The Great A&P and the Struggle for Small Business in America (27 page)

In the early 1930s, when the supermarket concept first arrived in New York, the Hartfords had ignored it. Although their decision not to open supermarkets in 1931 and 1932 has been roundly criticized by later writers, it proved fortuitous. From May 1933, when Congress enacted the National Industrial Recovery Act, until May 1935, when the Supreme Court overturned it, the retail prices of most items on grocers’ shelves were effectively set by manufacturers. The NRA Food and Grocery Code made it hard for A&P to win wholesale price concessions from manufacturers and mandated at least a 6 percent markup over wholesale on all items at all grocery stores. Had A&P opened supermarkets, the stores could not have passed their lower operating costs through to customers in the form of lower prices. An investment in new supermarkets would have been difficult to recover, for under the codes large stores had no competitive advantage.
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The end of the NRA restored price competition in food retailing, and supermarkets made sense once again. As independently owned supermarkets cut into A&P’s market share, John A. Hartford was eager to start opening large stores. George L. Hartford, per usual, took a more conservative stance. “We had a conflict at headquarters whether we should adopt that type,” John testified later. “Some said it wouldn’t last—you can’t operate without selling under cost, and that we won’t do.”
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The decision to adopt a new type of store was far more complicated for a retailer the size of A&P than for independent operators. An independent could install a store in any suitable space, but the Hartfords needed to find a format they could replicate widely. Independents could position themselves as wild-eyed price-cutters—the image conveyed by such banners as Big Bear and Big Bull—whereas A&P, whose name was a household word, had to develop a format consistent with its established identity. Many independently owned supermarkets staged marketing stunts reminiscent of the Great Atlantic & Pacific in the era of George F. Gilman, with free prizes, product giveaways, and cooking demonstrations before hundreds of customers. One even hired a hypnotist to put a woman to sleep; while the subject slept in a store window, the hypnotist granted private interviews to shoppers. The day when A&P could promote itself so shamelessly was long past. In retailing, it was the establishment, not the upstart, and it had to position itself accordingly.
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Pressed by division and unit managers, who saw their sales leaking away to supermarket competitors, the brothers agreed to a trial. In 1935, A&P opened its first supermarket in Paducah, Kentucky. The goal was to hold expenses to 12 percent of sales, far below the company-wide average of 17.6 percent. At first, that goal seemed unattainable, but as the store lowered its prices, sales soared with little increase in operating costs, and the expense ratio began to fall. John Hartford liked what he saw, and he encouraged other experiments to raise volume by lowering prices. These trials showed that if they were located properly, supplied efficiently, and operated on a self-service basis rather than with clerks waiting on shoppers, supermarkets could be highly profitable. In some stores, expense rates fell to less than 11 percent, more than a third below the company-wide average.
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In March 1936, John spoke to the division presidents about developing more supermarkets. He was plainly worried about A&P’s competitive position. Unless the company moved faster to shed low-volume stores and build big stores, he said, it would face increasing difficulties. George Hartford said he was less pessimistic about A&P’s outlook but supported “conservative” development of supermarkets. A few more were opened, giving A&P twenty in all by the end of 1936. But it was clear the brothers were not of one mind. In October 1936, they disagreed openly at a division presidents’ meeting, with George insisting that “too much emphasis had been placed on the procuring of a large volume” even as John complained that “we have not progressed nor adapted our business in pace with the changing times.” There was no getting around the financial facts: profits were down almost by half from their peak in 1930, and the pretax return on investment was only half John Hartford’s target of 25 percent. A&P’s thousands of older stores, the ones that did not even sell meat, were downright dowdy, and many of the combination stores with meat counters, innovative in the 1920s, had become obsolete and unattractive. In too many places A&P was no longer the low-cost grocer.
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As A&P’s profits collapsed in early 1937, George changed his mind. He agreed to slash markups in order to increase sales volume, always John Hartford’s preferred approach. John ordered a concerted effort to replace underperforming stores with supermarkets. But in a company the size of A&P, the boss’s order was not always heeded. John’s instruction went to the division presidents, who in turn told their unit managers to find sites for supermarkets. Some did; some did not. The Eastern Division, in the New York City area, promised to open sixty-four supermarkets in the first quarter of 1938, but only twenty were ready. In Olean, New York, part of the Central Division, the unit manager opened a supermarket in 1937 but refused to close the four traditional full-service stores, destroying profitability. “Do you realize that we have gone all this quarter with only two supermarkets being opened in the entire Division?” J. J. Byrnes, head of the New England Division, wrote to the head of his Providence unit in 1938. “I shall have to go in again and try to offer alibis, which I dislike very much doing, as to the reasons why we have not procured more supermarket locations.”
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Opening supermarkets posed a troublesome management problem, because it was difficult to introduce the lower-price format without destroying the profitability of the company’s older stores nearby. The Hartfords preferred price discrimination: when A&P opened a new supermarket, it would advertise its low supermarket prices while charging higher prices for the same products in conventional stores. This approach, of course, hurt the conventional stores’ sales, leaving profits in tatters and employees bewildered. It is no wonder that John Hartford’s enthusiasm for supermarkets was not widely shared.
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The brothers may have controlled A&P’s shares, but turning their huge company required Herculean effort. John visited division-level management meetings to talk up supermarkets. At the December 1937 meeting of division presidents, John “emphasized the importance of doing this quickly,” and George said he was “completely convinced that the rapid carrying out of the program outlined by Mr. John is the only salvation of the business.” The gears began to mesh. From 1929 through 1936, A&P had closed an average of 356 stores per year, a small fraction of the number that were losing money. In 1937 and 1938 combined, more than 4,000 older stores were closed down, and 750 supermarkets were opened. The new stores all had meat, produce, and dairy departments and far more shelf space than the combination stores. Wide aisles allowed shoppers to take advantage of another innovation of the 1930s, the shopping cart, in which a large volume of purchases could be wheeled directly to the shopper’s car in the parking lot adjoining the store.
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Supermarkets offered economies of scale in almost every area of store operations. The bigger, the better: labor costs, restocking costs, store rental, and administrative costs all were much lower, relative to sales, in large supermarkets than in small ones (
Table 2
). In the largest supermarkets, operating costs were barely half those of traditional A&P stores. Supermarkets allowed A&P to capture economies of scale—and the company’s sheer size permitted it to capture those scale economies in a very big way. The sole exception was advertising expense: because big stores drew customers from a large geographic area, they required much heavier spending on circulars and newspaper advertisements to spread the word about their low prices and special sales.

John Hartford pushed his company into supermarkets for the most traditional of business reasons, retaining customers and rebuilding market share. But there was an important side benefit. By 1937, more than half the states imposed chain-store taxes, almost all of which were based on the number of stores owned by a chain. Replacing several small stores with a single supermarket let A&P markedly reduce its taxes. A&P’s store count, which hovered around fifteen thousand in the mid-1930s, fell 27 percent between February 1936 and February 1939, shrinking its tax bill accordingly. The state chain-store taxes, meant to shelter small grocers and wholesalers against the depredations of giant chains, gave chains such as A&P an added incentive to shift to large stores that would provide even tougher competition for mom and pop.
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For Wright Patman, the enactment of his bill against price discrimination in June 1936 was not an end but a beginning. Fighting for the independent businessman was to prove rewarding, personally as well as politically, and it would occupy the Texas congressman for the next decade.

A few weeks after the Robinson-Patman bill became law, Patman signed a contract with the Thomas Brady Speakers’ Bureau, which sent him on tour in the fall of 1937. The congressman traveled the country, speaking to civic associations and small-business groups from coast to coast. The trip was a triumph—until word leaked out that McKesson & Robbins, a drug wholesaler, had paid part of the cost. McKesson supplied drugs to independent pharmacies and therefore had a direct interest in legislation that protected independent druggists against pharmacy chains. Patman later denied allegations that McKesson had paid him $18,000 and bought him a new car; his speaking fees, he claimed, were only $4,000.
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What Patman did not disclose, and what was never revealed, was that he had done far more for McKesson than give speeches. He introduced the company’s president, F. Donald Coster, to Jesse Jones, then head of the Reconstruction Finance Corporation, a powerful federal lending agency, in 1937, and tried unsuccessfully to arrange a meeting between Coster and President Roosevelt in March 1938. Coster, well-known in business circles, was a man of substantial wealth, owner of a 133-foot yacht and of a twenty-room house in Fairfield, Connecticut, where he attended the local Methodist church. But there were a few things about his patron that Patman almost certainly did not know. Even as McKesson & Robbins was financing the anti-chain campaign and positioning itself as the protector of independent retailers, the company was secretly assembling a retail drug chain of its own. Also, Coster was not his sponsor’s real name. As Philip Musica, he had a background as a smuggler, bootlegger, and gunrunner with a federal bribery conviction on his record. He would shortly come under federal investigation for looting his company along with his brothers, who, it turned out, also were serving as McKesson executives under assumed names. After the fraud was unveiled, Coster-Musica committed suicide in December 1938.
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None of this caused Patman much damage back in his northeastern Texas district. The region was one of the poorest parts of the country, and getting poorer. The eleven counties in the First Congressional District would collectively lose 53,300 residents between 1930 and 1960, with three consecutive decennial censuses showing population decline. Hughes Springs, Patman’s hometown, had 1,000 residents in 1929, but only 767 in 1940. As tenants fled drought-stricken farms and as small towns withered, resentment of distant forces making it hard for a man to earn a living ran very strong. Martin Dies, the Democratic congressman from a district adjoining Patman’s, explained this feeling eloquently in 1937: “If a man undertakes to go into the grocery business, there is hovering above him the shadow of the Great A&P.” Although A&P controlled one-fifth of the grocery business in Texarkana, Patman’s constituents shared the views of most Americans, as revealed in a
Fortune
magazine survey: most households bought their food at chain grocery stores but also favored restricting them. The chain-store issue was one Patman could ride.
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The passage of the Robinson-Patman Act immediately unleashed a new round of political warfare. Patman told supporters that he had two other bills in mind. One would prohibit manufacturers from engaging in retailing, so large merchants could not circumvent Robinson-Patman’s restrictions on volume discounts by running their own factories. His other idea was to force wholesalers and distributors selling in towns where they did not pay local taxes to pay a federal tax instead. This, Patman argued, “would remove a discrimination against local merchants in favor of absentee distributors.”
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A&P, though, was not sitting idle. At the start of 1936, in the midst of the battle over the Robinson-Patman Act, John A. Hartford had taken what by A&P’s standards was a truly radical step. He appointed an outsider, Caruthers Ewing, as the firm’s general counsel. Ewing, then sixty-five, had been on the verge of retirement after a prominent career as a corporate lawyer in Memphis and New York. He had long been John Hartford’s personal attorney, but he owed nothing to the company. Quite unlike every other top executive—the man he replaced as general counsel was John Hartford’s cousin and an employee since the turn of the century—Ewing had not spent his entire career at A&P. John had decided he had been passive too long in the face of political attack, and he wanted Ewing to test the limits of the new law.
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