The Great A&P and the Struggle for Small Business in America (33 page)

By the end of the 1930s, fifteen years of attacks and investigations had left their mark on the Great Atlantic & Pacific. A&P remained the world’s largest retailer by far, but it operated under a microscope. Although the NRA’s price restraints had been overturned and the federal chain-store tax defeated, the Robinson-Patman Act was in full force, complicating the company’s efforts to command discounts from suppliers and to use profits from its factories to hold down prices in its stores. At the state level, chain-store taxes and “fair trade” laws requiring uniform prices and minimum markups played havoc with the most routine business decisions. A Kansas official visited a store in Kansas City to buy three packages of coffee for forty-nine cents, then purchased the same brand in Topeka at three packages for fifty-three cents to accuse A&P of illegal price disparities. A county attorney threatened to arrest the manager of a new supermarket in St. Paul for having prices below those in other A&P stores. A regional circular advertising Waldorf tissue at five boxes for nineteen cents had to be withdrawn because that price, legal in Indiana, where the circular was printed, was illegally low at stores across the state line in Ohio. The wholesale price of Sparkle gelatin from A&P’s Quaker Maid factories, 3.035 cents per package, was too high to resell at three for ten cents once Arizona’s state-mandated markup was factored in, but Quaker Maid refused to reduce the wholesale price a few hundredths of a cent per package lest sales from one A&P division to another be deemed too cheap.
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Such legal assaults contributed to a sharp drop in profitability. In 1937, George Hartford was forced to abandon the cherished $7-per-share dividend because profits were too small to cover the cost. Even after doubling since that low point, A&P’s after-tax earnings remained far lower than they had been a decade earlier. In 1939, which saw the best performance in six years, earnings per share of the company’s stock were down 42 percent from their peak. At the start of the decade, investors had scrambled to buy five or ten nonvoting shares whenever employees were willing to sell on the New York Curb Exchange, but now, according to
Barron’s
, A&P was “a stock that has lagged far behind the average.” Shares that had changed hands for $260 in 1930 could be had for as little as $36. The Hartfords even offered to repurchase shares from employees who had invested with great enthusiasm in the late 1920s and had seen the value of their holdings collapse.
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For a company listed on the stock exchange, owned by impatient investors demanding increased dividends and a higher share price, such performance would have been disastrous. George and John Hartford, however, controlled all of A&P’s voting shares, and they had no need to answer to anyone. They could do as they pleased. They stuck with the strategy they had finally agreed upon in early 1937, closing older, smaller stores and opening supermarkets. In 1937, when A&P had been stripped of almost all its cost advantages, 44 percent of its retail outlets had lost money. By February 1940, after 5,950 store closures in three years, the proportion of “red-ink” stores was below 18 percent and headed into single digits. In place of these outmoded stores, where wages and operating expenses ate up 17 percent of every dollar of sales, A&P rapidly rolled out supermarkets where expenses took less than twelve cents per dollar of sales. Its new stores lacked the flash of independent competitors’ stores; as
Fortune
magazine described matters, “A&P’s entries in the field are like wrens in a flock of noisy parakeets.” But those wrens proved to be extremely profitable. Three years after the start of A&P’s transformation, supermarkets accounted for half the company’s profits.
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The supermarket was a shock to the tens of thousands of longtime employees at A&P. When A&P had begun to shift from traditional grocery stores to combination stores in the late 1920s, the main changes at store level had been the installation of meat counters and the employment of butchers. Outlets had relocated to slightly bigger premises gradually, over a period of many years, but the work of store clerks and store managers barely changed. The shift from combination store to supermarket was far more abrupt. A full-service combination store, of which A&P still had thousands, might occupy a space twenty-five feet wide and fifty feet deep on the ground floor of a narrow building. New supermarkets were four or five times as large. A combination store, on average, had sales of $1,400 a week at the start of 1940. New supermarkets were expected to have weekly sales of $10,000 or more. Fixtures, displays, lighting, and even scents were carefully thought out to attract more prosperous shoppers. Employees’ jobs changed, too. Clerks were no longer meant to chat with customers, pick their purchases off the shelves, and ring up the sale; now supermarket stock clerks—largely male—specialized in moving boxes and keeping the shelves filled, without disturbing shoppers, while checkout clerks—mostly female—were more like assembly-line workers, serving unending queues of customers. The shrinking store count meant that many erstwhile store managers no longer managed, and those who remained had so many employees to oversee and so many items to keep in stock that they rarely labored alongside their clerks, as they had in the past. Even high-ranking executives had difficulty adjusting to these changes. At the end of 1938, as he was pressing his staff to open more supermarkets, the head of the New England Division asked all workers to make sure “no customer is allowed to leave our stores until at least one item has been suggested”—a demand for just the sort of face-to-face contact the supermarket was intended to eliminate.
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A&P’s vast manufacturing and distribution system was well suited to keeping these large new stores stocked at favorable prices. Due to the Robinson-Patman Act, A&P could not buy branded goods from outside producers for less than its competitors paid, except where it could justify volume discounts. But its factories and bakeries gave it brands other retailers could not offer. If it organized orders properly, those plants could operate steadily near maximum capacity, driving down the cost of producing each can of green beans and each loaf of bread. With demonstrably lower production costs, A&P’s factories could set their wholesale prices below those of outside suppliers, allowing the retail stores to price below the competition without running afoul of the law. So important was in-house manufacturing that A&P set up a merchandising committee in late 1938 to find ways to get more of its own products into its growing number of supermarkets. “A&P products are the largest single source of profits which A&P has,” the committee agreed. “To increase these profits is our one aim.”
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Supermarkets had far larger produce sections than the combination stores they replaced, giving the Atlantic Commission Company, A&P’s produce wholesaler, a critical role in the business. Atlantic Commission was controversial, because by the standards of the fragmented produce trade it was an extremely large operation, handling 9 percent of U.S. shipments of fresh fruits and vegetables in 1940. Most produce in those days was sold through local grower associations; when an area’s pea harvest or plum crop came in, individual farmers would haul their output to the association’s warehouse, where it would be auctioned to specialized brokers. The brokers, in turn, would move the produce in smaller lots through wholesale markets in major cities. Atlantic Commission sometimes joined those auctions, but it could also circumvent them. Unlike the independent brokers, it had agents at big-city markets in addition to a hundred buying offices around the country. Their close communication enabled it to decide whether, on any given morning, Atlantic Commission would bid at the apple auction run by the Yakima Valley Growers Association in Yakima, Washington; strike private deals with the association or individual apple growers; or buy nothing in Yakima and meet its requirement for apples at the market in Chicago or New York. Atlantic Commission was big enough to obtain volume discounts by purchasing dozens of railcar loads at a time and to control risks by contracting for farmers’ potato harvests in Kern County, California, before the crop was even planted. Its scope and scale gave it advantages smaller brokers could not match.
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Purchasing in volume, circumventing brokers and wholesalers, and minimizing losses in transit brought lower costs: in 1940, A&P estimated that moving a box of oranges from California to a store in Jersey City would cost forty-six cents with a broker but only twelve cents through Atlantic Commission. Even allowing for exaggeration, the cost saving was huge. Atlantic Commission’s marketing muscle allowed it to balance supply and demand in a way a smaller dealer could not. It could organize regional or national promotions of fruits that were in oversupply, redirect shipments to places where a commodity was scarce, and sell excess to other retailers when it had more peaches or carrots than A&P needed in a particular location. In 1941, Atlantic Commission bought up 26 percent of Maine’s potato crop and organized ships to take the potatoes to ports in the South and Southeast, allowing A&P supermarkets to stock Maine potatoes in towns where they were normally unavailable. Atlantic Commission enabled A&P to gain efficiency in a highly inefficient corner of the food distribution world, filling the new supermarkets with an unprecedented array of produce from all over the country.
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The spread of supermarkets also opened new possibilities for A&P’s huge bakery division. Until the late 1930s, the thirty-five bakeries served principally to supply cheap sliced bread; A&P’s grocery stores had neither space nor equipment to sell more perishable baked goods, and the bakeries rarely produced them. The supermarkets, however, had room to display cakes, pies, and pastries attractively, assuming A&P could figure out a way to deliver the goods quickly enough to keep them fresh. In 1939, A&P began to train its bakers to make cakes and pies on an industrial scale. To convince customers that the goods were as fresh as those in any bakery window, A&P wanted to display them on sheet pans rather than in packages, so its engineers developed a galvanized container to transport sheet pans safely from bakery to store. Glass display cases appeared in the supermarkets, where clerks were taught to sell and wrap baked goods. With the creation of a heavily advertised bakery brand, Jane Parker, sales took off. Retail sales of baked goods jumped 35 percent in three years, and may have accounted for half the company’s profits by 1941.
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In hindsight, it is difficult to appreciate the speed with which the mammoth retailer restructured a business that operated from Florida to Alaska and Quebec to California. By the end of 1941, two-thirds of the A&P stores that had been open in 1937 no longer existed. In their place were bigger stores operating far more efficiently. While food prices rose only a few percentage points over those four years, sales at the average A&P store increased 236 percent, and the physical volume of merchandise moving through the average store nearly quadrupled. Sales per employee rose by half. With prices held constant, expenses fell by one-third in four years, relative to sales. By 1941, A&P’s operating costs, per dollar of sales, were half what they had been in 1925.

The company’s advance would have been even more rapid had it not heeded the counsel of Carl Byoir to slow the pace of supermarket openings. Byoir frequently participated in A&P management meetings to advise on public relations. In June 1939 he warned that simultaneous supermarket openings in individual cities might “be detrimental to the company in a public relations way.” The order went out from headquarters to move more slowly. Unit managers were advised to take care to avoid the perception that A&P was trying to dominate the local grocery trade anywhere.
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The supermarket was the fourth retailing revolution through which George and John Hartford had guided the Great Atlantic & Pacific. With their father, they had turned George Gilman’s tea company into the first grocery-store chain in the 1890s. Starting in 1912, their Economy Store had changed the grocery trade from a haphazard enterprise of uncertain profitability into a large-scale business based on careful control of costs and prices. In 1925, the Hartfords had reorganized the company to take advantage of vertical integration and economies of scale with the aim of boosting profits by increasing volume. Now, with little ado, they brought about yet another transformation by moving quickly from the combination store to the supermarket. They were by no means the inventors of the large self-service food store. Their contribution came in figuring out how to use this new format to increase efficiency and lower costs. In the space of a very few years in the late 1930s and early 1940s, A&P turned the supermarket from a wild marketing concept of uncertain profitability into the main place American families bought their food. In 1939, the first time it examined the supermarket phenomenon, the U.S. Census Bureau counted 1,660 self-service food stores with sales exceeding $250,000 per year. A&P had more stores fitting that description than all other food retailers combined.
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The numerous government investigations of A&P have left an unusually detailed picture of how the Hartfords managed their company through the 1930s, a decade of extraordinary economic and political challenges. In the tens of thousands of pages of surviving company documents, though, George L. Hartford remains an enigma. By the second half of the 1930s—George turned seventy in 1935—his appearances at company meetings were limited to the quarterly reunions of his highest-ranking executives, such as the division presidents. Even in earlier years, the only division board meetings he attended were those of the Eastern Division, which were held at the Graybar Building; he would normally arrive at a prearranged time, speak his piece, and leave. There is no record of him traveling to company functions outside New York. The minutes of corporate meetings cite him only occasionally. When he is mentioned, his utterances either are benign generalities—“He mentioned that we were passing through some trying times, but he felt that our company was in splendid shape to weather any storm”—or concern financial performance, the sorts of comments one might expect from a corporate treasurer, not from the chairman of the board.
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