to tax his competition out of business.
Heated controversy raged over the tax plans. The side of moderation was typified by the views of the Secretary of Agriculture, who noted that some regulations might be necessary to maintain fair competition where chain practices were generally detrimental. "However," he added, "we think it would be unwise and unnecessary to give up the economies which have been brought about by chain store distribution in order to prevent certain practices which may not be in the public interest."
Although the proponents staged a vigorous battle in support of the chain tax principle, the movement scored only minor successes and eventually was abandoned.
Without Government Intervention
Denied this legislative support, how did the independent food merchant manage to hold his position in a highly competitive field against such heavy odds? How did he survive the intense pressure of big chains? The key to the independent’s story of progress is cooperation. By two principal methods, the merchant associated with other merchants in the common cause of survival.
One system has been built around the voluntary group, sponsored by the wholesaler. The wholesaler supplies the initiative and the program for coordinating independent market owners in one cohesive operation. They are given a common name, so they can advertise and merchandise collectively and enjoy other benefits similar to those that the individual chain store derives from being part of a corporate chain organization.
The other principal form has been the cooperative. In this arrangement the market operators, on their own initiative, develop a joint organization that owns its warehouse and hires a manager. Each market owner has shares in the company and any amounts exceeding the operating costs of the warehouse are distributed among the holders.
While the ownership and some of the procedures vary, the two systems have much in common —particularly their function of keeping the independent market operator a going and successful business.
The new concept in marketing is symbolized by a statement in an annual report issued this year by one of the nation’s larger wholesalers, which listed its sales as over $100,000,000.
"Food distribution has undergone major changes during the past ten years. Our role as wholesale supplier is radically different from ten years ago. Our planning and thinking is devoted almost entirely to the continued development of modern retail food facilities in prime locations for qualified, proven operators," the annual report noted.
In arrangements such as these, the retailer-owned cooperative and the voluntary-group-sponsor both provide most of the headquarters services that are performed by chain main offices. Except under special conditions, however, the independent retains ownership of his own market. In some cases, with large supermarkets the order of the day, the private owner may have an investment of around a quarter of a million dollars in his facilities.
By being a member of such an organization, cooperative or voluntary group, the independent can serve his customers under conditions that enable him to be fully competitive with chain store neighbors. Since the members of the organization concentrate their business with the single distributor as much as is feasible, the wholesaler can operate economically, on a high-turnover basis, the same as a chain warehouse. Similarly, the wholesaler’s selling costs are reduced since the loyalty of the affiliated retailers makes it possible for him to eliminate expenditures for salesmen. The savings are passed along to the retailer in lower cost of merchandise, which in turn enables the retailer to price his food products at the level of the chains.
In effect, this is enlightened selfishness at work. The wholesaler works to reduce his costs, so he can supply the retailer at a lower price so the retailer can sell at a price fully competitive with chain competition. If the wholesaler did not do this, and instead sought his profit through higher pricing, the retailer would ultimately go out of business and soon thereafter so would the wholesaler. Similarly, the retailer concentrates his business with his principal wholesaler to help the wholesaler lower his costs and thus set the whole cycle into action.
There are adjuncts to this basic marketing policy that further enhance the status of the independent market. Effective group advertising programs are conducted on the same basis as chain advertising. Joint headquarters provide technical assistance that independents, singly, could not afford.
The degree of integration of the retailer with his source of supply is indicated by the fact that headquarters in some cases keeps the books for the market owners. In addition, headquarters will seek out new choice locations for markets. If the retailer affiliate is not sufficiently capitalized to gain consideration as a tenant, the wholesaler may put its own name on the lease and help the retailer finance the undertaking.
" ‘Retailer-mindedness’ has become a by-word the wholesale fraternity is justly proud of," R. L. Treuenfels of the National-American Wholesale Grocers’ Association reported to the most recent International Congress on Food Distribution in Rome.
In retrospect, the campaign for chain taxation may now be considered as having been, in the long run, a liability for the cause of the independent. This could be true in that it suggested that the independent was not a fully efficient distributor, but instead needed a brake put on his competitor as an equalizer. Such thinking may still carry over among financial institutions, for example, whose assistance in expansion might be helpful at this time. This may be so even though the character of the industry has changed completely.
Furthermore, the independent has demonstrated that resourcefulness and cooperation are surer ways than government intervention to sustain progress and prosperity under the American system of free competition.
Ideas On Liberty
Strength Through Struggle
The something-for-nothing-idea grows out of failure to see the purpose behind the struggle for existence. The fullest possible employment of one’s faculties is what makes for strength of body, of character, of spirit, of intellect. Nonuse of faculties leads to atrophy. The story of the wild duck that joined the domestic ducks, was fed, but later couldn’t fly above the barn; of the gulls that fattened up at a shrimp plant but starved when it shut down; of the cattle that became accustomed to pen feeding and died rather than forage any more; of the hand-fed squirrels that laid up no nuts for the winter but bit the hands that had fed them when they no longer held food — these and other stories of nature attest to principles of biology which are as applicable to persons who won’t use reason as they are to animals which haven’t the faculty of reason.
Leonard E. Read, Victims of Social Leveling