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Thursday, January 1, 1987

Supermarket Myths

Mr. Barger was associated with Libbey-Owens-Ford Company and one of its subsidiary firms for nearly 33 years. He was a public relations representative at the time of his retirement and is now a writer-consultant in Toledo, Ohio. He has been a contributor to The Freeman since 1961.

Growing up in Norfolk, Nebraska, in the 1930s, I heard my elders voice a number of economic myths which were part of the populist folklore. We heard shocking reports about the big oil companies who had bought up and suppressed the carburetor that would deliver 100 miles to the gallon. There were also sinister hosiery manufacturers who withheld silk stockings which would last a lifetime. And we felt deep rage when we heard that nine powerful men on Wall Street met every weekday morning to decide the nation’s economic affairs for that day.

The threats posed by grocery chain stores were part of that folklore. Safeway Stores, the most successful of the four grocery chains operating in our town of 10,000, was the most feared of the group. There were also about 40 independent and neighborhood grocery stores in the city. Their proprietors warned us of the grim fate that lay ahead as a result of Safeway’s growth and expansion.

A typical comment about Safeway would go like this: “Sure, Safeway offers good merchandise at low prices. But you just wait! With their size and profits, Safeway can drive us little fellows to the wall anytime they want. Then watch out! They’ll get together with the other chain stores and charge any prices they choose.” This dire warning might be followed by a grumbling comment that the government should do something to curb the power of giants like Safeway.

But a funny thing happened to upset this grim scenario for Norfolk. Safeway isn’t there anymore! It bit the dust in 1982 as part of the company’s shutdown of its Omaha Division. And none of the other chains that operated in Norfolk in 1936 is still in business in the community! Yet Norfolk has almost doubled in population since the mid-1930s and enjoys a prosperity brought on by decades of improved farming and the development of manufacturing. Why could Safeway and other chains survive in the community during those bleak Depression years and then be forced to shut down in a later time of affluence and growth?

During a recent visit home, I discussed the Safeway closing with several people, including the independent proprietor who took over Safeway’s building. My conclusion is that Safeway and the other chains came to grief because of market forces in the food business—the very forces that were supposed to be the chain stores’ principal advantages. While it may have seemed to my elders that the chains had invincible power, they were never as strong as they appeared to be. And some of their strengths also became serious liabilities in later years.

One of Safeway’s supposed advantages was its leverage as a volume buyer. With centralized purchasing serving a large number of stores, it could obtain price advantages that simply were not available to the small grocer. I can even remember neighborhood store proprietors telling me that certain Safeway selling prices were below their own costs for the same items.

While small outlets may always have this problem, it was not the same for larger independent markets in Norfolk which were competing directly with Safeway. Thanks to the rise of the food wholesalers and other organizations which perform buying and warehousing for large numbers of these independent stores, the chains’ advantage in this area was soon blunted. The independents also turned out to be resourceful competitors by pooling their advertising efforts. Independent grocery retailers learned, too, that there was some advantage in being locally owned although connected with a larger buying organization. While this was probably not a large factor in sales, it was a way of trading on the natural resentment townspeople had toward absentee owners.

Union vs. Nonunion

Another fact my elders failed to understand in the 1930s was that “bigness” creates certain costs and problems which independent operators can sometimes avoid. One of the key points in Safeway’s closing of its 67-store Omaha Division was the competition from “nonunion” stores in the area. Translated into more understandable terms, this means that aggressive union action had driven Safeway’s costs up so high that the company found itself unable to operate profitably and was disadvantaged because independent supermarkets in the same area had lower labor costs.

In fact, however, unionization is one of the risks of bigness. Unions, despite the ideals they profess to the public, will devote far more time and effort to organizing a large company than they direct to a small one. For the union, it is much more financially rewarding to organize a large chain grocery with many outlets than to organize a single independent store with only 40 or 50 prospective dues-paying members.

Union officials representing retail grocery clerks would prefer a tidy world which would see all supermarkets in a single area being forced by government edict to operate under a union banner. The very presence of nonunion stores acts as a check on union demands. Editorializing in his union’s magazine, President William H. Wynn of the United Food and Commercial Workers noted: “Our contracts are, to a large degree, dependent on our success in organizing. In retail food, for example, our contracts are best in those geographic areas where virtually every grocery store employs UFCW members. Therefore, with all employers paying similar labor costs, then stores must compete on the basis of managerial ability, efficiency and customer acceptance, rather than by trying to squeeze profits out of their employees.” (UFCW Magazine, March-April 1986)

While Mr. Wynn thinks standardized pay is a great idea, this is not the way the market works and it is not the best way to serve either the customers’ or the store employees’ interests.

While a nonunion supermarket owner may appear to be “squeezing profits” out of his employees, he may also be assuring the workers of long employment. The Safeway workers who lost their jobs with the closing of the Omaha Division were not helped in the long run by union pressures which forced their wages up to a level the general market would not support.

The union argument is that nonunion employees are used to whipsaw those who belong to unions. The lower wage worker is called a “scab.” But the flip side of this argument is that persons who want to work in supermarkets are often excluded from employment by union contracts and arrangements which give the current employees of the firm an unusual advantage (no matter how poorly they are performing). But a wage that appears low to one worker may be very attractive to another whose needs and aspirations may be different. Rather than condemning persons who work at lower wages than the union scale, we should applaud them for working and for bringing needed corrections to a market situation that has been distorted by excessive coercion.

Another myth about Safeway stemmed from “awe of the expert” which sometimes afflicted business people in small towns. The large chain stores like Safeway supposedly had teams of management “experts” at corporate headquarters who outclassed the small, independent proprietors in our hometown. It was believed that the local proprietor was too busy “running the store” to take note of long-term trends and developments which were necessary for the survival of the business.

In fact, however, the independent grocery store proprietors in Norfolk were more attuned to the demands and needs of their own market than anybody at a grocery chain headquarters ever could be. The independent proprietor who works long hours in his own store still might be the most cost-effective manager in the business. A typical owner-manager in Norfolk could be found almost anywhere in the store, helping out in the meat market, supervising an unloading on the dock, or working at the checkout. It is an intensive form of business management that results in clean stores, good merchandise, fast service, and low costs and prices. Best of all, a proprietor who works in this manner also is constantly keyed in to the performance of other store employees and how well they are serving customers. Owner-managers who worked this way in Norfolk kept their own costs under control and managed to stay competitive with Safeway and the other chains.

But these independents were larger grocery stores which stocked numerous items and sought high volumes; they were early supermarkets. Also scattered about the town, several blocks apart, were about 30 neighborhood stores—small establishments run by families who lived in rooms above or behind the store. And another of the myths we heard in the 1930s was about the importance of the neighborhood store. Something important was going to be lost, we were led to believe, if these neighborhood stores went out of business.

But as I found on my recent trip home, the small neighborhood stores from the 1930s have disappeared from Norfolk. They actually began to disappear during World War II and in the years immediately following. But it wasn’t perfidious price competition from Safeway that did them in. Most of the neighborhood stores I remember were marginal businesses and wouldn’t be very attractive to us today. They have been largely replaced by the convenience stores with names like 7-Eleven and Mister G’s Mini Mart.

The Neighborhood Store

In the 1930s, we lived next door to a small neighborhood store operated by a man named Bob. Bob and his wife lived in a small room or two at the rear of the store. They were friendly, kindly people, but I know today that their store probably made them very little beyond a small living. It existed largely because most people used it for convenience items like bread and milk, where Bob could usually be competitive with the larger stores. He also kept a barrel of kerosene because many people in the neighborhood used this fuel for kitchen stoves.

But Bob’s prices for meats, canned goods, and other processed foods were usually much higher than at the downtown chain or independent stores. He was so much a part of the neighborhood, however, that my mother felt guilty about shopping downtown. When we returned from a downtown store carrying grocery sacks (we had no car), we would come in through the backyards so Bob and his wife would not see us. As young people would say today, Bob managed to lay a guilt trip on us! It was all part of the populist folklore—the belief that we were somehow betraying our friends and neighbors by shopping at Safeway.

As we know, increased ownership of automobiles put Bob and other neighborhood stores out of business—but most of them went on to higher paying employment in another field. As for the convenience stores that replaced them, we are more realistic about their role than we were about the neighborhood store. If a 7-Eleven operates in our neighborhood, we no longer feel guilty about shopping elsewhere for better prices on our larger purchases!

Although Safeway had to quit the community in 1982, it did have a long run in Norfolk. It was successively in four different locations in the city, each an improvement over the previous one. The Norfolk Safeway store in the late 1930s was larger and more efficient than any store in the city, and it attracted considerable business from farm families who could bring eggs there in exchange for other food products. Although the Safeway store of the 1930s would be outmoded by today’s standards, it forced the other stores to improve and upgrade their facilities. And Safeway, which battles with Kroger for eminence in the food business nationwide, continued to upgrade its Norfolk facilities and was occupying a new 19,000-square-foot building at the time of its closing.

Viewed as a threat in the 1930s, Safeway was actually a public benefactor because it set a standard which the other stores had to match—and would eventually surpass. But it is ironic that Safeway was the pacesetter in Norfolk during the depressed 1930s and faltered during a much brighter era. At the time of the Norfolk closing, Safeway Stores Inc. had consolidated sales of nearly $20 billion and operated about 2,500 stores. What went wrong?

According to Safeway’s 1982 Annual Report, the closing of the Omaha Division was to carry out a company objective of divesting operations with poor prospects so assets could be deployed into areas with a greater potential rerum on investment. Business Week (April 5, 1982, p. 109) noted that the division had chronic losses and the region had limited population growth and increasing numbers of nonunion stores. Safeway also left the Memphis market at the time of the Omaha Division closing and had left the New York City market 20 years earlier. These explanations make sound business sense and Safeway, at this writing, is apparently following strategies which will help it maintain its position as one of the world’s largest grocery chains. It will probably continue to do well in many markets as it builds new stores and expands into more profitable lines.

But Safeway’s performance record in Norfolk shows that it never had the power to monopolize the market, it never was in a position to set prices of its own choosing, and it was never more than a few steps ahead of its independent competitors in the city. And with its corporate overhead and general policies, it could not be profitable in markets like Norfolk where other retailers continue to make a good living.

In the light of what actually happened, the 1930s myths about Safeway and its vaunted powers over the market seem quaint today. But are they really so quaint? While I was in Norfolk recently, an independent supermarket owner voiced grave concern about the market strength of another chain competitor that is having considerable success in the region. I also heard concern expressed over the shakeout which may reduce the total number of food wholesalers to about ten.

My own feeling is that market forces in the retail grocery business have served the public well and will continue to bring needed changes as we require them. Our interests will be served if we let stores compete freely and if we don’t fear or penalize the successful supermarket operator.

But I know that myths die hard. A few years ago, I heard a college graduate say that the big oil companies had bought up and suppressed a carburetor which will deliver 100 miles per gallon. Others have said that hosiery manufacturers design their products for short life, only now it’s panty hose instead of silk stockings. And I still hear now and then about those nine old men on Wall Street who control our economic destiny!

  • Melvin D. Barger is a retired corporate public relations representative and writer who lives in Toledo, Ohio. He has been a contributor to The Freeman since 1961.