The Great A&P and the Struggle for Small Business in America (15 page)

The Hartfords moved to exploit these advantages with scientific precision. With ample profits to reinvest and no outside shareholders clamoring for higher dividends, the Hartfords had the resources to expand quickly. No surviving information documents the discussions between George and John in the early 1920s, but it would have been in character for John to push faster growth and George to question the payoff from new investments. In any event, teams of company real-estate experts scoured the country, drawing on A&P’s detailed statistical information to evaluate buildings, measure pedestrian traffic and neighborhood wealth, and estimate how much revenue a new location might bring in. Data in hand, A&P was in control when it came time to negotiate a lease. Construction workers swarmed in, readying the store within days. Over the three-year span between February 1922 and February 1925, the gold-on-red A&P logo went up on seven new storefronts a day, a pace limited only by the company’s ability to find store managers. “We went so fast that hobos hopping off the trains got hired as managers,” John Hartford joked later. By February 1925, the Great Atlantic & Pacific operated more than thirteen thousand stores from Maine to Texas.
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As leases expired, existing stores were relocated to larger premises. The six-hundred-square-foot Economy Store, state of the art before World War I, was an anachronism by the Roaring Twenties, and the new stores were twice that size or more. Here, too, scientific thinking came into play, with A&P’s designers using sales data and customer surveys to decide where to place the various departments and how to present the goods. The larger stores displayed products on counters, rather than behind them, so shoppers could serve themselves. Some stores had room for electric refrigerator cases, a new invention, to hold fresh milk and produce. Customers’ new expectations extended to trading stamps. With the Economy Store, John Hartford had convinced shoppers to forgo premiums in return for low prices, but in the 1920s they expected both. By the early 1920s, A&P shoppers in some locations could once again obtain coffee mills or sherbet glasses in return for stamps handed out with every purchase.
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Around 1920, the Hartfords decided that their fast-growing retail business would assure a profitable outlet for manufacturing. The evidence suggests that this, too, occurred at John’s urging. Vertical integration—the idea that a company should take charge of multiple facets of its business, one supplying the other—was all the rage in American industry. In 1917, the Ford Motor Company had begun building its vast River Rouge plant near Detroit, which was designed to take in iron ore, rubber, and other raw materials, turn them into mufflers, windshields, and fan belts, and combine the thousands of parts into a complete vehicle, all at a single site. John, impressed, consulted Henry Ford about applying the secrets of volume production to the food sector. The meatpacking industry was already trying to do this. The five big firms that dominated hog and cattle slaughtering had opened retail meat markets, allowing them to control the industry vertically from the fattening of animals for slaughter to the retail sale of pork chops, and one of the five, Armour & Company, had built a retail fruit and vegetable business. Federal antitrust action in 1920 forced the meat packers to exit their retail businesses, but it did nothing to hinder retailers from entering manufacturing. A&P was already vertically integrated in a modest way thanks to its Jersey City manufacturing complex, but it manufactured only a small part of the goods it sold. Reliance on outside suppliers must have seemed a disadvantage at a time when manufacturers were capturing a greater share of the food industry’s profits. As George and John debated this issue, they decided that the best way to fight the growing power of grocery manufacturers was to manufacture more themselves.
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The first step came in 1919, when the brothers turned A&P’s coffee business into the American Coffee Corporation, a wholly owned subsidiary. A&P, of course, had been selling coffee since the Civil War, and had imported coffee directly from Brazil since at least the 1890s. Its brands, however, were not the market leaders, and the name A&P was not associated with high-quality coffee. George Clews, the son of George and John’s sister Minnie, took charge of American Coffee. Again, scientific thinking was put to use. American Coffee set up a buying office in Santos, the main Brazilian coffee port, and established a network of agents in the growing regions; rather than accepting whatever Brazilian exporters chose to ship, it would select the beans with the characteristics its customers preferred. Roasting and grinding plants were built across the United States so A&P could move coffee to its stores quickly after grinding. The product was enveloped in an aura of quality carefully constructed by A&P marketers. Experts were said to blend the beans in precise fashion at Santos. Trained testers sampled the coffee on the docks and again before it left the roasting plants to maintain consistency. George L. Hartford, a man who never went out to lunch, established the new tradition of visiting the tasting department at 2:00 p.m. each day to make sure the coffee tasted just right. Several weak brands were dumped so A&P could put its marketing muscle behind Eight O’Clock Coffee, its bestselling coffee.
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In October 1922, A&P spent $275,000 to buy the White House Milk Company at West Bend, Wisconsin. At the time, grocery stores rarely sold fresh milk, which had a short shelf life due to the lack of refrigeration. Instead, A&P sold canned evaporated milk, which the consumer could use simply by adding water, and sweetened condensed milk, similar to evaporated milk but with sugar mixed in. By acquiring White House, which produced only 400,000 cases of evaporated milk per year, the Hartfords were entering head-to-head competition with established manufacturers of brand-name canned milk, such as Borden and Carnation. John Hartford visited West Bend in 1923 and must have liked what he saw. A&P rapidly added plants across Wisconsin to purchase milk from farmers, condense it, and can it. It was soon among the biggest milk producers in America.
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The story was repeated with bread. Once, when its stores had been concentrated around New York City, most stores had sold bread baked at the A&P headquarters complex in Jersey City. By 1923, though, A&P had stores in twenty-three states, most of which had to be supplied by local bakers under their own brand names. These industrial bakers usually wanted to charge all retailers the same price, a situation the Hartfords saw no reason to accept. A&P went on a buying binge, purchasing existing bakeries, installing the most modern equipment, and becoming the second-largest baker in the country, with costs far below those of other bakeries. The company’s mass of sales data allowed A&P’s bakeries to forecast demand with a high degree of accuracy, minimizing returns of stale bread and doughnuts. Bread was delivered to stores in the same trucks that delivered other foods rather than by commissioned salesmen, a system that saved a penny per one-pound loaf at a time when the average loaf sold for a nickel. With a cheap source of supply, the stores could use Grandma’s Bread and pound cakes as major customer draws.
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Another subsidiary, A&P Products Corporation, plunged into the salmon industry. Fresh fish were extremely difficult to transport and were rarely sold far from the docks where they were landed. Most of the catch was canned, and canned salmon had been a major grocery product since the turn of the century. The salmon-canning industry had boomed during World War I. When prices collapsed after the war, many canneries failed. A&P swooped in. It leased three canneries in southeastern Alaska in 1922 and added others. By 1926, A&P’s operation, renamed Nakat Packing Company, was challenging Libby, McNeill & Libby as the leader in the $46-million-a-year canned salmon trade.
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The Hartfords expanded their manufacturing business in the continental United States under a subsidiary that became known as Quaker Maid. Great Atlantic & Pacific was not entirely new to packaged foods, having opened a vegetable cannery around 1907, but Quaker Maid was on an entirely different scale. A&P-owned plants began churning out everything from peanut butter to gelatin. The company’s market-research department surveyed consumer preferences and massaged detailed sales data from individual stores so Quaker Maid could adjust its recipes to suit local or regional tastes. Quaker Maid was so large that A&P even owned a factory to print labels and another to manufacture cans, twenty-two million of them a year.
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Being a food processor vastly complicated the job of moving raw materials and finished products, and A&P created a huge logistical infrastructure. Leased refrigerator cars carried produce from growing areas to canneries and warehouses. Goods from outside suppliers were purchased by the boxcar, minimizing the purchase price and allowing the company to save about 15 percent on freight costs. As one of the country’s largest shippers, A&P had the muscle to bargain with the railroads, saving $60,000 a year by winning changes in the rates for moving coffee from ports to roasting plants to warehouses. Its in-house transportation division marshaled fleets of company-owned trucks and refrigerated boxcars to get food delivered on time.
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By all public evidence, A&P was an amazing growth story. Its stores, warehouses, and factories had been planted in thousands of communities across the eastern half of the United States. Its new manufacturing might would give it an ever-bigger cost advantage over neighborhood grocers. Its brand was famous, promoted on the
A&P Radio Hour
, one of the earliest national radio shows, by the music of Harry Horlick and the A&P Gypsies. Its sales figures, released annually since its first bond sale in 1916, astonished the experts. “1924 Sales Were Enormous,”
The New York Times
declared in 1925. The annual dividend on the common stock, which was announced each May, was raised to $3 in 1923, $4 in 1924, and $5 in 1925, seeming proof that the firm was in the best of health.
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The reality was otherwise. Although the numerous articles and books about the Great Atlantic & Pacific uniformly praise the Hartfords’ management skill, the push to grow so quickly in the early 1920s and to diversify into manufacturing, apparently driven by John’s eagerness to expand, was unwise. The Hartfords had always been parsimonious with their investment dollars, doing all they could to avoid buying fixed assets: by the company’s estimate, its average store involved an investment of only $1,120 in real estate and equipment, a fraction of the $2,740 invested in the average Kroger store and the $4,543 at American Stores. But manufacturing, as John Hartford frequently pointed out, involved a great deal of “capital tie-up.” He was forced to admit that the results of his push for vertical integration were disappointing. In 1924, A&P’s canneries and milk plants produced a 23.6 percent return on invested capital—but while two canning plants were extremely profitable, others barely made money or even ran in the red. The bakeries as a group earned only a 17 percent return, far below the company average, and several of them lost money. Manufacturing was no gold mine.
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Worse, running a complex manufacturing operation caused management to take its eye off the main business of selling groceries. Although A&P’s total sales rose 50 percent between 1920 and 1924, sales per store
fell
almost 50 percent. The physical volume of groceries handled in the average store declined for four consecutive years: A&P was not even keeping up with mom and pop. Among ten grocery chains, none approaching A&P’s size, A&P ranked dead last in sales per store. Selling expenses, 14 percent of sales in 1920, climbed to 18 percent of sales in 1924, forcing A&P to hike prices and retreat from discount pricing. While A&P was content with a profit of three cents on each dollar of sales, American Stores, a Philadelphia-based chain, was rumored to be earning twice as much. Those impressive dividend increases merely reflected the amounts George and John Hartford chose to pay themselves and the family trust, and were no indication of the company’s performance. By some measures, A&P was using more cash than it was generating.
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The Hartford brothers were in no danger of running out of money, but the trend lines were pointing in the wrong direction. By 1925, they could not ignore the fact that their company had grown too big and too unwieldy. It was time for a new strategy.

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THE PROFIT MACHINE

If the modern consumer economy can be said to have a starting date, 1925 is as good a choice as any. In that year, George and John Hartford began to steer their company onto a dramatically new course, one that sought growth and profitability by emphasizing low costs, low prices, and high volume. In restructuring the Great Atlantic & Pacific Tea Company, they transformed both the nature of retailing and the expectations of the American shopper. The Hartfords’ organizational changes created a retailing behemoth whose size was almost beyond comprehension and touched off a quarter century of political and legal warfare over the role of small business in the American economy.

The Hartfords’ initiatives were in tune with the spirit of the times. In January 1925, the Chamber of Commerce of the United States gathered two hundred executives in Washington for the first National Distribution Conference. The featured speaker was Herbert Hoover, the secretary of commerce and the man who had mobilized the American food distribution system to feed a starving Europe in the wake of the world war. Hoover, an engineer by training, had spent years trying to standardize everything from typing paper to bricks in order to improve the efficiency of the manufacturing sector. Although far from being a socialist, he believed that capitalism naturally led to so much diversity as to create inefficiency. “The only case where unlimited diversification seems justified is padlock keys,” Hoover said. Government, he asserted, could make the capitalist system more productive by helping businesses agree on standard products and procedures that would eliminate unnecessary costs. Now he was turning his engineer’s eye to America’s wholesale and retail trades, and he did not like what he saw. Those thousands of tiny wholesalers and retailers that made up the distribution system meant waste and inefficiency, and the public was paying for it. He called on businesses to standardize their products, their record-keeping systems, and their freight handling. If products could move more efficiently from producer to consumer, Hoover insisted, farmers and manufacturers would earn more profit, consumers would save money, and the country would prosper as workers shifted from distribution to more productive activities.
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