The Great A&P and the Struggle for Small Business in America (23 page)

Neither law made the least mention of retailing. Yet both struck directly at the way A&P conducted its business.

The scale of the threat became clear on June 23, when the AAA convened food-industry executives in Washington. John A. Hartford was in the audience as Charles Brand, briefly serving as the agency’s co-director, laid down rules that went far beyond the language of the new laws. No food distributor, Brand said, had the right to sell commodities produced from one set of materials at a loss and make up the loss on commodities produced from other materials. Though the language was obscure, it meant that the administration was joining the battle against big grocery chains. Independents had long accused the chains of selling some items at money-losing prices—loss leaders, they were called—in order to bring customers in the door. Brand’s words meant that government would no longer allow some goods made from farm products to be sold at a lower profit than other goods. Nor could the retailer use advertising and brokerage allowances to reduce the price to the consumer. As A&P took in far more in advertising and brokerage allowances than any other retailer, the new rules seriously restricted its ability to set prices below those of competitors.
10

Worse was to come. The AAA was overseeing the development of marketing agreements among distributors of some agricultural products, such as milk. As early as July 1933, AAA rules forced A&P to raise the price of White House milk, canned in the company’s Wisconsin factories. A&P was required to charge at least seventeen cents for three cans of milk, executives in the Southern Division complained, while small competitors “have made inroads on our business through offering specials at 5¢ per can or less.” Federal officials had no realistic way to police such violations at the hundreds of thousands of independent grocery stores, but the nation’s largest grocer could not avoid compliance.
11

Food manufacturers, wholesalers, and retailers all were expected to adopt codes of fair competition under the National Industrial Recovery Act. Administration officials made clear that grocery wholesalers were to write one code, grocery retailers another. Chain and independent grocers were to be covered by the same code. And what if they could not agree what that code should say? “The government’s thought in this connection is that when an industry comes together to draw up a code, the thoughtful men in every line will pretty nearly embrace the same opinion,” an AAA representative explained helpfully. The food retailers, he added, were expected to agree to “a truce in competition.”
12

Like groups in hundreds of industries, food wholesalers and food retailers spent the summer of 1933 drawing up codes of fair competition for government approval. Fair competition, as the National Recovery Administration defined the term, meant that competitors should have similar cost structures so that they could charge similar prices. The results would have the force of law, but the process was nothing like lawmaking. The grocery code was to be drafted by various state and national organizations, which were deemed to represent the interests of all firms in the industry, whether or not individual firms concurred. The draft code was to be submitted for a formal hearing, at which witnesses could object to particular provisions or offer substitute language. The NRA’s consumer, industrial, and labor advisory councils could weigh in as well. After these procedural niceties, agency officials would negotiate with the groups that drafted the code, agree on final language, and submit the finished product for President Roosevelt’s approval.
13

This process allowed wholesalers and retailers to write rules that could be used to strangle competition to the advantage of small retailers. The National Association of Grocery Wholesalers, one of two nationwide wholesaler groups, dominated the writing of the food wholesale code. While the National Association of Food Chains helped draft the code for grocery retailers, its interest was the many chains owning only a few stores, not the large retailers. A&P, which had sales greater than those of the next seven food chains combined, was not an association member. Although A&P accounted for one-sixth of all sales at grocery stores in 1933, it was not invited to join the code-writing bodies. Nor did those bodies have the slightest interest in efficiencies that could reduce the cost of distributing food to consumers. The codes turned out to be competitive weapons, and A&P was in the line of fire.
14

The grocery code, signed by Roosevelt at the end of 1933, was an independent grocer’s dream. Like all NRA codes, the grocery code was stuffed with provisions to stabilize labor costs at a time when falling prices and high unemployment were pushing market wages down. Individual employees could work no more than ten hours in a day and forty-eight hours in a week. Children under sixteen could work no more than three hours per day. The minimum wage for grocery clerks would be $15 a week in large cities, $10 per week in small towns. Workers had the right to form unions to bargain with employers. But none of these provisions applied to family labor in independent stores or to small independent stores operating in rural areas. Of the 482,000 food stores in the United States, upwards of half were unaffected by the labor rules in the grocery code, while chains were uniformly forced to comply.
15

The pricing provisions of the codes were even more damaging to the chains. The grocery code barred the sale of any grocery product for less than the invoice cost plus freight plus a 6 percent markup. This required markup on food was set lower than the independent grocers and wholesalers hoped for, and in November 1933 representatives of the National Association of Retail Grocers and the National-American Wholesale Grocers’ Association visited Marvin H. McIntyre, Roosevelt’s secretary, to plead unsuccessfully for a mandatory 10 percent markup. Even so, minimum selling prices on everything except meat, which was covered by a separate code, were a direct attack on John Hartford’s philosophy of cutting prices to increase volume. The NRA food code would not allow more efficient grocers to operate with lower prices than competitors, even if they could do so profitably. This hardly served consumers’ interests, but it served the administration’s objective of keeping less efficient retailers in business to avoid adding to unemployment. Protests by the NRA Consumer Advisory Board against the ban on below-cost sales were ignored.
16

With a stroke of the president’s pen, the codes rendered many routine food-trade practices illegal. A&P and other grocery chains frequently accepted slim margins on sale merchandise to entice shoppers who would fill their baskets with more profitable items. The chains often found such sales profitable after taking manufacturers’ allowances for advertising, brokerage, and fast payment into account. Now, however, allowances could not be considered in setting prices; any retail price below 106 percent of invoice price plus freight constituted unfair competition. A&P often featured low prices at new stores to build a clientele, and this, too, was barred by the codes. Selling one product with a low margin subsidized by the high-margin sale of another product was illegal. Fresh milk had to be sold at a single wholesale price across an entire region; coupled with the rules on minimum markups, this effectively meant that all retailers in a city had to charge the same price. The NRA macaroni code barred sales “below a fair and reasonable price,” leaving it to bureaucrats to decide when the manufacturer’s wholesale price constituted “destructive price cutting.” The codes prohibited rebates of brokerage fees to grocers that did not buy through brokers, such as A&P, and required that advertising allowances be offered equally to all grocers, even mom-and-pop stores that never advertised.
17

The list of prohibitions was extensive. Grocery stores could not remain open more than sixty-three hours a week, fulfilling a long-standing demand of independent grocers who stood behind the counter every moment their stores were open. For chains, however, the sixty-three-hour limit effectively mandated each store to close for a day and a half each week, reducing efficiency by requiring costly assets—store, furnishings, equipment—to sit idle. Premiums such as trading stamps were not permitted, a restriction that hardly affected independent stores, which rarely offered them, but did affect chains. Grocery stores could not hold two-for-the-price-of-one sales or give a discount on one product in return for the purchase of another. Separately, the codes for grocery manufacturers discouraged advertising and brokerage allowances and cash discounts, raising the effective prices manufacturers charged A&P and other big chains but leaving the prices for small grocers unaltered. The trucking code eroded A&P’s cost advantage in moving foodstuffs from warehouses to stores.

These rules, and many more, were enforced by 783 local code authorities, which were charged with monitoring compliance and investigating suspected violations. Complaints were frequent. Between November 1933 and May 1935, officials registered 3,327 alleged violations of the Food and Grocery Code. Only the trucking and construction industries generated more complaints than the grocery trade. The more complicated complaints ended up at the central code office, located a couple of blocks from the White House, where seven employees devoted to food retailing sorted out such issues as when markdowns of dented cans and rotting produce were legal and when not. Smaller firms often paid little attention: a survey of 181 grocery wholesalers in New York state found one-third of them in violation of the food wholesaling code, with smallest wholesalers the most common violators. In combination, New England Division executives estimated, the NRA codes increased expenses by an amount equal to 1.5 percent of sales, while “many of our competitors, particularly the smaller chains and independents, are not adhering to the Code as rigidly as we are … and we find them proving very stiff competition.”
18

*   *   *

The Hartfords were slow to respond to the mounting threat. While the New Deal’s policies permitted competitors to enlist Washington in their fight against A&P, Roosevelt’s supporters continued their assault on chains at the state and local level. Before 1933, only a handful of states taxed chains. Between 1933 and 1935, fifteen states imposed new chain-store taxes, sometimes more than once. Minnesota, where A&P had only recently entered the market, passed a tax in 1933 that rose to $155 per year for each store in the state above fifty. Michigan, where A&P had done business for half a century, enacted an assessment that rose to $250 per year for each store over twenty-five. Florida’s state senate came within one vote of banning chain retailers altogether in 1935; instead of a total ban, the legislature enacted a “privilege tax” of $10 for one store, $400 for each chain-owned store over fifteen, along with a tax of 5 percent of the gross receipts of chain stores. The most onerous levy, in Huey Long’s Louisiana, taxed a chain with even a single store in the state according to the number of stores it owned nationwide, with the tax reaching $550 per store for chains with more than five hundred stores. The levy on A&P’s fifteen thousand stores came to $8.25 million—half the company’s total profits in 1934. Long, then a U.S. senator but still dominant in Louisiana politics, made no bones about the purpose of the tax. “I would rather have thieves and gangsters than chain stores in Louisiana,” he told his constituents.
19

The anti-chain forces made imaginative use of the day’s most powerful communications medium, the talking picture. In 1934, a former NRA official, Frank Wilson, released
Forward America
, a film devoted to exposing “the anti-American business methods” of the chains. “The picture is dedicated to the American housewife,” the publicity proclaimed. “It shows her how by sending her money away from home she is trading her husband out of his job, destroying the value of her home, and adding to the national problem of unemployment.” Independent merchants arranged for local cinemas to show
Forward America
as the second film of double features and handed out free tickets to their customers to build support for further action against the chains.
20

While chain-store taxation affected all chains, the Great Atlantic & Pacific was the main target. The Supreme Court had specifically ruled that a graduated per-store tax was constitutional, while taxes on chain stores’ revenues or profits were not. In 1935, A&P had four times as many locations as Kroger; ten times as many as J. C. Penney, a clothing and dry-goods chain; and eight times as many as Woolworth, the king of variety stores. Unlike Kroger, A&P had stores throughout the South, where chain-tax fever ran especially high. Its chain-store tax burden, never disclosed to the public, was $2.2 million in 1935, or one-seventh of its total profit. And to the burden of state taxes must be added the municipal taxes that sprang up from Hamtramck, Michigan ($25 for a company’s first local store, $1,000 for the fourth), to Fredericksburg, Virginia (up to $250 per store), to Little Rock, Arkansas, to Portland, Oregon.
21

The proponents of state chain-store taxes were among Franklin Roosevelt’s strongest backers. According to the economist Thomas Ross, the single most important variable in predicting which states would tax the chains was politics. States in which the Democratic Party controlled the governorship and both houses of the legislature were much more likely to enact chain-store taxes than states where the Republican Party shared power. Although these taxes raised consumers’ costs, the pro-consumer New Dealers in Washington dared not criticize the small-town Democrats who led the anti-chain crusades. Nor did they object to the many other state laws that sought to protect small merchants and thereby raise the consumer price of food.
22

John Hartford, standing aloof from politics, never opposed the New Deal’s efforts to cartelize the food sector under the Agricultural Adjustment Act and the National Recovery Act. At the onset, in 1933, he had told his executives that while the code for the food and grocery trade “will undoubtedly place certain restrictions and burdens upon our operation,” he thought “the industry as a whole” might benefit. The responsibility that came with running the nation’s largest retailer may have made him hesitant to criticize the New Deal. In July 1933, he agreed to join other executives on the Agricultural Adjustment Administration’s Food Industries Advisory Board, lending tacit support to the Roosevelt program, and two weeks later he publicly pledged his company’s support for the codes. Perhaps the fact that the codes would constrain the new discount supermarkets, which made heavy use of loss leaders, made him hesitant to condemn the new regime. But he also refused to speak out against the rapid spread of state and local taxes on chains, which affected his company enormously but touched the independently owned supermarkets hardly at all.
23