THE NATURE OF POSTWARRETAIL COMPETITION

VICTOR LEBOWChester H. Roth Co.^ Inc.

EDITOR'S NOTE: AS ivith the preceding article, thiscontribution by the Sales Manager of Chester H. Roth Co.shouldpromke discussion and, perhaps, dissenting opinionto which the Notes and Communications section mil heopen.

GREAT CHANGES took place in retail-ing in the decade 1931 to 1941; new

areas of competitive conflict were devel-oped. The war has both intensified andin some cases distorted these trends^Their projection into the years ahead willhelp us discern the nature of postwarretail competition.

No one who sets down his thinking ofthe times to follow the war can do sowithout making some basic assumptions.For the purposes of this article, the au-thor has assumed: (i) that Americanbusiness will come through the war withits vitality still "bunyanesque," with itscapacity for enterprise and venturing un-diminished; (2) that American businessleaders are still capable of learning, andthat they have drawn sharp lessons fromthe events of the last twenty years; (3)that the goal of industry will be fullproduction for an expanding marketprovided by a people on a rising livingstandard.

The third assumption is of particularimport to retailing. The degree to whichthis goal is realized may determine, forexample, how desperate must be thestruggle for existence on the part ofsmaller independent retailers. For re-tailers in general, the more nearly weapproach a state of full productivity andfull employment, the higher will be therewards for success in the competitivestruggle and the less grave will be thepenalties for failure. Realization of that

goal will have profound effects on thenature of retail competition, but evenits complete realization will not diminishthe degree of retail competition.

Change breeds change in the field ofdistribution. The technique, forms, andcompetitive relations in retailing are al-ways subject to the influence of new de-velopments. When drug stores addedsoda fountains and candy cases to theirequipment, for example, the confec-tionery stores and ice cream parlors de-clined in importance. There are more re-tail food stores than any other type ofretail establishment—well over half amillion—yet in ten years the supermar-ket, a new type of outlet, so altered thepattern of food distribution that a iswthousand self-service "supers" today aredoing 25% of the nation's food business.*

But the changes and trends which in-fluence retailing are not always generatedwithin the pattern of distribution. Thecommodities produced and the peoplewho buy have obvious efl'ects on dis-tribution, which serves to bring themtogether. Therefore it is necessary totake a look at some of the relevant fac-tors in production and consumption;these will set the frame, so to speak, forthe picture of postwar retail competition.

PRODUCTION

The demonstration of America's pro-ductive capacity which the war efforthas unveiled is a lesson the Americanconsumer cannot forget; by such an

^ M. M. Zimmerman, "Supers as Mass Oudet forDrugs and Cosmetics," Supermarket Merchandising,November, 1943, p . 41,

11

12 THE JOURNAL OF MARKETING

achievement American industry has un-dertaken an obligation which it cannever henceforth deny.

Even assuming a postwar national in-come of 150 billion dollars or more, how-ever, the economy faces a vast complex ofcontradictions. The fact is that the con-centration of economic power has beenhastened by the war. In the words of theSenate Education and Labor Commit-tee: "America, a land of giant corpora-tions before the war, will emerge fromthis war with a larger share of its vastlyexpanded economy controlled by asmaller number of firms."^ This concen-tration has been accompanied, not onlyby a huge addition to the national plant,but also by the introduction of newerand much more efficient labor-savingand automatic machines; new materialssuperseding old materials that called forgreater expenditure of labor, as for ex-ample, plastics and laminated plywood;and new processes, like centrifugal cast-ing, which are as economical in man-hours. Thus we have a network of forceswhich tend toward reduced employmentcoupled with the national determinationto achieve "full employment."

Without a huge multiplication of com-modities and an income distributionwhich will permit the consumption ofthis output, we shall face crises darkerthan even 1930-1933. On the part of thegiant industries, such as aluminum, elec-trical equipment, glass, and perhapssteel, a number of totally new decisionswill be called for: relaxation of patentmonopolies, licensing of additional pro-ducers, and especially the renunciationof superprofits and planned restrictionof production. Of immediate concern,however, is the effect upon retailing of anation on a rising living standard with

' Quoted by Vice-President Henry A. Wallace, "WeMust Save Free Enterprise," Saturday Evening Post,October 23,1943.

mote leisure and security than ever be-fore. There are likely to be changes, forexample, in the character and number ofretail units through which this doubledor trebled production of consumers'goods will flow, and developments in theextent to which large manufacturers par-ticipate directly in distribution.

CONSUMPTION

What will be the ability of the con-sumers to absorb the increased produc-tion? The answer to this question de-pends in large part on the distribution ofpostwar income.

Even if we assume that employment,together with income, will be maintainedat wartime peaks, it must be remem-bered that the present prosperity is il-lusory for a large part of the population.The OPA study, "Civilian Spending andSaving, 1941 and 1942," shows that61.8% of the families in the countrylived in 1942 on an income of less than^50 a week, and this was a year of highprices.' The new high records of depart-ment store sales reflected the heavyspending of the four out of every tenfamilies who had an income of over^2,500. The OPA tells us further thatover 88% of the savings by individualsin 1942 were made by people in the in-come level above $2,500, savings of 22.4billion dollars out of a total of 25.4billions.*

An uneven distribution of income is,of course, not a new factor to be reck-oned with; we have always had it. Thepoint is that it is still with us; that thedoubled or trebled income we now enjoyhas not changed it, except in degree.

In 193 5-1936, according to the Na-tional Resources Committee, 87% of thefamilies in the country lived on an in-

' O.P.A. Division of Research, Civilian Spending andSaving, ig/fj and 1942, p. 16.

* Ibid., p. 17.

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come of less than |2,5oo a year.* Obvi--oasly, the reduction of this- gfoup toaround 60% of the population means atremendous rise in the national standardof living. We have seen such a rise; de-spite a higher price level, more of ourpopulation have had enough to eat andwear in 1943 than ever before. But it isalso clear that even now more than halfof the people are living below what isgenerally considered a minimum stand-ard of living for Americans.

The families and single individuals inthe income classes below ^2,500 a yearin the years 1935 and 1936 made uproughly 89% of the population. Theybought 67% of the clothing, 68% of thefurnishings, 72% of the housing, and79% of the food.* It is probable that thepercentage of commodities bought bythose now in the income classes below^2,500 will continue in about the sameratio to the percentage of the populationthey represent. Therefore, if in 1935 and1936 the 89% of the population in theincome brackets below ^2,500 bought67% of the clothing, the 60% of thepopulation now probably in that cate-gory can be expected to buy about 44%of the clothing, and similarly with theother items. In other words, eyen if in-come is maintained at wartime heights,close to two-thirds of our families willprovide a restricted market for commodi-ties.

The trends in consumption will havea determining effect on the price rangesof the goods to be sold at retail, the typesof stores through which the greatestvolume of commodities will flow, and alsothe area of the most intense competition.

' National Resources Committee, Consumer Incomesin the United States—Their Distribution in 1935-1936.(Washington, United States Government PrintingOffice, 1938), p. 18.

^ Idem, Consumer Expenditures in the United States—Estimates for ipss--ipj6. (Washington, United StatesGovernment Printing OiEce, 1939), pp. 83, 90.

ANALYSIS OF RETAIL COMPETITION

With this appraisal of production andconsumption in mind, it should be easierto understand the forces which will shapethe nature of postwar retail competition.

For purposes of analysis, the competi-tive situation can be broken down into aseries of "relationships of active opposi-tion":

(1) The independent merchant vs. thechain store.

(2) The smaller independent vs. the largerstore.

(3) The general department store vs. thelimited-price variety store.

(4) The new unorthodox channels for agiven commodity vs. the traditionaloutlets for the same commodity.

(5) The drive for higher net profits andthe acceptance of higher expenseratios vs. the trend toward lowermarkups.

(6) Brands, name, and product monop-olies vs. lower cost distribution.

In the sections of the discussion de-voted to the first three of these "relation-ships" the trends in retail competitionare assessed for their effect on differenttypes and sizes of outlets. The develop-ments cited in these sections will serveto suggest and point up the more fun-damental nature of the trends as theyare analyzed in the discussion of thelast three "relationships."

The independent merchant vs. the chainstore. The 1939 Census of Business re-vealed that in the decade following 1929the number of independent stores in-creased both relatively and absolutely.On the other hand, the number of chainstore units declined from 148,000 in 1929to 123,000 in 1939, or from 9.8% to 7.0%of all stores.^ The share of the total retailbusiness taken by the chains shows only

' Census of Business, Volume I, Retail Trade:p. 9.

14 THE JOURNAL OF MARKETING

a moderate upward trend, while the in-dependents lost some ground.

The figures of dynamic significance areto be found, however, in the trend of"sales per store." Contrast the rise involume of sales for each chain store unitto the steep decline in sales for each inde-pendent store:^

IndependentChain

1939?I9,33373,484

Sales per store

'935^16,73858,231

1929127,61465,681

This improvement in the quality ofeach chain store unit's performance canbe compared with the increase of outputper man-hour resulting from rationaliza-tion in industry. The most spectacularof the policies leading to this rise in salesper store has been, of course, the closingup of chain grocery neighborhood storesby the thousands and their replacementby supermarkets in a relationship of fromfive to fifteen stores closed for eachsupermarket opened. Throughout thechain store field in general, similar re-sults have been achieved by the closingof less profitable stores, the remodelingand modernization of good stores, theimprovement of locations, and the growthof the "super" or "A" stores.

It should be pointed out however, thatthe chains reduced the number of theirunits and concentrated on improving thequality of their operation during a dec-ade marked by a drastic decline in na-tional income. Their decision, not neces-sarily to distribute more goods but to sellthe goods more efficiently and profitably,corresponds to the policies of large manu-facturing corporations during the sameperiod. But if we are going to witnessa postwar rise in income and a multipli-

* United States Department of Commerce, Bureau ofthe Census. Sixteenth Census of the United States: 1(140.Census 0} Business Volume I. Retail Trade: 1^39. Part L(Washington, United States Government PrintingOffice: 1943.) Based on data from Table 3F, p. d^.

cation of the volume oi commodities,then an increase in the number of chainstore units must be a direct consequence.Judging from the history of independentstore openings, we shall probably witnessa far larger number of new independentand partially integrated or dealer stores,while the chains continue to open rela-tively fewer but larger units.

The smaller independent vs. the largerstore. While the intensity of chain storeoperation has been increasing, the inde-pendents have tended toward lower salesper store, more services, greater expenseratios, and ever-increasing variety ofmerchandise.

It is true that during the war the smallmerchant has been forced—often to hisprofit—into changes contrary to hispolicy. He has had to cut out many ofhis services. He had been able to obtainneither so much merchandise as hewanted nor so great a variety. Here, as amatter of fact, his ability to use odd lotsand small quantities from a wide rangeof sources has in many instances givenhim an advantage over the chains; thissituation explains in large part why inde-pendents in the grocery field have re-versed the trend and for the first timehave increased their share of the totalfood business at the expense of thechains.

With the possible exception of in-creased cash reserves, most of the advan-tages won by the independent during thewar will probably not be permanent. Theone conclusion justified by the evidenceis that the independent is not being ren-dered extinct by the chain. Rather, he isbeing confined to a narrower and lessfertile area, where he has to dig harderfor lesser profits.

There has developed in distribution,as in production, a sort of caste system.This does not deny to the man who is ex-ceptionally aggressive and intelligent the

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opportunity to grow from a small mer-chant to a large one. But small businessas a class is a permanently stunted formof enterprise—a function of big business,in mathematical terms. The number ofstores doing below ^30,000 a year in-creased from 1,098,910 in 1929 to 1,481,-089 in 1939. At the other end of the scalethe larger stores doing above 1300,000a year, representing less than i % of allstores, had declined in number by 1939but still did close to one-quarter of allthe retail business.*

Of special significance is the fact thatthe chains are doing a diminishing portionof their total business in their smalleroutlets and an increasing percentage intheir larger stores, and the degree ofchange is striking. Among the inde-pendents, on the other hand, the largerstores are increasing their share of totalindependent business only slightly, whilethe stores doing under i 100,000 a yearin volume show a slightly lower per-centage. These movements are sum-marized as follows: "

Chain UnitsOver 51100,000Under $;IOO,IDOO

Totals

IndependentsOver $100,000Under $100,000Totals

^939

37-4100.o

36-463.6

51.8%48.2

34-565.5

100.o

The large independent stores appearto be able to meet the chains on an equalbasis, although the competition of thetwo groups is made less direct by thefact that the independents in part servea different and higher income group. Thesmall independent enterprises appar-ently go where the chains do not wishto follow; they fill in the less profitableareas of the distribution map, rent the

• Idem, Volume I, part 2, p. 8." Ibid., p. 9.

lower cost and less desirable locations,and serve a smaller or poorer traffic.

Thus the basic conflict in retailingactually resolves itself into a strugglebetween the chains and the large inde-pendents for the profitable business, anda struggle among the smaller independentsfor the unprofitable or less profitable busi-ness,

In the years between 1900 and 1939some 16 million enterprises opened theirdoors, and about 14 million closed up.Much can be done to give small businessboth long-term credit and managementguidance to raise its efficiency andlongevity. Undoubtedly the develop-ment of the dealer-agency relationshipof the type of Western Auto SupplyCompany, Firestone Tire and RubberCompany, The Gamble Stores, andothers, and the wholesaler-dealer tie-upin the Butler Brothers plan, will reducethe mortality rate of small retailers. Butsince the small independent is the mar-ginal distributor, so to speak, passing onmaximum distribution costs which hecannot reduce, it would take incredibleplanning and effort on the part of thegovernment to reverse the trends affect-ing small stores. Birth control, volun-tarily imposed, may be even more impor-tant than guidance and credits to reducesmall business mortality.

The trend toward decentralization,as exemplified by department storebranches, the entry of Firestone into thedepartment store field, the appearance ofChicago Mail Order House, and nowSpiegel's, on the retail horizon, promiseto keep most independent retailers Lilli-putian in size.

The general department store vs. thelimited-price variety store. The depart-ment stores have in the past catered tothe middle and upper middle class, arelatively small fraction of the popula-tion. The Department of Labor studies

16 THE JOURNAL OF MARKETING

on Family Expenditures in SelectedCities, give the prices paid by consumersat different income levels in 1935 and1936." It is noteworthy that the pricespaid by groups below the $2,000 a-yearincome are generally either at the lowestprice in a department store or below thedepartment store prices. Consumers inthese low-income groups have formed thehabit of patronizing the limited-pricevariety chains and other low-cost dis-tributors for many of their householdand clothing purchases.

The chains, in developing their largerstores to do a greater volume, have beenadding lines and expanding their selec-tions. By 1939 the term "limited-pricevariety" less accurately described thelarger units of syndicate store chainsthan it did in 1929. This multiplicationof lines and varieties is also to be ob-served in supermarkets, auto accessorystores, apparel and furnishings chains,cigar store chains and drug chains. Theseoutlets challenge the department storeseven more strongly than in the past.

At the same time, the middle class istending to shrink in size and influence.The huge industrial employment ac-companying high peacetime commodityproduction will change not only theoccupational trends but even the socialcomposition of the American population.The mechanization of office work willfurther deflate the middle class. Itseems clear that these factors, in com-bination with the pressure to distributemerchandise at lower costs in order toincrease the flow of commodities, will re-strict the typical department store, withits high fixed expenses and costly serv-ices, to a steadily shrinking segment of

^ Department of Labor, Bureau of Labor Statistics,in cooperation with Works Progress Administration.Family Expenditures in Selected Cities, 1935-1936.(Washington, United States Government PrintingOiBce, 1941.) For example, see Volume III, Clothingand Personal Care, p. 37.

the population. It seems clear that thedepartment store, the "popular-price"department store particularly, will beforced to institute drastic changes in itsmethods, to reduce its costs of operation,lower its mark-ups, and so compete atthe price levels sought by the lower in-come groups.

The new unorthodox channels for a givencommodity vs. the traditional outlets jarthe same commodity. The channels of dis-tribution have become fluid. The neces-sity for increasing sales volume in storeswith high fixed expenses led the cigarand drug chains into new fields, particu-larly in the years betweeri 1930 and1940. The supermarkets, when they firstappeared, carried "soft goods"; in theSouthwest and on the Pacific Coastmany of them have built a steady busi-ness on men's and women's apparelitems. And now, during the war, super-markets have ad.ded hundreds of house-hold, drug, and toilet articles, glassware,books and even hosiery. The impact ofwar economy also forced the huge autoaccessory chains into apparel, householdequipment, and other lines.

At the same time there has been aheavy mortality of independent storesand wholesalers in many lines. During1941-1943, for example, in radio andelectrical supplies 30% of the dealershave gone out of business, largely be-cause of inability to obtain adequatesupplies of merchandise; in clothing thefigure is somewhere around 5%. ^ Sincethese dealers have not been replaced bynew ones, their place in the communityis largely being taken by an auto supply,drug, food, or cigar store. Thus, certainoutlets have taken advantage of a tem-porary opportunity to broaden theirlines, have shown that they can dis-

12 T. G. MacGowan, "A Pattern for Postwar Market-ing." A speech delivered before Midwestern Sales Con-ference, Chicago, November, 1943.

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tribute economically the new commodi-ties which they have taken on, and willprobably continue into peace many oftheir inarketing innovations. In the off-ing is the plan of the oil companies tosell at roadside filling stations articles ofgeneral use. And a huge food processorwho has been making equipment for thearmed forces is reported preparing to sellhousehold electrical supplies throughgrocery stores.

No longer are commodities bound totravel foreordained paths. Rather, onetype of distributor now reaches out andappropriates the fastest moving items inthe lines carried by others. So, vitaminsand drugs and glassware go into super-markets; hosiery, and other apparelitems into cigar and drug chains as wellas "hard goods" stores; and ladies'"man-tailored" suits into men's clothingstores.

The drive for higher net profits and theacceptance of higher expense ratios vs. thetrend toward lower mark-ups. This tend-ency for unrelated channels of distri-bution to add to their lines the fastestmoving items from other fields naturallyaffects the net profits of the traditionaldistributor of the items thus selected.Women's full-fashioned hosiery pro-vides approximately 3% of the salesvolume of a department store but pro-duces over 7% of the net profits.-' Thisfast turnover item may become attrac-tive to a drug store for the additionalvolume it can furnish. But a drug storerequires approximately the same mark-up as a department store. Let cigar storechains or supermarkets take such a fast-moving item and apply their traditionallower mark-ups to it, and a revolutionis affected in the distribution of the arti-cle. This is today happening with vita-

' Controllers Congress of the National Retail DryGoods Association, 1941 Report, p. 15. Also 1942 Re-port, p. 47.

mins and other drug items in super-markets, with paints in auto supplystores, and with books at newsstands.

The competition is thus developed be-tween various channels of distributionover the same items—with the point ofconflict set by their differing minimummark-up requirements.

A scale of competition is likely to belarger, however, than a scramble for ascore or so of selected items. It may takethe form of a struggle between chains ofdifferent structure, based upon theirdiffering costs of operation. There willcome into collision on a national scalethe chains against organized streamlinedsmaller independents; the "super" storesof the chains battling each other as wellas the larger independents; A & P vs.Kroger, Safeway, and the others; Wool-worth vs. Kresge, Kress, Newberry;Sears Roebuck & Company vs. Mont-gomery Ward, Firestone, Western Auto,Gamble's; and J. C. Penney Co. againstmost of the field.

Clearly one of the solutions thesechains will consider (and not necessarilythe correct one in all cases) is their entryinto the manufacturing of many of thearticles they sell. Many vsall be forced inthat direction by the lowered mark-upsthey are and will be taking, especially ontheir fastest moving and most competi-tive items. It is no secret that a numberof them are already engaged either inmanufacturing or assembling commodi-ties they sell.

Brands, name and product monopoliesvs. lower cost distribution. A ievf years agothe Twentieth Century Fund in its studyDoes Distribution Cost Too Much? ar-rived at the conclusion that of the con-sumer's dollar, 59 cents goes for the costsof distribution and only 41 cents forproduction. In November of 1943 theFederal Trade Commission published asummary of its study on the costs of dis-

18 THE JOURNAL OF MARKETING

Processors

Cane Sugar RefinersMeat PackersChain Store BakeriesWholesale BakeriesBiscuit & Cracker Mfrs.Packaged Cereal Mfrs.

WholesalersCooperative Wholesale

GrocersOld Line Wholesale Grocers

RetailersRetail Cooperative GrocersRetail Grocery Chains

Independent Retail GrocersHouse-to-House Bakeries

tribution of important food products inwhich were included the data which

PeriodCovered

Year 1939Year 1939Sept. 1941Sept. 1941Year 1939Year 1939

Year 1939Year 1939

Year 1939Year 1939

Year 1939Sept. 1941

per $1 ofNet Sales

4.J36.72

12.1826.8634-6634-93

5.879.65

19.5020.62

22.5837.51

It is clear that at each of the three levels,manufacture, wholesale, and retail, thereare cases of excessive distribution costs—excessive from the standpoint of success-ful marketing of the maximum produc-tion of commodities.

High distribution costs attract lowercost producers and distributors who arefaced with declining mark-ups and in-tensified competition; I have called thisprocess "marketing arbitrage." We shallsee both manufacturers and distributorsgo into new fields or take on new com-modities precisely because the tradi-tional selling costs or mark-ups of the"oldtimers" are higher than those of thenewcomers. An example, not too vision-ary, might be the entry of the Kaisershipbuilding or the Boeing aircraft in-terests into the manufacture of inex-pensive motor cars, distributed through

'* Federal Trade Commission, Methods and Costs ofDistribution, Part one, November 11, 1943, p. 3.

such channels as Sears Roebuck & Com-pany—certainly an occurrence that woulddeflate the prewar automobile agency or-ganizations with their expensive andw asteful duplication.

The effect of these changes will alsofall upon the use of brands. It is surelymore then coincidence that pricescharged for products distinguished by abrand or name monopoly are typicallyhigher than for unbranded products.Why can not standardization and gradelabeling become important aids to low-cost marketing? In this brief article noattempt can be made to answer thatquestion explicitly. But perhaps an hy-pothesis, like the following, will serve tomake the point:

Picture a conveniently located self-servicesupermarket in which all the products offeredwill be under one brand name, their qualitydetermined by independent testing labora-tories and authenticated by seals nationallyrecognized and fully accepted by the con-sumer. Since all articles are under one brand,there will be variety, but it will be reducedto a minimum; there will be no duplicationsuch as is required when competing brandsare stocked. All prices will reflect the absenceof promotional costs such as are needed tobuild up national brand preference, and thelower warehousing costs of the chain or co-operative warehouse as against the greaterexpense of manufacturers' outlets or the oldline wholesaler.

We shall not see such an institutionin the postwar period, but this is thetheoretical limit of efficiency in distri-bution toward which retailing will nowhave to move. The compulsion to ap-proach nearer and nearer this limit willin fact be the essence of postwar retailcompetition.