Division of Agricultural Sciences UNIVERSITY OF CALIFORNIA ''.nstf GROWTH PATTERNS STEPHEN J. HIEMSTRA b. B. DE LOACH IN THE RETAIL GROCERY BUSINESS CALIFORNIA AGRICULTURAL EXPERIMENT STATION BULLETIN 786 TABLE OF CONTENTS HIGHLIGHTS iv INTRODUCTION 1 FACTORS AFFECTING THE DEMAND FOR FOOD AND SERVICES 1 Population 1 Income 2 Food Prices and Marketing Costs 4 RETAIL FOOD STORE SALES 5 Grocery and Food Store Sales 7 Sales Size of Grocery Stores 9 RESOURCES USED IN THE RETAIL GROCERY BUSINESS 10 Grocery Firms and Stores 10 Number of stores 10 Number of retail firms 12 Number of stores per firm 12 Grocery Store Employment 13 Labor costs 13 Number of employees and size of payroll 14 Employees per reporting unit 17 Capital Requirements of Retail Grocery Firms 20 Relation of Size to Unit Cost 21 Seeking optimum size 21 The survival technique 21 Application of the survival technique 21 ORGANIZATIONAL FORMS AND GROWTH PATTERNS 23 Legal Form 23 Aid in obtaining capital and management 23 Growth Pattern of Retail Firms 24 Size of stores 24 New stores 25 Bases for growth of store and firm 27 Limitation of store numbers 28 Vertical growth of grocery chains 28 Group Buying 32 Retailer-owned cooperative warehouses 32 Voluntary groups 37 a RELATION OF OPERATING POLICIES TO PROCUREMENT 39 Merchandising Policies 39 Pricing policy 40 Product-mix policy 43 Volume control 45 Advertising and promotion policies 47 Internal Organization Policies 49 Forms of organization 49 Purpose of internal organization 49 Centralized versus decentralized decision making 49 Financial Policies 50 Sources of capital 50 THE INSTITUTIONAL ENVIRONMENT 52 Legal Restrictions and Regulations 52 Antitrust laws 53 Antichain store taxes and "fair trade" laws 53 The Robinson-Patman Act 54 Antitrust actions against food firms 55 Taxes 55 Regulation of Markets and Marketing 56 Sanitation and health inspection 56 Trading regulations 56 Grading standards 56 Agricultural Policy Programs 57 Supply pressures 57 Marketing orders 57 Collective Bargaining 59 Customs, Mores, and Goals 59 IMPLICATIONS FOR FOOD MARKETING SYSTEM, FARMERS AND CONSUMERS 60 Adjusting Supply Requirements to Consumer Demands 60 Impacts of the Food Procurement System 61 Customers' choice of mass merchandising system 61 Competitive adjustments by retail firms 61 Effects upon wholesale suppliers and supply requirements 63 Impact on Farmers 64 APPENDIX TABLES 66 LITERATURE CITED 73 HIGHLIGHTS Merchandise procurement policies pliers, small retail competitors, and con- of retail firms are determined by their sumers. This bulletin analyzes some of • structure and organization, these changes. • type of merchandising program, • As population has increased and in- • sales volume, comes have risen consumers have been • number and location of retail stores, demanding more services with their and food purchases. As a result, competition • fixed and operating capital. among retailers has shifted from prices In recent years, an increasing share to services. of the retail grocery business has been • Costs of retailing groceries have shifting to large stores and firms. Be- been rising, particularly for labor. To cause of this, procurement and selling offset this, retailers have tried to im- policies have changed, with both favor- prove their methods of buying and sell- able and unfavorable effects on sup- ing to attain the lowest unit cost while SOURCES OF DATA This study is based primarily upon published and unpublished data, supplemented by interviews with industry leaders and by notes from a week-long conference on the subject of this report participated in by economists from the food industry, univer- sities, and the United States Department of Agriculture. Experiences of members of industry and economic analysts are relied on for a meaningful interpretation of data. THE AUTHORS Stephen J. Hiemstra was formerly Junior Specialist, Agricultural Experiment Sta- tion and on the Giannini Foundation, University of California, Berkeley. He is now Agricultural Economist, Marketing Economics Division, United States Department of Agriculture. D. B. DeLoach is Professor of Agricultural Economics and Agricultural Economist in the Experiment Station and on the Giannini Foundation, University of California, Davis. iv still maintaining competitive quality in both products and services. • There were about 252,000 retail grocery stores in the United States in 1958—136,000 fewer than in 1939 and 99,000 fewer than in 1948. As the stores decreased in number, the size of indi- vidual firms and stores grew. By 1958, 4 per cent of the stores made 46 per ► cent of all grocery store sales — each averaging more than one million dol- lars in annual sales. • Single-unit grocery store firms not affiliated with a buying group have been disappearing since 1939. In the nation as a whole, fewer and fewer stores are operated solely with family labor. In * California, the decline of these stores has been so rapid that if it continues at the present rate, they will be virtually , eliminated in about 15 years. • Consumers have responded favor- ably to mass merchandising, giving an impetus to the changeover from small to large stores and firms. The larger firms operate on a relatively low marketing margin, turn over products rapidly, have " a large volume of sales per store and carry a wide assortment of products. Through mass merchandising, operators ► can spread higher total costs over a larger volume of sales. Larger stores, of course, require a greater concentration of capital investment and more workers per store. • Because sales per store and firm have grown, buying power for all classes of grocery firms has become increasingly concentrated. • The number of chain firms in- creased 42 per cent from 1948 to 1958. Two-to-three store chains increased by 68 per cent, while 4-9 and 10-and-over store chains declined by 10 per cent. • From 1948 through 1958, the num- ber of stores operated by all chains de- creased by 9 per cent. The 4-9 store chains had 11 per cent fewer stores, and the 10-and-over store chains had 18 per cent fewer stores. These declines offset the 58 per cent increase in the number of stores operated by 2-3 unit chains. • Local and regional chains have grown more rapidly than national chains since 1948. Several local chains have become members of merchandise buy- ing groups to lower their merchandise procurement costs. This trend has been particularly noticeable in Califoria. • Chains of two or more stores and stores affiliated with buying groups made more than two-thirds of all grocery store sales in 1958. Retailers affiliated with buying groups purchased only about one-third of their merchandise, primarily dry groceries, through their own buying organizations. Because in- dividual stores have formed buying groups, they have strengthened their bargaining position in procuring mer- chandise. • Chains and affiliated groups did an increasing amount of their own whole- saling and processing between 1948 and 1958. The proportion of groceries sup- plied by integrated firms, however, re- mained about one-half of the total sold through retail stores. This integration back to the sources of supply was done in order to lower merchandise prices and selling costs through volume procure- ment, a goal not always achieved by the broader operation. • Integrating to supply sources has served another purpose — it is used to offset restrictive antitrust legislation, particularly the price discrimination provisions of the Robinson-Patman Act. • Voluntary and cooperative buying groups, perhaps because of a shortage of capital or because decision-making is decentralized, have not integrated back to supply sources as much as chains. • Mass merchandising has stimulated specification and contract buying, as well as vertical integration. Through contract buying, firms are assured a steady flow of large quantities of uni- formly graded products. Vertical inte- gration implies that these firms either do not choose to or cannot get the quantity and quality of products and services they need through competitive bidding. • Competition to reduce costs has in- creased group buying, although there has been less group action in advertis- ing and management service. Group ac- tion has taken two forms. In whole- saler-sponsored buying groups, the wholesale firm contracts to supply its affiliated stores with specified merchan- dise and management services. In re- tailer-owned buying groups, wholesale warehouses are run cooperatively by member patrons. Between 1948 and 1958, wholesaler-sponsored groups in- creased their sales 150 per cent, while retailer-owned groups increased their sales 275 per cent. • Large quantity buying of uniformly graded products favors large farming and processing operations. However, col- lective action among small operators al- lows them to offer the quality and quan- tity of products to attract buyers. With- out collective action, small operators are handicapped by limited market outlets and decreased bargaining power in deal- ing with large buyers. JUNE, 1962 VI Growth Patterns in the RETAIL GROCERY BUSINESS Stephen J. Hiemstra and D. B. DeLoach Merchandise procurement policies have changed drastically in the retail grocery business in recent years. The purpose of this study was to determine how procurement policies are formu- lated, if they are of such importance that they determine the structure of retail firms, and how they affect suppliers, marketing channels, and consumers. Statistics for this bulletin were drawn largely from the period between 1948 and 1959, since many of the operating procedures learned during World War II were put into practice during these years, even though post-war adjust- ments were not completed by 1948. Dur- ing the next ten years food was processed and distributed by new methods, and the composition, geographical distribu- tion, and demands of the buying public changed rapidly. Sudden population in- creases as well as suburban migration in California make it ideally suited to a study of these new developments in food retailing. In this bulletin, income, population changes, and the cost and efficiency of retailing food will be analyzed since they have affected demands for different kinds and qualities of products and services. In addition, the organization and operation of the retail grocery busi- ness in general will be analyzed, fol- lowed by an analysis of its supply func- tions, including • changes in sales volume of stores and firms, • new methods of acquiring, organiz- ing, and allocating resources among and within firms, • new operating policies associated with structural changes, and • the institutional environment in which firms operate. Finally the implications of supply problems for the food marketing system, for farmers, and consumers will be dis- cussed. FACTORS AFFECTING THE DEMAND FOR FOOD AND SERVICES Population growth and redistribu- tion as well as increased real income of consumers have been the primary fac- tors affecting the amount and kinds of food and services purchased by our population (National Resources Com- mittee, 1939) . Population Population increase requires a cor- responding expansion of food supply, assuming the composition of the popu- lation, physical environment, and in- come per capita remain unchanged. Be- 1 Submitted for publication March 28, 1961. This study is a contribution to Western Regional Marketing Research Project 40. [i] cause food is relatively perishable and consumers must replenish their supplies frequently and locally, the food industry adjusts its location and other supply functions to the needs of consumers. Since 1929 population growth and move- ments have caused widespread changing of location and supply functions (table 1, Appendix). A 43 per cent increase in population from 1929 to 1959 and a particularly rapid growth since World War II brought in their wake a proportionate expansion in food production, proces- sing, and distribution. The population increase of 24.1 million nationally be- tween 1950 and 1959 was largely in the outlying urban fringe and rural nonfarm areas. In fact, the decline of numbers in farm communities was offset by a 3.1 million increase in urban areas (table 1), the latter being almost entirely de- pendent on the supply of food made available by retail grocery and specialty food stores. California's population rose 170 per cent between 1929 and 1959. The dif- ferential growth rates that have char- acterized farm, rural nonfarm, urban, and suburban areas in other parts of the country are equally applicable to Cali- Table 1. Civilian Population Change, United States, from April 1950 to April 1959 Place of residence Population change Farm +0.8 +2.3 llions — 3 1 Urban + 3.1 Central metropolis Other urban Outlying urban fringe +15.3* + 8.8 Rural nonfarm Total +27.2 * Includes the decrease in rural farm population within the outlying urban fringe. SOURCE: Adapted from U. S. Bureau of the Census, Department of Commerce, Current Population Charac- teristics, Civilian Population of the U. S., by Type of Residence. No. 98 (Ser. P-20):l. Table A. U. S. Govern- ment Printing Office, Washington, D.C., January 1960. fornia. New and improved equipment and store arrangements have enabled operators to meet the changing require- ments of their customers. Since many of the new retail outlets were located in new buildings that were leased or owned by the retail firm, both the building structure and the equipment could be adapted to current needs. Income The wants of people must be backed by purchasing power in order to become effective demands. Engel found that, as incomes of consumers go down, people tend to spend proportionately more of their income for food in an effort to maintain their level of food consump- tion. As incomes rise, they tend to spend more dollars for food but a smaller pro- portion of their income (Engel, 1931). Schultz has estimated that a 10 per cent increase in per capita income in the United States results in an increase of only 1.5 to 2.5 per cent in food expendi- tures (Schultz, 1957). This indicates that the income elasticity of demand for food is low but positive. It appears that the increase in food expenditures associated with an increase in income is largely due to an upgrading of the diet and incorporating more serv- ices (for example, precooking and prep- aration of food, and customer parking) with food products. The income elastic- ity of demand for such services ap- proaches -1.0, while the income elas- ticity of demand for food at the farm level is near -0.2 2 (Bunkers and Coch- rane, 1957). This reflects the greater de- mand elasticity for the marketing services associated with food than for food alone. Table 2 shows that a relatively high percentage of the total disposable income was spent for food during the depression of the 1930's. The percentage was kept artificially low during World War II due to rationing and price controls. It ' The elasticity of demand for food marketing services has been estimated to be between -.75 and -1.5 by other authors, using varying methodologies. [2] Table 2. Consumer Expenditures for Food, United States, 1929-1959 Year Expenditures on food* Total per capita disposable income Food as per cent of total expenditures 1929 billions of dollars 19.5 18.0 14.7 11.4 10.9 12.2 13.6 15.2 16. 15.6 15.7 16.7 19.4 23.7 27.8 30.6 34.1 40.7 45.8 48.2 46.4 47.4 53.4 55.8 56.6 57.7 59.2 62.2 65.2 67.4 68.6 dollars per capita 160 146 119 91 87 96 107 119 127 120 120 127 146 176 204 221 244 288 318 329 311 313 346 356 355 355 358 370 381 388 388 dollars 682 604 515 390 364 411 459 517 551 506 538 576 697 871 977 1,060 1,075 1,136 1,181 1,291 1,271 1,369 1,473 1,520 1,582 1,582 1,660 1,742 1,804 1,826 1,905 per cent 23.5 1930 24.2 1931 23.0 1932 23.4 1933 23.9 1934 23.4 1935 .23.4 1936 23.0 1937 23.0 1938 23.8 1939 22.3 1940 21.9 1941 20.8 1942 20.2 1943 20.8 1944 20.8 1945 22.7 1946 25.4 1947 26.9 1948 25.5 1949 24.5 1950 22.8 1951 23.5 1952 23.4 1953 22.4 1954 22.4 1955 21.6 1956 21.2 1957 21.2 1958 21.3 1959f 20.8 * Excluding alcoholic beverages. t Preliminary. Source: United States Department of Agriculture Supplement for 1959 to Consumption of Food in the United States, 1909-52. Agricultural Handbook 62:38-40 U. S. Government Printing Office, Washington, 1959. rose rapidly after price controls and ra- tioning were removed in 1946, but started down in 1949 as food became abundant and disposable income rose. These data also support Engel's theory which was cited above. In recent years, an increasing share of consumers' ex- penditures for food products has been for more marketing services. Per capita disposable income in- creased 125 per cent between 1929 and 1957. However, during this period, the price level of food rose 76 per cent and [3 the average level of consumer prices rose 64 per cent. Deflating by these two measures of price inflation leaves only a 28 or 37 per cent rise, respectively, in real disposable income per capita. This amounts to about 1 per cent a year. Be- cause of the low income elasticity of de- mand for food, this moderate increase in real income has been a lesser factor in increasing the demand for food than the increase in population. The demand for marketing services is important in determining the prices of ] 200 1 1 1 Figure 1 . Total cost of marketing farm products by cost comparisons, 1947-1958 (1947-49 = 100) 160 120 rs^rc? Rail and truck transportation \ Total marketing bill Labor HO Corporate profits S after taxes X — ^*^- Source: Appendix table 3 1947 1949 1951 1953 1955 1957 1955 different food products. The cost of such services is allocated among the various food products by means of the retailer's pricing system, which is based largely on what the market will bear. This af- fects food prices and the relative de- mands for different kinds and qualities of food products. Since marketing costs have such an important influence on food prices, the ensuing discussion deals briefly with some of the major cost com- ponents in the marketing bill. Food Prices and Marketing Costs The total marketing bill 3 for farm products rose 64 per cent from the 1947- 1949 base period through 1958 ( figure 1) . It is assumed that approximately the same per cent change would apply to food alone as that which applied to the total marketing bill. The rise in the total cost of marketing food reflects a 27 per cent increase in the sales of food prod- ucts and an increase of 34 per cent in the unit costs of moving food through processing and distribution channels (U. S. Department of Agriculture, 1959) . Since the 1947-1949 base period, the hourly earnings of labor have increased roughly one half more than the cost rates of other inputs (figure 2). The rise of 65 per cent in the price of labor in food marketing (excluding fringe benefits) is practically the same as the 67 per cent rise in labor costs per unit of output (figure 2). Ogren and Parr (1955) associate a part of the rise in unit labor costs with an increase in the amount of food processing and other consumer services which require more labor per unit of product. Any rise above that attributable to added services would seem to be caused by wages rising faster than productivity. Regardless of the cause, such a rise in costs of marketing influences the total cost of products to the retail store, and must be taken into consideration in pricing the products to consumers. The matter of labor rates and other costs will be discussed in greater detail later in this report. 3 This includes payments to agencies that assemble and process food and perform other func- tions needed to supply such products to consumers in the form they desire. 4] 1929 1939 1949 1959 RETAIL FOOD STORE SALES The foregoing discussion was con- cerned with the two basic determinants of the demands for food and services sold with food, namely, the number of consumers and the ability of those con- sumers to pay for food and services. This section deals with consumer expenditures in different classes of food stores in the United States and California. 4 The as- sumption is that the relative demands for food and grocery store services are best reflected in the sales data for food stores offering various combinations of food and marketing services. Another assumption is that consumer purchases from retail food stores are an indication of their preferences for different quali- ties of products and merchandising methods, which is an important guide to merchants planning new or modernizing old stores, and changing procurement and merchandising methods. 4 The ownership classification includes four units. Chains are horizontally integrated retail grocery firms with two or more outlets under a common ownership and control. Such chains often acquire ownership or control of their supply sources. Wholesaler-sponsored voluntary re- tail groups are composed of independently owned retail firms that are contractually associated with a wholesale firm for their supplies of merchandise and some management services. Retailer- owned cooperative buying groups are member-owned nonprofit wholesale establishments through which members buy a part of their supplies and receive some management advisory services. Independents are single retail outlets that are not affiliated with any other store in terms of ownership or merchandise supply arrangements. Classification by size includes: Supermarkets, sales of more than $375,000 annually: Superettes, sales of $75,000 to $375,000 annually; and Small stores, sales under $75,000 annually. Merchandising methods include Service and Self-service stores. 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Per Cent of Disposable Income Spent in Food Stores, 1929 and 1957 1929 1957 Type of store California United States California United States per cent Grocery stores 8.2 4.1 8.8 4.2 13.3 1.7 13 6 Specialty food stores 1 2 Total food stores 12.3 13.0 15.0 14 8 Sources: California: Compiled from table 3 and Appendix, table 2. United States: Compiled from U. S. Bureau of the Census, Fifteenth Census of the U.S.: 1930; Distribution; Retail Distribution (Washington: Govt. Print. Off., 1934), Vol. 1, Part I, p. 47; idem., Annual Retail Trade Report, 1957 (Washington: Govt. Print. Off., 1957), p. 5 with adjustments made on the basis of the 1958 U. S. Census of Busi- ness; and, U. S. Department of Agriculture, Supplement for 1958 to Consumption of Food in the U. S., 1909-52 (Agricultural Handbook No. 62) (Washington: Govt. Print. Off., 1959), p. 36. Grocery and Food Store Sales'" The ratio of grocery store sales to total food store sales has been increasing steadily over the past 29 years, accord- ing to the United States Census of Busi- ness. California's grocery store sales ac- counted for only 67 per cent of total food store sales in 1929, but this increased to 90 per cent in 1958 (table 3). Apparently there has been a sub- stantial shift of sales from specialty food stores to grocery stores during this pe- riod." The shift has been rather steady, but it was slower between 1948 and 1954 than between any other two census years. Sales of specialty food stores reached a ► high of $576 million in 1954 and in the next four years decreased by 10 per cent. This represents a 16 per cent decline Y after deflation by the United States Re- tail Food Price Index, compared with an increase of 26 per cent in deflated grocery store sales during the same period. 7 Meanwhile, the population of the state increased by 18 per cent. Between 1948 and 1958, a 27 per cent gain in sales of specialty food stores compared with a 98 per cent increase in sales of grocery stores and a 46 per cent increase in population. The shift in sales from spe- cialty food stores to grocery stores thus represents a large source of the sales gain by grocery stores between 1929 and 1958 (table 4). Total consumer purchases of food, including the imputed value of home- grown food, were much greater than were total expenditures in all food stores in 1929 and 1957. This indicates that a substantial share of food was purchased 5 The definitions of these terms conform to the ones used by the United States Census of Busi- ness. In 1958 food stores included all establishments primarily engaged in selling food for home preparation and consumption (Standard Industrial Classification 54). It included grocery stores, meat and fish (seafood) markets, fruit stores and vegetable markets, candy, nut, and confectionery stores, dairy product stores, retail bakeries, and miscellaneous food stores, SIC 541-546 and 549, respectively. Food store sales included all sales made by food stores, including sales of both food and nonfood products. Similarly, grocery store sales included sales of both food and nonfood products. 6 The term specialty food stores will be used to refer to all food stores other than grocery stores. 7 Since 1929, food prices have increased by 88 per cent, according to the United States Retail Food Price Index; the increase has been 15.6 per cent since 1948. In view of this price inflation it is desirable to deflate sales figures in making comparisons over time. Food prices in California are not necessarily equal to those in the rest of the United States ; but relative prices are expected to change in roughly the same proportion. So, use of the United States Retail Food Price Index is appropriate as a deflator, and will be used as such throughout this study. [7] T3 » CD O o O 16 oi DQ s 3 c p COOOOcOOOt^-OOt^ CM CO OS 0> O C4 O0 O »0 OO O l~- t— •*! 02 0> CO ~H lO o OO O CO CO CO CO CO CM 0> lO 00 lO l(! N o m n -H ,-H |^ CO O T»i CO CO -h lO CM CO M « « "5 N rn CO — i CM CO CM CO CM lO -"C^ -f w oo o> t^ t^ CO CO t^ CM O t- ^l »-< CO CO CO M 00 Ol rt N N N KJ CO CO Oi ©' <-H -i t^ t-- CO -* y-* >C CO CO © "0 O co O h 113 Ol 00 CO O OS O O) O) Ol Oi OS CO £g ©3 o o © »o co © © © o o o o o o o o © o io O) Ol OJ OJ ^ o o o o o o o o o io + + + + I I — i o *o oj io o f N M CM -^i + + + + I I o o o o o © © © © »o through nonfood stores, such as general stores, drug stores, and department stores, and in prepared form through hotels, restaurants and institutions (HRI) . However, the sales of food stores also included a growing share of sales of nonfood items. As a result of the shift of customers and sales from specialty to grocery stores, expansion of grocery stores has increased at a faster rate than can be accounted for by population growth and income changes only. Shifts in consumer patronage from one kind of food store to another also affect whole- sale suppliers to the extent that different retailers buy from different wholesalers. Sales Size of Grocery Stores The change in number and sales of grocery stores in sales categories of var- ious sizes is given in table 5. The number of such stores selling in excess of one million dollars annually increased more than fourfold and their sales increased more than sixfold between 1948 and 1958. The rate of growth declined by size groups down to the $100,000 annual sales level, a level which seemed to mark the boundary between growth and de- cline. The number and sales of smaller stores declined by more than one-fourth in spite of a 20 per cent increase in the price of food. By 1958, about 45 per cent of total grocery store sales was made in stores selling one million dollars or more compared with about 11 per cent in 1948. Twenty per cent of all grocery store sales in 1958 were made by stores selling two million dollars or more an- nually. In both 1954 and 1958, the percentage of stores with sales in excess of one mil- lion dollars in California was double that for the United States. Only about one- third of California grocery stores sold less than $50,000 in 1958 compared with more than one-half in the United States. On the average, the grocery stores operated by single-unit firms in the United States in 1958 sold less than one- tenth as much per store as the large chains (table 6). The average size of store in- creased with the size of firm up to the 26-50 store chains and then decreased slightly. The grocery chains with 26 or more Table 6. Sales Per Grocery Store, by Size of Firm Classes, 1948, 1954, and 1958* Sales per grocery store Number of stores California Increase, 1948-1958 United States Increase, per firm 1948 1954 1958 1948 1954 1958 1948-1958 thousand dollars per cent 148 98 199 163 154 thousand dollars per cent Average, all stores .... 1 130 82 231 552 588 227 124 503 1,013 1,087 323 162 691 1,450 1,491 66 42 154 315 378 123 70 299 629 802 168 88 420 797 1,090 155 110 2-3 173 4-10 153 188 11-25 940 1.153 1,118 1,097 26-50 51-100 101 and over * Establishments operated entire year. Data for 1958 include delicatessens. Sources: Compiled from U. S. Bureau of Census, U. S. Census of Business — 1948, The Grocery Trade (Washing- ton: Govt. Print. Off., 1952), pp. 102-109 (Trade Series, Bull. No. 3-1), idem., U. S. Census of Business: 1954; Retail Trade— Summary Statistics (Washington: Govt. Print. Off., 1957), Vol. 1, p. 4-2, idem., U. S. Census of Business: 1958; Retail Trade, Single Units and Multiunits (Washington: Govt. Print. Off., 1960), pp. 4-36. . [9] Table 7. Distribution of Grocery Store Sales, 1948, 1954, and 1958* California Change 1948-1958 United States Change 1948-1958 < Number of stores per firm 1948 1954 1958 1948 1954 1958 per cent , Total 100.0 55.5 5.0 6.6 32.9 100.0 47.3 8.7 9.0 35.0 100.0 43.0 8.1 9.0 39.9 -23 62 36 21 100.0 58.8 3.6 3.2 34.4 100.0 51.8 4.8 4.0 39.4 100.0 47.0 4.8 4.2 44 -20 33 31 28 1 2-3 4-10 - 11-25 3.3 4.4 4.0 32.3 26-50 1 51-100 101 and over * Establishments operated entire year. Data for 1958 include delicatessens. Sources: 1948 and 1954: Compiled from U. S. Bureau of Census, U. S. Census of Business — 1948, The Grocery Trade (Washington: Govt. Print. Off., 1952), pp. 102-109 (Trade Series, Bull. No. 3-1), idem., U. S. Census of Busi- ness: 1954; Retail Trade— Summary Statistics (Washington: Govt. Print. Off., 1957), Vol. 1, p. 4-2. 1958: U. S., idem., U. S. Census of Business: 1958; Retail Trade, Single Units and Multiunits (Washington: Govt. Print. Off., 1960), pp. 4-36. stores had sales in 1958 averaging in excess of one million dollars per store. However, the large number of small single-unit firms brought the average of all grocery stores down to only $168,000. Between 1948 and 1958 the average sales of grocery stores more than doubled. This growth occurred in all sizes of firm groups, but the stores in the 11-and-over size chains increased sales at a faster rate than did the other size groups; the single-unit stores increased sales at the slowest rate (table 7). RESOURCES USED IN THE RETAIL GROCERY BUSINESS Grocery Firms and Stores Number of stores. An estimated 251,664 retail grocery stores handled the $43.2 billion sales volume for the United States in 1958. In California, 13,374 stores accounted for $4.4 billion sales during 1958 (table 5, Appendix). The number of grocery stores in the United States was at a high of 387,337 in 1939. In California, there were 17,140 stores in 1939. The number declined in both the United States and California during World War II, followed by a rise from the end of the War through 1948. Be- tween 1948 and 1958, a drop of 28 per cent in the number of stores occurred in the United States and 21 per cent in [10 California, all of the California decline occurring in the number of single-unit store firms. California chain store outlets increased by 26 per cent between 1948 and 1958, and the number of single-store firms de- clined by 26 per cent. The greatest de- cline was in firms with no paid em- ployees, which showed a decrease of 36 per cent compared with 18 per cent for single-unit store firms with payrolls. The decline in the number of stores without payrolls averaged 310 stores per year between 1949 and 1958 (table 8). A continuation of this trend for another 15 years would mean a virtual elimination of all California grocery stores operated with family labor. Ap- ] Gi C5 05 o (4-1 ;=! O 73 » O O (h O 06 3 G 2 u _o3 V£ q ">3 " u o a a, CO •*! CO OO t^ CO CO OO OS O0 O ■<*! t— CO CO »o CO 00 o Total number of firms 12 15,216 15,176 12,810 11,439 03 a y=! 3. 3 o c Without payroll 11 7,169 7,407 5,464 4,614 1 3 l o H I 1 15,011 14,963 12,499 11,083 — O o to 3 "3 -3 O 1 • O iO -^ ■«*< ■ OS 00 CO CO 00 1,813 1,776 1,982 2,291 — 8-3 o a co 5 bl £.2 CJ"S 3," CO JH ^ 14,404 17,140 16,824 16,739 14,481 13,374 1 1 a «=> T |>T J>T CO* •S'g -II CO • CM O -H CO ■ O H H If) • CM CM CO CO -5> o a H g (N 8,047 7,769 7,346 6,825 6,793 Reporting units* 8,263 7,985 7,562 7,041§ 7,009§ (4 03 > o- — c: 9 a cr O — X Is -a 43 o .a ft SB S i « ~ co 1^ *e 3 .20 a 3 s ° * S 2"3 "5 2 03 r-o s >i o3 o 3 c-3 3 cS cS HSrQ C T3 .. 3S ° 3 « » .02 M o3< Vco ^fl 8 '55 °^ a g g 8 co fl > cp £.£•<* c3«G cp-< p^ q M T3 03T3 O O S cSU^ o3 .. ..^ w< ^^ „ « asaaas- =3 3 3 3 3 e 10 CD „,_ a o o o^^ T373 O -" O O O " OOO •5 » § £ « -2 N|l If 1 "S 2 S o aj o> -3 a ^fl§a a * ".S^ o 1=1 a co § >> 2^ <» * 2 B rj 3T3 <3j3 « „58«^2S °5 •i. -B ' 7J ."S CO CM OD 0-3 03 £ bO^ ^ = §iS.J-3£Lsl ^■^ 3 a §^a^- ii. ^ i — 3 °° rj * ^ .^-^ O o 3 C io cu-3 ° co "3 .2 ■sfSSgfS ^.S'g C-3 2-3 j"°^'d a^ a -^ 03 -3 B a g- XlOQONrHCM a t3 fl 3 fl 3 3 fl ga aaaa.s ft'0'0 '0*0*0.^ V -^ -w!5^ > ^*3-5i2 flC g-g a§=| ^d 3.2, *3 * 03 m 3^2° a a; a) +2 cu -^ Q^^g c mEH a ; re • 2§ ^2-sS§ 03 O .S3 -a is ^ a*i£l o *- 03 *^^ -u JG 0> s^-3 03 -^ P. -h> "3 _3 -t= •^ 3-- co «) j) uj C &gs§«g"-s £3£*-go|J * |-Sc32-3S cjBS3 a>0 cp'c X O -3 cio ^ a 3 3 to • • O.J3"" Ofe aScM.2 S e ^O 03 05 -»j ^ at- E ■ 3^^ C i 3 S 3 03 i-^ OO :o parently, large volume retail stores can operate with a much lower unit cost for their services, thereby making it difficult if not impossible for family-type stores to compete, even though the latter cus- tomarily allow themselves a very low labor wage. A percentage distribution of all chain grocery stores shows that ownership con- centration decreased in California dur- ing the past decade (table 9). The proportion of stores owned by firms with fewer than 26 stores each rose, while the proportion owned by firms with 26 or more stores decreased. In 1957, California had a significantly larger share of its chain grocery stores owned by small-sized chains than did the nation as a whole. California also had more than 50 per cent more stores, proportionately, in the category of 10-25 stores than did the United States. The average grocery store in Cali- fornia served about 50 per cent more people in 1958 than the average for the United States (table 10). The average size of all grocery stores in California doubled during the decade, since, wherever possible, firms replaced one or more small stores with one large store. Number of retail firms. The num- ber of single-unit firms decreased about one-third in both California and United States between 1948 and 1958 (table 11). In contrast, there was a 76 per cent increase in the number of chain store firms in California, predominantly in the chains of 2-3 stores. Proportionate gains in the number of medium- and large- regional chains in California were also substantial. The only group to increase in the United States was the chains of 2-3 stores, but their numbers rose suf- ficiently to increase the total number of chain firms by 33 per cent during the ten-year period. Chains accounted for only 1.7 per cent of the total number of grocery firms in Table 9. Distribution of Chain Grocery Stores by Size of Chain, California and the United States, 1948 and 1957 California United States Number of stores per firm 1948 1957 1948 1957 per cent of total 2-9 35 10 55 41 13 46 22 30 10-25 8 26 and over 62 * Data not available. Sources: Compiled from Appendix, tables 6 and the United States in 1958, compared with 98.3 per cent for the single-unit firms. In contrast, it has been shown that the average sales volume of these single- unit firms is quite small, the total sales of the group probably amounting to not more than 20 to 25 per cent of all sales. With such a small part of the total sales volume arising in 98.3 per cent of the retail grocery firms, it is to be expected that the unit cost of supplying merchan- dise to the large number of small inde- pendent stores would be substantially higher than for stores and firms with larger sales volumes. To lower their unit merchandise procurement costs, owners of small retail firms often enter into ar- rangements with wholesaler-sponsored retail buying groups or retailer-owned buying associations for joint purchasing of merchandise, advertising, and manage- ment services. Number of stores per firm. The average number of stores per chain de- creased 29 per cent in California and 34 per cent in the United States from 1948 through 1958. The number of stores per chain in California declined from an * average of 9 stores in 1948 to 6.4 stores by 1958. During this period, the number of chains rose from 202 to 356 and the t number of chain store outlets rose from 1,813 to 2,291 (tables 8 and 11). [12 I Table 10. Civilian Population per Grocery Stores in the United States and California, 1948 and 1958 Year Population per all grocery stores Population per chain stores* California United States California United States 1948 588 1,194 414 713 5,458 6,308 4,819 1958 6,260 Per cent increase, 1948-1958 103 72 30 * Civilian population divided by numbers of chain stores with no allowance for independent stores. Sources: Compiled from table 8 and Appendix, table 1. Grocery Store Employment Labor costs. W. B. England reported that over a four-year period, 1955-1958, somewhat over one-half of the expenses of the 27 identical chains used in his study was for payroll (table 12). Consequently, changing uses of labor and labor costs have influenced the growth and changing character of the food retailing business. As the price of labor has risen in the national labor market due to a relative labor shortage, this industry, like all others, has tried to offset it by increasing the output of labor per hour, by reorganizing re- sources, and by substituting capital for labor whenever costs could be lowered by such a substitution. Consequently, labor costs per unit of output have not increased as rapidly as has the price per unit of labor, as already shown in this report. In addition to the impact of labor costs upon food marketing margins and buy- ing and selling prices, rising wages have done much to alter specific procurement practices (U. S. Department of Agricul- ture, 1958) . For example, because of the time saved in negotiating purchasing transactions and the availability of uni- formly graded products offered by a number of wholesalers, store managers prefer to telephone orders and specify the grade or quality of product desired and to check the prices of competing wholesalers. Employment data can be used to ana- lyze some aspects of efficiency, for ex- ample, such measures as sales per em- Table 11. Grocery Store Firms, by Size of Firm in California and the United States, 1948 and 1958 Sources: Compiled from table 8 and Appendix, tables 6 and 7. [13] California United States Number of stores per firm 1948 1958 Per cent change 1948 1958 Per cent number of firms number of firms change Total 15,216 15,011 113 67 12 8 2 10,158 9,802 255 68 19 12 2 - 33 - 35 126 1 58 50 322,856 320,629 1,412 601 [ 279 216,856 213,194 2,381 542 248 - 33 1 - 34 2-3 69 4-9 - 10 10-25 26-99 - 11 Table 12. Labor Costs as a Proportion of Total Expenses, 27 Identical Grocery Chains Expense 1955 1956 1957 1958 Per cent per cent of sales 1955-1958 Total expenses Payroll* 16.88 9.81 17.89 9.89 18.62 10.01 18.78 10.07 11 3 Payroll as per cent of total expenses 58 55 * Including supplementary benefits. Source: England, W. B., Operating Results of Food Chains in 1958 (Boston: Harvard Business School, 1959), p. 2. (Bureau of Business Research Bull. No. 156). ployee, sales per man-hour, and grocery store employees per capita. Such data show the gains in total output per unit of a single input but they are of limited usefulness because other inputs are not necessarily held constant. If constant dollars are used, sales data indicate the physical changes in output that are due to the substitution of capital for labor and to the specialization of labor. Number of employees and size of payroll. The number of employees hired per store, per firm, and by the entire industry indicates the growth of the industry and gives some evidence for studies of the effect of size increases on unit costs. Employment data for firms and industries are particularly useful as partial measures of concentration of business over a period of time because they are not affected by inflation and valuation problems. A discussion of some of the changes in employment and their relation to other changes in the grocery business follows. The total number of employees hired by grocery stores in California more than tripled between 1929 and 1958, and there was a 55 per cent increase between 1948 and 1958 (table 13). The number of active proprietors of unincorporated businesses declined by 21 per cent be- tween 1948 and 1958 (table 14). The number of workers, excluding corporate management, increased 35 per cent. An increase of 28 per cent in sales per worker occurred in spite of a de- crease in the number of hours worked per employee (table 14) . Various in- dustry and government studies associate these increases with specialization of workers as stores and firms have in- creased in size, with self-service meat departments, and with a greater use of laborsaving equipment and methods, such as a faster checkout system, and more efficient inventory control and in- store handling of merchandise. There was a decline of 21 per cent in the total number of grocery stores and a decrease of 15 per cent in the number of firms with payrolls in California from 1948 to 1958 (table 8). There was also a rapid growth in the number of em- ployees hired per store and per firm (table 15). These increases were often necessary complements to the increases that oc- curred in the sales size of stores and the number of stores per firm. Between 1948 and 1958, when the civilian population of California increased by 46 per cent (table 1, Appendix), the ratio of em- ployees per thousand population in- creased by only 8 per cent, and the worker-population ratio declined by 8 per cent (tables 13 and 14). The payroll of grocery store em- ployees increased by 147 per cent between 1948 and 1958 (table 13). De- [14] I I Oi O 73 CO > £ w CO (-1 O > 03 03 Oh *3 a s- 73 a 5 03 03 03 S3 >> 0 OO CD t-- ^H 00 00 OO lO O -Q 03 03 O Tt< CM -HH OS O CD CO i-H CO W t^ OS ^ N H 1IJ 5) H — I t-i CM CO o Si >> GO 05 08 Ph J © » >£) l<5 N W5 tD 13 O * O) * O h O i— I CO «~> CO ■>* las IC £ QO O CD CO IN CO* e ^ CO IM 115 ■* N ^H i-H CM CO o Q r« CO * CO 1(3 N O! i-l CM CO • -o G S3 cs O S- co ■ rt 3"ct3 .8 g 1 jo _, "o ft s 03 CM 1 g s • CO CO O lO • CO OS CM CM "o Ph -g i—i i—l 03 £ S 3 z ^_ .2 CO l« ffl H M if * o3 OO OO CM O CO 00 Tt< O ^H g •»*< OO C5 OO lO O0 Oi E-i s «3 (N CO* * OO ^i CO C3> CN CO Kl •* «5 K3 lO O O Cfi O) Oi OJ CJ) GO 6 g-n Eq 03 S P .2 ^T-,00 c-co ^ g += o o o o o OOUOU £co aPn 03 Q x gaaaaa c fcl 'o'o'o'o'o OOOOO .05 o ° ^3 cm ^2 CD > 03 -3 x" <5 a 1« .A CD Ph'C 73 Ph 2 i- O CD PHg 03 g 03 O P^O hS-3 §-a «« « a t-i co . ^a|^ o-o^a <*- ^ o ^°ca «^«c3 c fl * g 2 csU * H-K75O03- GO flation of these wages changes the in- crease to 114 per cent. 8 Deflated wages per employee increased by only 38 per cent. When the total deflated payroll is divided by the total civilian population of the state, the increase in cost of grocery store labor per consumer is 47 per cent. If it is assumed that the pro- prietors of unincorporated grocery stores received the same wage as all grocery store employees, then the total cost of grocery store workers per consumer in- creased by only 25 per cent in deflated dollars. Total payroll as a per cent of total sales in California increased in the last ten years from 7.2 per cent to 8.9 per cent, after reaching a low of 6.8 per cent in 1950 and 1951, and a high of 9.4 per cent in 1956. Again this rise was tem- pered by allowing for salaries of unin- corporated proprietors, but the cost of Table 14. Total Number of Workers and Sales per Worker in Grocery Stores in California Census Years, 1929-1958 Year Number of employees Active proprietors of unincorporated business Total number of workers* Deflated grocery store sales per workerf number thousand dollars 1929 25,488 32,885 52,801 68,533 81,884 14,085 14,085 19,043 16,674 15,023 39,573 46,970 71,844 85,207 96,907 26.2 1939 37.2 1948 40.5 1954 42.7 1958 45.0 Per cent change, 1948-1958 55 -21 35 * The number of employees plus the number of active proprietors of unincorporated businesses. t Deflated by U. S. Retail Food Price Index (1947-1949 = 100). Sources: Tables 3 and 13 and Appendix, table 5. Table 15. Employees and Workers per Grocery Store, California and the United States, 1948 and 1958 California United States Employees per Total workers* per store Employees per store Total workers* per store Year Store Firm with payroll average number 1948 1958 3.1 6.1 6.6 12.0 4.2 7.2 1.8 3.8 2.8 4 9 Per cent increase 07 82 71 111 75 * Includes owners. Sources: Compiled from tables 8, 14, and Appendix, table 5. H Deflated by the United States Retail Food Price Index; deflation by the United States Con- sumer Price Index results in an increase of 106 per cent during this period (table 13). [16] all grocery workers increased from 9.8 to 10.6 per cent of sales, a rise of 0.8 per cent in the last ten years. Labor costs per capita and payroll as a per cent of sales indicate that the cost of labor per unit of output in food re- tailing increased during the ten-year period, in spite of the increase in sales per worker. This finding was substan- tiated by the United States Department of Agriculture, which estimated a 67 per cent increase in labor costs per unit of output in the entire process of market- ing farm food products between 1948 and 1958. However, the increase in unit cost of labor may have been partially caused by additional labor services per unit of output. Employees per reporting unit. The employment data from United States De- partment of Commerce's County Busi- ness Patterns for 1946, 1947, 1948, 1951, 1953, and 1956 give the number of re- porting units stratified into employee size classes. 9 These data are useful in describing the growth rates of different sizes of firms, in showing the firm sizes with lower unit operating costs, and in measuring the concentration of owner- ship of firms. In California, the number of report- ing units each having between 100 and 499 employees increased more rapidly than did any other employee-size strati- fication between 1948 and 1956 (table 16). Since 1951 the 100-499 employee stratification has consisted of two classes. Between 1951 and 1956, the 100-249 employee class increased only 7 per cent, whereas the 250-499 class increased in number by 175 per cent. This latter class grew more in five years than any other size class in eight years. The 20-49 and 50-99 employee classes also increased substantially. There was a decrease in the number of reporting units having 3 employees or less. In contrast, the United States exhibited a closer approximation to a statistical "normal" curve in the increase in numbers of grocery reporting units, by employee-size classes (table 16) . However, this curve also was skewed to the right. The modal point on this curve was the 50-99 employee-size class. The California data for 1959 showed a continuation of the time trends already noted, with one exception. The largest increase since 1956 was in the 500-and- over size class rather than in the 250- 499 class. In fact, the latter class de- creased by one reporting unit while the former gained six, for an increase of 43 per cent in three years. The 20-49 class gained 20 per cent, so a bimodal pattern emerged; however, the 50-99 and 100- 249 classes, respectively, increased by 12 and 14 per cent. The bimodal industry growth pattern for California was consistent with the data presented on the increase in number of stores per firm. From 1948 to 1958, the number of firms in the chain store group of 2-3 stores increased by 126 per cent, compared with the 136 per cent increase in number of reporting units having 20-49 employees. These stratifi- cations were comparable because it was estimated that, on the average, there were 8 employees per grocery store in this size of chain in California in 1954. 10 The chains of 26-99 stores also showed rapid growth in the last ten years by increasing their total number of stores by 109 per cent. The average size of these chains was 32 stores each in 1948 and 42 stores each in 1958. These stores employed an average of 17 employees in 1954. Thus, they accounted for the large increase in the 250-499 employ- 9 This report is supplemented by unpublished 1959 data from the California State Department of Employment. 10 This estimate was based on the total payroll and number of establishments by size of chain. It assumes that the average wage paid to all grocery store employees in California was also paid to those employed by this size of chain. [17] > 1 02 ho S-l o o « 13 t- c 4 OS Tfl O (M © * * N £1 0O CM O cS lO -«'» OS d> OO !D N H OS CO 00 »-H CM CM t cm * CO (M CO « 3 t— "<*< 115 t- — OJ — CO CO CO CO 115 © ■* o o CM ^H -H 113 113 CO 41 ^ os O C N O N h OO ^ r^ o - CM CM O0 t^ -h * * W O) N lO *-* *> 73 a 3 0> CaO '8 3 CO CO ■»*< CO CM t 60 OS C s M 3 a O0 CO CO -h o — < Tt< «5 OS 00 T»< OS C U5 N M M O0 s-, a S3 o i-< ,-( CM CO CO 03 O o M a a 0> a Cp >> o o s 1 o f- a a 0) a a (-1 CD Oh w OS \ 3 00 O CM CM Tf< 3 O oo ■* os O fc fc •& 00 ■«*< 113 1*5 U5 CO CM CO CO 00 O0 OS o e> CM O 00 CO t- us OS CO Hi CO 00 A 1 N h O * M CM CM rt (M CM ,_, ID CO lO OO Ol mi a n a « CO CM CO CO o CM CM CM CM CM 1 a tO « N M N ^ M h rt 113 M U5 w m ^ !D N o I | ■>*| co M< t^ o 1 * U5 «3 ^i * ■<(( CO OS CO OO CO 00 00 0)00 00 > y e io « oo h oi o -»< o cm o os o CO — 1 1 CM OS CO lO O0 os os © © os s ' H co t— r— t^ co r- "5 — < O CO -h >— i CM CO CM CM -^ i • ' I -4 c 3 ^ H in a> »^ 03 co o- 03 115 lO OS O- ■ft. O N 00 H W !D O) -a J n oo ih m o ^j t * 115 113 U5 h <* Tfi IO «J ifl 115 __. Oj -l iH 5 J 3 ^ & CM CM CM CM CM CO o c 1« o «-• -< CM CO CO CM ^ CM l« lO O O CM CO CO CO ■ — 00 CO oo o ■* ■* U5 I t^ CO 00 O CO -^ 1^ CO •*f -*l t~ OO O o 03 B o Pi « OC O — O0 i-H OS - N M IM ■* ■* bt C c 03 CM 03 a O -*■>*< CM t— <— I — i — < cm cm co' 03 bO a s » o CM c 83 03 Ph CO l« CO »o c» iO iO CO CO t-- -* I o . cm CO - o co MN O 0O O O N O N N * 20.2 18.8 18.3 19.0 16.6 CM 7 • 1 t^ CM CM CM t^ ^h Oi CM CM 0> tci CM (C N S (O (O (O i 7 72.0 73.5 71.8 70.4 70.6 7 1 o o o o o o o o o o o d o o o o o o o c o o o o o o ©' o o o o o o o o o ► k • »- N California 1947 1948 1951 1953 1956 1959 CC cr OC cr >r oc — United States 1947 1948 1951 1953 1956 CC a OC cr P! 03 >£■ Is «-. 3 is - — 1 X i c S3 PI ;- EJ - - o X -3 §0' M» .PI O £ g-o +*X2 03 ^ 2 5-S >-< 03 Pi - 1* 03 • OS 03 03tC^ CO . - O* J) 03 CO oa & Sti - 8 « 'SO ment-size class between 1948 and 1956 and in the 500-and-over size class since 1956. Between 1956 and 1958, the chains of 51-99 stores increased in number from 1 to 3, and in stores from 98 to 212. In each of the cumulative size classi- fications, California had the highest pro- portion of large-size reporting units (table 17). The lead appeared comparatively the stronger in the 100-and-over employee- size group, but it was substantial in all classes. This measure of size of firm also shows that the retail grocery business was more concentrated in California than in the total United States, even though ownership concentration in the state declined from 1948 through 1958. Capital Requirements of Retail Grocery Firms Service-type businesses, such as retail grocery stores and commercial banks, generally operate with a much lower sales-asset ratio than firms merchandis- ing dry goods and hardware, manufac- turing firms, and petroleum and mining firms (The Fortune Directory, 1959). For example, the sales of the Great Atlantic & Pacific Tea Company were $5.1 billion in 1958 and total assets (owners and creditors) were $647 mil- lion. In contrast, General Motors had sales of $9.5 billion and assets of $7.3 billion. Safeway Stores, Incorporated, had sales of $2.2 billion and assets of $408 million, compared with the Texas Company (oil) sales of $2.3 billion and assets of $3.1 billion. Sears, Roebuck and Company had sales of $3.7 billion and assets of $2.0 billion. An examina- tion of the financial data of a number of firms reported in Dun and Bradstreet tends to confirm the foregoing generali- zation regarding sales-asset ratios. Like- wise a study of such records shows a lower investment by grocery chains in physical facilities and equipment, which apparently arises from differences in the Table 17. Cumulative Distribution of Reporting Units of Grocery Firms with Payrolls, California and the United States, 1956 Employee size class California United States per cent of total firms 500 and over 250 and over .2 .5 1.4 2.7 6.8 16.4 34.3 .1 .3 100 and over .8 1.8 4 9 12 8 29 4 Source: Compiled from table 16. kinds and amount of such facilities and more rentals by grocery firms. The average investment in buildings and equipment for new supermarkets (ex- clusive of parking lots and merchandise inventory) was estimated at $431,000 in 1958. This was an increase of 29 per cent over 1955 (table 9, Appendix). While an investment of $500,000 does not represent "big business" in the usual sense of the term, a supermarket is a sizable commercial venture compared with past standards for the retail grocery business. A further concentration of sales in the supermarket-type retail outlet suggests that the capital required for opening such stores and supermarket chains will ordinarily be obtained from the public sale of corporate securities or from un- distributed earnings supplemented by leasing arrangements. Such an arrange- ment spreads any risks among a large number of investors and also gives small investors an opportunity to provide capi- tal for a grocery business. In recent years there is no evidence of any short- age of capital for investment in well- organized chains and supermarkets, a condition that is related to an average net return on net worth in excess of 12 per cent per year after taxes (Fairchild Publishing Company, 1957 and 1959). [20] Relation of Size to Unit Cost Seeking optimum size. Manage- ment is continually seeking the combina- tion of production factors and/or size of store or firm that will minimize unit cost of the product under specific conditions. According to Bowring, Southworth, and Waugh (1960), "the combination will change as the prices of the productive factors change. For example, an increase in wages may be sufficient to justify the purchase of an additional piece of equip- ment. . . . Similarly, the prices of raw materials used in production may change, and one material can be substi- tuted for another." Or, the size of the firm's operation may be increased, the justification in each case arising when it may be possible to obtain constant or proportionately greater increases in out- put (total revenue) than the constant or proportionate changes in inputs (costs). This latter set of conditions would lower the unit cost of products and improve the profit position of the firm. The growth in the average size of grocery stores and firms which is dis- closed by the foregoing analysis of sales, employment, number of stores per firm, size of stores, and financial require- ments is one manifestation of manage- ment's belief that the most effective way to keep down or lower unit costs is to increase sales volume. This belief is per- fectlv tenable since most grocery stores and firms have been found to have labor and/or facilities that are not fully em- ployed. Undoubtedly, an absolute in- crease in sales volume would lower unit buying and selling costs by spreading operating costs over a larger volume of products. Since each firm is seeking to move into a more favorable economic position as rapidly as possible, it appears that there would be a gradual attrition of the least efficient firms by (1) closure, (2) merger with other firms to achieve some of the advantages of size, (3) adjust- ments in operating methods to bring costs and revenues into balance, or (4) an increase in sales which would better utilize the capacities of the least ef- ficient firms. In any event, the manage- ment of retail grocery firms recognizes the necessity of achieving greater op- erating efficiency in order to survive. The survival technique. Stigler has developed a very useful procedure for determining the optimum-sized plant or firm, particularly when the data for more accurate analyses are not available or are impossible to obtain because of the time or the costs involved (Stigler, 1958). He reasoned that the optimum size is the one that has best stood the test of time and competition. The con- cept, based on Darwin's principle of the survival of the fittest, is called the sur- vival technique. The technique involves classifying plants or firms in an industry by size, and calculating the share of business of each size group over time. If the share of business in a given size group falls, that group is considered relatively inefficient; if its share of busi- ness is maintained or increased, that size group is relatively efficient. Efficiency in this sense is defined from the standpoint of the owner of a firm and not neces- sarily from the standpoint of society. Thus, the efficiency of survivors may be due to monopoly power, as well as tech- nological efficiency. 11 However, social efficiency involves moral judgments which Stigler considers outside the realm of economics. A difficulty with the sur- vival technique, particularly when ap- plied to a growing industry, is that an optimum size may change over time. Time periods, therefore, should be kept relatively short and optimum size should be stated as a range rather than a point. Application of survival technique. Many of the data already presented can be used to determine the optimum size of grocery store and firm by the survival A relative increase in output is associated with improved work methods and/or equipment. [21] technique. Table 5 shows that between 1948 and 1958 grocery stores selling one million dollars or more annually had about a sixfold increase in dollar sales, that is, a rise from 11.9 to 45.4 per cent of total grocery store sales. The $300,000 to one million dollars group declined from 26.2 to 23.4 per cent, and the less-than-$50,000 to $300,000 sales group dropped from 61.9 to 31.2 per cent of total grocery store sales. During the same period the U. S. Retail Food Price Index advanced 20.3 per cent. Between 1954 and 1958 the grocery stores selling in excess of one million dollars annually increased their share of total sales from 32.5 to 45.4 per cent. These data and those for 1948-1958 seem to indicate that the optimum-sized store had an annual volume of more than $300,000 and possibly more than one million dollars in 1958. This rough estimate received further verification from industry economists at a seminar concerning the "Growth and Develop- ment of Food Retailing" sponsored by the Western Regional Marketing Tech- nical Committee of the eleven Western Agricultural Experiment Stations and held at the University of California, Los Angeles, in January 1960 (DeLoach, 1960). Table 7 sheds some light on the opti- mum grocery-firm size. Single-store firms lost an estimated 21 percentage points of their share of all grocery sales in California, against 12 points in the United States, between 1948 and 1958. Meanwhile, all of the chains gained in their share of sales, with the 2-3 and 4-10 store chains in California gaining most. All sizes of chains in the United States showed about proportionate gains. While the share of sales and the num- ber of stores per firm of the single-store firms declined between 1948 and 1958 (table 8), California stores with no pay- t roll declined in number by 36 per cent, while those with payrolls declined only 18 per cent. The 2-3 store chains in- creased most rapidly in number and the number of the largest chains (400 and more) declined. The optimum-sized grocery firms in California operated be- tween 2 and 99 stores each, with a sug- gestion that the 26-99 store range was gaining favor. Apparently the very- large-sized chains and the single-unit firms were proving less economical than the 2-99 store class. \ The reporting units in the size classes hiring between 8 and 499 employees in- creased as a proportion of the total grocery stores in the state (table 16) , while the 1-3 class decreased and the 4-7 and 500-and-more store classes re- mained about the same. The optimum- sized firm apparently hired between 8 and 499 employees per county between 1948 and 1959, with the upper half of this range the most likely to contain the i optimum-sized firms. Data are not available for comparing the net profits of firms in the various i size classes. Such a comparison would be quite meaningful, if it were possible. [22] ORGANIZATIONAL FORMS AND GROWTH PATTERNS 12 The preceding discussion of grocery store sales, employment, store and firm sizes, and capital requirements focuses at- tention on the demands for products and services in stores in different size and ownership classifications. The ensuing analysis deals with firms as productive units and with changes in their organiza- tion and structure. The objective is to describe and analyze the organizational forms and other managerial processes that are used to facilitate the mass buying and selling of groceries. Legal Form Aid in obtaining capital and management. The form of business organization chosen by management or owners is ordinarily determined by the amount of capital required for the busi- ness venture, the sources from which capital is to be obtained, and the desire to limit the risk assumed by the in- vestors. An assurance of continuity of the business firm is also needed to obtain capital and the type of personnel re- quired for its operation. With the growth in size of retail grocery firms, the amount of capital and the number of qualified employees needed to finance and operate such firms increases, though not always in proportion to the growth in size. It would appear, therefore, that there is a correlation between the size of the firm and the type of business or- ganization (table 18). As might be expected, the number of single proprietorships far outnumbers partnerships and corporations. Even though more than three-fourths of all grocery stores in the United States were single proprietorships, they accounted for less than one-third of the 1958 sales. In contrast, about two-thirds of the stores in California were single pro- prietorships and they accounted for slightly more than one-fifth of the 1958 sales. The proportion of total sales by partnerships and corporations was high in relation to the number of firms in Table 18. Grocery Store Establishments and Sales by Legal Form of Organization, California, 1958, and the United States, 1948 and 1958 United States California 1948 1958 1958 Form of organization Establish- ments* Sales Establish- ments* Sales Establish- ments* Sales per cent of total 77.9 14.4 I 7.7 42.2 17.2 | 40.6 77.3 12 10.5 2 29.5 12.5 57.7 0.3 64.8 20.5 14.6 0.1 21 4 17.8 60.5 Other 0.3 * In 1948 an organization needed only $500 in gross sales to qualify. Since 1954 this was raised to $2,500 in the case of no paid employment. Source: Compiled from U. S. Bureau of the Census, U. S. Census of Business— 19^8; The Grocery Trade (Trade Series, Bull. No. 3-1), and U. S. Census of Business: 1958; Retail Trade — Legal Form of Organization. ^According to Duddy and Revzan (1953), "the term 'structure' connotes something that has organization and dimension — shape, size, complexity — a design that is evolved for the purpose of performing a function. The function or functions it performs help in turn to influence its design. Function modifies structure." [23] Table 19. New Supermarkets Opened Each Year, 1953-1959* Year opened Total store area Selling area only 1953 1954 square feet 13,600 15,000 18,000 21,200 22,000 20,500 20,000 square feet 9,400 10,200 t 11,700 12,400 13,100 13,300 per cent of total store area 69 68 1955... t 1956 54 1957 1958 1959 56 64 66 those categories in both California and the United States. Between 1948 and 1954 the sales of both partnerships and corporations, as a proportion of total sales, increased at the expense of single proprietorships. In California, where a higher proportion of retail grocery stores were in the supermarket class and a part of chains, the proportion of partnerships and corporations was higher than for the United States as a whole (table 18). As is shown elsewhere in this analysis, the recent rate of attrition of unaffiliated Single-Store firms, if Continued, will vir- . * Since 1955 a supermarket has been defined as hav- o ' ' ing sales of $20,000 or more per week, completely depart- tUally eliminate all SUch firms in Cali- mentalized store and at least the grocery department J . _ fully self-service. In 1953 and 1954, the definition includ- fomia in the next fifteen years. ed all stores with annual sales of at least $500,000. t Data not available. Source: Super Market Institute, Facts About New Growth Pattern of Retail Firms Super Markets (Chicago: 500 N. Dearborn, annual 1953- ' 1959). Size of stores. In addition to sales volume which has already been men- Table 20. Items Carried by tioned, floor area and the number of Grocery Supermarkets different items handled by each outlet are useful physical measurements of size and partial indicators of investment and personnel requirements. Table 19 shows that the average selling area of new supermarkets built in 1953-59 in- creased, while the over-all area of the stores reached a peak in 1957 and de- clined in 1958 and 1959. This decline in over-all Qfnrp snapp armors tn Kp vp Source: Mueller, R. W., "1958 Food Store Sales Up in OVer-ail Store Space appears tO De re- 4 9 per ce nt-Reach $48,275 Billion," Progressive Grocer, lated to changes in the inventory policies Vo ^_ 3 3 8 - No - 4 (New York: 161 Sixth Avenue > A P ril 1959 >' of retail firms which have been shifting more of the warehousing function back In other words, the increase in average to their central warehouses or to their store size is associated with the efforts of wholesale suppliers. operators to obtain cost economies from The flood of new products offered to large volume operations. At least, the retailers by suppliers in recent years and growth in the number of large stores at the receptiveness of consumers to new a time when the number of small stores products have encouraged retailers is declining tends to support the premise gradually to increase the number of that high volume sales per firm and store items they carry (table 20) as one com- gives the operators an opportunity to petitive weapon in the struggle for cus- spread their fixed costs over a larger tomers. Furthermore, the increase in the number of items sold, thereby reducing number of items handled provides a unit costs of selling. It appears that the re- broader merchandise base for a store's tailers' bargaining position with their operations, assuming the margins and suppliers would be improved and that volumes of new products yield additional there would be more opportunities for net revenue that justifies the cost of pro- in-store mechanization and specializa- viding the shelf space allocated to them. tion of labor as stores expanded. Year Average number of items 1928 867 1946 3,000 1950 3,750 1955 4,723 1957 5,144 1958 5,600 [24 Table 21. Distribution of Size of Supermarkets, United States, by Size of Firm Classes, 1957 Square feet Number of stores per firm Under 5,000 5,000- 10,000 10,000- 15,000 15,000- 20,000 Over 20,000 per cent of total stores in size group 1 15.2 6.3 .8 1.5 .0 .2 53.3 40.0 16.4 6.0 2.7 10.8 20.1 23.1 21.3 31.8 20.2 35.2 6.8 12.7 25.4 28.8 30.5 36.5 4.6 2-3 17.9 4-10 36.1 11-25 31.9 26-100 46.6 101 and over 17.3 Source: Super Market Merchandising (New York: Super Market Pub. Co., 67 West 44th St., April 1957), Vol. 22, No. 4, p. 124. Food industry economists who par- ticipated in the seminar at the Univer- sity of California, Los Angeles, in Janu- ary 1960, claimed that a single-store firm with annual sales of around one million dollars is probably large enough to obtain a substantial share of the po- tential economies of large quantity orders (price discounts, and lower han- dling and receiving costs), particularly if it purchases through a cooperative or voluntary type buying group. It was their belief that quantity discounts and any lower per unit costs of handling merchandise are available to firms that can take a rolling unit (truckload, car- load, or lesser-sized rolling unit) in one order. For most merchandise require- ments, this size order was considered to be within reach of a store with a one million dollar volume. The industry economists also claimed that any cost reductions possible from direct buying, specification buying, and to some extent, vertical integration back to the process- ing level are within the reach of most single-unit firms buying through affili- ated groups. It was recognized, however, that procurement cost reductions that can be obtained from volume buying by affiliated groups can be lost through un- economical distribution from central warehouses to small stores affiliated with the buying group. 35 The economists ex- pressed a belief that a substantial part of the single-unit firms operating in 1958 did not have a sufficient sales volume to achieve the low-unit operating cost now required in the retail grocery business. There is also some indication that the actual physical limitation of store space might contribute to the inability to in- crease the number and kinds of items handled, thereby holding down sales (table 21). New stores. In addition to the dif- ferent possibilities for growth of the size of stores, a firm can achieve horizontal growth by building new stores, or by the acquisition of stores from other firms '"Affiliated stores are divided into two groups. (1) Retailer-owned cooperatives which are owned and operated by a group of member retail grocery firms. The central warehousing organiza- tion performs the major wholesaling function of buying for and distributing to retail members the quantity and kinds of merchandise desired by the members. Most cooperatives limit their buying to staple groceries. Some of the larger organizations offer other services to their members such as credit, joint advertising, and special management services. These are nonprofit-type associa- tions. (2) Voluntary ivholesaler-sponsored buying groups which are organized by grocery whole- salers. The wholesale firm contracts with individual retail firms to supply all or part of the retail firms' merchandise requirements and specified managerial services. These are profit -type firms. [25 either by purchase or merger (horizontal integration). Between 1953 and 1958, 154 food chains reported to the Federal Trade Commission that 71 per cent of their 1958 sales originated by stores owned and operated by them in 1953, 22 per cent by stores opened since 1953, and 7 per cent by stores acquired since 1953 (table 22). Medium-sized chains were the most active in opening and acquiring new stores. The effect on total sales volume of the firms acquiring stores was notice- able. Chains of 26-50 stores obtained more than one-third of their 1958 sales from new stores opened since 1953. Chains of 51-100 and 101-500 stores obtained slightly less than one-third of their sales from new stores opened since 1953, but they led all groups in the proportion of 1958 sales from newly ac- quired stores. Chains of 101-500 stores obtained nearly one-half of their 1958 sales from stores built or acquired since 1953, whereas the sales of the large chains (more than 500 stores) came more from stores owned prior to 1953. For all chains, new or replaced stores accounted for about three-fifths of the total sales increase of 56 per cent be- tween 1953 and 1958, the original stores accounted for one-fifth, and acquisitions, one-fifth (Federal Trade Commission, 1960) . In all sizes of chains, new stores contributed to the management goal of a larger sales volume. These statistics take on added signifi- cance when it is realized that the 1953- 1958 period was one of relatively rapid merger activity. Table 23 shows that, of all the food stores acquired by the 154 chains between 1949 and 1958, 81 per cent were acquired since 1953. Fewer than 83 of the total 154 chains reporting made acquisitions during this ten-year period. There is some question about the pro- portion of all food chain acquisitions represented by those reported by the Federal Trade Commission study. The National Association of Retail Grocers (1959) reported that 2,657 stores were acquired by 160 acquisitions in the 1955 to 1958 period. This was 76 per cent more acquired stores than was reported to the Commission, resulting from 34 per cent fewer acquisitions. However, most of this difference was accounted for by 740 stores acquired by George Wes- ton, Ltd., a Canadian concern not in the Commission study. Weston acquired a controlling interest in National Tea, which had 761 stores at the end of fiscal year 1956. National Tea in turn was re- ported to have acquired 178 stores, so double counting has occurred. By means of sampling, Nelson and Paul (1959) estimated a total of 730 Table 22. Distribution of 1958 Sales of 154 Food Chains, United States, by Size of Chain Number of stores in chain, December 31, 1958 Number of chains Stores in operation in 1953 New stores opened since 1953 Stores acquired since 1954 per cent of total 1958 firm sales Total 154 71 46 18 13 6 71.2 64.1 61.7 57.2 55.6 81.6 21.8 24.7 34.3 28.5 29.0 14.9 7 11-25 11 2 26-50 4 51-100 14 3 101-500 15 4 601 and over 3 5 Source: Compiled from Federal Trade Commission, Economic Inquiry into Food Marketing; Part I: Concentra- tion and Integration in Retailing (Washington: Govt. Print. Off., 1960), p. 105. [26] Table 23. Food Store Acquisitions by 154 Food Chains, United States, 1949-1958 Year of acquisition Acquiring companies Acquisi- tions Stores acquired Annual sales when acquired number thousand dollars 1949 6 5 10 5 11 17 23 36 34 38 83* 6 5 12 10 12 20 48 70 54 78 315 72 5 69 273 71 70 455 439 363 421 66,180 1950 3,889 1951 27,829 1952 70,800 1953 86,617 1954 60,580 1955 434,166 1956 397,325 1957 322,520 1958 450,003 Total 2,238 1,919,909 * Column does not add since some companies made acquisitions in more than one year. Source: Federal Trade Commission, Economic Inquiry into Food Marketing; Part I: Concentration and Integra- tion in Retailing (Washington: Govt. Print. Off., 1960), p. 128. food store acquisitions from 1952 through 1958, or more than double the Federal Trade Comission count. In ad- dition, they reported 422 disposals by food firms during this period. These acquisitions and disposals included re- tail outlets and processing facilities, so both horizontal and vertical expansions were included. Their sample was de- signed to cover the entire food retailing business, including small chains, whereas the Commission's data cover only the large chains. Merger activity, though not the major method of growth for the food industry from 1949 through 1958, was the pri- mary method for some firms and used only infrequently by others. The bulk of the mergers was centered in relatively few firms. Of the 2,238 stores acquired by the 154 chains between 1949 and 1958, 35 per cent was acquired by 2 chains, National Tea and Winn Dixie, and 66 per cent by 10 chains. In 1959, not a single acquisition was recorded for the same 10 large chains (Wall Street Journal, 1960). Atlantic and Pacific Tea Company did not acquire any stores by merger from 1926 through 1958, and Safeway acquired relatively few stores in recent years. The National Association of Retail Grocers ranked the Pacific Region second among regions in sales by ac- quired stores, with only 20 per cent of the total national acquisitions. However, the Pacific Region ranked fifth in num- ber of acquired stores, with 15 per cent of the total. Los Angeles was the primary center of acquisitions in the Pacific Region. Among the 13 chains listed as leaders in annual sales of acquired stores, 3 were in the Pacific Region, an area in which the growth in size of store outlets and firms has been high. Bases for growth of store and firm. Regardless of the method used to accomplish the growth of a store or a number of stores in a retail grocery firm, there are three main reasons for de- cisions to expand. These are (1) a de- sire to utilize more completely the labor, management, cash, credit, and/or plant facilities available to the firm; (2) a de- sire to spread or reduce risks; and (3) an opportunity to develop new and prof- itable market outlets. The desire to utilize fully the available resources of the firm can apply to any one or all factors of production. For ex- ample, a chain with a warehouse that is not completely utilized will often attempt to obtain more retail outlets to lower the unit cost of warehousing, other things [27 being equal. A chain with a processing plant that is not being fully utilized might seek to increase its retail outlets by ownership or to sell at wholesale prices to other retail firms. And fre- quently, the opportunity for quantity discounts and lower unit receiving and handling costs that are possible through large orders may furnish an additional incentive for expansion in the number of stores. The opportunity to spread advertis- ing and other promotional costs over a larger volume of sales arises when one newspaper advertisement or radio pro- gram would serve a multiunit firm with no more cost than one store. The pres- sure on management from ambitious em- ployees who are seeking advancement opportunities frequently encourages own- ers to expand their business in order to lower labor turnover. Likewise, an ac- cumulation of cash reserves or the pos- sibility of credit under very favorable conditions are incentives to manage- ment to find a profitable outlet for such resources. Since the experience of man- agers is largely in the retail food or re- lated wholesale and processing activities, it is only natural for them to explore any possibilities in that area before in- vesting in other business ventures. Chains can minimize store location risks by geographic distribution of their store outlets and by locating outlets in areas with different income levels and different sources of employment for their customers. Multiunit firms can also withstand a loss of business in one or more stores without seriously affecting the over-all net income of the firm. With population shifts becoming more impor- tant, especially in communities that de- pend on national defense activities for employment opportunities, the in-and-out movements of retail grocery stores has been of considerable importance to such operators. While there are location risks in pop- ulation shifts and growth, there are also opportunities. The managements of many firms contract with or employ market research analysts to appraise the sales potential for stores in specified lo- cations. When promising sites are dis- closed, chains normally have or can ob- tain the capital and qualified personnel to accomplish such an expansion. Fre- quently, the sites of interest to chains are located in new shopping centers, the own- ers of which usually control the number of each type of store admitted to the center. Such a "franchise" is often a highly valuable and sought after ar- rangement. The rapid increase of new shopping centers throughout the country has afforded chains an unusual oppor- tunity to expand their store numbers or to relocate store outlets. This has been particularly true in California. Limitation of store numbers. Even though there are many inducements for horizontal and vertical expansion of chains, overexpansion is possible and it has occurred. The main limitations on firm size are (1) increasing costs of communication as a firm expands, (2) increasing costs of managerial control, data reporting, and employee supervi- sion, (3) increasing legal costs associated with various government regulatory ac- tivities, and (4) promotion expenditures that are assumed to be necessary to main- tain favorable public relations. The first two are interrelated. They can often be mitigated by decentralization of decision making and improved management tech- niques. The third and fourth factors probably increase in some geometric pro- portion to the size of a firm. Vertical growth of grocery chains. Vertical growth of grocery chains refers to the ownership or control of food proc- essing or wholesaling activities, while * horizontal growth refers to an extension of the retailing function only. The only vertical growth considered in this section is that based on control of supply sources and functions; consideration of contrac- tual agreements is deferred. [28 Table 24. Food Manufacturing Establishments Operated by Food Chains, 1954 and 1958 Kind of establishment Number of chains reporting 1954 1958 Number of establishments 1954 1958 Meat-packing plants Prepared meats Poultry-dressing plants Dairy products, except milk Concentrated milks Fluid milk and other products Canning, preserving and freezing Bread and related products Confectionary and related products Miscellaneous food preparations and kindred products. Coffee, roasted or concentrated 12 3 33 13 22 16 126 7 20 38 299 14 5 42 13 27 18 147 8 18 39 Total* 52 63 340 * Some firms reported the same establishment in more than one category. Source: Federal Trade Commission, Economic Inquiry into Food Marketing; Part I: Concentration and Integra- tion in Retailing (Washington: Govt. Print. Off., 1960), p. 284. Between 1954 and 1958, the Federal Trade Commission reported an increase of 17 per cent in the number of food manufacturing establishments operated by food chains (table 24) . The total value of shipments from such establishments increased by 21 per cent, compared with an increase of 19 per cent in the total sales of food during this four-year period. Apparently retailers continued to purchase about the same proportion of products from their own establishments. Mueller and Garoian (1960) reported that in 1958 all chain- manufactured products sold through chain stores accounted for only 7.6 per cent of total grocery chain store sales, compared with 11 per cent in 1930. Thus, these data show a relative decrease in vertical integration in the last three decades. Probably the most complete tabulation available of grocery store chains owning establishments in other industries is pre- sented in table 25. A total of 2,077 establishments in other industries was owned by 219 gro- cery firms in 1954. These firms included many with establishments in more than one other industry. Counting each firm in each industry in which it had estab- lishments gives a total of 347 ; thus, there were 128 duplications of grocery firms owning establishments in more than one other industry. Only 443 of the 2,077 establishments were classified by indus- tries. Tables 24 and 25 are generally con- sistent except that table 24 excludes inte- gration into industries other than food manufacturing. Among food manufac- turing industries, the most common pro- duction activities of grocery chains were the processing of bakery products and dairy products. Chains have found con- ventional processing and wholesale mar- gins particularly wide in these activities as a result of relatively high selling and delivery costs. In some states, minimum legal retail prices on fresh milk probably prompted chains to move into dairy prod- ucts manufacture in order to profit from legally maintained margins. Table 25 indicates three other industries in which about as many grocery firms owned establishments: retail trades other than food, other food retailing, and food- product wholesaling. Mueller and Garoian (1961) noted that by 1957 the 4 largest grocery chains [29] Table 25. Grocery Store Firms with Establishments in Other Industries, by Industries, 1954 Number Number of estab- lishments Industries other than grocery of grocery firms in other industries owned by these firms 7 11 26 54 Canned and frozen food 9 18 Grain mill products 3 3 42 128 Other food products (retail) 19 70 6 * 1 * Lumber and furniture 2 * 1 * 2 * Chemicals, refining and rubber.. . 2 * Public warehouses 1 * Food product wholesalers 43 57 Wholesale trade, not food 24 * Assemblers of farm products 1 3 Food stores except groceries 41 102 Eating and drinking places 31 57 Retail trade, not food 63 * Service trade, not food 12 * Other industries 11 * Total enumerated 347t 443 219 2,077 * Data not available. t Some companies owning establishments in more than one industry were counted in each industry in which they had establishments. Source: Bright, I., Food Marketing Companies, Di- versification and Structure, U. S. Department of Agri- culture (Washington: Govt. Print. Off., 1958); pp. 6, 7, 19 and 20 (Marketing Research Report No. 291). This report is adapted from U. S. Bureau of the Census, Company Statistics (Washington: Govt. Print. Off., 1958) (Bull. CS-1). Table 26. Firms in Other Industries Owning Grocery Stores, by Industries, 1954 Industries other than grocery Meat packing Dairy products Canned and frozen food Grain mill products Sugar Other food products Mining Textiles Lumber and furniture Pulp, paper, and board Printing Chemicals, refining, and rubber. . . Milling Fabricated metal products Machinery, instruments, and parts Miscellaneous manufacturers Food products wholesalers Wholesale trade, not food Food stores except groceries Eating and drinking places Retail trade, not food Service trade, not food Company not specified Total enumerated. Other industries, not enumerated. Actual total Number of firms Number of grocery stores owned by these firms 3 47 10 2 10 59 37 13 3 4 8 18 2 2 13 2 50 39 30 21 288 11 278 950 450 1.400 * Data not available. Source: Bright, I., Food Marketing Companies, Di- versification and Structure, U. S. Department of Agri- culture (Washington: Govt. Print. Off., 1958), pp. 19-21 (Marketing Res. Rep. No. 291). These data are adapted from U. S. Bureau of the Censvis, Company Statistics (Washington: Govt. Print, Off., 1958) (Bull. CS-1). had integrated on the average into 10.5 of 17 important grocery manufacturing industries; the 4 next largest chains had integrated into 4.6 of these industries; and the 12 chains next in size had inte- grated into only 1.9 industries. They then noted that since 1942 these latter 12 firms had vertically integrated at a rela- tively faster rate than had the larger firms, which was commensurate with their comparative horizontal growth rates. Table 26 shows that 1,400 grocery stores were owned by firms classified in other industries in 1954. These stores comprise only one-half of 1 per cent of the total number of gro- cery stores in the United States. Of these 1,400 stores, 950 were classified by the name of the industries of their parent firms. Retail trades other than food owned the largest number of stores, and the degree of forward vertical integra- tion by food manufacturers and whole- salers was relatively small. Table 26 also indicates the number of other retail and nonfood firms which have entered gro- cery retailing. Vertical integration of grocery chains into wholesaling and processing is often [30] used (1) to assure a regular supply of a given quantity and quality of products, (2) to assure an opportunity to invest profitably in certain processing indus- tries, (3) to obtain any cost advantages arising from the elimination of whole- sale selling costs of suppliers, and (4) to avoid some of the impacts of minimum legal pricing. The ability to use vertical integration to acquire control of sources and the advantages gained from such an action often depend upon the horizontal size of the retail firm. When retailers find it necessary to resort to ownership or control of supply sources, the pricing system may be at fault or a monopolistic control may be affecting the conditions under which supplies are forthcoming. As chains have expanded horizontally and have intro- duced standardized merchandising and promotion practices, their supply re- quirements have been increasingly dif- ficult to fill on the open market. This encouraged large retail firms to resort to purchase on contracts and to specifica- tion buying of some commodities. Some processors apparently have been reluc- tant to sell to chains on the basis of buyer specifications or to pack for a buyer's label. This reluctance has been based on a belief that, if they sold un- branded merchandise to chains at price discounts, small independents, small chains, and independent supermarkets would discontinue orders for their ad- vertised brands (DeLoach, 1960). Dairy and bakery products industries, the two food industries that lead in food chain integration, have been good examples of high-profit potentials. Significant cost economies arise from volume deliveries of bread and milk to retailers. Because of the flat legal minimum-pricing pro- visions of milk laws in several states and/or the danger of granting varying quantity discounts to retailers under the Robinson-Patman Act, the safest and sometimes the only legal way for re- tailers to benefit from the pricing situa- tion is through integration into milk processing and sometimes into the bak- ing business. Except for the purchase of meat through packer-owned and -operated wholesale outlets, only a small proportion of the large chains seem to rely on whole- salers for their supplies of merchandise (table 27). One of the main reasons retailers give for direct buying from processors and growers is that it gives them more con- trol over their supply. This seems to be- come more important as their retail sales increase, creating a greater need for stocking uniform quality products and brands in their store outlets (Scott and Williams, 1959). In this respect, it is interesting to note that some large chains have decentralized their procurement activities for branded merchandise and have retained a central procurement office for products bought on a speci- fication basis. Absorption of the wholesaling func- tions of collection and dispersion into a retail organization does not eliminate the functions; however, it normally re- duces the number of selling transactions and title transfers that are required in moving products through traditional marketing channels. Unless these trans- action reductions are offset by inefficient operations within the retail firm (which is often possible), procurement costs Table 27. Grocery Chains Supplied by Wholesalers, 1958 Number of stores per chain Total number of stores Number that buy from wholesalers Per cent of total Total 2-3 28,500 5,700 1,750 1 , 650 2,000 17,400 8,325 4,500 1.250 775 750 1.050 29 79 4-5 6-10 11-25 26 and over 71 47 38 6 Source: Mueller. R. VV., "1958 Food Store Sales Up 1.9 per cent Reach $48,275 Billion," Progressivi < Vol. 38, No. 4 (New York: 161 Sixth Ave. April 1959) p. F-19. [31] Table 28. Sales of Grocery Wholesalers, United States, 1948 and 1958 Type of wholesaler 1948 sales 1958 sales Change 1948-1958 ■ thousand dollars 5,772 1,627 582 3,563 358 1,977 3,107 11,213 per cent of total sales 51.5 14.5 5.2 31.8 3.2 17.6 27.7 thousand dollars 8,665 4,063 2,176 2,425 664 3,802 7,120 per cent of total sales 42.7 20.0 10.7 12.0 3.3 18.8 35.2 100.0 per cent 50 150 Retailer-owned cooperatives . 274 -32 86 Meat and meat products 92 129 Total 100.0 20,251 81 Source: Compiled from Federal Trade Commission, Economic Inquiry into Food Marketing; Part I: Concentra- tion and Integration in Retailing (Washington: Govt. Print. Off., 1960), p. 203. The 1958 breakdowns of general-line grocery sales are estimates based on the Commission's survey data and the 1954 U. S. Census of Manufacturing. should be favorably affected. The in- dustry economists who participated in the Los Angeles meeting cited lower transaction and transfer costs as im- portant factors in the lower delivered costs to chains. These claims of lower costs and prices were questioned by rep- resentatives of brokers and some proc- essors who appeared before the Subcom- mittee of the Select Committee on Small Business of the House of Representatives in San Francisco and Denver in 1959. Group Buying Retailer-owned cooperative ware- houses. Between 1948 and 1958, the wholesale business done by the retailer- owned cooperative groups was the fast- est-growing segment of the food whole- saling business (table 28). Both the cooperative and voluntary types of chains grew rapidly while the remaining general-line grocery whole- salers lost sales. Nevertheless, the co- operatives still accounted for only a small part of the total wholesale food markets, transacting about one-half as much business as the voluntary chain wholesalers. Group buying through cooperatives has developed much more in the Pacific Coast states than elsewhere in the United States (table 29). Retailer-owned cooperatives in the Pacific Region sold 37 per cent of the total cooperative wholesale sales in the United States in 1948 and 32 per cent in 1958, according to the Federal Trade Commission. The three largest coopera- tives in California accounted for about one-fourth of the total United States sales of cooperatives in both 1948 and 1958. 14 These three cooperatives ranked first, second, and fifteenth in national whole- sale sales of cooperatives in 1958. A fourth cooperative in California, the San Francisco Grocery Company, had sales of about $15 million in 1958. The Com- mission also found that total cooperative sales in California in 1954 amounted to 54 per cent of the sales of all general-line wholesale sales, compared with 18 per cent for the United States. The increase in sales of the California cooperative wholesalers amounted to about two and one-half times in the ten- year period while the retail sales of their members increased nearly as much. This compares with an increase of 98 per cent in total retail sales of all grocery stores in California (table 3). The retail sales of the members of these cooperatives ac- 14 The number of cooperatives in California was reduced from five to four in July, 1957, when Sparton Grocers, Inc., merged with Certified Grocers of California, Inc. In referring to prior periods, the two organizations will be considered as one. [32] Table 29. Organization of National Retailer-Owned Grocers, Inc., 1958 Regional buying group Location Buying groups Retail members Wholesale sales Retail sales of members number million dollars Pacific Mercantile Co San Francisco Chicago New York 12 37* 36t 85 146 7,200 7,398 5,360 19,958 33,007 721 492 182 1,396 2,031 2,743 Central Retailer-Owned Grocers, Inc. (CROG) Eastern Division, NROG Total NROG 1,816 583 5,142 All United States groups reporting 6,939* NROG AS PER CENT OF UNITED STATES 58 61 69 * Data are for 32 of the 37 cooperatives, t Data are for 32 of the 36 cooperatives. j Data are for 128 of the 146 cooperatives. Sources: Compiled from Federal Trade Commission, Economic Inquiry into Food Marketing; Part I: Concentra- tion and Integration in Retailing (Washington: Govt. Print. Off., 1960), pp. 161, 172, 179, 197, and 201. counted for about 29 per cent of total grocery store sales in California during 1948. This was increased to about 48 per cent of the total in 1958, which com- pared with only 16 per cent for the United States. In spite of this rapid growth in sales, no new California co- operatives were formed from 1948 through 1958. The Federal Trade Commission's 1960 report shows that the three large cooper- atives were all among the 12 cooperative owners of Pacific Mercantile Company, San Francisco, California. The nine other cooperatives were scattered throughout the other western states and Hawaii, two of them in Washington and one in Oregon. These latter three were the only cooperatives located in those two states. The wholesale sales of the 12 amounted to over $700 million in 1958, about 70 per cent of which was accounted for by the three cooperatives in California. The 12 cooperative members of Pacific Mercantile had a total of 7,200 members, two-thirds of which (4,817) were mem- bers of the three large California as- sociations. Retail sales of members of the 12 cooperatives totaled about $2.8 billion in 1958. About $2.1 billion of the sales were made by the California co- operatives. The Pacific Mercantile Company and two other regional buying groups owned the National Retailer-Owned Grocers, Inc. (NROG), Chicago, Illinois. These two other groups are Central Retailer- Owned Grocers, Inc. (CROG), Chicago, Illinois; and Eastern Division National Retailer-Owned Grocers Cooperative, Inc., New York, New York. Pacific Mer- cantile was the largest of the three in terms of sales (table 29) . More than half of all the retailer-owned cooperatives in the United States are members of NROG. The three regional groups are non- profit corporations that provide advisory service and information to their members and do some buying for them. The buy- ing is only a fraction of their warehouse members' total volume and consists largely of National Retailer-Owned Gro- cers labeled goods. The regional groups maintain no warehouses and shipments are made directly to members. The bulk of the buying of the retailer-owned groups is done at the local warehouse level. The primary functions of the na- tional headquarters groups include li- censing the users of brand names and trademarks owned by them, and hand- ling insurance arrangements for their members. In 1958, the 4,817 members of the [33 three large California cooperatives in- cluded 62 that owned chains with four stores or more, for a total of 669 stores (table 30). It is not clear from the Federal Trade Commission report whether the 4,817 cooperative members represented 4,817 stores or whether each was a separate firm, since the cooperatives varied in reporting membership. If each member represented one store, then 40 per cent of all the grocery stores in the state were affiliated with one of these three coopera- tives. But if each member was a separate firm, the 4,817 members operated a minimum of 5,424 stores in 1958, 45 per cent of the total number of grocery stores in California. This conservative estimate, based on table 30, assumes that the 4,755 members reported as owning three stores or less owned only one store each. Cooperative wholesalers, in contrast to voluntary groups, make few sales to non- members. In 1958, both California and United States cooperatives made 99 per cent of their sales to their own members. However, the members did not make all of their purchases through the coopera- tives. The 1958 wholesale sales of $552 million of the California cooperatives amounted to $626 million in retail sales, allowing for a 20 per cent gross markup, according to the Federal Trade Com- mission. This estimate represented only 30 per cent of the estimated total retail sales of their members. Comparable per- centages for the United States were 34 and 35 per cent for 1948 and 1958, re- spectively. Thus the rapid sales gain during this period was a result of obtain- ing new members and the sales growth of these members, rather than of an in- creased proportion of purchases from the cooperatives. The Commission also reported that retail sales of the members of Certified, the largest cooperative group in Cali- fornia and in the United States, amounted to $1.4 billion in 1958. Only three corporate chains in the United States had sales exceeding this volume. Certified's sales were all concentrated in 12 counties of southern California, and one county each in Nevada, Arizona, and Hawaii. The retail sales of the mem- bers of Certified accounted for 35 per cent of the total food store sales of the counties in which they had members in 1954. This increased to 42 per cent in 1958. The members of United Grocers, San Francisco, accounted for 15 to 20 per cent of all food sales in the counties in which they had members in 1954, and 20 to 30 per cent in 1958. In 1958, Safeway had 10.4 per cent of the market in its operating area, Atlantic and Pa- cific Tea Company had 12.9 per cent, and Kroger had 11.0 per cent. The low percentages of total purchases from cooperative warehouses by member firms fail to disclose the actual concen- tration of purchasing power of some co- operatives. Certified had wholesale sales Table 30. Chain Store Members of California Retailer-Owned Cooperatives, 1958 Chains Stores Size of chain Total in Members of California cooperative Per cent of total Total in California Members of cooperative Per cent of total number of stores number 63 57 number 4-10 1 1 and over 73 28 46 16 408 1,315 267 402 65 31 Source: Compiled from Federal Trade Commission, Economic Inquiry into Food Marketing; Part I: Concentra- tion and Integration in Retailing (Washington: Govt. Print. Off., 1960), p. 166 and Appendix, table 6. [34] that accounted for $417 million in retail sales after allowing for markup. These sales would rank Certified about tenth in relation to national chains — about the size of Jewel Tea. This is equivalent to all of the sales of Thriftimart, Lucky Stores, and Mayfair Markets, the three largest corporate chains in California next to Safeway. The members of Certi- fied obtained only about 30 per cent of their total requirements from Certified. Discounting the 42 per cent of all food business in its operating area by this amount left 12.6 per cent, which was comparable to the average share of local markets served by the three largest na- tional corporate chains. However, 80 per cent of the members of Certified were estimated to be in Los Angeles County. Assuming that the members in Los An- geles County purchased a proportionate share of supplies from Certified, they accounted for $339 million in retail sales, allowing for retail markup. These sales accounted for 18 per cent of the $1.9 billion in total food store sales in Los Angeles County in 1958. Dry groceries were the most common type of commodity purchased by mem- bers from retailer-owned cooperatives (table 31). Produce and meat were not carried by a majority of the groups, but the pro- portion of groups handling these prod- ucts appeared to be increasing. Between 1948 and 1958, the frozen-food group was added by more cooperatives than any other commodity group. However, the proportion of all purchases made through cooperative wholesalers by their members remained at near one-third of their total requirements. In view of this, it is doubtful if commodity group cover- age increased to any significant extent during the last ten years. The operating expenses of the retailer- owned cooperatives were considerably lower per sales dollar than for other types of wholesale organizations. Table 32 shows that total operating expenses of the cooperatives amounted to only 4.4 per cent of sales, compared with 7.4 per cent for the voluntaries, and 7.5 per cent for all general-line grocery wholesalers. According to cooperative and chain store officials, these lower costs were due to the selective and limited product mix sold to members, the performance of fewer services, and the lower selling and inventory costs. As evidence of the latter, sales per establishment and per employee were higher, and inventories and payroll as per cent of sales were lower than for either of the voluntary groups or for all Table 31. Commodities Purchased Through Retailer- Owned Cooperative Groups, United States, 1948 and 1958 Commodity Number of cooperative groups purchasing commodity Per cent of total cooperative groups purchasing commodity 1948 1958 1948 1958 130 61 11 34 27 15 142 103 84 64 42 28 100 47 8 26 21 12 92 72 58 44 29 19 Total coopei NATIVE GROUPS 130 144 Source: Federal Trade Commission, Economic Inquiry into Food Marketing; Part I: Concentration and Integra- tion in Retailing (Washington: Govt. Print. Off., I960), p. 167. [35] Table 32. Establishments, Sales, and Expenses of General-Line Grocery Wholesalers, 1954 Establish- ments Sales Per cent of sales to Sales Type of wholesaler Inven- tories Operating expenses* Payroll Per employee Per estab- lishment number 3,320 574 193 291 2,262 million dollars 7,354 2,464 1,298 140 3,452 per cent thousand dollars General-line grocery 7.4 6.7 5.8 8.2 7.6 7.5 7.4 4.4 4.2 8.9 4.4 4.5 2.7 2.4 5.1 88.8 95.5 153.8 156.0 72.4 2,214 4,292 Retailer-owned cooperative group Cash-and-carry depots. . . Other general-line firms.. 6,726 481 1,526 * Including payroll. Sources: U. S. Bureau of the Census, U. S. Census of Business: (Washington: Govt. Print. Off., 1957), Vol. Ill, p. 1-4. 1954; Wholesale Trade — Summary Statistics general-line wholesalers. The costs of the cooperatives were about in line with those of cash-and-carry food depots. The retailer-owned cooperatives have some nationally advertised private labels, and a few of the large cooperatives have integrated into food processing. The Federal Trade Commission found only seven cooperatives integrated into food processing. These seven owned a total of nine manufacturing plants that had total shipments of $13 million in 1958. Cooperative officials usually gave four main reasons for the lack of integration into food manufacturing. These were: (1) Cooperatives are not obligated to provide all of the merchandise required by member firms. This condition exists because the firms are under different ownership and each has its own mer- chandising policies with respect to prod- ucts and brands. Consequently, the co- operative is not under the same pressures as large chains to develop stable sources of supply for large quantities of uniform quality products. (2) The cooperative usually has a shortage of investment capital, a condition that is inherent in the cooperative-type organization, which has a legally limited right to accumulate reserves. (3) Member firms are reluctant to delegate power to their cooperative. (4) Membership turnover is high. In fact, most member contracts are short term and easily severed so that the co- operative cannot make long-range plans with any great certainty. For example, the recent loss of the large Fox Market (Los Angeles) account by Certified was sufficient to affect adversely the annual sales of Certified. The retailer-owned cooperatives were developed mainly to give single-store firms and small chains an opportunity to compete effectively with large chains in buying merchandise. It is clear from the Commission data that the total volume of products purchased by most of the cooperatives is equal to, if not in excess of, the volume of some competing chains. Under the provisions of the Robinson-Patman Act, therefore, it can be assumed that the cooperatives are entitled to the same quantity discounts as chains, provided the merchandise and services are identical. However, some managers claim they lack the resources and the decision-making power to take quick action when merchandise price advantages would accrue to the members as a result of timed purchases. Some co- operative managers also claim that much of the competitive advantage they achieve in procurement from suppliers is dis- sipated by high distribution costs to member stores or firms with low sales [36] Table 33. Wholesale Sales of Affiliated Groups in California, 1948, 1954 and 1958* Group 1948 1954 1958 Change, 1948-1958 million dollars per cent Cooperatives 170 t 36 350 133 507 522 238 327 200 All 4 Voluntaries 568 All 4 * Total sales, including sales to nonmembers. t Blanks indicate data not available. Sources: Estimated from Federal Trade Commission, Economic Inquiry into Food Marketing; Part I: Concentra- tion and Integration in Retailing (Washington: Govt. Print. Off., 1960), pp. 179 and 187; letter from Whitney, S. N., Director, Bureau of Economics, Federal Trade Commission, Washington, D.C., April 4, 1960. volume. Some of the cooperatives have changed their membership requirements to discourage firms with small sales volume from joining the cooperative; other have added service charges that discourage smaller members from con- tinuing their membership, which is another indication of the difficulties small retail stores and firms are having in their struggle to survive. The rapid growth of cooperative buy- ing during the past decade, and the fact that several strong regional chains have found it to their advantage to become affiliated with and to purchase through such organizations, reflects the competi- tive success of some of these cooperatives in the area of merchandise procurement. This success has been particularly notice- able in California. Voluntary groups. These whole- saler-sponsored voluntary groups were second only to the retailer-owned cooper- atives in the growth of wholesale sales between 1948 and 1958. Their sales in the United States increased by 150 per cent, compared to an average increase of 81 per cent for all wholesale food and 50 per cent for the entire general-line grocery group (table 28). The voluntary groups accounted for 47 per cent of the sales of the general-line grocery group and 20 per cent of total wholesale food in 1958, compared to 25 per cent and 11 per cent, respectively, for the retailer-owned co- operatives. Even though the voluntaries grew more slowly, their total sales were about double those of cooperatives. In California, voluntaries had smaller total annual sales but grew more rapidly than cooperatives (table 33). Volun- taries in California accounted for 5 per cent of United States total sales of volun- taries in 1948 and 11.2 per cent in 1958, which is much less than California's share of the total United States sales of cooperatives. According to the Federal Trade Com- mission, the four voluntaries in Cali- fornia in 1958 sponsored 3,176 stores and sold to 13,594 affiliated stores. 10 Sponsored stores purchased an average of $78,516 in supplies from their whole- sale sponsor. The retail sales volume of the sponsored stores was quite small; 80 per cent had annual sales of less than $375,000, 10 per cent had sales between $375,000 and one million dollars, and 10 per cent more than one million dol- lars. However, the sponsored stores were ir> Letter from S. N. Whitney, Director, Bureau of Economics, Federal Trade Commission, Washington, D. C, April 4, 1960. However, according to a letter from E. J. Kapun, Assistant Secretary, National-American Wholesale Grocers' Association, Inc., New York, March 2, 1960, they had six members in California that sponsored wholesale groups in 1959. [37] Table 34. Commodities Purchased Through Voluntary Groups, United States, 1948 and 1958 Commodity Dry groceries Nonfoods. Frozen foods. Meat Dairy items . . Produce Number of voluntary groups purchasing commodity 1948 150 84 39 13 30 33 1958 301 200 133 79 77 73 Per cent of total voluntary groups purchasing commodity 1948 20 1958 Total voluntary groups mi 330 Source: Federal Trade Commission, Economic Inquiry into Food Marketing; Part I: Concentration and Integra- tion in Retailing (Washington: Govt. Print. Off., 1960), p. 220. on an average larger than the other cus- tomers of these voluntaries; only 4 per cent exceeded one million dollars in an- nual sales. Of the four voluntary groups in California, the smallest and the only one affiliated with a national headquart- ers group, sponsored 50 stores; the larg- est sponsored about 1,125 stores. Two of the voluntary groups made acquisitions between 1948 and 1958; one acquired 11 wholesale facilities and one manufacturing plant; the other a warehouse unit. Thus, the rapid growth in sales shown in table 33 was in part attributable to acquisitions. Only one voluntary group reported ownership of manufacturing facilities to the Federal Trade Commission. It operated eight ice cream plants with sales totaling $418,000 in 1958. None of the four voluntaries owned any retail stores in 1958 ; however, one of the four was a sub- sidiary of Mayfair Markets, a retail gro- cery chain with 66 stores in 1958, 62 of which were located in California. Most voluntary groups sell dry gro- ceries; only a small proportion of them sell perishable foods to their members (table 34). The number of voluntary wholesalers offering meat increased most in the ten- year period. Except for frozen foods, there was little shift in the proportion offering other commodity groups. This pattern of commodity coverage was quite similar to that of the cooperative groups; however, a somewhat larger share of the cooperatives offers nonfoods, frozen foods, dairy items, and produce. Appar- ently both types of affiliated groups find their greatest advantage in dry groceries. Table 28 shows that sales of specialty- line and fish wholesalers increased 129 per cent between 1948 and 1958 ; they do not appear to have lost sales to the af- filiated groups. The three voluntary groups in Cali- fornia that were in business for the en- tire ten years increased the share of their total business going to sponsored stores from 75 per cent of the total in 1948 to 85 per cent in 1958. This was substantially higher than the United States average of 69 per cent for 150 voluntaries in 1958, but it was lower than the 99 per cent of sales going to members of the three large cooperatives in California. Only 52 per cent of the sales of the fourth voluntary group in California was made to sponsored stores. The 3,176 stores sponsored by the voluntary groups and the minimum 4,817 stores that were members of cooperative groups accounted for 66 per cent of the [38] total number of grocery stores in the state in 1958. Some of these voluntary stores belonged to chains but a much smaller share of corporate chain stores were affiliated with voluntary groups than was true of the independents. As a result, more than two-thirds of the inde- pendent grocery stores were members of cooperative or voluntary affiliated groups. The growth of the voluntaries in Cali- fornia is indicative of their advantages to independent store operators. Assured of volume outlets by contract, voluntary wholesalers are able to buy in large quantities and receive price discounts. They also have made progress in spread- ing advertising and some managerial service costs. Like the cooperatives, voluntaries have had difficulty holding member stores under contract. But the voluntaries would appear to possess a greater potential for vertical integration because of their central ownership. It appears that both the voluntary and retailer-owned cooperative groups have been quite effective in getting the maxi- mum quantity discounts on merchandise. Up to the point of distribution to retail outlets, they seem to be competitive with the chains in this respect. The advantages that chains possess appear to lie in rou- tinized merchandising policies, central- ized decision making, and certain ad- vantages of size, geographical distribu- tion, and ability to obtain capital. RELATION OF OPERATING POLICIES TO PROCUREMENT In response to rising production prices and to changes and anticipated changes in consumer demands, food retailers have altered their merchandising policies and practices. Innovating firms have been rewarded with relatively high profits. Firms resisting these changes have lost profits and in many cases have discontinued business. As a result, most of the industry has progressively adopted the new ways of doing business, either by accepting the innovations or develop- ing other new methods. Merchandising Policies Some of the new developments in mer- chandising policies and practices have had direct and indirect effects upon pro- curement policies and practices. Changes in merchandising techniques, innovation in the form of firm organization, larger stores and firms, and new developments in capital markets have all contributed to changes in the organization and finan- cial policies of retail grocery firms. New combinations and larger aggre- gates of resources have required that in- ternal management controls be altered to maintain efficient communication within the firm. All of these policy changes have had an indirect effect on procurement practices. Merchandising policy, even though comprising only one aspect of the total entrepreneurial function, reflects the basic objectives of the management of a firm. These objectives can be placed in categories only in broad terms, such as maximum profit, output, or growth rates. Many examples can be pointed to, ex post facto, as indications of shifts in underlying objectives of a firm that were expressed in mechandising policies. These in turn led to radical shifts in per- formance, including procurement. Never- theless, merchandising policy itself is difficult to quantify. Shifts in manage- ment personnel within a firm often re- flect policy changes. Over very short pe- riods of time the net income of a firm is frequently altered considerably by changes in policy, even though the struc- [39 ture of the firm and the institutions which surround it may remain unaltered. Pricing policy. Kaplan, Dirlam, and Lanzillotti in their recent book, Pricing in Big Business (1958), suggest five distinguishable objectives in company pricing policy. They are (1) achieving a target return on investment, (2) sta- bilizing prices and margin, (3) main- taining or improving market position, (4) meeting or following competition, and (5) achieving product differentia- tion. Kaplan's analysis was based on pub- lished reports and personal interviews with top management of each of the firms concerned. He admitted that many of the firms were reluctant to think of a price policy apart from the context of general company policy; thus, his classi- fications were determined somewhat arbitrarily by observation. These classi- fications probably would be more rele- vant to a classification of merchandising policy as a whole rather than pricing policy alone. Nevertheless, the fact that Kaplan was able to classify firms as to policy objectives suggests that differ- ences in pricing policy are observable and lead to differences in procurement policies. The difference between the wholesale and retail price is the gross retail mar- gin. This margin must be sufficient to enable a retailer to pay for all the neces- sary costs of production, transfer of own- ership, service to consumers, and in the long run, to pay a competitive return on investment. If expansion of the industry is needed, profits must be adequate to bring new risk capital into the industry. In multiple product firms, such as those in the food retailing industry, the goal is an aggregate gross margin for all products. Pricing policy must be con- sistent with a given aggregate gross mar- gin that is sufficient to cover costs, but it is meaningful only in terms of margins applied to individual commodities and groups of commodities. One conceivable general pricing policy, and the one generally thought to exist in retailing, is the addition of a fixed per- centage margin to the purchase price of goods. However, in food retailing, a vari- able percentage margin is commonly added to the purchase price of goods. ,rt The size of this margin appears to vary, by commodity groups, inversely with the rate of turnover of the commodity. That is, slow-moving items have high percentage margins, while fast-moving items have low percentage margins. The policy of adding a variable per- centage margin to the price of goods, which is inverse to the rate of turnover, is consistent with marginal cost pricing. Slow-moving goods cost more to sell be- cause of the higher space-time units re- quired to sell them, as well as the slower turnover of capital in such products. The cost of shelf space is a fixed cost in total, but it may be a variable cost in terms of turnover. Because of the product competition for space in multiple product grocery stores, managers try to equalize dollar profits for commodity groups and for linear feet of shelf space by varying the markup or margin and the shelf space allocated to products. Since product turnover rates reflect relative consumer demands for alternative products, retail- ers' actions are consistent with economic theory and profit maximization. Mer- chandise turnover rates and pricing poli- cies of retailers, in turn, are reflected in their procurement policies by affecting the choice of products and the prices that can be paid for them in order to realize gross target returns. ia Conversations with industry price makers suggest that the margin is the result of a sub- traction of purchase from selling price. That is, selling prices are determined independently of purchase prices on the basis of competition and past experience. Therefore, margins are analyt- ically determinable only ex post facto. Many industry people distinguish between anticipated gross and realized gross margin. The first may be used as a goal in pricing. The latter is the margin actually received. [40] Table 35. Annual Turnover of Grocery Products Compared with Per Cent Margin on Sales Grocery product Annual turnover rate* Rank (low to high) 14 3 1 5 2 6 3 7 4 7 4 7 4 7 4 9 8 9 9 10 10 10 10 11 12 12 13 12 13 12 13 13 16 13 16 13 16 13 16 13 16 14 21 14 21 14 21 15 24 15 24 15 24 15 24 16 28 18 29 18 29 20 31 20 31 21 33 23 34 26 35 28 36 31 37 Per cent margin on sales Rank (high to low) All grocery products Diet foods Chinese foods Salt, seasonings and spices Pickles, olives and relishes Housewares Vegetables, dried Meat, canned Health and beauty aids Fruits, dried Syrups and molasses Household and laundry supplies Macaroni products, dry Jams, jellies and spreads Fish, canned Candy Paper products Baby foods Soaps and detergents Juices, canned Prepared foods, canned Beverages Fruit, canned Desserts Vegetables, canned Cookies and crackers Baking and batter mixes Salad dressing and mayonnaise. Condiments and sauces Pet foods Milk, canned and dry Soups Snack and party foods Baking needs Shortening Breakfast foods Cigarettes and tobacco products Sugar 18.2 27.0 24.3 24.6 26.7 25.1 25.4 21.0 31.3 22.1 17.9 28.3 18.8 23.6 19.4 25.5 23.4 14.1 10.5 19.4 20.8 12.1 21.6 16.7 21.4 25.3 17.5 15.5 18.4 20.2 13.5 15.0 23.9 16.5 9.7 18.1 6.0 8.0 * Number of times merchandise turned over per year. Source: Progressive Grocer, Super Valu Study (New York: 161 Sixth Ave., 1959), pp. 1-32. In table 35 grocery products are classi- fied into 37 product groups. For each product group, the annual turnover rate and the percentage gross margin on sales have been computed. These two variables have been independently ranked. The turnover rates are ranked from the low- est, or slowest moving, to the highest; the margins have been ranked from the highest percentage to the lowest. A sta- tistically significant correlation of these two rankings was found, which tends to confirm the general price policy sug- gested. 17 17 The Spearman Rank Correlation Test was used to verify this conclusion statistically. This test is appropriate because (1) it is a nonparametric statistical test; that is, no assumption is necessary regarding the distribution of the sample points; and (2) it does not specify any particu- lar form of relation between the two ranks, which is appropriate because the relation is not ex- [41] However, such a conclusion is not warranted in comparing grocery prod- ucts as a group with produce, meat, baked goods, dairy products, and frozen food. This is to be expected because other factors such as perishability and the use of specialized equipment have a significant effect upon costs of selling some products, whereas selling and other retail handling costs of subgroups of grocery products are relatively homoge- neous. The Super Valu Study (Progres- sive Grocer, 1959) found a close rela- tion between the per cent of total dis- play space occupied, the per cent of total sales, and the per cent of total gross dollar margins (table 36). It also showed that the gross dollar margin tends to be related to turnover rates (table 35) . The study suggests that proper space alloca- tion would tend to equate these three percentage relationships, but some small deviations would be necessary because of other factors connected with product- mix policy. According to This Week Magazine (1960), one grocery store studied uses these three percentages in the allocation of its shelf space. This general pricing policy imposes restraints on the other aspects of mer- chandising policy — product mix, promo- tion, and volume control. On the other hand, prices may be adjusted in re- sponse to the other dimensions of mer- chandising policy. For example, price "specialing," which is characterized by weekend sales, is a form of promotion and a refinement of the general pricing policy. In fact, this policy helps explain the reason for the frequent selection of high-turnover items as specials. High turnover products can economically be sold at low margins because of their low space-time cost. In addition, these prod- ucts exert more pull on potential cus- * tomers than do low-turnover products. Price specials have implications for suppliers because of their effect upon the quantities of specialed products de- manded. An analysis of the Los Angeles beef market by Williams and Uvacek (1960) indicated rather pronounced weekly fluctuations in purchases of fresh beef by chains. Among individual chains, increases in purchases from one week to the next of more than 100 per cent and reductions of more than 50 per cent were not unusual. They found a * marked similarity among chains in their timing of increases and decreases in pur- chases. They attributed this similarity to a uniform recognition of changing price relationships and economic conditions and to the desire to meet competition with competition. Williams and Uvacek reported that several of the chain buyers interviewed in Los Angeles indicated that their sales volume fluctuated even more than did their purchases. They were able to ab- sorb some of the variations in sales by varying inventories. The chain buyers indicated that retail sales volume in any week could be changed by 50 per cent or more through price specials. The in- fluence of factors other than price spe- cials on volume moved was considered to be small. Williams and Uvacek concluded that because of the effect of price specials on pected to be linear. The statistical hypothesis to be tested is that there is no association between the two ranks. The test will determine the probability of this hypothesis being rejected. According to the data from table 35, this probability was found to be .0001; there is only one chance in 10,000 that these two ranks are not correlated. As a result, this statistical hypothesis of no as- sociation can be rejected with considerable confidence and the conclusion accepted that there is a significant inverse relation between the annual turnover rate and the percentage gross margin on groups of grocery products. The data computed from table 35 are: ?>! r' = l 6Srfi s Ho No association between ranks n(n 2 -\) r'VT^T : 7V(0,1) [42] 2di 2 = 2586 t' = .6935 4.161 = ^(0,1) p = .0001 product movement, the Los Angeles chains might have affected producer and wholesale prices at times. It appeared possible that within short periods of 2 or 3 weeks severe reductions in pur- chases by chains probably could in- fluence prices at the producer and whole- sale levels to some extent. However, doubt was expressed that the chains could influence longer-term prices be- cause of the perishability of beef and the size of the wholesale market. The Williams and Uvacek report stated that the ability of the chains to increase beef sales by using price specials is encour- aged by suppliers when supplies are large and it is desirable to move large quantities of products to improve the market. However, this ability can also be a disadvantage. When specials are placed on substitute meat products, such as chicken, the movement of beef may drop rather sharply. These repercussions are also felt in the wholesale and live markets, and they are often resented by both processors and producers. Product-mix policy. Policy with respect to product mix involves shelf- space allocation (table 36), inventory control, and the selection of products and brands. The relation of retail margins to turn- over rates and space allocation has al- ready been discussed. Other factors re- lated to the proper determination of space allocation are size and type of package, number and variety of items in a given product group, number of brands of products to be stocked, and frequency of restocking. Policy decisions regarding inventory relate to a choice among available meth- ods. The choice is influenced by tech- nological changes and the extent of inte- gration of wholesale and supplier func- tions into the retail firm. For example, General Foods has recently announced plans for a new nationwide food distri- bution system that will allow customers to reduce inventory levels about 25 per cent. Such centers could decrease the value of retailer-owned warehouses and increase the dependence upon store-door delivery. Store inventory levels can be maintained at any desired point by elec- tronic equipment which automatically records withdrawals and orders stock re- placements. Shelf-space allocation influences pro- curement owing to the effect of store displays on product movement. In turn, retail sales are reflected in the relative demands for products from suppliers. The value of display space is now recog- nized by the rental of specified areas of shelf space by suppliers. P. Lorillard Company, for example, has begun pay- ing supermarkets rentals of from $5 to $10 per month for eye-level shelf posi- tion. The selection of brands and products to stock is another policy variable which affects suppliers. In 1958 the average supermarket stocked about 5,600 dif- ferent items on its shelves, or nearly double that of 1946 (table 20). It is estimated that an average of 6,000 new products are submitted to retailers an- nually, from which about 500 are se- lected (Food Topics, 19596). But for every new item accepted, many chains are forced to drop an item because of the lack of shelf space (This Week Maga- zine, I960) . Thus, pressure develops to enlarge store size, even though sales may not be increasing. Grocery Manu- facturers Association estimated that about two-thirds of today's grocery sales are in products that are new or basically improved since 1946 (This Week Maga- zine, 1960). These new products are most common in the following product groups, in the order mentioned: soaps and detergents, cake mixes, frozen foods, health and beauty aids, and canned fruits, vegetables and juices. Many of them are merely old products in new packages or in greater size and color variety. Many represent convenience fea- tures not available previously. [43 Table 36. Grocery Products' Share of Display Space Compared with Per Cent of Total Grocery Sales and Dollar Margins Grocery product Per cent of grocery linear shelf feet Per cent of total grocery- Sales Margin All grocery products Household and laundry supplies Vegetables, canned Candy Beverages Cookies and crackers Paper products Fruit, canned Soaps and detergents Housewares Health and beauty aids Baby foods Cigarettes and tobacco products. Baking and batter mixes Juices, canned Jams, jellies and spreads Breakfast foods Baking needs Condiments and sauces Snacks and party foods Pickles, olives and relish Soup, canned and dehydrated. . . Pet foods Fish, canned Salt, seasonings and spices Salad dressing and mayonnaise. Vegetables, dried Diet foods Macaroni products, dry Syrups and molasses Desserts Prepared foods, canned Sugar Fruit, dried Pet supplies Milk, canned and dry Chinese foods Meat, canned Shortenings Toys Miscellaneous 100.0 8.2 6.7 6.5 6.2 5.5 4.9 4.5 3.9 3.6 3.5 2.9 2.8 2.7 2.6 2.6 2.4 2.2 2.2 2.1 2.1 1.9 1.7 1.5 1.3 1.3 1.3 1.2 1.1 1.0 1.0 .9 .9 .9 .9 .8 .7 .7 .6 .4 1.4 100.0 5.5 5.0 4.0 12.1 4.7 4.6 3.9 4.3 1.6 4.1 2.1 10.8 2.9 1.8 2.2 3.1 3.1 1.2 2.2 1.2 3.0 1.4 2.4 .8 .8 .5 .3 .8 .5 1.2 .9 2.2 .7 .1 .8 .3 .7 1.4 .3 .3 100.0 6.2 5.3 8.0 6.6 5.8 4.6 2.5 2.2 7.0 1 3 2 2 2 3 3 1.1 2.8 1.7 2.5 1.6 2.5 1.1 1.2 .5 1.1 1.0 1.0 Source: Progressive Grocer, Super Valu Study (New York: 161 Sixth Ave., 1959), p. 54. The influence of this proliferation of products on suppliers is difficult to assess, a priori. Most of them are developed by old suppliers and are used as competi- tive devices in the suppliers' battle for retail shelf space. The over-all effect upon agricultural producers is probably slight because the raw products remain unchanged in most cases. Even so, de- mand might be strengthened to some ex- tent because of the promotional ad- vantages inherent in new products. More important, however, is that demand may be altered among substitute products as new features are incorporated in new products. [44 Selection of brands and products in- fluences the extent and nature of vertical integration. Private-label merchandise can either be contracted for on the basis of specifications or supplied by subsidi- ary plants, depending on prices, financial policies, and the availability of whole- sale suppliers. Suppliers of proprietary-label goods often react unfavorably to a private- label policy because they do not wish to become wholesale suppliers of specifica- tion merchandise and run the risk of selling exclusively on a price basis. They wish to protect vested interest in their respective labels and maintain their markets in small independents and supermarkets that are the principal out- lets for national brands. They often pre- fer to increase their expenditures on pro- motion and a proliferation of differenti- ated products. If consumers can be sold on the merits of such new products, then retailers are forced to carry them, at least until such time as they can be imitated. This type of competition is a big factor in the flow of new products. It is also a part of the battle for shelf space now being waged among whole- sale suppliers and integrated retailers. Apparently the sales gains of private label goods (controlled and minor brands) compared with major adver- tised brands is leveling off. A. C. Nielsen Company reported that in 1951, 25.5 per cent of sales of 39 basic food product groups were accounted for by private labels. The percentage declined to 24.1 in 1955 and increased to 25.6 in 1958 for these 39 food groups. The number of private labels doubled in the last five years, but apparently the private label business, in total, is growing at only about the same rate as the entire food business. The Nielsen data obscure the cross-cur- rents among and within some commodity groups. For example, Market Research Corporation of America found that pri- vate label business increased from 38 per cent of the total volume of frozen vegetables in 1955 to 53 per cent in 1958; instant coffee increased from 12 to 31 per cent of the total in the same period {Food Topics, 1959a) . Thus. while the over-all trend appears to have stabilized, significant changes are oc- curring in individual product groups, with concurrent shifts in the methods of procurement, especially through the inte- gration of chains into the production of frozen foods and coffee. The importance of product and brand selection as a dimension of managerial policy making and its direct influence upon procurement policies and practices were set forth by Robert A. Magowan, president of Safeway Stores. According to Food Topics (19596), he stated that, since he assumed the presidency in 1955, 210 different products were reduced to 71. In canned goods an original 40 brand names were reduced to 6. This consoli- dation was accompanied by a decentrali- zation in buying which reduced the num- ber of supply divisions from 14 to 7 and the number of manufacturing, process- ing, and buying companies from 50 to 29. Volume control. Volume control is closely related to product-mix policy. It is concerned with the total quantity of goods sold rather than the combination of products. It has affected procurement indirectly by altering financial and ex- pansion policies — a determination of the number and size of stores, the services to be provided, and the number and amount of vertically integrated functions to be incorporated into the retail firm. More directly, volume control affects the use of existing facilities. The purpose of volume control is to increase total net income by manipu- lating the supply of products or services to influence prices. If a seller is to bene- fit from such manipulation, three condi- tions must be present: (1) demand must be inelastic (less than one in absolute numbers), (2) entry into the market must be controlled, and (3) collusion [45 among existing firms must be feasible and to their mutual advantage. The price elasticity of demand for all food at retail has been found to be much less than one, absolutely. Estimates vary somewhat, but the average is usually near the range of -.3 to -.4 suggested by Fox (1953). However, this average is a composite of commodities with price elasticities mostly in a range of -.2 to -1.0. Thus, there is an aggregation prob- lem in speaking of the elasticity of de- mand for all food at retail. However, au- thorities generally agree that the average is well below one, in absolute numbers, thereby fulfilling one of the conditions for profitable volume control. Established multiunit grocery firms usually face different market entry problems from those faced by new firms. The latter need to establish their supply sources — a relatively minor problem for grocery firms with adequate capital, credit, and reputable management. Both new and established firms seeking to open stores in new or different com- munities must face up to the competitive environment in a proposed location. The risks of entry for an established multi- unit grocery firm are less critical to the over-all performance of such a firm than they would be for a single-unit firm whose survival depends on the success of one retail outlet only. A few of the problems of entry are discussed below. Even though there may be no legal or institutional restraints on opening a new store in any community, this does not obviate the competitive problems con- fronting the management of a new store. In communities where the number of consumers is expanding, a new store might find a place for its services with- out seriously "overstoring" an area. In other words, the rate of expansion in the number and/or size of retail stores might correspond to the growth rate of the community. "Overstoring" may be vitally important in established com- munities with static populations. Com- petitive entry under this latter condition often disrupts the customer-sales balance among existing markets causing some stores to quit business or operate with higher unit costs, or lower wages for owner-operators, or lower returns to capital. Unless it is eliminated by com- petition, "overstoring" could increase the costs of marketing, with a resulting effect on retail prices and/or retail profits. Chains often choose to buy and mod- ernize existing stores rather than build or buy new stores in new locations. Firms without an established sales record are reported to have difficulty renting space in shopping centers. Some of the testimony before the Senate Select Com- mittee on Small Business supported this claim of some discrimination in favor of multiunit firms over lesser-known or unknown independents in the selection of shopping center tenants (U. S. Con- gress, 1959). Since rentals are usually based on sales gross, the attitude of shopping-center owners in favoring proven management is a rational one. In view of the geographic dispersion of the retail grocery industry and the relative abundance of most food items, it is doubtful if entry is restricted in any way by the inability of retail firms to buy supplies of merchandise. Affiliated buying groups apparently are competing effectively with corporate chains, judg- ing from their relative growth. Member- ship requirements for joining buying organizations are usually quite reason- able, so affiliated independents can com- pete effectively for merchandise with their large corporate chain competitors. 18 Bain (1959) states that "the condi- 18 Of 43 retailer-owned cooperatives reporting their membership requirements to the Federal Trade Commission, 9 specified stock purchase or deposit of less than $1,000, 16 specified stock purchase or deposit in excess of $1,000 and in 2 cases as high as $6,000, 14 specified stock pur- chase or deposil of unspecified value, and 4 had only a minimum purchase requirement. [46] tion of entry to any industry is measured as the percentage excess of the maximum entry-forestalling price over minimal or competitive average costs." A quantitative measurement of the effect on prices of restricted entry is im- possible because neither the price level necessary to attract entry nor the mini- mum average total unit cost can be measured. But the size of any differ- ential between the two should be reflected in excess profits. Until profits can be studied more thoroughly, the best con- clusion regarding entry must be based on the structure of the market. A third requirement for profitable vol- ume control is probably the hardest to attain for this industry, except in a few local markets. Overt collusion among firms in any industry to control either prices or volume amounts to "restraint of trade" and is illegal. Tacit collusion to control volume is usually not feasible in the retail grocery trade because of the large number of competing firms in most markets and a lack of mutual ad- vantage in any volume-control policy. Small independents have nothing to gain by volume limitation, because their gross sales are already too small. Large super- markets were founded on precisely the opposite principle. Their competitive ad- vantage is based on the efficiency of a large sales volume, so any volume limita- tion would undercut their basis for sur- vival unless all firms followed the same policy and prices were adjusted accord- ingly. Except in quite isolated local markets, where collusion could exist without fear of legal action and where entry could be restricted, the retail grocery business does not appear to satisfy the basic re- quirements for profitable volume con- trol. On the contrary, freedom of entry, except for financial limitations, seems to characterize the industry. Advertising and promotion poli- cies. Corporate food retailers increased their total advertising expenditures from .5 million in 1947 to $167.4 million in 1956, a gain of 303 per cent (Lamb, 1960). This accounted for 11 per cent of the $398 million spent on all food advertising by corporations in 1947, and 17 per cent of the $976 million spent in 1956. Thus, corporate retailers in- creased their advertising expenditures faster than food processors and whole- salers during this period. There was a 70 per cent increase in the number of retail food corporations, against an in- crease of 25 per cent for wholesale food corporations and a decrease of 1 per cent for food manufacturing corpora- tions. Even if all retail firms, corporate and noncorporate, had been included in both years, it is probable that retailers would still have shown a relative in- crease in advertising expenditures. The effects of advertising and promo- tion that are relevant to this study re- volve around their effects upon the (1) total movement of product, (2) product mix, (3) fluctuations in total movement and product mix, (4) competition among retailers, and (5) competitive relation- ships among retailers and their suppliers. Within this frame of reference, several of the important methods of advertising and promotion are examined. Price specials were cited as an im- portant method of advertising and promoting, as well as an effective tool of pricing policy. Shelf-space allocation and display of product, together with in-store promotion activities, encouraged impulse buying, thereby affecting the commodity mix sold by retailers. A selec- tion of given products and brands deter- mines product mix and has promotional significance as well. Retailers often pro- mote their own brands because they want to build consumer loyalty to the retail firm. Manv retailers believe that shelf space should be used to build "firm loy- alty" rather than "brand loyalty" for nationally advertised brands. "Firm loy- alty" encourages "one-stop" shopping, establishing a locational advantage. [47] Cooperative advertising allowances are a common method of passing a share of the costs of retailers' advertising back to suppliers, according to a recent sur- vey by Food Topics (table 37). These allowances make up a large share of retailers' total advertising budget. The advertising expenditures found in the Food Topics survey are categorized in table 38. This study found that most wholesale suppliers were dissatisfied with cooperative advertising allowances. How- ever, they felt compelled to continue them. Advertising allowances have become an important element in the negotiations between buyers and sellers as one of the terms of sale. Another reason for keeping the allowances is the differential that exists between national and local ad- vertising rates. Suppliers usually pay the former, and retailers the latter, which are usually lower. As a result, retailers get more space for each dollar spent in newspaper advertising. Retailers rate newspapers as the most effective advertising medium. In one survey, 93 per cent of the chains rated newspapers as either excellent or satis- Table 37. Food Retailers Frequently Receiving Cooperative Advertising Allowances, Listed by Food Product Groups Table 38. Use of Food Advertising Expenditures Product groups Chains Affiliated groups per cent of total number Canned foods Cooking and salad oils .... Crackers and cookies Frozen foods Lard and shortening Macaroni products Paper products Soaps and detergents Starch, bluing, and bleaches 87 89 88 88 81 76 91 95 84 76 96 97 94 91 85 81 93 100 93 Tea 81 Use of expenditures 45 chains 69 affiliated groups per cent of sales Total 2.0 1.0 .4 .6 1.9 Trading stamps Cooperative advertising. Other 1.1 .6 .3 Soubce: Olsen, P. C, "Contract Terms Are Mis- understood: Specifics Needed," Food Topics, Vol. 14, No. II (New York: Food Publications, Inc., 708 Third Ave., Aug., 1959), p. 10. Source: Olsen, P. C, "Contract Terms Are Mis- understood: Specifics Needed," Food Topics, Vol. 14, No. 14 (New York: Food Publications, Inc., 708 Third Ave., Aug., 1959), p. 10. factory. Only 40 per cent gave equally high rating to television, 47 per cent to radio, and 45 per cent to circulars. The voluntary and cooperative chain group rankings concurred very closely with these percentages. It would appear, there- fore, that retail food advertising tends to be locally or regionally centered. Econ- omies (lower unit cost) in advertising appear to be an important cost factor within a trading area covered by a single newspaper. But the advantages of spread- ing costs often cited for national adver- tising media did not appear important to retail grocery firms. Even national chains advertised on a regional basis. Affiliated buying groups have recog- nized the possible lower unit costs of col- lective advertising. In 1958, 91 per cent of the voluntaries and 86 per cent of the cooperatives performed this service for their members, according to the Federal Trade Commission. The only service outranking advertising was the purchase of dry groceries. The total and regional size of affiliated groups substantiates the hypothesis that there are rather definite geographical limits on the ability of multiunit firms to spread advertising costs. Interviews with responsible food in- dustry leaders disclosed that lobbying for or against proposed legislation af- fecting the food industry has become an accepted promotional policy as well as [48 a legitimate business cost. Trade as- sociations of corporate, voluntary, and cooperative chains, and unaffiliated groups place great importance on main- taining a favorable political climate in Washington, D. C, and the various state capitals, and they maintain trade as- sociation representatives to perform such services. Lobbyists also attach great weight to administrative attitudes and interpretation of laws relating to the industry. Industry leaders maintain that the cost of regularly defending a com- pany against various kinds of antitrust actions has become an unnecessarily heavy burden on retail grocery and food packing firms. Internal Organization Policies Forms of organization. The legal forms of business organization were dis- cussed in the preceding chapter. Since the corporate form of business provides the only means of assuring continuity of the firm and limiting the liability of the owners to the amount of their invest- ment, this form became the preferred type of organization as retail grocery firms became larger. Purpose of internal organization. Organization is defined in various ways by different authorities in the field of management. Some consider it a process; others, a relationship. All agree that a precise definition is not possible with- out numerous qualifying assumptions. For this analysis, William R. Spriegel's (1960) statement is a usable working tool: "An organization is . . . the relation- ship between the various functions and factors. Within this relationship the process takes place as desired by admin- istrative management." The relations be- tween functions (services performed) and factors (resources used to perform services) may be changed by manage- ment through changing the flow of authority for decision making, varying the inputs of factors, using the factors (labor and capital) to perform the func- tions in different ways, and/or changing the functions. Essentially, that is what is done when management realigns or reorganizes the structural relations among the factors, for the purpose of increasing its output of goods or services and increasing the net returns to the firm. Centralized versus decentralized decision making. An effective internal organizational structure controls and utilizes the resources at its command in meeting its objectives. Decisions with important effects on all parts of an organ- ization must be centralized so that all factors bearing upon them can be con- sidered before reaching a conclusion. However, the costs of administration are often increased when this procedure is followed. Internal management control depends upon effective inventory control, accounting procedures, and the collec- tion and dispersion of other types of in- formation. The size of a system of man- agement controls increases as the size and complexity of the firm increases, and unless ways are found to lower the costs of such controls they can become deterrents to a firm's growth. Some in- dustries are doing this with the help of high-speed electronic computer systems. The food industry as yet has not made much progress in this direction but a large potential exists. Decentralization of decision making is another method used to lower the admin- istrative costs of expanding firms. This is a reasonable reaction to the increases in costs of collecting and disseminating information as firms grow in size and complexity. Many large retail food firms, including Atlantic and Pacific Tea Com- pany, Kroger, and Safeway, have adopted this policy. Such decentraliza- tion is often oriented by commodity and region, particularly in procurement. The decrease in concentration, ob- served in the case of the national chains, is contrary to the centralization of pro- curement taking place by means of the 49 affiliated buying groups. Apparently, some large chains have reached the point where the costs of centralization out- weigh the benefits. On the other hand, some affiliated groups and small- and medium-sized chains are still operating under a condition of decreasing unit costs as volume increases. Organizational policies regarding growth and expansion are closely related to and dependent on financial policies and the surrounding institutional frame- work. Only if sufficient capital or credit is available will expansion be possible. Institutional restrictions in the form of antitrust legislation frequently restrict expansion policies of large firms, but the Robinson-Patman Act appears to have encouraged vertical integration. Expansion policies are usually cen- tered around the desire to increase long- run profits and/or reduce risks based on assumed lower unit costs associated with volume buying and selling. They can be analyzed further by separating vertical and horizontal expansion. As already shown, horizontal expansion of stores was based on assumed lower unit costs of large-volume procurement and mer- chandising that are attainable in one establishment. The horizontal expansion of multistore firms centers around (1) a desire to utilize specified existing re- sources more completely, (2) a desire to reduce risk, and (3) an opportunity to develop new and profitable market areas. Vertical integration was encouraged by (1) a need to be assured of large quanti- ties of given qualities of products, (2) an opportunity to invest profitably in certain processing industries, and (3) an as- sumed lower unit product cost when sources of supply are owned or controlled by the retail firm. The methods of growth and expansion are policy matters. Some firms grow al- most exclusively by mergers or outright purchase of facilities while others rely primarily upon construction of new facilities. Important determinants are the objectives of management and the rates of growth desired. Some firms appear expansion-minded, while others are not. Other factors that can affect the rate and methods of expansion are (1) the size of the barrier to entry into a partic- ular market, (2) the need to acquire and keep management talent, (3) anti- trust and other legal regulations, (4) the financial reverses of the firm, (5) the activities of financial promoters, (6) the rate of growth of the total food market, and (7) the development of new shop- ping centers. Each of the seven factors appears to be important in some situations. The development of new shopping centers is becoming of significant importance in horizontal growth. In 1959, 47 per cent of all new supermarkets opened were in shopping centers. Chain Store Age (Kaylin, 1959) reported that 300 new stores were opened by food chains in shopping centers in 1957, 600 in 1958, and 900 were planned for 1959. These 1,800 new stores represent about half of the total number of grocery stores in operation in shopping centers. The in- fluence of various types of financing on expansion will be considered in the next section. Financial Policies Sources of capital. Large amounts of capital are required for the operation and expansion of retail food firms. The average size of investment in a super- market opened in 1958 was estimated at $431,000, plus the cost of the parking lot and merchandise inventory. This was an increase of 29 per cent in three years (table 8, Appendix). One of today's supermarkets is a sizable commercial venture in comparison with previous corner grocery stores. Likewise, a chain of large supermarkets is "big business" and has most of the advantages and dis- advantages that go with size. Retail grocery firms have several sources of capital: (1) retained earn- ings, (2) sale of corporate stock, (3) [50] issue of bonds or debentures, (4) loans from private investors, (5) loans from financial institutions such as banks and insurance companies, (6) leasing agree- ments, and (7) extension of credit by suppliers. Stocks, bonds, and debentures are used by corporate-type firms only. This gives such firms certain advantages in obtaining capital in the organized money markets. It is obvious, however, that any such disadvantage of unincor- porated firms arising solely from organi- zational form can be remedied by adopt- ing the corporate form of organization. This access to organized money markets, which well-managed corporate chains usually possess, appears to be a signifi- cant advantage to expansion-minded firms. Probably an important share of the economies that accrue to large chain organizations arises from their ability to finance expansion at lower interest rates than small firms, and to time their entry into new markets. Regardless of the size or form of organization of a prospective borrower, investors usually request the same infor- mation on a borrower's loan application. The questions concern (1) the firm's management record, which is a basis for appraising an applicant's past and poten- tial earning capacity, and (2) the type of collateral or other security for a loan. Hence, the form of organization and size of a retail firm may be of consider- able importance to investors in apprais- ing risks. Many retail grocery firms have ex- panded by means of retained earnings. Management and investors like this type of expansion because it expands manage- ment power and builds up stockholders' equity without subjecting the stockholder to income taxes on current distribution of earning. Expansion by using retained earnings has been feasible during the last twenty years because profits in the grocery busi- ness have been comparatively favorable. Profits of the large grocery chains have compared well with the profits of food manufacturers and other manufacturing industries. Thirty-three large food chains averaged, after taxes, earnings of 15.4 per cent on stockholders' investments be- tween 1948 and 1958. The 25 largest industrial firms in the nation earned 14.7 per cent, after taxes, on stock- holders' equity for the years 1955-1957, compared with 12.8 per cent for the 20 largest steel companies and 15.2 per cent for the 33 food chains (Federal Trade Commission, 1960; Mitchell, 1959). It is standard practice for many corporate firms to distribute about 50 or 60 per cent of earnings to stockholders. The remain- der is available for expansion or other uses that management deems necessary. Leasing of land, buildings, and equip- ment is not technically a source of credit, but it is an alternative method of obtain- ing the use of capital or resources. Leas- ing buildings and land has become a common practice; 71 per cent of all new supermarkets operated in leased build- ings in 1958 (table 8, Appendix) . The leasing of equipment such as display cases and mechanical equipment is still rather uncommon, but it is becoming more important. In 1957, 10 large food chains paid out $140 million in rentals (Gant, 1959 ). 19 Rental payments represented 1.11 per cent of total sales of these firms. These firms had an aggregate of only $259 million in long-term debt. If the assets represented by rental payments were all financed by long-term debt, the outstanding debt would rise by $1,400 million to a total of $1,659 million, as- suming a capitalization of 10 per cent." If this $1,400 million were added to 19 These payments include the rental of land, buildings, and equipment, but most rentals are believed to consist of only land and buildings. 20 A 10 per cent capitalization assumes rental payments equal to 10 per cent of original asset cost, the average remaining length of lease to be fifteen years, and interest at 5.5 per cent. [51 existing assets, total assets of these firms would increase by 68 per cent. Long- term debt would rise from 18 to 59 per cent of total capitalization. Therefore, leasing represents an important method of financing by the food chains. Open book credit extended by whole- sale suppliers is another source of much of the working capital for merchandise inventory. Historically, grocery stores have relied heavily on wholesale sup- pliers for inventory credit. The annual stock turnover varies considerably by products but averages about 14 times per year for dry grocery products, 75 times for produce, and 171 times for baked goods. This means that if credit from suppliers is extended for about 2 days on baked goods and 30 days on grocery products, suppliers would carry the en- tire financing cost of inventory. In fact, fast-moving items such as baked goods and milk can be counted on for a surplus of financing if terms run as long as a week, which is not uncommon. Credit terms are commonly offered by full-line wholesalers. Cash on delivery is demanded on purchases from members of affiliated groups, thereby contributing to their low-margin operation. However, a lack of credit keeps down the number of independent grocers buying through groups. It also helps explain why such a small proportion of total purchases of members is made through their groups. It is estimated that an additional $15,000 to $20,000 in working capital per store would be needed by affiliated members if they were to purchase all of their mer- chandise through their group organiza- tions. Lenient credit terms decrease the amount of working capital required by retailers but increase the amount re- quired by suppliers. Apparently any shift in the terms of credit is one indica- tion of change in the relative bargaining positions of buyers and sellers. In a market where administered prices pre- vail, the terms of credit provide an op- portunity to shade prices without affec- ting listed prices. THE INSTITUTIONAL ENVIRONMENT Merchandising, organizational and fi- nancial policies concerning procure- ment, or any other decision variables are made within the constraints of a given institutional framework. They are fre- quently of primary importance in setting restraints upon the direction and rates of growth of the food industry, its opera- ting characteristics, and the effects of this industry upon related industries. Three types of institutional forces are analyzed: (1) legal controls, regulations, and restrictions affecting the food indus- try, (2) the nature of the organization of the labor market facing this industry, and (3) the customs, mores, and ac- cepted goals of consumers and retailers. These institutional forces vary con- siderably in their effects upon procure- ment policies, practices, and costs. Some set only broad restrictions on the type of marketing agencies, legislative regula- tions, and management policies. But others, such as antitrust laws, are quite specific in setting restraints on particular actions and operating procedures. Insti- tutional forces can have a direct influ- ence upon price and the cost structures of inputs and the prices of products. For example, labor unions may affect the price of labor; resale price maintenance laws may affect retail prices. Legal Restrictions and Regulations There are many different objectives of legislation, and, inevitably, some of them are conflicting. The Sherman and Clayton Antitrust Acts are aimed at in- 52 creasing the intensity of competition. Some of their amendments — for ex- ample, the Robinson-Patman and Miller- Tydings Acts — are aimed at restriction of competition. These amendments are concerned with the protection of com- petitors at the expense of restricting competition, The objective has been to in- crease the ability of the small inde- pendent entrepreneurs to compete with their more efficient competitors. A simi- lar conflict in policy objectives exists with respect to agricultural legislation: efficient production is encouraged at the same time that inefficient producers are being subsidized. Some regulations, such as the various health inspections, have other primary objectives, but they exert important in- fluences on the nature of the structure and the policies and practices of various firms and industries. Other regulations are directed more specifically toward particular food processing industries, but they incidentally affect procurement practices of the retail food industry. Antitrust laws. The maintenance of competition is based, largely, on the in- terpretation of four fundamental anti- trust laws, namely: the Sherman Anti- trust Act of 1890, the Clayton Antitrust Act of 1914, the Federal Trade Com- mission Act of 1914, and the Packers and Stockyard Act of 1921. The stated objectives of these laws are to outlaw "restraints of trade" and "unfair meth- ods of competition." They were written in very general terms, particularly the Sherman Act. Therefore, court interpre- tations have significantly affected the legality of certain business policies and practices. Some of the amendments to the basic antitrust laws are probably more im- portant to the retail food industry than the original legislation, because several of them were initiated specifically to reg- ulate the retail grocery business. When the original legislation was passed, a good deal of attention was given to regu- lating the food processing industries; it was not until the 1930's that strong inter- est developed in control of the buying and selling practices of food chains. This interest led to the passage of many spe- cial state tax laws on chain stores, the Robinson-Patman Act in 1936, the "fair trade laws," and state "minimum markup" laws. Antichain store taxes and "fair trade" laws. At one time, 29 states had antichain store tax laws designed to in- crease the overhead costs of multiunit store operation, and thereby make it uneconomical for them to operate in competition with local merchants. The laws applied to all multiunit chains, in- cluding dry goods, drug, and food. The purpose of the "fair trade" laws enacted by 45 states was to prevent retailers from selling branded products below the re- tail listed price prescribed by the whole- saler or manufacturer marketing a branded product. Since contracts were made between the retail handler and the wholesale supplier for a right to buy and sell the branded item, such contracts were enforceable. Retailers who failed to agree to such contracts could not buy the partic- ular branded product from the whole- sale supplier. State "minimum markup" laws were instituted to prevent retailers from selling any product for less than cost plus a given percentage markup. "Minimum markup" laws are on the statute books in 28 states, but little effort is made in most instances to compel com- pliance. More than half the states that enacted antichain store taxes repealed their laws, and those that still have such legislation have no great enthusiasm for using their power of taxation in a wholly discrimina- tory manner. "Fair trade" laws remain on the statute books of many states: however, cooperative buying groups, dis- count houses, and nonfair-traded brands have forced most of the larger firms that supported resale price maintenance to abandon it. "Minimum markup" laws [53 have never been used to any great ex- tent by states having such legislation. The basic difficulty in using such laws to curtail price cutting on food is that of finding the exact cost price to a retailer. The Robinson-Patman Act. It ap- pears to the authors that the Robinson- Patman Act, an amendment to Section 2 of the Clayton Act, has been a far more important factor in changing mar- ket structure and practices than the types of legislation discussed in the preceding paragraphs. Its purpose was to curtail the unfair buying advantages that chain stores were alleged to possess. It forbade any price discrimination by a seller to any of his buyers, except those which could be justified on the basis of cost dif- ferences in supplying different buyers. In addition, it outlawed all discounts for brokerage services performed by buyers, regardless of cost differentials, and all advertising and other allowances that were not made to all competing buyers on "proportionately equal" terms. It re- quired that any differentials among buy- ers had to be explicitly shown. More- over, the burden of proof of cost dif- ferentials was placed on the defendant in case of legal action. The effects of the Robinson-Patman Act on the retail grocery industry have been rather extensive, but it has had only limited success in achieving its original purpose. Even though the Act was di- rected primarily at food stores, its ap- plication has been industry-wide. Chains have been able to side-step the law to some extent by integrating to their supply sources. Contractual arrange- ments with suppliers whereby the chain agreed to take the entire output of a given plant obviates any possible charge of discrimination among buyers. Selling private label merchandise packed ac- cording to a buyer's specifications mini- mizes charges of price discrimination. If all else fails, outright purchase or construction of suppliers' plants is pos- sible. An increase in the number of all three types of vertical integration ac- tions has been observed in the food in- dustry since passage of the Robinson- Patman Act. Another method of circumventing the purpose of the Robinson-Patman Act has been intensified bargaining on terms of the sale other than price. The possibili- ties for shading price have already been examined with respect to cooperative ad- vertising allowances and alterations in the terms of credit. The Federal Trade Commission has kept a close watch on advertising allowances and has indicated that suppliers' lack of proof of per- formance on the use of these allowances may be sufficient proof that they are merely price reductions in disguise. Other types of allowances offering the same opportunities include swell allow- ances, label allowances, freight allow- ances, and pickup allowances. The Robinson-Patman Act apparently did not significantly lower the propor- tion of business done by the food chains or substantially affect their profit posi- tion. One reason might be the relative advantage that some chains have had over many independents owing to more efficient merchandising operations. Sec- ond, the chains have been able to cir- cumvent the intent of the law by various methods of vertical integration. Third, the attitude toward administration of the law appears to have fluctuated a good deal; thus, legal delaying tactics were profitable. The Robinson-Patman Act seems to have been effective in reducing the pred- atory and exclusionary tactics sometimes used by large chains in earlier years. For example, Atlantic and Pacific Tea Com- pany in a consent decree signed in a United States district court in New York in 1954, agreed among other things not to run any of its divisions at an inten- tional loss, not to dictate to suppliers the prices at which they could sell to others, and not to accept any label or container allowances in excess of that offered to [54 other buyers. The Wall Street Journal of December 22, 1958, reported that in the view of some suppliers, Atlantic and Pacific Tea Company has been a changed company and it is living up to the spirit as well as the letter of the law. Antitrust actions against food firms. It is paradoxical that efforts to enforce the antitrust laws have been quite vigorous in the case of the food industry, which appears to have a lower level of concentration and collusive ac- tivity than most manufacturing indus- tries. The Wall Street Journal of May 5, 1960, reported that during 1959, for ex- ample, the Federal Trade Commission began more than 125 investigations of the food industry, of which 16 involved large food chains. One reason for this attitude toward the food industry is that it is relatively easy to detect a violation among food processors and distributors because of the large number of com- peting firms. A second reason is that the food industry is in close contact with large numbers of people, both as con- sumers and producers. Thus, actions of food firms and regulatory agencies of government are readily observed by large numbers of people. This appears to make the food industry a popular one for political debate and harassment. A third reason is that, although economic concentration is relatively low, the food industry is quite large in absolute terms. It contains a few firms that are very large and a great number of very small firms. The latter tend to emphasize any questionable actions of larger firms. Apparently, the antitrust laws have had an influence in stimulating integra- tion of retail food firms into wholesaling and processing operations. The hori- zontal growth (acquisition of more stores) of a few of the largest retail firms probably has been restricted by the threat of these antimonopoly laws. How- ever, diseconomies of size of the large chains have probably been a greater restraining factor than fear of violating antitrust legislation. The over-all effect of legal restraints on the horizontal growth among retail grocery firms has probably been slight, since most of the horizontal merger activity has taken place among medium- and small-sized chains, which usually have not been bothered by actions of the regulatory agencies. The high costs both of cooperating with the many legislative and quasi- judicial committees probing the indus- try for illegal behavior and of fighting antitrust litigation have become burden- some to firms that are regularly under fire from Federal agencies. Even favor- able rulings have proved costly because of the complexity of the legal struggle. As previously shown, large firms find it expedient to spend additional sizable sums for promotion and lobbying ac- tivities. These costs become part of the diseconomies of large-size firm operation. Taxes The total of business and income taxes on retail food firms increased from an average of 41 to 52 per cent of net earn- ings between 1948 and 1958. With tax rates at these levels, tax laws are of strategic importance in directing the op- eration and expansion policies of a firm. Whenever an opportunity for saving taxes is found, it is taken almost regard- less of the effects upon procurement of supplies. The growth methods of a firm are fre- quently dictated by the tax implications. For example, the carry-forward provi- sion of losses makes a firm that has been losing money a prime candidate for merger. Continual losses soon make a firm worth more as a part of a profitable operation than it is as an operating entity. Also, an increase in allowable depreciation rates on fixtures and equip- ment in supermarkets in recent years has allowed owners to modernize equip- ment and redecorate stores more fre- quently. The Internal Revenue Depart- [55 ment in recent years has recognized that obsolescence plays a large part in de- preciation and it has been more liberal in allowing a more rapid depreciation of buildings and equipment (Commer- cial Bulletin, 1960) . Regulation of Markets and Marketing The regulation of markets and mar- keting practices is of three types: (1) sanitation and health programs designed to protect the interests of consumers, (2) trading practices established to pro- tect buyers and sellers from unscrupulous traders, and (3) quality and grading regulations designed to promote orderly marketing. The objectives of all of these regulations have been to promote equit- able and efficient market conditions, to aid mass buying and selling, and to re- duce marketing costs. Sanitation and health inspection. Ever since 1906, when Congress passed the Food and Drug Act and the Meat Inspection Act, the government has been concerned with policing food purity be- fore it reaches consumers. The need for this regulation arises because the mod- ern food distribution system does not allow the final consumer to exercise con- trol over products in the production process. The effects of these inspection pro- grams upon procurement practices vary considerably by commodities because of the nature of the products and the scope of the enabling legislation. However, the inspection services have been designed not to interfere materially with the nor- mal course of trade. Procurement prac- tices have of necessity been altered to some extent to permit the inspection function to be performed. To the extent that these regulations have been effec- tive in preventing unfit food from reach- ing consumers, the entire food industry has benefited by the favorable influence upon consumer confidence and demand for products. Trading regulations. The purpose of trading regulations is to promote orderly and efficient marketing and to prevent unfair practices among traders in a given market by setting certain < ground rules on trading practices and policing their observance. Legislation of this type includes the Perishable Agri- cultural Commodities Act and the regula- tions governing trading on the organized commodity exchanges. These various regulations affect the precise nature of the procurement prac- tices that traders are allowed to use in purchasing commodities. The permitted behavior varies with the type of product and nature of the market. In general, these regulations attempt to improve the « efficiency of the markets for the various products without affecting the terms of trade. Only very general types of ac- ceptable trading practices can be regu- lated in unorganized markets. The trend toward direct buying by corporate chains and affiliated groups has intensified the problem of adequate regulation and supervision. As a result there has been increased dependence on antitrust-type regulations governing legitimate market behavior rather than precise rules regu- lating specific procurement procedures. Grading standards. Grade and quality standards have been devised to improve the performance of the market for farm products in all stages of the marketing channel. An accurate price- reporting system is dependent upon a uniform product that falls into precise standardized grades. Some commodities, f such as grain, easily lend themselves to such a system whereas others, such as fruits and vegetables, do not. Most gov- ernment grading standards have been developed and used on a cooperative or voluntary basis, except where they are required in organized trading markets i or were required during wartime under the Office of Price Administration. A growing use of federal standards and grades has affected food procure- [56] ment policies and practices of producers, processors, and retailers, particularly in the early stages of the marketing chan- nel, in farm price reporting, and in organized futures markets. Technically, processed foods are potentially more ho- mogeneous and easier to grade, but processors have preferred to differentiate them further and rely on private grades and brands to transmit quality informa- tion to consumers. This practice is con- sistent with the desire of merchandisers to sell differentiated products. With an expansion in private label and specifica- tion buying by retailers, there has been an increase in the use of federal grades, especially in the wholesale meat and poultry markets. Federal grades have frequently been used as a basis for more precise specifications within the food in- dustry. The economic effects of the increasing use of federal grades on beef were ex- plored by Williams, Bowen, and Geno- vese (1959). They found that the use of United States grades has contributed to many basic changes in the structure of the wholesale-retail beef market. They also assert that federal grades have (1) intensified competition in the fresh beef wholesale market because of the descrip- tive language which is now more uni- form, enabling buyers to expand the market in which they can compete for supplies without proportionately increas- ing buying costs; (2) contributed to an increase in pricing efficiency, which has been expressed by an increase in the ac- curacy, ease, and effectiveness of prices in reflecting value differences among various qualities of beef; (3) reduced the bargaining strength of the national packers relative to the chains, because of the replacement of a differentiated product by an undifferentiated one; (4) contributed to raising the level of de- mand for high quality products, or at least have aided consumers in their ability to express their desires for it; and (5) encouraged many retailers to merchandise and promote the "choice" grade of beef. It is apparent from the experience of federal grades on beef that grading is a function which the government can perform in improving the competitive operation and organization of markets for farm products. Agricultural Policy Programs Supply pressures. In spite of di- version programs and acreage controls, there has been an increase in the quan- tity of food products marketed. As already shown, the volume of domestic farm food products marketed increased by 27 per cent between 1947-1949 and 1958, while the United States civilian population increased by 18 per cent. Thus, food products marketed per capita increased by 7.5 per cent. Because of the inelasticity of demand for food, this ex- panded volume has generally resulted in a buyers' market at all levels of market- ing, resulting in adverse effects on farm- ers which have shown up in the form of lower prices. Farm prices declined by 8.3 per cent between 1947-1949 and 1958 (Agricultural Outlook Charts, 1960). At the wholesale level, supply pressures also have favored buyers. This is revealed in lower prices, increasingly favorable credit and delivery terms, shifts in the cost of storage to the seller, and acceptance of buyer specifications. Implicit in this statement is the fact that if either the supply of food products de- creases or the demand for them increases then the terms of trade will reverse and suppliers will again be in a stronger bar- gaining position, as happened during World War II. Marketing orders. The primary pur- pose of marketing orders and agree- ments has been to raise producer in- comes, recognizing the necessary restric- tion that an adequate supply must be produced to satisfy consumers' needs. Provisions to attain this objective usually include grade and quality control, volume [57] control, prorated marketing, advertising and other promotion, and research on marketing problems. An effective organization of the mar- ket for certain commodities at the grower level, such as prevails under marketing orders and sometimes with the help of marketing cooperatives, can aid producers in obtaining higher prices and help wholesale buyers procure the kinds and quantities of products needed. In his study of marketing fresh fruits and vegetables, Folz (1958) found that chain buyers thought that producers would receive better prices and con- sumers better produce, with narrower middlemen margins, if terminal market operations and pricing could be elimi- nated entirely. However, this result is contingent on an effective organization of the market at the grower level. With- out such organization, buyers are forced to buy either through terminal markets or from only those growers who are large enough individually to satisfy sub- stantial proportions of a buyer's require- ments. The procurement practice of direct buying on specifications is being aided by marketing orders and is, at least po- tentially, to the mutual advantage of buyers and sellers. The grade and quality provisions of the orders can be adjusted to coincide with the needs of buyers, as dictated by consumer demands. Orderly marketing over time alleviates distressed sales and transportation, spoilage, and storage problems, and results in a more dependable supply of products. Short- term volume control and prorated ship- ments apparently are mutually beneficial to farmers, processors, and distributors, because of the inelasticity of demand for these products and the apparent value of trade confidence in a stable supply of product. The effects of milk-marketing orders upon procurement practices of retailers and their market structure are the most obvious in the case of state orders like California's, in which minimum whole- sale and retail prices are set by the Bu- reau of Milk Stabilization. Prior to 1956, flat pricing to retailers was enforced with no volume discounts or any other dis- i] criminatory pricing allowed, regardless of differences in cost. This legislation had two major effects: it decreased the efficiency of the milk distribution system and it was responsible for "rather elabo- rate procedures by which wholesale cus- tomers become attached to particular milk distributors" (Clarke, 1951). Since retailers paid the same for their milk, they had an incentive to carry a large number of brands to take ad- vantage of any product differentiation that may have existed. This practice re- « suited in a decrease in the average size of each delivery. Packages per stop de- creased from 89 to 57 and packages per route decreased from 2,498 to 2,108 be- tween 1945 and 1950 in Los Angeles County, during which time the order was made effective (Clarke, 1951). To obtain the benefits of any decreas- ing costs associated with volume de- livered at one stop and to comply with the milk order, some large retailers ap- parently found it to their advantage to integrate backwards into dairy product processing and wholesaling. For ex- ample, between 1946 and 1950, the sales of milk-distributing firms owned by grocery firms in Los Angeles County increased by 24 per cent in spite of a 4 per cent decrease in total sales of milk sold through stores (Clarke, 1951). The Federal Trade Commission's recent re- t port showed that integration of chains into dairy products manufacture was a common practice. Since 1956, changes in the California milk order have provided for a sliding price scale based on the quantity delivered, but a recent study revealed that, in Los Angeles, the exist- ing scale is not sufficient to cover the dif- ferential costs of volume delivery (Forker and Clarke, 1960) . [58] Collective Bargaining As already shown, labor costs ac- counted for somewhat more than one- half of the gross margin of retail grocery firms in 1958 (table 12). Likewise, it has been shown that the price of labor has gone up faster than its productivity. Since collective bargaining has been an important factor in setting the conditions of employment in grocery stores (for ex- ample, wage rates and fringe benefits that make up labor costs), it must be reckoned with in any study of business structure and practice. Unionization of labor has attained much greater relative strength in the retail food industry than in other retail trades. By 1955, between 25 and 30 per cent of all food store employees were union members, compared to 10 per cent of department store workers, and 7 per cent of the employees of all retail trades. Of the estimated total food store union membership of 280,000 in 1954, 150,000 belonged to the Retail Clerks, American Federation of Labor, and 120,000 be- longed to Butchers, American Federation of Labor (Estey, 1955). The rapidly rising labor costs associ- ated with collective bargaining have en- couraged the adoption of self-service stores, prepacking, and larger retail grocery stores, according to industry leaders. Management has substituted capital for labor and it is seeking further economies through labor specialization in procurement and merchandising op- erations. The fact that wages have been higher and unions stronger in California than the rest of the United States ap- pears to have been a factor in the faster rate of capital substitution and labor spe- cialization among California food re- tailers. Customs, Mores, and Goals Duddy and Revzan in Marketing, An Institutional Approach (1953), ex- plained the importance of customs and habits in conditioning market behavior in the following way: Finally, one must not overlook the fact that much of economic behavior is based on cus- tom and habit. Management is continually trying to break through this crust of custom, but to be successful in marketing operations, management must largely conform to cus- tomary modes of behavior on the part of con- sumers. Custom, moreover, continues to govern the practices of businessmen in their relations with each other. Every trade has its custom. Therefore, custom, as an important part of the social environment within which an institutional economy must work, be- comes a determining factor in the coordina- tion of market structures. The trend toward family shopping seemingly increases the importance of impulse buying and hence the value of prime display and shelf space. This trend could influence the relative de- mands for various products from alterna- tive suppliers. The custom of weekend shopping ex- erts a powerful influence in food retail- ing. The Super Valu Study (Progressive Grocer, 1959) shows that 44 per cent of the week's customers shopped on Fri- days and Saturdays, on which days 62 per cent of the week's sales were made. This distribution apparently has not shifted much in recent years. Food stores must be large enough to accommodate weekend peak traffic or they will lose customers. This skewed traffic flow means that fixed facilities are under-utilized most of the time. Nevertheless, the cost of increasing capacity to satisfy week- end requirements must be counter- balanced against the loss of customers due to overtaxing facilities. Thus, while an individual store may profit by ex- pansion of facilities, the net result to the economy may be "overstoring" and a consequent increase in the total cost of retailing food. The capacity of a store can be raised by increasing the variable inputs used in combination with the fixed facilities. This is normally accomplished by vary- ing the labor input to coincide with the [59 traffic flow. But this practice is becoming increasingly difficult and expensive be- cause of labor union objections to the use of part-time labor and because of union insistence on premium pay for irregular working hours. Thus the sub- stitution of capital for labor (for ex- ample, modernized checkout counters) has become more feasible economically. The skewed traffic flow has encouraged retailers to direct their advertising to weekend customers, when the marginal returns from advertising are greater. Since advertising of weekend specials further encourages customers to shop on weekends rather than during the week, this contributes to the industry's problem of capacity. Locational advantages of certain store sites owe their value, in many cases, to the stability of customer loyalties and habitual shopping patterns. The effects of these advantages on the structure of the industry and the nature of the com- petition were analyzed in connection with the discussion of freedom of entry into the industry. Other important customs and mores of consumers are regional or local in character and based upon nationality and religious beliefs. Merchandising practices and product mix must conform to these localized demands. For example, the demand for kosher beef and lamb is centralized in the New York City and West Coast areas. This demand is one of the reasons for the large number of specialty meat shops in San Francisco and New York City. In this case procure- ment practices are directly affected be- cause of the special requirements of the final product. Any changes that occur in the marketing channel for these products must conform to local demands. Every trade also has its customs. This is particularly true in the case of food retailing. A large number of small inde- pendents regard their business as a way of life closely akin to the family farm philosophy; therefore, the firm often loses its original goal as a productive unit and functions as a means of self- employment for its owner. Thus, custom and tradition can become deeply en- grained in merchandising and procure- ment practices. Many of these customs are reinforced by strong influences from the marketing agencies with vested in- terests in maintaining the status quo. IMPLICATIONS FOR FOOD MARKETING SYSTEM, FARMERS AND CONSUMERS The buying policies of retail grocery firms are evidently an outgrowth of other firm policies, such as their merchandis- ing program, internal structure and or- ganization, sales volume, number and location of retail outlets, and also the firm's ability to obtain fixed and operat- ing capital. Since most firms operate under a policy of mass merchandising, volume buying becomes a necessity. The buying policy is a result, rather than a cause, of the merchandising program. Changes in buying policies, however, have important implications for retail store customers, competing retail firms, wholesale suppliers, and farmers. Adjusting Supply Requirements to Consumer Demands Current food distribution methods have evolved to meet the changing food requirements of a growing population with increased purchasing power. Re- tail grocery stores have followed the population shift to urban and suburban areas, bringing perishables within easy access of consumers. When consumers have had a choice of stores, some run by [60] traditional merchandising methods and some by mass merchandising methods, they have chosen the large supermarkets and chains because of the greater num- ber and variety of products as well as shopping conveniences and services. As a result, retailers using new, efficient merchandising methods have usually earned satisfactory returns on their in- vestments, while those resisting change have found it difficult if not impossible to compete. The search for lower unit costs has brought about changes in buying meth- ods. Since the retailers need a stable source of uniform quality merchandise, they have been purchasing more goods on the basis of strict specifications as well as buying directly from farmers and processors. In addition, many large retailers have begun processing their own products as a way of controlling quality and reducing unit costs. Impacts of the Food Procurement System Changes in procurement methods have had different effects on customers, com- petitive retailers, wholesalers, processors, and producers. These varying effects have been, to some extent, the result of differential rates of adjustment to chang- ing requirements. In many cases, laws have been set up to fight change rather than adjust to new requirements. This reaction is to be expected in a marketing system where institutional forces play an important role and where certain competitive adjustments penalize one seg- ment of the system while aiding another segment, even though the over-all result is an improvement in marketing ef- ficiency. Customers' choice of mass mer- chandising system. As indicated by customer patronage, a deliberate choice has favored the chain of supermarkets or independent supermarkets purchas- ing through efficient affiliated buying groups over small independent grocery stores buying through full-line whole- salers. Customers seem to prefer one-stop shopping in community shopping cen- ters. Customers also have indicated their acceptance of standardized products and services by their willingness to shop in supermarkets, at a lower price, rather than in specialty shops catering to in- dividualistic demands. In fact, their will- ingness to accept mass merchandising has led to scale economies of sufficient magnitude to justify the sale in super- markets of large numbers of products previously reserved for specialty shops. This trend has been noted in stores of increasing size that stock increasing numbers of products. In turn, this cus- tomer practice has stimulated demand for specialty products from suppliers and increased competition among sup- pliers of alternative products. Customers have indicated their ac- ceptance of certain private label mer- chandise and rejected others by their purchases. This has encouraged the trend toward specification purchasing on the basis of contracts and a vertical integra- tion of some retail firms into processing. However, the choice between the two methods of procurement is dependent upon other considerations. Competitive adjustments hy re- tail firms. Retail food firms have prob- ably adjusted to changing requirements of consumers and competitors more rap- idly than have other marketing firms, as evidenced by their comparatively rapid structural changes and their compara- tively favorable profit rates. As a result, the changes in structure and procurement practices that were observed have fo- cused attention on these firms. The procurement and other advan- tages of large-sized stores over their small competitors, whether owned inde- pendently or by chains, is leading to the displacement of small stores by larger ones. This trend is facilitated by popu- lation pressures stimulating growth in total volume, the development of shopping [61 centers, and consumer demands for an increased number and variety of prod- ucts from which to choose their pur- chases. This trend has continued to the point where, by January, 1960, the Progressive Grocer estimated that super- markets which accounted for only 11 per cent of the total number of grocery stores accounted for 69 per cent of all grocery stores sales. The development of voluntary and co- operative buying groups is the best ex- ample of competitive adaptation to effi- cient procurement methods. Independent retailers purchasing through general- line wholesalers usually have been un- able to purchase supplies at prices com- petitive with those paid by chains. There- fore, competition is causing many inde- pendent retailers either to go out of business or to join affiliated buying groups. By purchasing cooperatively or through voluntary groups, independent grocers and small chains have achieved many of the lower unit costs in procure- ment that the large chains possess. The elimination of personal selling by sales- men who called at retail stores appears to be a source of added efficiency in procurement. Affiliated groups are not vertically integrated to the same extent as chains. However, this disadvantage is at least partially counterbalanced by the advantages of local owner operation of stores and lower overhead costs of the affiliated groups' central organizations. Despite the procurement advantages from group buying, some retail stores are too small for economical operation. This disadvantage cannot be overcome except by increasing store size, which may not be feasible. The rapid growth of affiliated groups in recent years attests to their success in competing with the chains. At current rates, the time will soon arrive when nearly all small retail grocers will be affiliated with a buying group of some sort. These affiliated groups have con- centrated on horizontal growth in the past but when they have had sufficient time to consolidate sales gains and im- prove their financial position, they are likely to move into vertical integration either by ownership or contractual agree- ments, thereby narrowing further the current procurement advantage of the chains. Between 1935 and 1948 the share of total grocery sales made by chains had declined somewhat for the United States as a whole, although it had increased slightly in California. For the following decade, it is estimated that grocery chains in California having 2-10 stores each increased their share of total gro- cery sales from 11.6 per cent in 1948 to 17.1 per cent in 1958, compared with 6.8 and 9.0 per cent in the United States (table 7). The sales of the chains in California with 11 stores or more in- creased from 32.9 per cent of total gro- cery sales in 1948 to 39.9 per cent in 1958, against 34.4 and 44.0 per cent for the United States. This rise was due to an increase in the share of grocery stores operated by chains as well as an increase in sales size of these stores. Horizontal growth of the grocery chains has been the most rapid among the medium- and small-sized firms. The primary method of horizontal growth has been by internal means: replacement of small stores by large supermarkets and the addition of newly built stores, largely in shopping centers. Growth by merger has been secondary. Mergers have been dramatized because they result in more noticeable changes in firm organization and because they have been centered in relatively few firms. Vertical integration of grocery chains appears to be increas- ing at only about the same rate as the growth of the total food business; thus, no increase in concentration of owner- ship of the food business has occurred by this method. However, vertical inte- gration is concentrated in medium-sized chains which have been rapidly expand- ing horizontally. As a result, many [62 regional chains have grown substantially in recent years, particularly in California. As a result of the rapid increase in volume of purchases through affiliated groups and the increase in number and size of regional and small chains, pur- chases by retailers are becoming con- centrated into fewer and stronger hands. However, as a whole, retail buyer con- centration is still less highly concen- trated than are the suppliers from whom they buy. 21 The retail buyer concentra- tion also is low compared with most manufacturing industries. There is some evidence suggesting that retail buyer concentration of food retailers has stimu- lated rather than restricted competition among retailers in supplier markets. The large national chains are no longer alone in large buying power but must now compete on more equal terms with the affiliated groups and the strong regional chains. This competition has cost some of the large national chains a part of their previous share of the nation's total food business. Several chains have had to make significant adjustments in their organization and operating methods in order to meet their new competition. Effects upon wholesale suppliers and supply requirements. In the years since World War II there has been constant pressure of excess supply of food products upon the demand for these products. This pressure has usually meant a buyers' market for food at all stages of the food distribution system. Such a market has encouraged proces- sors and wholesale dealers to accept lower prices and to adapt their marketing procedures and organizations to the changing supply requirements of re- tailers. Direct marketing of products from i processors to retailers bypasses conven- ' tional wholesalers. Nevertheless, the wholesaling functions of collection, trans- portation, and dispersion are not elimi- nated. These functions are incorporated into retail firms, which in many cases are large enough to purchase in quantities similar to those of conventional whole- salers. This first step in vertical integra- tion of retailers often results in certain cost economies by reducing the number of ownership transfers and aiding re- tailers in control of product quality. The- oretically perfect markets would allow buyers to purchase the desired quantities and qualities of supplies in central mar- kets with no fear of losing sources of supply and at prices comparable with those obtained in direct purchasing. Therefore, this trend can be viewed as a correction of imperfections in the mar- keting system. It is also probable that direct buying has increased competition for supplies, and possibly improved the terms of trade for many suppliers. Large-volume wholesale transactions often result in lower unit costs to both buyers and sellers. To realize any econ- omies of volume and to avoid legal com- plications, many retail firms have inte- grated back into processing or made ex- clusive supplier contracts. The mere ability to integrate vertically back into processing has the effect of increasing the number of alternative sources of mer- chandise open to retail stores. Purchasing on the basis of price and specifications and selling on the basis of private labels weakens the advantage that suppliers previously had in selling differentiated products. As a result, price competition is intensified in the whole- sale market. This less favorable position of processors should increase over-all marketing efficiency unless retailers are able to gain the advantage through the use of private labels. Price discounts commonly available on retailer private 21 In 1954 the 20 largest grocery retailers accounted for just under 32 per cent of all grocery store purchases. But in 47 of the 49 grocery manufacturing industries, the 20 largest firms ac- counted for more than 32 per cent of their industry's sales; in 29 of these industries, the 20 largest firms accounted for more than 70 per cent of their industry's sales. [63 labels indicate that at least a part of the benefits of this increased competition is accruing to consumers and producers. But, if consumer acceptance of these private brands increases sufficiently, then retailers should be in a position to raise their prices on their own brands. Wholesale suppliers have increased their advertising expenditures and added new products in an attempt to hold and extend consumer acceptance of their dif- ferentiated products. However, they ap- pear to be fighting a losing battle against large-volume retailers, who are in a posi- tion to control the allocation of their shelf space among alternative brands and products. This appears particularly true in view of the acceptance by con- sumers of private-label goods at a com- petitive price. Impact on Farmers It has been shown that the practices followed in the procurement of supplies by retail grocery firms follow from the nature of their supply requirements and the desire by retailers to perform the procurement function more efficiently. The wholesale market for food supplies is composed of the interaction of derived and anticipated demand, which reflects consumer desires, and existing supply, which reflects the production potential of producers. Incomes of producers are a reflection of this wholesale market. The inelastic demand for farm products, coupled with the pressure of rapidly in- creasing quantities of output, has resulted in reduced real incomes to farmers in the last ten years. The per capita decline of 2 per cent in net farm income from farm sources between 1948 and 1958 occurred at a time when the prices paid by farmers were rising (U. S. Department of Agriculture, 1960) . If incomes re- ceived by farmers from nonfarm sources were added to the net income from farm sources, the total would amount to an 8 per cent increase in total per capita net income during the ten-year period, compared with a 35 per cent rise for the nonfarm population. In spite of what is basically a supply- demand problem, the marketing system and procurement practices of retailers in «. particular have received a large share of the blame for the relatively low in- comes received by farmers. The market- ing system has been able to operate with- out any real concern about shortages of 1 products and has been able to purchase farm products at favorable prices. Be- *' cause of these supply conditions, the in- come elasticities for retailer services, and the institutional restrictions on price competition, retailers have shifted their competitive efforts toward increasing services and away from reducing prices ^ in an attempt to attract customers. As a result, efficiencies in merchandising and * procurement have not usually been used to reduce marketing margins between wholesalers and retail customers but f rather to increase customer services. The changes in organization and meth- * ods of procurement of merchandise made by the food marketing system have en- couraged many compensating adjust- ments by farmers. These adjustments have sometimes, but certainly not always, been to their advantage. Some of the . policies and practices of retailers that have induced adjustments by farmers < include: (1) the increase in number and variety of products offered by retailers; (2) allocation of shelf and display space among products ; (3) advertisements and price "specials" on certain products; (4) 1 policies to emphasize certain kinds or grades of products, such as "U. S. Choice" grade beef; and (5) policies of < the firm regarding a choice of geograph- ical supply areas. Many of these changes affect the quantities demanded by con- . sumers of particular products, usually at the expense of competing products. These v shifts in demand among products require compensating shifts in production of the raw products to avoid gluts and scarcity of products at the wholesale level. 64] Contractual arrangements with broiler and fruit and vegetable processors are examples of one method of speed- ing adjustment by farmers. They ena- ble the processor-buyer to make long- term commitments on supply require- ments and to exercise more control over quality and methods of production. In turn, a farmer is assured a market out- let for his products at a prearranged price and quantity. These contracts can be mutually beneficial when entered into freely on the basis of the existence of alternative market outlets and supply of product and when market information is equally available to both parties. Farmers lose nothing by agreeing to certain prod- uct specifications such as timeliness of planting crops, selection of varieties, and certain other production practices as long as decreases in yield or additional costs are compensated for by price in- creases. Direct selling to retail grocery chains is rather common for certain commod- ities that require little processing. In such cases, buyers favor large volume orders to minimize transaction costs per unit and to assure stable sources of sup- ply. Obviously, this method of selling favors large operations. Nevertheless, small producers of some commodities can realize similar economies if they band together and negotiate sales col- lectively and if they are willing to adhere to the same requirements regarding quality of products and specifications used in production. Cooperative marketing often seems to be particularly adaptable to the sale of specialty crops for which production specifications are relatively important to processors or retailers. Standardization of production and volume negotiations are functions that cooperatives can per- form effectively in improving marketing information and efficiency. Furthermore, it is a form of organization by which farmers operating family-sized farms may be able to adjust their production and marketing operations in accordance with changing requirements of retail firms and consumers and retain any ef- ficiencies inherent in owner-operated firms. State or federal marketing orders covering commodities being marketed cooperatively may assist cooperatives in standardizing product specifications, minimizing membership problems, and obtaining useful market information. However, marketing orders may also be used to implement policies of supply re- striction and volume control that are aimed at obtaining monopolistic price advantages. These provisions are of doubtful value to producers unless there is a restriction on new producers enter- ing the market. Provisions that aid producers in orderly marketing of their products, and producing, grading, and sorting their produce according to supply requirements of buyers, would seem to be of greater value. [65] APPENDIX TABLES Appendix Table 1. Population of United States, California, and Selected Counties of California, as of July 1, 1929-1958 (Thousands) United States California (civilian population) California as per cent of United States Selected counties, California* Year Los Angeles Orange San Francisco San Mateo Tulare 1929 121,770 122,923 123,886 124,694 125,436 126,228 127,099 127,879 128,639 129,635 130,683 131,658 131,595 130,942 127,499 126,708 127,573 138,385 142,566 145,168 147,578 150,202 151,082 153,366 156,046 159,086 162,306 165,341 168,368 171,420 174,566 5,531 5,711 5,824 5,894 5,963 6,060 6,175 6,341 6,528 6,656 6,785 6,899 7,049 7,297 7,570 8,083 8,523 9,298 9,672 9,895 10,161 10,438 10,681 11,299 11,748 12,254 12,699 13,260 13,869 14,432 14,960 4.5 4.6 4.7 4.7 4.7 4.8 4.9 5.0 5.1 5.1 5.2 5.2 5.4 5.6 5.9 6.4 6.7 6.7 6.8 6.8 6.9 6.9 7.1 7.4 7.5 7.7 7.8 8.0 8.2 8.4 8.6 2,081 2,208 2,279 2,336 2,309 2,381 2,390 2,454 2,609 2,719 2,738 2,813 2,924 3,122 3,429 3,584 3,704 3,772 3,849 3,927 4,054 4,152 4,290 4,482 4,766 5,016 5,180 5,388 5,601 5,790 5,935 112 119 120 123 119 119 117 121 126 130 131 132 139 152 169 176 181 186 194 200 205 216 239 256 274 303 351 430 521 596 670 620 634 632 643 648 644 638 628 642 643 627 637 644 694 764 756 779 770 762 765 772 775 777 778 796 798 789 783 777 788 791 72 77 83 88 90 92 93 94 99 104 105 114 122 136 153 160 167 173 184 200 219 236 251 265 295 316 337 358 379 399 419 77 1930 77 1931 1932 77 77 1933 75 1934 75 1935 78 1936 81 1937 91 1938 98 1939 103 1940 107 1941 108 1942 110 1943 115 1944 1945 1946 1947 1948 124 135 142 144 145 1949 146 1950 1951 1952 149 144 144 1953 1954 1955 140 139 144 1956 146 1957. 148 1958.. 150 1959.. 151 Per cent increase, 1929-1959 4:-f 170 91 185 498 28 482 * Counties: 1929 and 1931-1939 are January 1 data; 1930 is April 1 data. Sources: United States: U. S. Department of Commerce, Statistical Abstract of the U. S., 1959 (80th annual ed. ; Washington: Govt. Print. Off., 1959), p. 5 (86th Cong., lstsess.). California: Senate Fact-Finding Committee on Commerce and Economic Development, California Statistical Abstract, Supplement to First Partial Report (Sacramento: State Print. Off., 1958), pp. 176 and 182. Counties: 1929: California Taxpayers' Association, Tax Digest (Los Angeles; 750 Pacific Electric Bldg., Feb., 1934), p. 61; 1930-1939: California State Chamber of Commerce, Intercensal Population Estimates — California Counties (San Francisco: 350 Bush, 1941), p. 1 (Economic Survey Series, 1940-1941, Report No. 6); 1940-1949: idem., Population of California Counties Between 1940 and 1950 Censuses as of Each July 1st (San Francisco: 350 Bush, 1953), pp. 1-2; 1950-1952: idem., Estimated Total Resident Population by California Counties and Regions — 1950- 1953 (San Francisco; 350 Bush, 1953), p. 1 (Economic Survey Series, No. 2, 1953-1954); 1953-1955: idem., Estimated Total Resident Population by California Counties and Regions (San Francisco: 350 Bush, 1956), p. 1 (Economic Survey Series, No. 2, 1956-1957); 1956-1958: idem., Estimated Total Resident Population by California Counties and Regions, 1950-1958 (San Francisco: 350 Bush, 1958), p. 1 (Economic Survey Series, No. 12, 1958-1959). [66] Appendix Table 2. California Income, 1929-1958 Year 1929 1930 1931 * 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 * 1947 1948 1949 1950 1951 1952 1953 1954 1955 - 1956 1957 1958 Personal income Disposable income million dollars 5,502 5,079 4,347 3,381 3,227 3,590 4,020 4,817 5,132 5,088 5,257 5,839 7,331 10,010 13,281 14,653 15,194 16,084 16,637 17,610 17,835 19,627 22,726 25,089 26,642 27,432 30,224 33,157 35,131 36,692 5,349 4,975 4,307 3,325 3,174 3,530 3,952 4,733 5,005 4,920 5,094 5,649 7,100 9,566 12,486 12,405 12,842 14,153 14,401 15,384 15,868 17,615 20,186 21,793 23,046 23,635 26,367 23,743 30,189 United States Retail Food Price Index Consumer Price Index 1947-1949 = 100 65.6 62.4 51.4 42.8 41.6 46.4 49.7 50.1 52.1 48.4 47.1 47.8 52.2 61.3 68.3 67.4 68.9 79.0 95.9 104.1 100.0 101.2 112.6 114.6 112.8 112.6 110.9 111.7 115.4 120.3 73.3 71.4 65.0 58.4 55.3 57.2 58.7 59.3 61.4 60.3 59.4 59.9 62.9 69.7 74.0 75.2 76.9 83.4 95.5 102.8 101.8 102.8 111.0 113.5 114.4 114.8 114.5 116.2 120.2 123.5 Disposable income per capita 967 871 740 564 532 582 640 746 767 739 751 1,007 1,311 1,649 1,535 1,507 1,522 1,489 1,555 1,562 1,688 1,890 1,929 1,962 1,929 2,076 2,168 $2,177 Deflated disposable income per capita col. 5 + col. 3 6 $1,474 1,396 1,440 1,318 1,279 1,254 1,288 1,489 1,472 1,527 1,594 1,713 1,929 2,139 2,414 2,277 2,187 1,927 1,553 1,494 1,562 1,668 1.679 1,683 1,739 1,713 1,872 1,941 $1,886 col. 5 + col. 4 $1,319 1,220 1,138 966 962 1,017 1,090 1,258 1,249 1,226 1,264 1,367 1,601 1,881 2,228 2,041 1,960 1,825 1,559 1,513 1,534 1,642 1,703 1,700 1,715 1,680 1,813 1,866 $1,811 Per cent increase, 1929-1957 539 464 76 64 125 28 * Blanks indicate data not available. Sources: Column 1: U. S. Department of Commerce, U. S. Income and Output, A Supplement to the Survey of Current Business (Washington: Govt. Print. Off., 1958), p. 156. Column 2: The years 1929, 1940, 1946, 1950, 1953 and 1955 are from U. S. Department of Commerce, U. S. Income and Output , loc. cit. , p. 160. The remaining years are estimates derived from personal income minus California state personal income taxes and federal internal revenue collections of individual income and employee taxes in California. The latter two are found in the Senate Fact-Finding Committee on Commerce and Economic Development, California Statistical Abstract, Supplement to First Partial Report (Sacramento: State Print. Off., 1958), pp. 176 and 182. Columns 3 and 4: 1929-1955: Joint Committee on Economic Report and Bureau of the Budget, Economic Indi- cators, 1955 Historical and Descriptive Supplement (Washington: Govt. Print. Off., 1958), p. 48 (84th Cong., 1st sess.); 1956-1958: Council of Economic Advisors, Economic Indicators (Washington: Govt. Print. Off., Mar., 1960), p. 23. Column 5: Column 2 divided by the civilian population of California, Appendix, table 1. [67 Appendix Table 3. Total Cost of Marketing Farm Products by Cost Components, 1947-1958* Year Labor Rail and truck transpor- tation Corporate profits Other costs f Total mar- Before taxes After taxes keting bill 1947 $ 92 102 107 112 120 127 135 142 146 154 160 $165 $ 91 100 105 118 118 136 145 154 145 159 164 $182 $107 93 93 114 93 100 107 107 129 129 136 $150 $125 100 88 113 75 75 88 88 113 113 113 $125 $ 89 102 107 93 117 124 123 125 139 148 156 $158 $ 92 1948 102 1949 106 1950 106 1951 117 1952 126 1953 1954 130 135 1955 143 1956 151 1957 158 1958* $164 * Index numbers (1947-1949 = 100). Computed from figures in hundreds of millions of dollars. t Includes costs such as fuel, electric power, containers, packaging materials, air and water transport, interest on borrowed capital, taxes other than those on income and noncorporate profits. t Preliminary. Source: Computed from U. S. Department of Agriculture, Agricultural Outlook Charts, 1960 (Washington: Govt. Print, Off., 1959), table 9, p. 51. 1 68] Appendix Table 4. Prices Per Unit of Inputs Used in Marketing Farm Products, Selected Years, 1929-1958* Year Hourly earnings All manu- facturing All food marketing employeesf All retail trade Railroad freight rates for farm products Prices of other inputs} 1929 1930 1931 V 1932 1933 1984 1935 1936 1937 1938 1989 1940 1941 1942 1943 1944 1945 1946 * 1947 1948 1949 1950 1951 1952 1953 1954 1955 t 1956 1957 1958 % 43 42 39 34 33 40 41 42 47 47 48 50 55 64 72 77 77 82 93 102 105 110 120 126 133 136 141 149 156 $160 % 42 39 42 43 42 45 46 46 47 51 57 60 65 70 81 93 99 108 112 119 124 132 138 142 149 158 ties t so 51 54 58 63 73 83 94 101 105 109 117 122 130 135 139 146 152 $158 $ 80 80 78 78 77 75 74 73 73 77 77 76 77 77 109 112 114 122 125 125 124 129 136 $142 I 93 102 105 108 119 120 122 124 128 136 141 $144 * Index numbers (1947-1949 = 100). t Average hourly earnings in food processing, wholesale and retail trades. % Fuel and power, packaging materials and containers, machinery, construction, and so forth. § Blanks indicate data not available. Sources: Columns 1 and 3: 1929-1954: Computed from Joint Committee on Economic Report and Bureau of the Budget, Economic Indicators, 1955 Historical and Descriptive Supplement (Washington: Govt. Print. Off., 1958), p. 29 (84th Cong., 1st Sess.); 1958: computed from Council of Economic Advisors, Economic Indicators (Washington: Govt. Print. Off., Mar., 1960), p. 15. Column 2: U. S. Department of Agriculture, The Marketing and Transportation Situation (Washington: Govt. Print. Off., April, 1960), p. 23. Columns 4 and 5: 1929-1944: U. S. Department of Agriculture, Farm-Retail Spreads for Food Products (Washington : Govt. Print. Off., Nov., 1957), p. 5; 1954 and 1958: U. S. Department of Agriculture, Agricultural Outlook Charts, 1959 (Washington: Govt. Print. Off., 1958), table 29, p. 68. 69 Appendix Table 5. Grocery Stores, Sales, Payroll, Employees, and Proprietors, United States and California, Census Years, 1929-1958 Item United States California Grocery stores 1929 number 307,425 303,910 354,971 387,337 377,939 350,754 279,440 251,664 number 14,404 13,742 16,238 17,140 17,090 16,824 14,481 13,374 per cent of total United States 4.7 1933 4.5 1935 4.6 1939 4.4 1948 4.5 1948* 4.8 1954 5.2 1958t 5.3 Employees 1929 443,628 454,287 515,747 540,002 686,256 811,018 962,648 25,488 24,306 29,200 32,885 52,801 68,533 81,884 5.7 1933 5 4 1935 5.7 1939 6.1 19481 7.7 1954J 8.4 1958ft 8.5 Active proprietors of unincorporated business 1929 285,277 304,097 318,736 351,981 380,492 298,422 265,232 14,085 14,072 15,065 14,085 19,043 16,674 15,023 4 9 1933 4 6 1935 4.7 1939 4 1948§ 5 1954 5 6 1958t 5 7 million dollars million dollars Sales 1929 7,353 5,004 6,352 7,722 24,770 24,730 34,421 43,217 439 301 409 577 2,227 2,226 3,292 4,430 6 1933 6 1935 6 4 1939 7 5 1948 9 1948* 9 1954 9 6 1958f 10 3 thousand dollars thousand dollars Payroll 1929 437,703 366,764 429,808 464,803 1,258,215 2,035,136 2,618,193 26,673 22,100 26,791 35,925 132,366 236,131 327,403 6 1 1933 6 1935 6 2 1939 7 7 1948§ 10 5 1954 11 6 1958f 12 5 * The number of establishments and total sales for 1948 are adjusted on the basis of the 1954 definition of an establishment; of the establishments having no paid employees, only those that had a minimum of $2,500 gross sales were included. t Published data include delicatessens so estimates of delicatessens based on the 1954 Census of Business were subtracted. X Work week ended nearest November 15. § November. Source: U. S. Bureau of the Census. U. S. Census of Business: Retail Trade (Washington: Govt. Print. Off., 1929-1958); see table 3, source column 1. [70 £ o 03 CM 03 O os os ■*wioooi»ifli«o 0> lO ■ lO CO ■*»< CO t^ l^ CM O 03 a lO OO 'OOMNM^^eiO 03 03 T 03 (1) l-i O 02 coo ■o)Nmoiom«oo CO CM --<**< ■BNtMNOOO'*U3 03 u +3 03 os 4< 03 O 02 lO CO ■0!DCD10lO 03 a u COTjl • U0 ^1 rt OS CM <— 1 CO l« ^H CM •lOlDOOHNNitllO rt ,_, ^H—<-HCMCMCMeMCM O 03 is a 1— 1 CO •tfiOS00OS-*tHT(ioo lO TfH ■ •>* CO CO CM~ <-H rt 0" Os" "3 03 O 5 ■*fOsO*OOCC^COCMCOO CMCOr^CMOOOOO^COOSOS OONtOWNttfOiWOO !D— 1 O CO O CO 00 CO 00 -Ht^ ■lOCMI>-'— lOSCOCMlO CM >— 1 • CO 1— 1 CO O0 O "O O0 >— 1 "O W ■**MNINrtOO OSOSOSOSOSOSOSOSOSOSOS 03 f — r- a (h p t~- lO ■O*of«nwo ■TlitNCXKINlOlOlO cO co •iO»0-'J<-«** fe 03 co 03 03 §g .0-H-HOCOCO-»t<0 ■oooooooo 02 03 OS CO CM a s •0 03 9 c •OOCO»OCOOCOCOCM 1 03 53 O ■ 10 10 m 10 os ^t< -h »H CM 03 03 OS OS ,— < a c .^h^h^h^hO^CMCO CM 1 PB| 03 •CMOOIO^OSOOS 03 O 10 .- ■COOSOOsr^-HCMCM CM CN ■CMCMCOCMCOCOCOCO CO 02 1 03 10 CD CM a CO cc ■OOOSOSOS^OSOSOS ^ H 00 a- O « n tr U5lO»OU3»OlC»OU3lO O" — os 0- ~ St a — a a - C 2 •- C It £ f I X — is .2* ir aj — "3 o c « 1— i — f-J o ♦ -i— w-02 [71] Appendix Table 7. Grocery Chain Firms and Stores, United States, by Size of Chain, 1948-1958 Total One store 2-3 stores 4-9 stores 10 stores 11-15 stores Year Firms Stores firms Firms Stores Firms Stores Firms Stores Firms Stores 1948 322,856 350,754 320,629 1,412 3,342 601 3,189 29 290 66 845 1949 1,551 3,650 572 3,020 32 320 68 868 1950 1951 1,890 4,387 592 3,068 28 280 260* 20,844* 1952 2,013 4,654 587 3,040 30 300 65 836 1953 2,234 5,122 592 3,109 26 260 66 843 1954 255,004 279,440 251,840 2,301 5,235 587 3,033 26 260 71 895 1955 2,464 5,560 598 3,116 88t l,052t 88f l,052t 1956 2,508 5,652 568 2,942 87f l,018t 87| l,018f 1957 2,335 5,207 543 2.848 24 240 64 803 1958 227,448 251,664 224,277 2,381 5,288 542 2,832 Per cent change, 1948-1958 -30 -28 -30 58 10 Stores PER FIRM 16-25 stores 26 stores and over 10 stores and over 2 stores and over Year Firms Stores Firms Stores Firms Stores Firms Stores 1948 184J 190* 260* 76 71 70 65 62 58 22, 422 t 21,511* 20,844* 1,484 3,378 1,382 1,296 1,215 1,153 184} 190J 260* 108 112 108 103 106 101 22, 422 X 21,511* 20,844* 17,564 17,279 16,795 16,703 16,774 16,848 279 290 288 279 275 276 256 255 247 248 23,557 22,699 21,124 20,184 19,129 19,332 19,051 19,007 19,044 19,267 2,227 2,366 2,770 2,879 3,101 3,164 3,318 3,331 3,125 3,171 30,125 1949 28,811 1950 1951 28,579 1952 27,878 1953 27,360 1954 27,600 1955 27,727 1956 27,601 1957 27,099 1958 27,387 Per cent change, 1948-1958 ■'■ -11 -18 42 -9 * Total of 11-15, 16-25 and 26-and-over stores. t Total of 10 and 11-15 stores. j Total of 16-25 and 26-and-over stores. Data for 1948 include 50 meat markets; 1949 data include 65 meat markets, except in final column. Source: Directory of Supermarkets and Grocery Chains, annual issues, 1948-1959. Appendix Table 8. Facts About New Supermarkets, 1955-1958* Number reported Display case Store size Over-all investment! Total invest- ment! Stores leased Rental expense Stores Year super- markets opened Meat Frozen food Total area Selling area Total area Main floor shop- ping centers number 141 156 147 152 191 lineal feet square feet dollars per square foot thousand dollars 335 395 442 431 per cent 84 81 72 71 75 per cent of sales t X 1.5 1.5 1.5 per cent 1955... 1956... 1957. ... 1958... 1959... 80 90 98 100 78 77 72 80 18,000 21 , 200 22,000 20,500 20,000 t 11,700 12,400 13,100 13,300 18.60 18.61 20.07 21.03 20.37 t 23.80 25.93 24.00 23.62 43 47 41 47 55 *A supermarket is denned as a completely departmentalized store with at least the grocery department fully self-service and having a minimum of $20,000 sales per week. t Includes land, building, and fixtures but excludes parking lot and inventory. X Data not available. Source: Super Market Institute, Facts About New Super Markets (Chicago j 500 N. Dearborn, annual issues, 1955-1958). [72] LITERATURE CITED ' Bain, J. S. Ij 1959. Industrial organization. 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