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MARKETING 
 
 METHODS AND POLICIES 
 
 BY 
 
 PAUL D. CONVERSE 
 
 Head of the Department of Commerce, 
 University of Pittsburgh 
 
 NEW YORK 
 
 PRENTICE-HALL, Inc. 
 
 1921 
 
COPYRIGHT 1921, BY 
 
 PRENTICE-HALL, Inc. 
 All Rights Reserved. 
 
TO MY FATHER 
 The memory of whose long years of self-sacrific- 
 ing devotion to the ideal of social justice has often 
 been an inspiration to his son. 
 
PREFACE 
 
 The author has long felt that there was a need 
 for a book covering the general field of marketing, 
 which would serve as an introduction to both the 
 college student and the young man- in business. Both 
 often desire a broad knowledge of the marketing 
 machinery which is operating around them. It was 
 with this thought in mind that the author entered 
 upon the preparation of this volume. He frankly 
 admits that he has not a first-hand knowledge of 
 every topic treated in this book. If the publica- 
 tion of such a book were delayed until a man was 
 found who could prepare such a volume entirely 
 from first-hand information it would probably never 
 be written. This is true for the simple reason that 
 no one man could make a thorough study of every 
 phase of marketing and write a book before much 
 of the information became obsolete. The author 
 has, however, been able to draw on studies and In- 
 vestigations conducted by himself for much of the 
 material contained in fifteen chapters of this volume. 
 A part of this information has appeared in publi- 
 cations of the Federal Trade Commission and due 
 credit is given by specific citations when such in- 
 formation is used. 
 
 There are many phases of marketing which, for 
 lack of space, are not treated in this book. This 
 
vi PREFACE 
 
 is true, for example, of advertising, personal sales- 
 manship, and salesmanagement. The reader can, 
 however, find many books on these subjects. All 
 topics are of necessity treated briefly. Somewhat 
 extensive bibliographies are given at the end of 
 several chapters which the interested student can 
 use in continuing his studies. Extensive bibliogra- 
 phies are not given for all topics covered for the 
 reason that very little information concerning them 
 is available in published form. 
 
 The field of business is divided into two parts — 
 production and market distribution. Production is 
 to a large extent a technical matter for engineers 
 and mechanics. In the past, we have placed greater 
 emphasis on production than on marketing. It is 
 shown in Chapter I that it now costs more to market 
 many articles than to produce them. From this, it 
 is clear that marketing is now of much greater im- 
 portance than most people have supposed. "Busi- 
 ness," as the term is generally understood, refers 
 to the commercial transactions involved in getting 
 goods from the producers to the place of consump- 
 tion and into the hands of the consumers. The 
 "business" man must exercise a general supervision 
 over production in order to determine what shall be 
 produced and in what quantities. It is also necessary 
 to purchase raw materials and finance the enterprise. 
 Still the main function of "business" is to market 
 goods. Accounting, banking, insurance, and trans- 
 portation are only aids, very important aids it is 
 true, to the production and marketing of goods. 
 
PREFACE vii 
 
 Students of business have, in the past, devoted more 
 attention to the aids than to the heart of business — 
 marketing. This has been true largely because more 
 information has been available on these subjects. 
 These professions have benefited from the study- 
 given to them. More information is constantly 
 becoming available on marketing. The increasing 
 amount of study that is now being devoted to market- 
 ing should improve marketing methods, increase 
 marketing efficiency, and reduce marketing costs. 
 
 P. D. C. 
 
 Pittsburgh, April, ig2i. 
 
TABLE OF CONTENTS 
 
 UilAPTER PAGE 
 
 -I — Meaning and Functions of Market 
 
 Distribution 1 
 
 The place of marketing in economics; The object 
 of market distribution ; Nature of human wants ; 
 Marketing a part of business; Little attention 
 has been given to the efficiency of market distribution ; 
 Importance of market distribution; More attention be- 
 ing paid to marketing. 
 
 Marketing Functions — Assembling; Dividing; Grad- 
 ing; Methods of grading; Transportation; Storage; 
 Modern storage methods; Financing; The assumption 
 of risks. 
 
 II — Physical Marketing Facilities . . 20 
 
 Transportation — Movements involved in transporta- 
 tion; Number of movements illustrated; Importance 
 of transportation; Our transportation system; Ade- 
 quacy of our railroad system; Poor terminal facili- 
 ties; Suggested remedies for terminals; Car shortages; 
 Wastes and losses due to poor transportation facili- 
 ties; High costs; Poor facilities in New York; Multi- 
 plicity of terminals increases cost of handling food; 
 Delays; Damages to foodstuffs; Messengers in charge 
 of cars ; Car shortages are expensive ; Risks increase 
 the margin between the producer and the consumer. 
 Storage — Importance of storage facilities; Storage fa- 
 cilities; Public warehouses; Non-fungible and fungible 
 goods ; Adequacy of storage facilities ; Adequacy of 
 cold storage facilities in various cities; Wastes due to 
 poor storage facilities; Inadequacy of facilities for 
 marketing foods. 
 
X CONTENTS 
 
 chapter page 
 
 Remedy For Situation In Terminals — Central 
 Wholesale Markets — ^Location; Outbound rail ship- 
 ments; Proper public regulation; Advantages; Limita- 
 tion; Difficulties in establishing central wholesale 
 markets; Establishment of central wholesale markets 
 for foods. 
 
 Ill — Trade Channels ...... 62 
 
 Producer direct to consumer ; One middleman ; Two 
 middlemen; Three middlemen; Four middlemen; Im- 
 ported goods; Variation in methods of distribution; 
 Longer trade channels; Necessity for sales in same 
 stage of distribution ; Sale of raw and semi-finished 
 goods. 
 
 IV — Brokers and Sales Agents . . .81 
 
 Definition of Brokers, Sales Agents, and Commis- 
 sion Merchants — Brokers ; Sales agents ; Commission 
 merchants; Merchandising brokers; Overlapping of 
 activities. 
 
 Functions of Brokers and Sales Agents — Specialized, 
 independent salesmen ; Giving information ; Financing 
 principals. 
 
 Buying Brokers and Agents 
 
 Operations of Brokers and Sales Agents — Organi- 
 zation; Little capital required; Selling ability nec- 
 essary to success; Must know supply and demand; 
 Prices; Canners often suspicious of brokers; Tend to 
 lower prices; Brokerage contracts. 
 Number of Brokers — Articles sold; No accurate fig- 
 ures available; Number of brokers handling typical 
 commodities. 
 
 Rates of Commission — ^Rates generally small ; Rates on 
 Chicago Board of Trade ; Rates on smaller exchanges ; 
 Change from unit to percentage basis ; Rates on canned 
 foods; Rates on insurance and ships; Rates on cloth; 
 Rates on foodstuffs ; Rates on anthracite coal ; Reason- 
 ableness of rates. 
 
CONTENTS xi 
 
 CHAPTER 
 
 Net Profit Of Brokers — Hard to get average figures ; 
 Return for personal services and for capital; Returns 
 for personal services ; Returns on capital ; Earnings of 
 Princeton graduates. 
 
 Conclusion As to Usefulness Of Brokers — Economy 
 of brokers; Merchandising business not justified; En- 
 courage speculation. 
 
 V — Wholesale Dealers 116 
 
 >' 
 
 Definitions ; Grocers ; Wholesaler and jobber ; General ^ ' 
 vs. specialty wholesalers; Semi-jobbers; Mail order ,j.^ 
 jobbers; Cooperative buying organizations; Commis- 
 sion merchants ; Decline in commission business ; Per- 
 sistence of commission business; Assumption of risk; 
 Rate of commission ; The number of wholesalers. 
 
 Services Performed By The Wholesaler — Much cri- 
 ticised ; 1. Warehousing and distribution in small lots ; 
 2. Furnishes manufacturers with a sales force ; 3. Ex- 
 tension of credit to retailers; 4. Education of the re- 
 tailers ; 5. Makes small community stores possible ;■ 
 Services performed by the specialty wholesaler; Ser- 
 vices performed by manufacturers' branch houses. 
 
 Problems Of The Wholesalers — Impossible to push 
 all lines; Leaders. 
 
 VI — ^Wholesale Dealers (Continued) . . 143 
 
 Modification Of The Wholesaler's Service — Spec- 
 ialty salesmen; The Philadelphia plan; Manufactur- 
 ing jobbers; Wholesalers' brands; Desirability of 
 jobber's label; Goods should bear producer's name. 
 
 The Wholesaler's Gross Profits — Meaning of gross 
 profit; Variation in gross profits; Wholesale grocers; 
 Flour jobbers ; Shoe wholesalers. 
 
 TiiE Wholesaler's Cost Of Doing Business — Varia- 
 tion in expenses; Wholesale grocers; Flour jobbers; 
 Produce dealers; Shoe wholesalers. 
 
CONTENTS 
 
 The Wholesaler's Net Profits — ^Wholesale grocers; 
 Flour jobbers; Shoe wholesalers; Net profits on in- 
 vestment; Increase during periods of rising prices; 
 Wholesalers of groceries, shoes and flour. 
 The Future of the Wholesaler — Threatened from 
 both sides; Wholesale grocers; Position in sale of 
 shoes ; Position in sale of hardware ; Position in sale 
 of drugs ; Position in sale of dry goods ; Position in 
 sale of produce ; Position in sale of farm implements ; 
 Wholesalers will continue to be important. 
 
 -VII — ^The Sale OF Goods AT Auction . .169 
 
 Private and public sales; Goods sold at auction; De- 
 cline in auction sales ; Sale of wool at auction ; Other 
 products ; Characteristics of auction sales ; Gives full 
 play to law of supply and demand; Auctions con- 
 trasted with sealed bids ; Goods sold "as is" ; Estab- 
 lishment of price; The fruit auctions; Graded vs. 
 ungraded fruits ; Large volume of sales ; Rates of 
 commission charged by the fruit auctions ; Services 
 performed by the fruit auctions ; Ownership of 
 fruit auctions ; Suggestions for extension of auction 
 sales; Proposal for government supervision; A cheap 
 method' of selling; Is the auction method a cheap way 
 of buying; Commodities adapted to sale at auction; 
 Effect of auction sales on prices ; Fluctuating prices. 
 
 VIII — Organized Produce Exchanges and 
 
 THE Question OF Speculation . .187 
 
 Controversy over the produce exchanges ; What are the 
 produce exchanges ? ; Exchanges vs. auctions ; History 
 of produce exchanges; Some important exchanges; 
 Commodities handled; Spot vs. future sales; Public 
 prices; Standardization; Contract grades; Corners; 
 Time of delivery; Actual delivery; Bucket shops; 
 Speculation: Advantages of speculation; Hedging; 
 Advantage of hedging; Risk taking; Stabilization of 
 prices ; Certainty of prices ; Equalization of prices be- 
 tween different markets; Benefits of marketing system 
 to farmers; Proposed remedies; Conclusions. 
 
CONTENTS xiii 
 
 IX — The Development of Retail Types 
 
 AND Methods 215 
 
 The Evolution of Retail Types — Importance of re- 
 tailing; Fairs and markets; Itinerant merchants; 
 Specialty stores; The traveling salesman; General 
 stores; Department stores; Mail order houses; Chain 
 stores ; The self-serve stores. 
 
 Change in Retail Methods — Conditions prior to Civil 
 War ; Higgling over prices ; Introduction of one price 
 plan; Changed methods due to falling prices; In- 
 crease in manufactured goods ; Rapid changes in 
 style; Wastes due to changes in style; Small size of 
 purchases ; Increase in competition. 
 
 X — Retail Types 234 
 
 1. The General Store 
 
 Still important; Inability to carry assorted stock of 
 goods. 
 
 Advantages of the General Store — Convenience of 
 its locafion; Personal contact; Can base credit on ex- 
 act knowledge ; Low operating expenses. 
 Disadvantages op the General Store — Small stocks ; 
 Small buying power ; Location poor for shopping 
 trade; Inefficiency; Other rural stores; Effects of the 
 automobile on the rural merchants; Opportunity of 
 town merchants. 
 
 2. The Specialty Store 
 
 Recent tendency toward greater specialization; Num- 
 ber of specialty stores; Competitors of the specialty 
 stores ; . 
 
 Advantages of Specialty Stores — Location; Personal 
 touch; Better assorted stocks; Quicker stock turnovers; 
 Low operating expenses. 
 
 Disadvantages of the Specialty Store — Little buying 
 power; Stores not centrally located; Advertising; Poor 
 management; methods of increasing efficiency. 
 Conclusions 
 
xiv CONTENTS 
 
 CHAPTER PAGE 
 
 —XI — Retail Types (Continued) .... 253 
 
 3. The Department Store 
 Definition; Importance; Character of trade; A 
 woman's store; Changed living conditions; Impor- 
 tance of women as buyers ; Characteristics of women 
 as buyers; Service; Competitors of the department 
 stores. 
 
 Advantages of Department Stores — Large purchasing 
 power; Location; Advertising; Delivery; Expert Su- 
 pervision; Centralized departments; Reputation. 
 Disadvantages of Department Stores — Can get only 
 shopping trade ; Abuse of services ; Decentralization of 
 policy; Poor salesmanship; Lack of personal touch; 
 Inability to cater to the ultra rich; High cost of doing 
 business; Advertising expenses high; Large delivery 
 expenses ; Lost motion ; Expense of developing systems ; 
 Average expense ; A successful manager's advice. 
 The Problems of the Department Stores — Problem 
 of management; Do not attract the best type of em- 
 ployees ; Success generously rewarded. 
 The Future of the Department Store 
 
 —^11 — Retail Types (Continued) . . . 276, 
 
 4. The Mail Order House 
 Classes of concerns doing a mail order business; 
 Importance of mail order business; Fraudulent 
 practices. 
 
 Reason for The Growth of Mail Order Business — 
 Increased standard of living; New wants; Desired 
 goods obtainable from mail order houses ; Manufactur- 
 ers forced to sell by mail; Low prices of mail order 
 houses; Manufacturers desire to control price to con- 
 sumers. 
 
 Advantages of the Mail Order Houses — Ability to 
 buy cheaply; The low cost of doing business; Quick 
 turnovers; Development expenses; Advertising ex- 
 penses ; Total expenses ; Low prices ; Farm implements 
 
CONTENTS 
 
 CHAPTER 
 
 as an example; Freedom from local depressions; 
 Drawing power of the catalog. 
 
 Disadvantages of Mail Order Houses — ^Lack of per- 
 sonal touch; Customers cannot inspect goods before 
 buying; Delay in delivery; Disadvantages of catalog; 
 Can carry only standard goods; Cannot render high 
 type of service; Tends to destroy community life. 
 Can the Rural Merchants Meet Mail Order Com- 
 petition,^ — Can carry carefully selected stocks; Can 
 meet mail order competition with mail orders; Can 
 render higher type of service; Extension of credit; 
 Higher cost of goods; Appeal to loyalty; Efficiency 
 in rendering service only claims for existence. 
 The Future of the Mail Order House 
 
 •XIII — Retail Types (Continued) . . . 306 
 
 5. The Chain Store 
 Definition'; Growth of chain stores; Importance of 
 chain stores. 
 
 Classes of Chain Stores — Ownership; Retail chains; 
 Manufacturers' chains; Jobbers' retail chains; Loca- 
 tion; Wholesale; Department stores; General stores. 
 Kinds of Goods Handled — Groceries; Drugs; Five 
 and ten cent stores; Cigars and tobacco; Candy; 
 Shoes; Hats; Restaurants; Other lines. 
 Advantages of Chain Stores — Buying power; Quick 
 turnovers; Efficient management; Store managers; Ad- 
 vertising ; Rent ; Low cost of doing business ; Non- 
 service method; Self-serve stores; Application of the 
 self-serve method ; Limitation on use of economy meth- 
 ods; Reduces wholesaling expenses; Total expenses of 
 chain stores; Low prices; Cut prices; Private brands. 
 Disadvantages of the Chain Stores — Difficulties in 
 management; Danger of too rapid expansion; Lack of 
 personal touch; Lack of personal service; Increasing 
 Efficiency of individual retailers; Danger of monopoly: 
 Conclusions as to Chain Stores 
 
xvi CONTENTS 
 
 CHAPTER PAGE 
 
 XIV — Expenses and Profits of Retail 
 
 Merchants 341 
 
 Importance; Poor accounting methods of the dealers. 
 Definitions — Gross profits; Expense of doing busi- 
 ness; Is interest an expense?; Net profit; Form of 
 profit and loss, or income, statement; Source of infor- 
 mation; Sales basis for percentages. 
 Gross Profits — Prices realized; Price fluctuations; 
 Variations in gross profits; Average gross profits. 
 Operating Expenses — Causes of variation in expenses ; 
 Operating Efficiency.and volume- of _sales; Location 
 of stores ; Services rendered ; Wide variation in ex- 
 penses ; Average expenses ; Average expenses of gen- 
 eral stores; Drug and jevfelry stores; Average expen- 
 ses of grocery stores ; Average expenses of shoe stores ; 
 Average expenses of hardware stores; Expenses of 
 novelty stores. 
 
 Net Profits — Variation in net profits of shoe stores; 
 Net trading profits of rural dealers. 
 
 Net Income — Net income earned on total investment; 
 Chain stores; Net income earned on own investment; 
 Return for the personal services of the dealers. 
 The Failure Rate Among Retail Merchants — Sys- 
 tem's studies; Nystrom's Oshkosh study; Conflict of 
 statements ; Limitation on figures ; conditions among 
 other classes of merchants; The measure of success. 
 
 XV — Purchasing, Stockkeeping and Stock 
 
 Turnover 383 
 
 Object of purchasing; Out of stock orders; Stockkeep- 
 ing; The perpetual inventory; Advantage of nearby 
 source of supply; Perpetual inventory not always prac- 
 tical ; Purchasing vs. ordering; Unbalanced inventor- 
 ies; Qualifications for successful buying; Changes in 
 demand; Few articles in steady demand; Local de- 
 mands; Seasonable demands; Can the weather be fore- 
 
CONTENTS xvii 
 
 CHAPTER 
 
 told several months in advance? Cold and warm 
 seasons ; Application of principles to purchasing ; 
 Anticipating demands. 
 
 Stock Turnover — Meaning of turnover; The manu- 
 facturer's turnover; Importance of rate of stock turn- 
 over to dealers; Retail hardware dealers as an Exam- 
 ple ; Stock turnover cannot make a profit out of a loss ; 
 Stock turnovers of difiFerent classes of dealers; Turn- 
 over of working capital. 
 
 —XVI — Cooperative Marketing . . .417 
 
 Meaning of cooperation ; Classes of cooperative enter- 
 prises. 
 
 Consumers' Cooperation — Object; History of consum- 
 ers' cooperation ; Importance of consumers' coopera- 
 tion ; Cooperative wholesale societies ; Principles of 
 the Rochdale plan; Development in the United States; 
 Reasons for failure; The recent movement; Organi- 
 zation; Sales; Opportunity for saving; Operating ex- 
 penses ; Actual savings on purchases ; Conclusions on 
 consumers cooperation. 
 
 ^XVII — Cooperative Marketing 
 
 (Continued) : . 43^ 
 
 Cooperative Marketing of Farm Products — Origin; 
 Present status; Grain elevators; Live stock shipping 
 associations ; Rice ; Potatoes ; California ; Fruit grow- 
 ers ; Object ; Cooperative enterprise the result of 
 necessity; Methods; Packing and manufacturing; 
 Pooling; Standardization and advertising; Purchasing 
 supplies ; Organization ; Accomplishments ; Low selling 
 expenses; Danger of monopoly; The Raisin Trust. 
 Cooperation Enterprises Among Dealers 
 
 XVIII — Trade Associations .... 462 
 
 Importance of trade associations; Types of organiza- 
 tions; Activities; Standardization of product; Objects 
 of Standardization ; Cooperation on credit ; Advertis- 
 
xvili CONTENTS 
 
 CHAPTER PA"^^ 
 
 ing and publicity; Prices; Old methods of price fixing; 
 Increased activity in fixing prices as a result of the 
 war; Recent methods of price fixing; Gentlemen's 
 agreements; Open price associations and comparisons 
 of prices; Cost discussions; Are price agreements 
 effective?; Are price agreements desirable?; Desir- 
 ability of government supervised price agreements; 
 Conclusions. 
 
 XIX — Market Analysis 488 
 
 Necessity of calculating sales possibilities; New prod- 
 ucts to meet demands — farm tractors; Automobile 
 paint ; Other products ; Use of questionnaires in deter- 
 mining demand ; Men's underwear ; Location of stores ; 
 Measuring the buying power of a community ; Im- 
 portance of .market analysis to merchants; Factors 
 affecting demand; income; Statistics of income; 
 Occupation; Other factors. 
 
 Measuring Demand— Cotton pickers; Competition; 
 Farm tractors; Railroads; Automobile accessories; 
 Electrical goods ; DifBculties due to changing demand ; 
 Automobiles ; Determining demand by experiment ; Se- 
 curing the estimated volume of sales; Success in sales 
 campaigns. 
 
 XX — Choosing a Method of Distribution 514 
 
 Importance of choosing proper method; Factors affect- 
 ing choice of method; Disposal of entire output to one 
 buyer ; Disadvantages ; Selling through a sales com- 
 pany; Selling through sales agents; Selling through 
 brokers. 
 
 Selling to Wholesalers vs. Selling to Retailers — 
 Soliciting orders ; Hitting the high spots ; Warehous- 
 ing and distribution ; Branch houses ; Pooled cars ; Ex- 
 pense of warehousing services; Extension of credit; 
 Limitations on the use of wholesalers; Disadvantages 
 of selling to wholesalers ; Types of manufacturers who 
 should sell to retailers ; Proctor and Gamble's change 
 to the retailers; Success of the P. &. G. plan; Ex- 
 clusive agencies. 
 
CONTENTS xix 
 
 CHAPTER pj^gg 
 
 Selling Direct to Consumers — New products; Goods 
 unsuited to dealers; Unknown brands; Methods of 
 selling consumers direct; Selling through specialty 
 salesmen; Securing a trained salesforce. 
 
 '- — XXI — Price Determining' Factors . .542 
 
 Importance of prices; Changes in price levels; Factors 
 determining changes in price levels; The quantity- 
 theory of money; Factors to be considered in fixing 
 prices; Cost of goods; Competitors prices; Quality and 
 reputation; Customary price; Ethical or fair prices; 
 Charging what the traffic will bear; Monopoly price; 
 Monopoly price may be based on average cost; What 
 constitutes monopoly? 
 
 XXII — Price Policies 562 
 
 Uniform Prices — Prices uniform as to territory; Uni- 
 form prices the result of competition ; Advantages of 
 uniform territorial prices; Difficulty of maintaining 
 uniform prices in all territories; Prices uniform as to 
 buyers ; Price based on position in trade. 
 Discounts — Prices based on quantity purchased; 
 Other forms of discounts; Cash discounts; Objections 
 to cash discounts; Arguments in favor of cash dis- 
 counts; Legality of price discrimination. List prices; 
 Freight; S. A. P.; F. O. P. 
 
 Guarantee Against Price Declines — Arguments for 
 and against guaranteeing prices against decline. 
 Resale Price Maintenance — Development of demand 
 for maintained prices; Rebuttal by opponents; Has the 
 producer an interest in his product after it leaves his 
 hands ? ; Legality of resale price maintenance ; Proposal 
 to legalize resale price maintenance; Is resale price 
 maintenance in the interest of the consumers?; Resale 
 price maintenance said to be opposed to interest of con- 
 sumers ; Economy stores ; Additional arguments in fa- 
 vor of resale price maintenance; Additional arguments 
 against resale price maintenance; Cut prices from 
 the dealers viewpoint; Odd prices. 
 Conclusions. 
 
CONTENTS 
 
 PAGE 
 
 XXIII — The Coordination of Marketing 
 
 Policies and Activities . . . .592 
 
 Relation of selling and production; Relation of the 
 sales and production departments ; Formulation of pro- 
 duction policies; Formulation of advertising policies; 
 Cost of advertising; Choice of mediums; advertising 
 vs. publicity; Business concerns too secretive in the 
 past; Coordination of advertising and selling activi- 
 ties ; Credit policies ; Choosing the proper credit pi^l- 
 icy; Work of the credit department; Relation of sales 
 and credit departments; Financial policy; Service pol- 
 icy; Broader aspects of service; Sales management; 
 Intensive selling ; The complete policy. 
 
 XXIV — Can the Cost of Market Distri- 
 bution be Reduced? 613 
 
 1. Decreasing the Number of Middlemen — Are there 
 too many middlemen?. 
 
 2. Shortening the Trade Channels — Number of deal- 
 ers between producer and consumer ; Large retail or- 
 ganizations; Manufacturers selling direct to retailers; 
 Relative costs; Producers selling direct to consum- 
 ers ; Manufacturers selling by mail ; Manufacturers 
 selling the consumers through their own stores; Farm- 
 ers' markets; Markets in Harrisburg and Knoxville; 
 Markets in Washington and California; Farmers 
 selling from house to house; Direct sales by parcels 
 post; Disadvantages of parcel post method. 
 
 3. Cooperation Marketing Organizations — Object; 
 Success, 
 
 4. Cheaper and More Efficient Methods — Cheaper 
 retail methods ; Elimination of over the counter sales ; 
 Should consumers buy in larger quantities?; Curb 
 markets; Elimination of wholesale warehousing func- 
 tion; Central wholesale markets. 
 
 Public Regulation — Public regulation of prices. 
 Conclusions. 
 
MARKETING 
 
 Chapter I 
 
 MEANING AND FUNCTIONS OF MARKET 
 DISTRIBUTION 
 
 The place of marketing in economics. — Eco- 
 nomics for the purpose of study i s div ided into pro- 
 duction, distribu tion, and consumption. Production 
 consists in the creatioir~6norm, place, and time 
 utilities. Form utilities consist of the various articles 
 or services which we desire for consumption, — coal, 
 automobiles, bread, beefsteak, medical attention, 
 grand opera, locomotives, or newspapers. The crea- 
 tion of place utilities consists in taking these articles 
 or services to the places where they are needed by 
 the consumers. The creation of time utilities con- 
 sists in supplying these articles or services at the time 
 they are needed or desired. The creation of place 
 and time utilities is just as much a part of production 
 as the creation of form utilities. If the city man is 
 to have bread it is just as essential that the wheat be 
 brought to the city and kept until he is hungry as it 
 is that the wheat be grown by the farmer, ground into 
 flour by the miller and made into bread by the baker. 
 This, however, does not mean that there may not be 
 more unnecessary effort in the creation of place and 
 time utilities than in the creation of form utilities. 
 
2 MARKETING 
 
 Marketing in a broad sense covers those business 
 activities which have to do with the creation of place 
 and time utilities. Marketing, to the economist, is 
 then a part of production. The business man, how- 
 ever, speaks of marketing as distribution. By distri- 
 bution business men mean either the transportation of 
 the goods from the point of production to the con- 
 sumers or the transportation and all the transactions 
 involved in getting the goods from the producers to 
 the consumers. 
 
 In economics, distribution refers to the division of 
 society's total product among the different factors of 
 production, — land, labor, and capital, and to the 
 division of each factor's share among the individuals 
 composing the factor." Disagreement over the divis- 
 ion of wealth is the cause of a very large part of our 
 strikes, industrial wars, and social unrest. In this 
 book distribution will be used in the business mean- 
 ing. 
 
 The Object of Market Distribution.— The object 
 of marketing is to supply or aid in the supplying of 
 human wants. Wants are supplied by the raw mate- 
 rials of nature (the economist's land) made available 
 by human and non-human agencies. Minerals are 
 dug from the earth, the soil tilled, crops harvested, 
 factories operated, goods transported, stored and 
 exchanged, and services performed by human beings 
 assisted by natural agencies such as gravity, rain, or 
 magnetism. Labor thus obtains from nature those 
 things which go to satisfy human wants. The activ- 
 ities by which the raw materials of nature are ob- 
 
FUNCTIONS OF MARKET DISTRIBUTION 3 
 
 tained, changed in form, and made available to satisfy 
 human wants go to make up business, provided the 
 persons engaged in these activities are actuated by 
 the hope of a profit. The savage who picks the 
 wild fruits or berries for his own consumption or 
 the charitable organization which ministers to hu- 
 man wants without a profit arc not ordinarily 
 considered as being in "business." Business in a nar- 
 rower sense consists in acquiring control of commodi- 
 ties or services and their sale in the same or in a 
 changed form with the expectation of making a 
 profit. Profit, however, is the incentive and not the 
 object of business. The object is to supply human 
 wants. 
 
 Nature of human wants. — Human wants are in- 
 definite in extent. There are not only the primary 
 wants for food, shelter, and clothing, but secondary 
 wants depending upon man's memory, imagination, 
 and reason. These secondary wants are limited 
 only by the mental powers of difFerent individuals. 
 In any but a very simple society, business is called 
 into use to satisfy the great majority of wants. As 
 human wants are unlimited business is capable of 
 indefinite expansion. 
 
 Marketing a Part of Business. — Business is divid- 
 ed into two parts: production (of form utilities) ; 
 and' market distribution or exchange. Manufac- 
 turers, miners and farmers have two problems to 
 consider: first the production of goods; and second 
 the sale of goods. Production deals with goods 
 until they are in the warehouse, tipple, or granary 
 
4 MARKETING 
 
 and marketing deals with goods from this point un- 
 til they have finally been placed in the hands of the 
 consumer. 
 
 Little attention has been given to the efficiency 
 of market distribution. — Much more attention has 
 been given to the efficiency of production than to the 
 efficiency of market distribution. Production has 
 been studied for generations, thousand of labor sav- 
 ing devices have been invented, and mechanical 
 power has been applied in hundreds of ways to in- 
 crease output. We have schools of engineering, 
 mining, and agriculture. There are mechanical en- 
 gineers, mining engineers, civil engineers and chem- 
 ical engineers. Agriculture Is now a science and 
 dozens of colleges and hundreds of papers are 
 instructing the farmers as to methods of Increasing 
 production or decreasing costs. Yet until compara- 
 tively recently little critical or serious attention has 
 been given to a study of market distribution. 
 
 Many economists, as well as business men, have 
 assumed that the distributing system which has de- 
 veloped under the existing conditions Is the most 
 efficient system that could be devised. It is not 
 clear, however, why we should assume that the mar- 
 keting system inherited from our fathers Is any more 
 efficient than the farming or manufacturing system 
 inherited from them. It has been repeatedly prov- 
 en that soil production can be increased by proper 
 fertilization, plant breeding, crop rotation, and cor- 
 rect tillage. Also that the cost of manufacturing 
 can be reduced by a systematic plant lay-out, use 
 
FUNCTIONS OF MARKET DISTRIBUTION 5 
 
 of well designed machinery, and the intelligent hand- 
 ling of labor. Many manufacturers and most 
 farmers have had their time so occupied with prob- 
 lems of production that they have given little at- 
 tention to problems of distribution, leaving that very 
 largely to take care of itself. 
 
 Importance of market distribution. — F. W. Tay- 
 lor, in his book on Shop Management, cites the case 
 of two competing manufacturers of chemicals, who 
 decided to consolidate their businesses. One of 
 these men had been an expert on production and had 
 been producing his goods forty per cent cheaper 
 than the other. The other man, however, was an 
 expert on marketing and saved an equal amount in 
 distributing his goods. After the consolidation they 
 were able to realize both savings. This indicates 
 that distribution is just as important as production. 
 Many persons have apparently assumed that distri- 
 bution was relatively unimportant and need be given 
 little attention. It has been stated that the factory 
 cost (pre-war) of a typewriter was not over $20.00 
 while the other $80.00, paid by the consumer went 
 for, marketing expense and profit. The author has 
 heard the statement that the distributor got 95 per 
 cent of the sale price of an enlarged portrait to 
 cover his expenses and profit. Milk is a staple ar- 
 ticle and yet figures published by large distributors, 
 who presumably have very efficient organizations, 
 show that about half of what the consumer pays 
 goes to the farmer and about half to cover the cost 
 and profits of distribution. Figures gathered a few 
 
6 MARKETING 
 
 years ago in Wisconsin showed that the cost of mar- 
 keting cheese was almost equal to the price paid the 
 farmer for the milk. A study made by the Ne- 
 braska Experiment Station showed that the farmer 
 received only 36 per cent of the price paid by the 
 consumer for apples which had been stored three 
 ' months and sold through the regular channels. 
 It is not unusual for a retail dealer to double the 
 price of an article and even on staple lines the re- 
 tailer often adds one half of the cost to him. Thus 
 an article costing the rcailer $1.00 is sold for $1.50 
 or $2.00. The wholesaler's gross margin of profit 
 on such an article is often 15 to 20 cents and the 
 manufacturers selling expense may be over 10 cents. 
 Thus an article with a factory cost of $.75 costs the 
 consumer $1.50 or $2.00. Some articles are dis- 
 tributed more cheaply than this but many others 
 have their price more than doubled between the 
 producer and the consumer. Swift and Company 
 publish figures showing the following distribution 
 of the consumer's dollar: manufacturing costs 37 
 cents; manufacturer's selling expense 12 cents; 
 manufacturer's profit 4 cents; wholesaler's expense 
 10 cents; wholesaler's profit 3 cents; retailer's ex- 
 penses 28 cents; retailer's profit 6 cents. These 
 figures are said to be based on clothing, foodstuffs, 
 and supplies made by forty factories and sold by 
 both large and small dealers. On the basis of these 
 figures 37 per cent of the consumer's dollar goes to 
 pay for raw materials and manufacturing expenses, 
 50 per cent to cover marketing expenses, and 13 per 
 
FUNCTIONS OF MARKET DISTRIBUTION 7 
 
 cent for profits. In spite of the fact that the ex- 
 penses of market distribution are commonly equal 
 to or greater than the factory or farm cost of an 
 article the emphasis is still placed on the cost of 
 production. It would seem that as much thought, 
 attention, and study should be devoted to the prob- 
 lem of marketing as to the problem of production. 
 Herbert Hoover states that as a result of studies 
 of the cost of distribution made by the Food Ad- 
 
 DISTRIBUTION ON CONSUMER'S DOLLAR (sWIFT & CO.'S FIGURES) 
 
8 ^ MARKETING 
 
 ministration it was established that "the margins be- 
 tween our farmers and the wholesaler in commodi- 
 ties — other than in grain in some instances — -are, 
 even in normal times, the highest in any civilized 
 state — fully twenty-five per cent higher than in most 
 European countries." He gives as reasons for the 
 expensiveness of distribution in the United States: 
 the great distances between producing and consum- 
 ing areas; the lack of public markets; the long chain 
 of manufacturers, brokers, jobbers, and wholesalers 
 through whose hands farm products pass; and "the 
 increasing demand for expensive service by our con- 
 sumers."^ 
 
 More Attention Being Paid to Marketing. — 
 Many persons are now studying marketing and many 
 of them are introducing cheaper methods of distribu- 
 tion. Witness the growth of the chain stores, which 
 not only eliminates one middleman, but as a rule, 
 have many economies of operation. Another ex- 
 ample of cheapened distribution is to be found in the 
 self serve stores which claim to operate much more 
 cheaply than the ordinary chain stores. 
 
 There are great opportunities in the field of mar- 
 ket distribution. The man who reduces the cost of 
 distribution and the price to the consumer is just 
 as much the public benefactor as the man who in- 
 vents some labor saving machine or perfects some 
 new industrial process and thereby lessens the cost 
 of producing certain articles. The man who re- 
 duces the cost of distribution, however, is much 
 
 'Writing in Saturday Evening Post, April 10, 1920. 
 
FUNCTIONS OF MARKET DISTRIBUTION 9 
 
 surer of a financial reward than is the inventor of a 
 new machine or an industrial process. 
 
 MARKETING FUNCTIONS 
 
 In taking up the study of marketing, the student 
 should have in mind the functions that are per- 
 formed in the marketing process. The chief mar- 
 keting functions, in addition to actually effecting 
 sales, are the assembling and dividing of goods, the 
 grading, sorting, packing and standardizing of 
 goods; the transportation of goods; the storing of 
 goods from time of production to time of consump- 
 tion, the financing of transactions; and the assump- 
 tion of risks. 
 
 Assembling. — Many goods are produced in small 
 units and it is necessary that they be assembled in 
 sufficiently large quantities to be shipped or sold eco- 
 nomically. Farm products are generally produced 
 in small quantities by different farmers and it is nec- 
 essary that they be brought together in quantities 
 large enough to fill a car to be shipped advantage- 
 ously. This is commonly true of eggs, cattle, tobacco, 
 wool, cotton, etc. It is true that large ' growers 
 often produce large enough quantities of certain 
 products — ^wheat, cattle, or apples, — to fill one or 
 more cars. Most farmers, however, operate on a 
 smaller scale and even the large growers often have 
 less than car loads of certain products for sale. 
 Herein lies the necessity of local buyers, country 
 shippers, or cooperative marketing organizations 
 among the farmers. The live stock shipping asso- 
 
10 MARKETING 
 
 ciations exist primarily to perform the assembling 
 function. Certain markets are sometimes referred 
 to as assembling markets. 
 
 Goods must also be assembled for sale in the 
 terminal markets. This is true of goods assembled 
 fpr auctions or for any centralized markets where 
 many buyers congregate. Most dealers, both whole- 
 sale and retail, perform an assembling function in 
 bringing many different articles, made by different 
 producers, together for sale to the buyers. 
 
 Dividing. — Goods produced or purchased in large 
 quantities must be distributed in small lots to the buy- 
 ers. The manufacturer must ship goods by the car, 
 case, barrel, or dozen. The wholesale and retail 
 dealers also subdivide goods and sell in smaller 
 quantities than the goods are purchased. This is 
 one of the important functions of many middlemen. 
 One reason why customers cannot buy direct from the 
 manufacturers is that they cannot buy in large enough 
 quantities to make it worth while for the manufac- 
 turers to sell to them. 
 
 Grading. — Many goods must be graded before 
 they can be sold to advantage. Buyers prefer goods 
 that are of uniform quality so that goods that are so 
 sorted and packed will sell for more than goods that 
 are not properly graded. A farmer may have 200 
 bushels of apples. He will receive more for these 
 apples in all likelihood, if he separates the varieties, 
 divides each variety according to size, and packs the 
 imperfect apples separately, or discards them alto- 
 gether, than if he tries to sell the 200 bushels as they 
 
FUNCTIONS OF MARKET DISTRIBUTION 1 1 
 
 come from the orchard. Buyers do not like to buy 
 goods of uncertain or mixed quality and when a 
 shipment is known to contain some poor goods the 
 value of the whole is likely to be lessened. The 
 buyer must protect himself by estimating the quan- 
 tity of desirable goods conservatively. Regrading 
 and packing are expensive. Buyers often want only 
 a certain grade of product. Cotton mills must have 
 cotton with certain lengths of fiber for different pur- 
 poses. Four millers must carefully select their 
 wheat with a view to producing the desired kind of 
 flour. A dealer in the aristocratic part of town may 
 want only the largest and most perfect apples while 
 the dealer in the poorer sections may have a market 
 for smaller or imperfect fruit. Users of steel, often 
 buy the steel under a guarantee as to its exact chem- 
 ical analysis in order to get the quality desired for 
 their needs. If the goods are not properly graded 
 the buyers must go to the expense of sorting the 
 goods and run the risk of loss in selling the part 
 not needed. It is absolutely necessary that goods 
 sold for future delivery be carefully graded accord- 
 ing to definite standards. Future trading would be 
 impossible without definitely established grades. 
 
 It is important that foods not only be graded but 
 that they be graded according to definite and uni- 
 form standards. It is also desirable that the size 
 of the packages used for marketing various food- 
 stuffs be standardized. Many manufactured goods 
 have been pretty well standardized. This is es- 
 pecially true of branded merchandise. The idea 
 
12 MARKETING 
 
 back of much advertising is to let the buyers know 
 that the advertised brand insures a certain quality, 
 which will always be found in the branded product. 
 Some of the staple agricultural products, such as 
 cotton and grains are now graded according to uni- 
 form standards by experts licensed by the govern- 
 ment. Many other farm products are either not 
 graded at all or are graded according to different 
 standards in different parts of the country. There 
 is a need for better grading and packing of farm 
 products. Much has been done in this connection 
 in recent years but much more needs to be done. 
 
 Methods of grading. — Goods may be graded ac- 
 cording to condition or quality of product; variety; 
 size; size of container; method of processing or 
 packing; etc. 
 
 As to condition or quality, goods may be graded 
 according to amount of moisture; soundness; uni- 
 formity of size ; color ; shape ; sweetness, chemical an- 
 alysis, etc. The amount of moisture permissable in 
 various grades of grain is carefully specified. Vege- 
 tables and fruits must be graded according to sound- 
 ness ripeness, and uniformity of size and shape. In 
 grading canned peas the uniformity of size is taken 
 into consideration. Color is important in grading 
 many food products. Canned fruits are often 
 graded according to sweetness or specific gravity of 
 the syrup. Canned vegetables arc commonly graded 
 and sold as "standard," "extra standard," and 
 "fancy." Poor quality goods are known as "sub- 
 standard" or "off standard." Many products such 
 
FUNCTIONS OF MARKET DISTRIBUTION 13 
 
 as steel, fertilizers, drugs, etc., are often graded ac- 
 cording to chemical analysis. 
 
 As to variety, wheat is graded as spring, winter, 
 durum, etc; apples as Kings, Baldwins, Bendavis, 
 Greenings, etc; and canned salmon as sockeye, 
 Alaska red, chinook, Alaska king, medium red, pink, 
 chum, and steelhead. 
 
 Apples, potatoes, oranges, lemons, prunes, canned 
 peas, and many other products are graded as to 
 size. Apples are generally graded by passing over 
 holes of a certain diameter, as 2j^ inches, and or- 
 anges and lemons as to the number in a box. Six 
 sizes of peas are recognized by the canners and are 
 graded by passing over screens with different sized 
 meshes. Peas not so screened are sold as "un- 
 graded" or "ungraded as to size." 
 
 In the sale of fruits and vegetables it is necessary 
 to specify the size of the container, as 150 pound 
 bags, bushel baskets, etc. On this point the Federal 
 Trade Commission says : 
 
 "Cucumbers, beans, and peas are shipped to the 
 New York market from Florida, Georgia, Virginia, 
 New Jersey, and Long Island, and the packages 
 from each of these sections are of different size. 
 Those coming from Florida are in hampers, which 
 contain a scant bushel if tightly packed. Those from 
 Virginia are much larger containing a little over a 
 bushel, while the shippers from Long Island and 
 New Jersey often ship in bags of no specific weight."^ 
 
 'Federal Trade Commission: "Wholesale Marketing of Food," 
 p. 84. 
 
14 MARKETING 
 
 The same conditions prevails with many other pro- 
 ducts. In canning fruits and vegetables the standard 
 size cans are Nos. 1, 2, 2^, 3 and 10. There is, 
 however, much lack of uniformity. There are three 
 sizes of the No. 3 can. Condensed and evaporated 
 milk is generally put in cans of sizes not listed above. 
 Also baked beans, soup, and canned fish are often 
 placed in cans of other sizes or shapes. 
 
 Goods may be graded according to the method of 
 processing or packing. Steel is sold as bessemer or 
 open hearth. Canned corn may be canned "Maine 
 style." Cloth may be bleached or unbleached. Sar- 
 dines are packed in olive oil, cotton seed oil, mustard, 
 or tomato sauce. 
 
 Transportation. — Transportation is one of the 
 most important functions in the marketing process. 
 Steam, steel, and electricity have made possible trans- 
 portation facilities that reach almost every part 
 of the world. These transportation facilities have 
 led to the development of commerce on a scale that a 
 century ago would have seemed to be an utter impos- 
 sibility. Without modern transportation facilities 
 there would be less marketing because each com- 
 munity would be more self sufficient and producers 
 and consumers would be much closer together. 
 Many of the problems arising out of the present 
 marketing system would be solved and the number 
 of middlemen reduced. This docs not mean that we 
 should tear up our railroads and sink our steamships 
 for commerce gives all of us many products that can- 
 not be produced near our homes and also gives us 
 
FUNCTIONS OF MARKET DISTRIBUTION 15 
 
 other products cheaper than would be possible if 
 they were produced in sections unadapted to their 
 growth. Without commerce Pennsylvania, for ex- 
 ample, would be without coffee, tea, oranges, rubber, 
 chocolate, pineapples, gold, diamonds, and many 
 other products and would have to pay more for 
 cotton, sugar, linen, and many other products which 
 the state can produce only at relatively high costs. 
 Transportation will be discussed at greater length 
 in the next chapter. 
 
 Storage. — Goods are transported from produc- 
 ing points to consuming markets but after reaching 
 the consuming market it is often necessary that they 
 be stored until needed by the consumers. The 
 greater the distance from point of production the 
 greater the need of storage, for there is greater 
 opportunity of delay in transit and it takes longer to 
 forward orders and receive the goods. 
 
 Modern storage methods. — Refrigeration, can- 
 ning, etc., have given us vegetables, fruits, eggs, fresh 
 meats, butter, etc., throughout the year at more or 
 less uniform prices. Modern transportation and 
 storage facilities have eliminated the old "starving 
 time" as the period before harvest was formerly 
 called in England. Without storage facilities many 
 goods had just as well not be produced as they can 
 not be consumed at the time of production. It is a 
 very common occurance in a good season for large 
 quantities of fruits and vegetables to rot on the 
 farms due to a glutted market and the lack of storage 
 
16 MARKETING 
 
 facilities to keep them until there is a need for them 
 in the consuming markets. 
 
 Storage and storage facilities will be discussed at 
 greater length in the next chapter. 
 
 Financing. — ^AU business transactions, whether 
 producing or selling, must be financed. Finance is 
 generally regarded as a separate subject and many 
 books arc available on banking, corporation finance, 
 business finance, etc. The relation of purchasing, 
 stockkeeping, stock turnover, prices, selling policies, 
 and cash discounts to the use of capital, operating ex- 
 penses and net profits are discussed in later chapters 
 of this book. 
 
 The assvunption of risks. — Risk is involved in 
 all business transactions. Anyone who purchases 
 goods for re-sale, in the same or a changed form, 
 assumes certain risks. The goods may be destroyed 
 by fire.^ stolen by burglars, damaged by flood, losses 
 may result from a drop in market prices, the goods 
 may be rendered unsaleable by a change in demand 
 perhaps resulting from a change of style or improved 
 designs being placed on the market, competition may 
 render it impossible to sell goods at a profit, goods 
 may be sold on credit and the bills prove uncollect- 
 ible, crop failures or industrial depressions may cur- 
 tail demand, or a hundred and one other things may 
 happen to cause losses. Some of these risks, such as 
 fire, flood, rain, tornado and burglary can be covered 
 by insurance. Risk of loss from a drop in prices can 
 
 ' The fire loss in the United States from 1915 to 1919 is given as 
 $1,416,375,000. 
 
FUNCTIONS OF MARKET DISTRIBUTION 17 
 
 be shifted to others in the case of a few commodities, 
 such as grains and cotton, by hedging transactions, 
 as explained in Chapter VIII. With most goods, 
 however, hedging transactions are now impossible 
 and the risk of price declines must be borne by the 
 owner of the goods. The advisability extending fu- 
 ture trading so as to make hedging possible in other 
 commodities should be carefully studied. 
 
 Most of the other risks, or hazards, involved in 
 handling goods cannot be shifted and must be borne 
 by the handlers of the goods. People are willing to 
 assume the risks in the hope of profits. A person 
 with a certain amount of capital has the option of 
 investing it where it will be relatively safe and yield 
 him a moderate rate of interest or of hazarding this 
 capital in a business venture. The greater the risk 
 or hazard, the greater must be the prospective pro- 
 fits to induce him to put his money and time into the 
 enterprise. The smaller the hazard the smaller the 
 profits need be to attract capital and managerial abil- 
 ity. To the extent that risks can be eliminated, or 
 shifted to the shoulders of professional risk takers, 
 the lower profits can be made and the cheaper goods 
 can be distributed. It appears that the cost of shift- 
 ing risks, when this is possible, is much less than the 
 profit necessary to induce the business man to bear 
 the risk himself. This is true because the one to 
 whom the risk is shifted ordinarily assumes many 
 risks and so can apply the law of averages in de- 
 termining his rates. 
 
 There is a lack of popular understanding as to the 
 
18 MARKETING 
 
 significance of risks. Much has been heard in recent 
 years about profits being too high. To such accusa- 
 tions the manufacturers and dealers reply that pro- 
 fits are necessary to pay for the risks incurred. Here 
 the discussion generally stops because no one has any 
 method of measuring these risks. A few years ago 
 a government commission published figures showing 
 the average profits of the manufacturers in a partic- 
 ular industry to have been equal to 32 per cent, of 
 their invested capital in 1917. Some of the spokes- 
 men for the manufacturers tried to defend them- 
 selves by questioning the accuracy of the figures. 
 This was a poor defense for the figures were appar- 
 ently carefully gathered and tabulated. Another 
 spokesman for the producers, however, met the 
 issue squarely by arguing that 32 per cent, was not 
 an Unreasonable profit for a good year, when the 
 losses sustained in poor years were considered. 
 
 This question of risks Is one that is deserving of 
 serious thought.' It is to be hoped that accurate 
 information will be gathered to enable various types 
 of risks to be measured with some degree of ac- 
 curacy. Very little such information is now available 
 outside the fields of insurance, and credits and 
 collections. 
 
 BIBLIOGRAPHY 
 
 Cherington, Paul T: "The Elements of Marketing,", chs. 4-10. 
 
 Duncan, C. S.: "Marketing," clis. 6, 8, and 9. 
 
 Weld, L. H. D.: "The Marketing of Farm Products," chs. 8, 11, 
 
 and 17. 
 See bibliographies at end of Chapters II and VIII. 
 For information on grading and packing of farm products see 
 
FUNCTIONS OF MARKET DISTRIBUTION 19 
 
 various publications on the United States Department of Agri- 
 culture. For information on the nature and satisfaction of 
 human wants see books on economic theory. For information 
 on financing see various books on money and banking, cor- 
 poration finance, and business finance. For information on 
 credits see books on credits and collections. 
 
 QUESTIONS— CHAPTER I 
 
 1. What is the nature of human wants? How does commerce help 
 
 us to satisfy these wants? Does the satisfying of these wants 
 make us happy? 
 
 2. Which has the most wants, the African savage, the oriental phi- 
 
 losopher, the middle western farmer, or the New York million- 
 aire? Which is the happiest? Why? Which is the least 
 happy? Why? To what extent does each depend upon com- 
 merce to satisfy his wants? 
 
 3. Which has the greatest variety of goods, the laborer of to-day 
 
 or the banker of the 18th century? Which is the happiest? 
 
 4. Why are there so many middlemen to-day? How could the 
 
 number of lessened? Would this be desirable? 
 
 5. Which is the most efficient at the present time, the methods of 
 
 producing or distributing goods? Why? 
 
 6. Enumerate the advantages that would follow grading farm 
 
 products according to uniform standards. Would it be pos- 
 sible to grade fresh vegetables according to uniform standards. 
 Why or why not? 
 
 7. How do storage facilities tend to equalize prices throughout the 
 
 year? 
 
 8. What is risk ? Would it be desirable that business men be en- 
 
 abled to shift all risks except those depending on their own 
 ability to professional risk takers? Why or why not? 
 
Chapter II 
 PHYSICAL MARKETING FACILITIES 
 
 The physical marketing facilities consist of the 
 equipment for the transportation and storage of 
 goods. The purpose of this chapter is to show the 
 importance of these facilities, the adequacy of our 
 present facilities to perform their functions, and to 
 suggest improvements in the methods of handling 
 goods, especially foodstuffs, during the marketing 
 process. 
 
 TRANSPORTATION 
 
 Movements involved in transportation. — Trans- 
 portation involves the moving of minerals from 
 the place of extraction to the mouth of the mine 
 and to the furnace or factory; the hauling of the 
 farmers crops to his barns, to the the local ele- 
 vator, creamery, or shipping station ; of moving raw 
 materials from saw mill, oven, smeltery, mine, or 
 farm to the factory and from one factory to another ; 
 of moving finished products from farm or factory to 
 local shipping station or car, from shipping point to 
 city market, from car or boat to wholesale ware- 
 house, from wholesale warehouse to retail store, and 
 from retail store to consumer's residence. It in- 
 volves movements by wagon, by tramway, by flume, 
 by auto truck, by railroad car, by steamship, by canal 
 
 2Q 
 
PHYSICAL MARKETING FACILITIES 21 
 
 barge, by ferryboat, by elevator, by pipe line, by belt 
 conveyor, by platform truck, by human hand and 
 shoulder, by delivery wagon, and by market basket. 
 It involves movements over country roads, city 
 streets, railroads, rivers, canals, and oceans. It in- 
 volves loading and unloading from wagons, trucks, 
 and cars; placing in warehouses, piers, shelves, and 
 coolers and taking from these places of storage for 
 delivery to the buyers. 
 
 Number of movements illustrated. — The number 
 of times a product is handled between the pro- 
 duction of the raw material and the delivery of 
 the finished product Into the hand of the ultimate 
 consumer, aside from the handling involved in manu- 
 facturing processes, may be illustrated by Cuban 
 sugar. The cane Is carried from the fields to the 
 mill, which involves loading and unloading from 
 carts or railway cars or both. After being pro- 
 cessed, it is packed In bags, piled In warehouse, from 
 the warehouse it is loaded on cars, hauled to port; 
 piled on pier, loaded in ship, stored in hold, carried 
 to an American port, unloaded, piled, lightered or 
 otherwise transported to refinery, unloaded and 
 piled. After being refined, it is placed in bags or 
 barrels, trucked to warehouse, piled, taken to cars, 
 loaded in cars, hauled to jobbers warehouse, un- 
 loaded, piled in warehouse, loaded on trucks, hauled 
 to retailer, and carried into his store. The retailer 
 weighs it out and sells to the consumer. Either the 
 retailer or the consumer carries it to the latters resi- 
 dence where It may be handled several times more 
 
22 .MARKETING 
 
 before it is consumed. Sugar is probably not handled 
 any oftener than many other products. In handling 
 products so many times by human hands and mechan- 
 ical devices there is room for much waste due to 
 unnecessary handling and to poor methods or equip- 
 ment. 
 
 Importance of transportation. — Much of mod- 
 ern civilization has been made possible by the de- 
 velopment of the transportation facilities. Trans- 
 portation has enabled all civilized communities to 
 draw goods from all parts of the world. It has made 
 available for our use a great variety of goods and 
 has enabled goods to be drawn from the sections best 
 adapted to their production. This enables different 
 sections to specialize in those industries to which they 
 are best adapted. To the consuming communities 
 it means that they can purchase their supplies from 
 the sections that can produce them the most cheaply. 
 Having become dependent upon supplies from a dis- 
 tance a transportation system is now necessary to our 
 very existence. Consider the results of a tie-up of 
 the railroads serving any large American city for 
 only a few weeks. 
 
 Over 90 per cent, of the food entering our large 
 cities is transported in interstate commerce. It is 
 estimated that the average distance between the 
 producer and consumer of food in the United 
 States is over 1,000 miles.^ New York 
 City draws its supply of apples from 24 States, its 
 
 ' Federal Trade Commission, "Wholesale Marketing of Food," 
 p. 188. 
 
PHYSICAL MARKETING FACILITIES 23 
 
 white potatoes from 23 States, its cabbage from 16 
 States, its cantaloupes from 15 States, its peaches 
 from 15 States, its tomatoes from 13 States, its straw- 
 berries from 12 States, and its sweet potatoes from 
 8 States. Practically the same is true of all larg-e 
 cities. Sixteen large cities draw their supplies of 
 white potatoes from an average of 23.8 States, and 
 their apples from an average of 16.8 States.^ The 
 wide sources from which a large city draws its food 
 supplies may be illustrated by the origin of the white 
 potatoes unloaded in Chicago during 1917. 
 
 Number of cars of white potatoes originating in 
 different States, unloaded in Chicago in 1917 : 
 
 The West: 
 
 Wisconsin 2,463 
 
 Minnesota 1,194 
 
 Idaho 550 
 
 Washington 384 
 
 Colorado 302 
 
 Michigan 274 
 
 California 241 
 
 South Dakota 197 
 
 Illinois 166 
 
 Oregon ". 116 
 
 North Dakota 49 
 
 Iowa 34 
 
 Kansas 30 
 
 Missouri 24 
 
 Nebraska 23 
 
 Indiana . . 21 
 
 Montana . . . 
 
 Ohio 
 
 Utah 
 
 New Mexico 
 
 21 
 9 
 6 
 
 2 
 
 The Lower South: 
 
 Florida 389 
 
 Texas 379 
 
 Louisana 315 
 
 Alabama 86 
 
 Mississippi 59 
 
 North Carolina 22 
 
 South Carolina 13 
 
 The Upper South: 
 
 Virginia 1,22 J 
 
 Maryland 152 
 
 Arkansas 143 
 
 Kentucky 114 
 
 Oklahoma 105 
 
 Tennessee 52 
 
 The East: 
 
 New Jersey 187 
 
 Pennsylvania 63 
 
 Delaware 2 
 
 West Virginia 1 
 
 Maine 1 
 
 ' Ibid., p. 48 and Map I. 
 
24 MARKETING 
 
 Our Transportation System, — To perform the 
 transportation function there are in the United 
 States approximately 1,000,000 motor vehicles, over 
 25,000,000 horses and mules, about 66,000 locomo- 
 tives, about 2,500,000 freight cars with an average 
 capacity of over 40 tons. There are approximately 
 60,000 miles of pipe lines, about 2,500,000 miles of 
 rural road in the United States, of which about 12 
 per cent is surfaced. There are approximately 
 255,000 miles of railroad lines, having a total 
 mileage including sidings and second, third, fourth, 
 fifth or sixth tracks of 400,000 miles. The railroads 
 moved 583,000,000 tons of freight in 1900; 870,- 
 000,000 tons in 1908; and 1,388,000,000 in 1918. 
 This shows an increase in the goods transported by 
 rail of nearly 140 per cent in 18 years. 
 
 The railroads are generally considered the most 
 important part of our transportation system al- 
 though the cost of moving goods by human labor, 
 by wagon, by motor truck and by elevator is prob- 
 ably much greater than the cost of transporting goods 
 by railroad. It has been estimated that it costs more 
 to load a car of canned goods in Chicago than to 
 move the car from Chicago to New York. There is 
 a large cost of moving freight before reaching the 
 rail or water terminals and after leaving the termi- 
 nals. The Railway Age has estimated that the 
 American people arc paying more for automobiles 
 than for railway transportation.^ The money spent 
 
 'Rail revenues for 1919 were $5,200,000,000 while the deprecia- 
 tion and cost of operation of automobiles exclusive of cost of roads 
 and accidents was estimated at $5,500,000,000. 
 
PHYSICAL MARKETING FACILITIES 25 
 
 on automobiles, however, Is largely for pleasure pur- 
 poses and not for the transportation of goods. Dur- 
 ing the war when the railroads had embargoes 
 against many articles, the auto truck was used to 
 move goods to the Atlantic seaboard from points as 
 far west as Detroit and Chicago. Under normal con. 
 ditions, however, the auto truck seems to be unable 
 to compete with the railroads for long haul business. 
 Due to congestion and delays in rail terminals trucks 
 are being used for hauls up to and over 100 miles. 
 They are reported to have taken a large part of 
 the local traffic away from the railroads in southern 
 New England. The truck's expenses may be higher 
 than the freight rate but k can load and unload at 
 store doors thus saving trucking expenses to and from 
 freight stations. The answers to a questionnaire 
 sent out by a committee of the New England Traffic 
 League showed that in SO per cent, of the cases where 
 the motor truck was used In New England the motor 
 truck charge from door to door was less than the 
 rail charge from station to station.* The motor 
 truck also saves time and frequently does away with 
 the need for crating the goods. Dealers in perish- 
 able goods often send their trucks to outlying yards, 
 2 to 20 miles distant to save the time necessary to 
 have the cars switched to their sidings. 
 
 The airplane is a demonstrated success for carry- 
 ing the mail, but there the no Indications of its use in 
 the near future for carrying freight. The motor 
 truck apparently will supplement rather than displace 
 
 'Journal of Commerce, March 5, 1921. 
 
26 MARKETING 
 
 the railroads. Much has been said in recent years 
 of reviving traffic upon rivers and canals. So far, 
 however, little has been done to transfer traffic from 
 our railroads to our inland water carriers and it 
 does not appear that any except the largest and most 
 favorably situated of these water carriers are in a 
 position to move goods cheaper than can be done by 
 the railroads. The railroads then remain the back- 
 bone of our transportation system. Their adequacy 
 for the task imposed upon them and their efficiency 
 are of vital importance to the American people. 
 
 Adequacy of oiu- railroad system. — During the 
 world war the railroads were unable to properly 
 handle the large quantities of goods offered for 
 shipment. This has caused the public to ask if our 
 railroad facilities are adequate to the needs of the 
 country. They certainly were not adequate to han- 
 dle the traffic offered during the war, although for 
 several years before the war they were as a whole, 
 able to move all goods offered with reasonable 
 speed. The railroad plant should clearly be de- 
 veloped somewhat in advance of our other indus- 
 tries so that there should be during normal times 
 an unusued margin to take care of rapid increases 
 in traffic caused by industrial prosperity or war. 
 It is generally admited that the roads are not now 
 so developed. 
 
 The railroad system is made up of tracks con- 
 necting different cities and of terminal facilities 
 within these cities. There are probably some single 
 track roads that need double tracking and some 
 
PHYSICAL MARKETING FACILITIES 27 
 
 double track roads that need third and fourth tracks. 
 There are also some sections in the South and West 
 where new lines should be built to open up and 
 develop new territory. A former director-general 
 of railroads gave it as his opinion that only one 
 additional trunk line need be constructed — an east 
 and west line to get around the Pittsburgh gateway. 
 The Railway Age estimates that we need 6,000 miles 
 of new line, 15,000 miles of multiple main track 
 and 30,000 miles of side and yard track.^ The need 
 for building tracks can be largely eliminated by 
 electrification. Electrification almost doubles the 
 capacity of a road over a mountain grade. Such 
 mountain grades often limit the amount of traffic 
 which a given road can move. Electrification also 
 increases the capacity of all tracks having grades 
 or curves. It increases the speed of local trains 
 and makes possible heavier freight trains, both of 
 which tend to increase the traffic that can be moved 
 over a given set of rails. Many plans have been 
 prepared for electrification and as soon as capital 
 is available on better terms it is expected that sev- 
 eral stretches of road will be electrified. 
 
 Poor terminal facilities. — The terminal facilities 
 of the railroads are admittedly inadequate for pres- 
 ent needs. Most delays occur in the terminals. 
 Recent figures show that a freight car is actually 
 moving in freight trains 11 per cent of the time, 
 that it is at the command of shippers for loading 
 or unloading 37 per cent of the time, and in yards 
 
 "January 2, 1920. 
 
28 MARKETING 
 
 or on transfer tracks 52 pcr'ccnt of the time. These 
 percentages show plainly the weak spot in our rail 
 facilities. After the return of the roads to private 
 operation on March 1, 1920, the managers started 
 to purchase new cars and locomotives and to in- 
 crease the efficiency with which the old equipment 
 was used. They state that the average car load was 
 increased from 28.3 tons March, 1920, to 29.8 tons 
 in August, 1920, and that the average number of 
 miles each car was moved per day increased from 
 23.8 miles in March, 1920, to 27.4 miles in August, 
 1920.® Although such improvements may be note- 
 worthy it does not appear that the terminal situa- 
 tion can be solved by any methods so far brought 
 into general use. It is extremely difficult to secure 
 additional space for terminal purposes in a city. 
 Real estate is very expensive and it is generally im- 
 possible to secure space to provide facilities to keep 
 up with the increasing population of American cities. 
 Much could be accomplished by the unified opera- 
 tion of all terminal facilities. The facilities in some 
 cities are at present operated as a unit. It seems, 
 however, that the ultimate solution of this problem 
 develops upon some new method of handling the 
 business. 
 
 Suggested remedies for terminals. — In Cincin- 
 nati, where conditions were especially bad, a fleet 
 of motor trucks has been introduced to handle 
 less than car load freight shipments between the 
 various freight stations. The bodies of these 
 
 'American Railroads, November 16, 1920. 
 
PHYSICAL MARKETING FACILITIES 29 
 
 trucks are removable. When a truck arrives at a 
 station one body is removed with a crane, another 
 quickly swung into its place, and the truck is away 
 on another trip in a very few minutes. This sys- 
 tem is reported to be both quicker and cheaper than 
 transfers in railroad cars. Freight that was days 
 in transit from one station to another when moved 
 in freight cars is now moved in hours. If this sys- 
 tem were generally introduced the congestion in the 
 city streets might be seriously increased. 
 
 Another suggestion for handling less than car 
 load freight is to substitute large steel bins or cases 
 for box cars. These cases would fit upon flat cars 
 and would be placed on and removed from the cars 
 by cranes. They would be loaded and unloaded on 
 station platforms so that cars would not have to 
 be kept standing on the tracks. They could also be 
 transferred to motor trucks and taken to and from 
 shipper's warehouses. This would eliminate the 
 loading and unloading at the station which causes 
 delay and damage by breakage as well as affording 
 the opportunity for pilfering. 
 
 During the war the Pennsylvania Railroad intro- 
 duced a system of "sailing days" for the movement 
 of less than car load freight at certain points on 
 its lines. Under this system freight is received 
 only on certain days for forwarding to certain des- 
 tinations. There were thus fewer cars at a loading 
 station on a given day and less work in sorting 
 and loading the goods. This system is said to have 
 saved the use of 10,000 cars in Philadelphia in 1919. 
 
30 MARKETING 
 
 Another much more radical suggestion for the 
 quicker handling of cars in terminals is to substitute 
 overhead cranes, which would bodily move the cars 
 from one track to another, for the slow switch en- 
 gines. 
 
 The best brains available should be set to work 
 on the problems of improving transportation facili- 
 ties in our terminals. The late James H. Hill was 
 one of the pioneers in securing heavy locomotives 
 and moving heayy trains. Other railroad executives 
 followed Mr. Hill's example until to-day the Amer- 
 ican railroads are the most efficient In the world 
 in the moving of traffic between our terminals. The 
 benefits of this efficiency are, however, partly lost 
 due to the Inadequacy or inefficiency of our city ter- 
 minals. 
 
 Car shortages. — Another cause of serious com- 
 plaint against our railroad system Is Its frequent in- 
 ability to supply all shippers promptly with cars. 
 During periods of industrial prosperity, and, es- 
 pecially during the fall crop moving seasons, car 
 shortages are often acute, while in periods of Indus- 
 trial depression the railroads are generally able to 
 furnish cars promptly to all shippers. The American 
 Railway Association publishes figures showing that 
 the car surplus in the long run exceeds the car short- 
 age. A car surplus means a loss to the roads just 
 as a shortage means a loss to the shippers. The ship- 
 pers feel that the roads should provide facilities to 
 handle the maximum and not merely the normal traf- 
 fic movement. The net freight car shortage 
 
PHYSICAL MARKETING FACILITIES 31 
 
 amounted to 149,865 cars on February 6, 1907; 
 114,908 cars on November 1, 1916, and 146,070 
 cars on September 1, 1920. On the other hand, 
 the net surplus of cars amounted to 413,388 on 
 April 29, 1908; 327,084 on April 1, 1915, and 
 450,000 in March, 1919. Many shippers expe- 
 rienced difficulty in securing cars during the period 
 from the fall of 1915 to the fall of 1920 with the ex- 
 ception of the six or eight months following the 
 signing of the armistice. Car shortages can be pre- 
 vented perhaps by a more efficient use of cars rather 
 than buying more cars to further congest the rail- 
 road terminals. 
 
 Wastes and losses due to poor transportation 
 facilities. — Our transportation facilities have ap- 
 parently not kept pace with the expanding area of 
 the markets and the increased quantities of goods 
 to be transported. This inadequacy of facilities 
 increases the cost of handling goods, involves delay 
 and damage to goods, decreases the prices paid to 
 producers, and adds to the cost of the goods to the 
 consumers as shippers and middlemen must Increase 
 their profits to cover the risks of loss, damage and 
 delay. 
 
 High costs. — It has been estimated that $90,000,- 
 000,000 of commerce passed through our rail and 
 marine terminals during 1919 and that about one- 
 third of the cost of this commerce, or $25,000,- 
 000,000 to $30,000,000,000 was due to Inefficiency 
 and preventable wastes in handling between pro- 
 ducers and consumers. Each middleman must add 
 
32 MARKETING 
 
 expenses (and profits) to cover the cost of moving 
 goods from car to warehouse, wharf to truck, etc. 
 It is estimated that the railroads could save an 
 average of 15c per ton by handling freight by me- 
 chanical equipment and many vessels could save as 
 much more.' 
 
 Poor facilities in New York, — Many of our 
 pprts are not properly equipped. The situation in 
 New York is especially bad both for handling do- 
 mestic and foreign shipments. New York is trying 
 to handle modern commerce with methods fifty 
 years out of date. There are relatively few modern 
 piers in New York Harbor and almost none on 
 Manhattan Island. Goods arriving by rail on the 
 Jersey shore are floated across the river on car 
 floats and delivered at railroad owned piers on 
 Manhattan Island or in Brooklyn. Most of the 
 foodstuffs arrive on the lower west side from which 
 section they are carted to all parts of the city. The 
 distances are so great to some parts of the city, as 
 the Bronx or Staten Island, that it often takes a truck 
 the best part of a day to make one trip. New York 
 consumes over 1,000 cars of fruits and vegetables 
 per week. The sale of southern vegetables is held 
 on piers 28 and 29, North River at 3 a. m., so that 
 the goods can be on the retail stands for morning 
 trade and so that the piers can be used for other 
 purposes during the day. Trucks often have to wait 
 for hours, and even days to get into the piers. It 
 
 'Forst, Ha5nwood: in American Business Sf National Acceptance 
 Journal, May, 1920. 
 
PHYSICAL MARKETING FACILITIES 33 
 
 is reported that wagons are sometimes smashed and 
 horses killed in the rivalry for position. For haul- 
 ing goods between the piers and stores on lower 
 Manhattan horse-drawn vehicles still predominate, 
 as the movement of traffic is so slow that there is no 
 economy in the use of motor trucks. "The direct 
 trucking expense under such awkward conditions is 
 enormous, while the indirect consequences through 
 delays and damage and stealage is perhaps even 
 greater."* 
 
 Multiplicity of terminals increases cost of han- 
 dling food. — New York City receives its supply of 
 food over 9 railroads and 45 steamship lines. Chi- 
 cago has 27 railroads, nearly all of which have 
 their own terminals. Poultry alone arrives at 17 
 different terminals. The yards in Chicago are lo- 
 cated from a quarter of a mile to two miles from 
 the produce market on South Water Street. A large 
 part of the perishable foods must be carted through 
 the busy Loop district to reach the produce market 
 and then carted to retailers in all parts of the city 
 or, if sold to out of town buyers, carted back across 
 the Loop to the rail terminals. Over 180,000 cars 
 of perishable foods reach Chicago anually, about 
 half of which are reconsigned to other markets. 
 This reconsignment often causes a delay of from 
 2 to 4 days to the cars and also adds to the con- 
 gestion of an already crowded terminal district. In 
 Minneapolis there are eight terminal yards located 
 
 'Federal Trade Commission: "Wholesale Marketing of Food," 
 pp. 118, 119, a«id 214. 
 
34 MARKETING 
 
 from 2 blocks to 2 miles from the produce market 
 district. St. Paul also has eight yards and most of 
 the produce has to be hauled to the dealers' stores. 
 The perishable food for San Francisco is unloaded 
 at eight places all at a distance from the produce 
 dealers. Norfolk has 6 railroad terminals and many 
 wharves; Wichita, Kansas, has five terminals lo- 
 cated from two to fifteen blocks from the produce 
 market. A dealer on a given day may have cars 
 arrive at several different terminals, which involves 
 extra expenses for cartage, inspection, etc. A St. 
 Louis poultry dealer, for example, has to send feed 
 to two freight yards located in opposite directions 
 and each five miles from his store. The average cost 
 of carting fruits and vegetables from the rail ter- 
 minals to the stores of the wholesale dealers in Chi- 
 cago, Indianapolis, Detroit, Cincinnati, Columbus 
 and Louisville, is equal to about one per cent of 
 the gross sales of the dealers.* 
 
 If all food arrived at one terminal near which the 
 dealers had stores a large saving would be made 
 in cartage expenses. The damages resulting from 
 cartage and hauling would also be reduced. Yet 
 if a joint terminal is not properly handled no bene- 
 fits may result. In St. Louis the terminal railroad is 
 supposed to handle all cars and yet there is so much 
 delay in switching cars to the tracks near the dealers' 
 stores that many of the dealers truck their goods 
 from scattered terminals, several of them across 
 the River in East St. Louis. Oftentimes a merchant 
 
 ' Ibid., p. 126. 
 
PHYSICAL MARKETING FACILITIES 35 
 
 has a siding connected with one road and yet all 
 shipments arriving from other roads must be carted, 
 because of the delay in switching the cars. This is 
 a common practice wi^h the perishable food dealers 
 in Minneapolis, Cincinnati, Louisville, Kansas City, 
 Providence and many other cities. Some dealers 
 state that they had just as well not be located on any 
 road as most of the goods have to be carted any 
 way and it is just as well not to be tied up with any 
 one road." 
 
 Delays. — Except in periods of severe congestion, 
 of extreme weather, or of labor troubles, there is 
 little complaint about delays in rail shipments dur- 
 ing the movement between terminals. There is, 
 however, serious complaint of delays in terminals. 
 In Cincinnati, "if a dealer wants a car sent to a 
 particular terminal cither it is not sent at all, or if 
 switched there is a delay of four or five days long- 
 er."" Similar delays of 24 to 48 hours are reported 
 in Minneapolis and St. Paul; of 36 hours in getting 
 cars from East St. Louisi to St. Louis; and of 36 
 to 48 hours in getting cars placed in Louisville after 
 they reach the west end yards, if they happen to 
 arrive at this yard. It is said to take as long to get 
 a car over the belt line in Philadelphia as to get it to 
 Philadelphia from Chicago.'^ The delays in the 
 classification yards, and transfer tracks are often 
 quite serious. It ordinarily takes several days to 
 
 ^"Ibid., pp. 114-118, and 97-101. 
 
 '^Ibid., p. 98. 
 
 '' Ibid., pp. 97-100. 
 
36 MARKETING 
 
 get a car through the Chicago terminal. Such de- 
 lays not only tie up the capital of the shippers for 
 long periods, but require more equipment on the part 
 of the railroads, and result in heavy losses to per- 
 ishable products, not to mention the extra cost of 
 feeding livestock and icing refrigerator cars. Per- 
 ishable foods are sometimes delayed in transit for 
 reconsignmcnt. Shippers in the West and South 
 commonly ship their goods before they are sold, 
 expecting to sell them while they are "rolling" or to 
 divert them to the market that appears to offer the 
 best price. Goods from the South, for example, are 
 commonly reconsigned at Potomac Yards (Va.), 
 Cincinnati, Louisville, or Mounds (111.). As the 
 prices of fruits and vegetables fluctuate widely from 
 day to day and week to week in different cities this 
 practice tends to equalize the supply and protect the 
 shippers. It does, however, delay cars, increase the 
 congestion of terminals, and add to the spoilage of 
 foodstuffs and should, therefore, be reduced to the 
 minimum. 
 
 Damages to foodstuffs. — Damages result from 
 delays in transit, from improper equipment, from 
 improper loading or overloading, and from carting 
 in unfavorable weather or over poor streets. 
 
 Delays in transit are estimated to cause a loss 
 in fruit of from 5 to 10 per cent of the amount 
 handled. Strawberries are said to lose from $5 to 
 $10 per car for every hour they are delayed beyond 
 a certain length of time. The loss on a car of 
 
PHYSICAL MARKETING FACILITIES 2,1 
 
 onions, potatoes, or watermelons may be as much 
 as $100, if the car is two days overdue. 
 
 Improper equipment results in heavy damage to 
 foodstuffs. Perishable foods are shipped in ven- 
 tilated cars that should be shipped in refrigerator 
 cars, and goods are shipped in ordinary cars that 
 should be shipped in ventilated cars. When new 
 potatoes are shipped in box cars and delayed in 
 transit beyond four days, 8 or 10 barrels are rotted 
 in each end of car.^^ There is also a serious loss 
 due to lack of heated cars in winter. Freezing causes 
 very heavy losses. It has been estimated that Spain 
 lost $1,000,000 on Almeria grapes in 1920 due to 
 lack of proper ventilation during ocean shipment." 
 
 Overloading often causes serious loss to perish- 
 able foods. The air in the top of a refrigerator car 
 is not cool and if foods are loaded above a certain 
 point they will not be kept cool. For example, it is 
 said that only four tiers of Georgia peaches can be 
 protected in a refrigerator car, yet the minimum car 
 load requires five tiers to be shipped, which means 
 that the top tier arrives overripe and must be sold 
 for 20 per cent less than is received for the peaches 
 in the four lower tiers.'' Overloading of green 
 vegetables in poorly ventilated cars leads to over- 
 heating and sweating. Serious complaint is made 
 
 " Ibid., p. 88. 
 
 " E. S. Godsell, Manager foreign fruit brokerage department of 
 Fruit Auction Company of New York, writing in Journal of Com- 
 merce, January 24, 1921. 
 
 ^ Federal Trade Commission : "Wholesale Marketing of Food," 
 p. 90. 
 
38 MARKETING 
 
 against steamship companies for improper loading 
 of perishable foodstuffs, such as loading fruit over 
 sugar where it is damaged by the heat, or loading 
 other goods on top of fruit and vegetables and so cut- 
 ting off ventilation. 
 
 The damage from handling and carting goods is 
 considerable. This is especially true where products 
 like eggs must be carted over rough streets. Dam- 
 age also results from exposure to heat or cold while 
 in trucks. There is also a heavy damage to eggs 
 from switching the cars. In fact, most of the dam- 
 age to eggs in transit is thought to occur as a result 
 of switching. Eastern dealers report the loss of 
 eggs due to breakage from 5 to 10 per cent." The 
 failure to keep refrigerator cars properly iced causes 
 a very heavy loss to fruits, vegetables, butter and 
 eggs. 
 
 Messengers in charge of cars. — Some large fruit 
 growers and shippers send messengers with their 
 goods to sec that they are properly cared for in 
 transit. These messengers attend to the tempera- 
 ture and ventilation of the cars. They see that the 
 cars are properly iced, that ventilators are opened and 
 closed under the proper conditions. They start the 
 stoves when the cars are in a cold area. They see that 
 the cars are kept together and upon arrival at des- 
 tination they see the goods are properly unloaded. 
 It is stated that much of the damage to foodstuffs 
 in transit is due to the fact that the railroad em- 
 ployees are ignorant of the proper methods of car- 
 
 "nid., p. 109. 
 
PHYSICAL MARKETING FACILITIES 39 
 
 ing for the goods. Small shippers are unable to 
 provide such messengers. The suggestion has, 
 therefore, been made that the railroads provide spe- 
 cial men who are familiar wiih the handling of food- 
 stuffs to see that all cars of perishable food are prop- 
 erly handled. Such men could be stationed at loading, 
 icing, diverting and unloading points, or could be 
 sent with trains of perishable foodstuffs as seems 
 best. At the loading points they should see that 
 goods are properly cooled, iced, loaded, and braced. 
 At the icing stations they should see that all cars 
 receive proper attention. Cars of cauliflower and 
 celery should be allowed to run for a few hours 
 with the vents open and plugs out if the tempera- 
 ture permits. At the diverting points all cars should 
 be inspected and the owners advised of all cars in 
 poor condition so that they could arrange for their 
 quick sale, perhaps selling at or near the diverting 
 point. At the unloading points they should see that 
 all cars are properly unloaded and the goods pro- 
 tected as much as possible from the weather. They 
 might also act as inspectors to pass on the quality . 
 or grade of all cars involved in a dispute. It is be- 
 lieved that the use of such men would lessen the 
 damage to goods and hence the cost of marketing 
 the goods." 
 
 Car shortages are expensive. — Shortages of coal 
 
 cars have been especially serious. Most mines have 
 
 little or no storage space, so that when cars are not 
 
 available the mines must close. This throws 
 
 "Ibid., pp. 104-106. 
 
40 MARKETING 
 
 the miners out of work while the overhead expenses 
 of the mining company go on just the same. Work 
 at many mines has been very irregular, cases have 
 been reported of mines being able to operate only 
 one, two or three days a week. As the miners must 
 live seven days a week such conditions mean that 
 the wage scale must be high enough to allow the 
 miners to make a living in the number of days 
 worked. This increases the cost per ton of mining 
 coal and results in high prices to the consumers or 
 losses to the operator. 
 
 Another serious result of car shortages is the 
 irregular supply of goods delivered to the consum- 
 ing markets. This irregular supply results in wide 
 fluctuations in price. When supplies are short prices 
 rise considerably. On this point Herbert Hoover, 
 former food administrator, said, "On one occasion 
 a study was made under my administration into the 
 effect of car shortage in the transportation of pota- 
 toes, and we could demonstrate by chart and figure 
 that the margin between the farmer and the con- 
 sumer broadened 100 per cent in periods of car 
 shortage. Nor did the middleman make this whole 
 margin of profit, because he was subjected to un- 
 usual losses and destruction, and took unusual risks 
 in awaiting a market. The same phenomenon was 
 proved in a large way at time of acute shortage of 
 movement in corn and other grain.'"' 
 
 Risks increase the margin between the producers 
 and the consumers. — Each middleman who han- 
 dwriting in the Saturday Evening Post, April 10, 1920. 
 
PHYSICAL MARKETING FACILITIES 41 
 
 dies an article tries to obtain a profit to cover all 
 the risks involved in the transaction. The greater 
 the risks the greater the profits. When risks can be 
 shifted by insurance, or hedging, the dealers can 
 include the expense of this shifting in their costs and 
 so do not need to add profits to cover the possibility 
 of losses from such risks. When such risks cannot 
 be shifted the dealers must figure on larger profits 
 so that reserves will be available to meet the losses. 
 Prices are fixed in the central markets. Dealers 
 buying goods for shipments to such markets must 
 protect themselves by paying the producers less for 
 their goods. For example, if a shipper of eggs 
 knows that eggs are often broken in transit he pro- 
 tects himself by paying the farmers less for their 
 eggs. Dealers handling goods between the central 
 market and the consumer must increase their selling 
 prices to cover such risks. The price paid to the 
 producers is lowered and the price charged the con- 
 sumers is raised to cover all the risks involved in 
 marketing goods. It is, therefore, in the interest 
 of both that the risks of loss or damage from im- 
 proper loading, from poor equipment, from rough 
 handling, from exposure to the weather, from lack 
 of proper storage facilities, from delays in transit, 
 or from irregular or fluctuating prices be reduced 
 as much as possible. Future trading in many prod- 
 ucts is probably impractical, but great benefits should 
 follow a better and more uniform grading of 
 products, of more careful packing, of better ter- 
 minal facilities, of a more adequate supply of cars, 
 
42 MARKETING 
 
 and of a more even distribution of each product to 
 the various consuming markets. This latter is es- 
 pecially important as it would tend to a greater 
 uniformity in prices. 
 
 STORAGE 
 
 Storage involves the keeping of goods from the 
 time they are produced until they are consumed. 
 It includes storage in the farmer's barn, granary, 
 cellar, or vegetables or fruits banked in the ground. 
 It includes storage in the warehouses or yards of 
 mills, factories, mines, and stores. It includes stor- 
 age in cold storage plants, grain elevators, mer- 
 chants' shelves, and consumer's pantries. Railroad 
 cars are primarily for transportation purposes, but 
 are also often used for storage purposes. 
 
 Importance of storage facilities. — It was pointed 
 out in Chapter I that the keeping of goods from the 
 time they were produced until they were needed for 
 consumption (the creation of time utilities) was 
 just as necessary to the satisfaction of the human 
 wants as was the original production of goods. 
 
 In recent years there has been a tendency for 
 dealers and manufacturers to carry just as small 
 stocks of goods as possible to permit the uninter- 
 rupted conduct of their business. When transporta- 
 tion facilities are dependable this is generally good 
 business policy. It is, however, necessary for some 
 one to carry the goods which are produced only at 
 certain seasons of the year until they are needed by 
 the consumers. The heaviest egg production comes 
 
' PHYSICAL MARKETING FACILITIES 43 
 
 in the spring, and it is very important that the sur- 
 plus be stored for use during the following winter 
 when the production is very low. The heaviest milk 
 production also comes in the spring, and it is very 
 desirable that the surplus milk be made into butter 
 or cheese and stored, or evaporated, condensed, or 
 powdered for use later in the year. The season for 
 some vegetables, such as potatoes, is spread over a 
 considerable length of time by drawing supplies 
 from different latitudes. Potatoes from Florida 
 are placed on the northern market in the early spring 
 and as the season advances supplies are obtained 
 from sections further and further north, ending in 
 the fall in Canada and such Northern States as 
 Maine, Michigan and Wisconsin. There remains, 
 however, a period of several months from the end 
 of the northern digging season until adequate sup- 
 plies are received from the South. Potatoes must 
 be stored for use during this season. Nearly all 
 farm products arc harvested in relatively short pe- 
 riods. Cotton, wool, wheat, oats, corn, barley, rye, 
 tobacco, hemp, etc., must be stored to secure a uni- 
 form consumption throughout the year. Seventy- 
 one per cent of the wheat sold by the farmers is 
 marketed during four months — July, August, Sep- 
 tember and October. Eighty-five per cent of the 
 boxed apples are placed in cold storage for a shorter 
 or longer period. Some of the farm products re- 
 quire special storage facilities as heated, dry, or 
 cooled space. 
 
 Many other products are stored for considerable 
 
44 MARKETING 
 
 periods of time. This is done with Lake Superior 
 iron ore, for example, which is transported on the 
 Great Lakes. As navigation is closed on the lakes 
 during the winter, sufficient supplies must be carried 
 at the lower lake ports and in the mill yards to keep 
 the furnaces in operation during the winter months. 
 The Northwest gets its coal supply largely by lake, 
 so that the winter supplies must be received at the 
 upper lake ports before the navigation season closes. 
 
 Some products must be stored for a considerable 
 period of time before they are ready for the mar- 
 ket. Lumber is often allowed "to season." Smoked 
 meats, cheese, tobacco, and hides are examples of 
 products that need a certain time for curing. Manu- 
 facturing processes, however, have in many instances 
 reduced the time necessary for curing. 
 
 Goods must also be stored to equalize the supply 
 over the consuniing area. This is one of the primary 
 functions of the wholesale dealers. Many goods 
 also should be stored for relatively short periods 
 due to irregular or bunched arrivals. Thus the 
 supply of peaches, cantaloupes, tomatoes, or any 
 other similar product arriving in a given city may 
 be very large one day and very small a few days 
 later. Serious loss occurs when proper storage fa- 
 cilities are not available to store such products for 
 short periods. 
 
 It is apparent from these facts that producers 
 and consumers are both vitally concerned with stor- 
 age facilities. When facilities are inadequate to 
 properly meet the needs of the community losses oc- 
 
PHYSICAL MARKETING FACILITIES 45 
 
 cur which tend to increase the prices to the con- 
 sumers or decrease the prices to the producers. 
 
 Storage facilities. — To provide facihties for per- 
 forming the storage function many warehouses, cold 
 storage plants, and elevators have been provided by 
 manufacturers, merchants, railroads, and ware- 
 house companies. A few figures will help us to ap- 
 preciate the magnitude of the facilities that have 
 been provided and they arc not always adequate to 
 the needs of the country. Chicago has grain ele- 
 vators with a capacity of about 45,000,000 bushels, 
 and warehouses, aside from cold storage warehouses, 
 with 4,500,000 square feet of space. There were in 
 the United States in 1913, 3,485 cotton warehouses 
 with a capacity of nearly 14,000,000 bales, aside 
 from the warehouses of the cotton mills.^* There 
 are about 30,000 country elevators and grain ware- 
 houses in the United States. 
 
 The total amount of cold storage space in the 
 United States is shown by the following figures: 
 
 REFRIGERATION SPACE IN THE UNITED STATES"" 
 
 Capacity 
 
 Warehouses Number Cubic Feet 
 
 Public Cold Storage Warehouses '..... 334 169,362,490 
 
 Packing Houses Doing a Public Cold Storage 
 
 Business 24 29,858,119 
 
 Public and Private Warehouses 216 45,304,945 
 
 Packing Houses 440 236,191,285 
 
 Private Cold Storage Warehouses 268 16,243,326 
 
 Total 1,282 496,960,165 
 
 "Duncan, C. S.: "Marketing," Ch. 8. 
 
 "° Figures furnished by Bureau of Markets, U. S. Department of 
 Agriculture. 
 
46 MARKETING 
 
 There are 1,327 branch houses of interstate 
 slaughtering houses, all of which have cooler space.^' 
 In spite of all the facilities that have been provided 
 there is in many parts of the country a shortage 
 of the proper kind of storage space. The Federal 
 Trade Commission as a result of an exhaustive sur- 
 vey of the food marketing methods and facilities, 
 has reported that many of our cities do not have 
 adequate cold storage space for perishable food 
 stuffs.^^ 
 
 Public warehouses. — Public warehouses are gen- 
 erally privately owned, but are subject to public 
 regulation. They hold themselves out to store cer- 
 tain types of goods under certain conditions. When 
 goods are stored with them a warehouse receipt may 
 be issued which carries title to the goods. The 
 owner of this receipt frequently takes it to the bank 
 and pledges it as security for a loan. On staple 
 commodities the banks will often loan almost up to 
 the market value of the commodity. In this way 
 the capital needed by the owner of the goods is re- 
 duced and the carrying of such goods made fairly 
 easy. The cost for storage space, insurance, and 
 interest is relatively low and can be calculated when 
 the goods ar^ stored. The owner thus knows how 
 much the market must rise to make his venture profit- 
 able. It is said that wheat can be carried in this 
 way for about one-half cent per bushel per month 
 
 "Federal Trade Commisison : "Report on Meat Packing In- 
 dustry," Pt. 4, p. 32. 
 
 '" "Wholesale Marketing of Food," pp. 137-142, 259 and 246. 
 
PHYSICAL MARKETING FACILITIES 47 
 
 and eggs at one-half cent per month per dozen. 
 This method of financing is often used in carrying 
 grains, butter, eggs, cotton, beans, staple groceries, 
 and many other products. 
 
 Non-fungible and fungible goods. — In most 
 cases the owner receives from the warehouses the 
 identical goods, but in other cases where the product 
 is standardized the owner receives only the same 
 number of units of the same grade as he delivered 
 to the warehouse. This is commonly done with 
 grain and cotton. Such goods are known as fungible 
 goods and may be mixed with the same grade of 
 similar goods. This practice is permitted for econ- 
 omy. It would be very expensive if not altogether 
 impracticable for a grain elevator to keep each lot 
 of grain separate. Such a requirement would prac- 
 tically mean that grain would have to be handled in 
 sacks. 
 
 Adequacy of storage facilities. — ^Afew years ago 
 a great deal was said about the lack of adequate 
 storage facilities in the west and south necessitating 
 the shipment of farm products as soon as harvested. 
 This caused a serious bunching of traffic on the rail- 
 roads and often resulted in slow movement of goods 
 and car shortages. If the railroads could not move 
 the goods promptly, serious damage resulted from 
 exposure to the weather. When storage space was 
 not available the farmers were forced to sell at once 
 regardless of whether the price was satisfactory or 
 not. To overcome these difficulties many storage 
 buildings have been provided and much less is heard 
 
48 MARKETING 
 
 of the lack of proper storage facilities in the pro- 
 ducing sections. Facilities for the handling of per- 
 ishable foodstuffs are, however, still inadequate at 
 shipping points.^^ 
 
 Adequacy of cold storage facilities in various 
 cities. — The F^ederal Trade Commission in 1918 
 made a study of the adequacy of the cold storage 
 facilities in several American cities. The branch 
 houses of the large meat packers are generally prop- 
 erly equipped with cooler space. There is, however, 
 a serious shortage of cold storage space for other 
 perishable foodstuffs in many cities. The facilities 
 were reported to be ample in Birmingham, Ala. ; 
 Seattle, Wash. ; Chattanooga, Tenn. ; Hutchinson, 
 Kan. ; Richmond, Va. ; and Witchita, Kan. ; but in 
 the two last named cities the warehouses were poorly 
 situated. The facilities were reported inadequate 
 in Philadelphia, Pa. ; Boston, Mass. ; Harrisburg, 
 Pa.; Norfolk, Va. ; Jacksonville, Fla. ; Pensacola, 
 Fla. ; Houston, Tex.; San Antonio, Tex.; and Wil- 
 mington, Del. The facilities in the last two named 
 cities were also reported to be of very poor quality. 
 Wilkes-Barre, Pa.; Savannah, Ga., and Knoxville, 
 Tenn., were reported to be entirely without cold 
 storage facilities, available to the produce dealers. 
 Charleston, S. C, was in the same position except 
 that some of the dealers had small coolers of their 
 own. In Pittsburgh the cold storage warehouses 
 were located at a distance from the produce market 
 but seemed to meet the needs of those who desired 
 
 "Ibid., pp. 86-87. 
 
PHYSICAL MARKETING FACILITIES 49 
 
 to cart their goods the necessary distance. New 
 York and Chicago had adequate facilities prior to 
 the war, but were unable to properly handle all the 
 goods needing storage during 1918. Buffalo had 
 adequate space but suffered from high rates and an 
 arbitrary management by a monopoly. Boston also 
 suffered from high rates and arbitrary rules. The 
 plants in New York and Boston had no rail connec- 
 tions so that all goods had to be carted to the ware- 
 houses. In few cities has the construction of ware- 
 houses since 1918 kept pace with the increase in 
 the need for storage space. 
 
 Wastes due to poor storage facilities. — Fruits 
 and vegetables are often carefully picked, graded, 
 packed and carried to the city markets under refrig- 
 eration, where they are unloaded and handled with 
 little or no protection from the weather. Large 
 amounts of goods are lost due to the heat and cold. 
 During extremely cold weather the loss from freez- 
 ing is very heavy. Oftentimes goods must be kept 
 in the cars until the weather moderates. This causes 
 serious delay to the cars. Perishable foods dis- 
 charged from vessels into unheated piers cause a 
 serious loss from freezing. Whole cargoes are 
 sometimes lost in this way. In January, 1918, it 
 is estimated that $500,000 worth of foods were de- 
 stroyed in New York City as the result of freezing. 
 In Pittsburgh the loss from freezing is estimated 
 at 10 to IS per cent in zero weather.^* "Every 
 year millions of dollars' worth of fruits, vegetables, 
 
 "T bid., pp. 123-24. 
 
50 MARKETING 
 
 and eggs throughout the country are partially de- 
 composed in refrigerator cars without ice as well 
 as upon docks and freight floors."^^ In many cities 
 the stores of the produce dealers are old and in- 
 adequate for present needs. Goods must be piled on 
 the sidewalk, in the street, or sold from truck or 
 railroad car. Coolers are often lacking. Inade- 
 quate storage facilities undoubtedly cause serious 
 damages not the least of which arise from inability 
 to store goods for short periods when there is a 
 glut in the local market. 
 
 Serious losses are reported in other products, 
 The country loss to cotton has been estimated as 
 high as $75,000,000 per year. There is also a se- 
 rious loss of grains and many other products which 
 could be materially lessened by proper storage 
 facilities. 
 
 Inadequacy of facilities for marketing foods. — 
 It is apparent from what has already been said that 
 the facilities for handling foodstuffs are inadequate 
 to present needs in many places. Many of the city 
 market districts are extremely congested, without 
 rail and water connections, and not located near the 
 centers of the populations which they serve. Condi- 
 tions are worse in some cities than in others. The 
 situation is worse in Chicago and New York than in 
 some of the smaller cities. For example, Hutchin- 
 son, Kan., is reported to have ample facilities.^' 
 Goods often must be carted from rail terminals 
 
 "^Ibid-.v- 102. 
 
 "Ibid., pp. 118 and 142. 
 
PHYSICAL MARKETING FACILITIES 51 
 
 over congested streets, to the produce markets and 
 then after being sold are often carted back to ter- 
 minal for out-of-town shipment or past the terminal 
 for delivery to the retailers. One expert has esti- 
 mated the needless waste at the South Water Street 
 market in Chicago at $5,000,000 a year. The 
 buildings are often old and poorly adapted to their 
 needs. The rents arc also frequently high. Proper 
 storage facilities are often lacking. The market 
 facilities in many cities are no better than they were 
 forty or fifty years ago. They have not developed 
 to keep up with the increase in population. 
 
 REMEDY FOR SITUATION IN TERMINALS: CENTRAL 
 V/HOLESALE MARKETS 
 
 One of the remedies proposed to meet the present 
 unsatisfactory conditions of handling foods in the 
 city terminals is the establishment of central whole- 
 sale markets. The Federal Trade Commission has 
 recommended that such markets be established in 
 the cities and larger towns by the Federal Govern- 
 ment and operated by individuals under government 
 supervision.^^ According to their proposal the han- 
 dling of all foodstuffs received by rail or boat would 
 be centralized in one large market in each city. 
 These markets would be strategically located and 
 properly equipped with all physical facilities for 
 properly unloading, handling, and storing all food- 
 stuffs reaching each city. In the larger cities one 
 market might be needed for handling fruits and 
 
 "Ibid., pp. 18-24, and 185-195. 
 
52 MARKETING 
 
 vegetables, another for handling dairy and poultry 
 products, and a third for handling staple groceries, 
 if they were included in such a system. New York 
 and Chicago might need two or more such markets 
 for handling each of these three classes of products. 
 Such markets need not necessarily be owned by the 
 government for they could be built by private, or 
 transportation companies. A certain amount of 
 government supervision is, however, advisable, al- 
 though there is a considerable difference of opinion 
 as to the proper extent and direction of such super- 
 vision. 
 
 Location. — Such a market should have direct 
 connection with all rail and water lines entering the 
 city and should also be easily accessible to the retail 
 stores. It would be impossible to secure ideal loca- 
 tions in some cities, but locations superior to those 
 of the present produce markets could be found in 
 many cities. Adequate buildings should be con- 
 structed providing protected platforms for unload- 
 ing the goods and floor space for the transaction 
 of business by the dealers. Both heated and cold 
 storage space should be provided in the basement 
 and on the upper floors. Coolers could also be pro- 
 vided on the first floor for the daily needs of the 
 dealers. Auction rooms and office space for the va- 
 rious dealers should be provided on the second floor. 
 Space in this market would be rented to all dealers 
 on an equal basis and at reasonable rates. The 
 rents in some of the present produce markets are 
 said to be exorbitant. One authority has estimated 
 
PHYSICAL MARKETING FACILITIES 53 
 
 the excess rent paid by two hundred firms in the 
 South Water Street market in Chicago at $720,000 a 
 ycar.^* The fruits and vegetables, and perhaps other 
 products, would be unloaded at night when the first 
 floor would be closed to the dealers. The market 
 would be opened at a fixed hour in the morning, 
 which might be 3 A. M., as at the fruit and vege- 
 table piers in New York, 5 A. M., as on the unload- 
 ing platform in Philadelphia, or at a later hour. 
 A plan for the first floor of one unit of such a mar- 
 ket is presented in Chart II. This is only to furnish 
 a general idea of such a market as the details of 
 size and arrangements would vary with the size of 
 the city, nature of market-space available, etc. 
 
 In this plan two railroad tracks are placed in the 
 middle of the unit. On each side of the tracks is a 
 passage way, or alley, for use in trucking goods 
 from one part of the market to another. Along' 
 side these aisles, or passageways, elevators are 
 placed at convenient distances for carrying goods 
 to the different floors. On each side of the passage- 
 ways, and occupying the greater part of the first 
 floor, is the space for the dealers. Here their goods 
 are placed at night and here they transact their busiv 
 ness during the day. This space is pooled for the 
 fruit and vegetable dealers and not divided by par- 
 titions so that the space may be utilized to better 
 advantage. This seems advisable due to the fact 
 that the various dealers receive different quantities 
 of goods on different days. Each dealer would, 
 
 ''Ibid., p. 147. 
 
54 
 
 MARKETING 
 
 
 
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PHYSICAL MARKETING FACILITIES 55 
 
 however, have his goods placed in the same part 
 of the market regularly. On the sides opposite the 
 tracks are paved streets for trucks carrying outgoing 
 goods. 
 
 Outboxind rail shipments. — Cars are left on the 
 tracks during the day to be loaded with goods for 
 shipment to other places. Enough cars are removed 
 to permit gangways to be thrown across these tracks 
 every two or three car lengths to permit easy access 
 between all parts of the market. Goods can easily 
 be trucked from all parts of the market for loading 
 into these cars. These cars are intended for small 
 wholesalers who buy goods in the market and ship 
 mixed cars. That is they make up a car of several 
 articles, e.g., apples, oranges, lettuce, cauliflower, cab- 
 bages, etc. In a large distributing market the cars 
 might have to be "pulled" in the afternoon and a sec- 
 ond bunch placed for loading. Cars reconsigned to 
 other markets should not be unloaded but should 
 be left on outside tracks for inspection. The dealers 
 would notify the market management before the ar- 
 rival of cars as to whether they wished them un- 
 loaded or reconsigned. Smaller consuming markets 
 would not need facilities for large outward rail 
 shipments. 
 
 Proper public regulation. — The Trade Commis- 
 sion proposes that all dealers be required to secure 
 a federal license before being permitted to do busi- 
 ness in this market. Under this license no dealer 
 would be permitted to engage in any unfair prac- 
 tices, to charge unreasonable prices, to make un- 
 
56 MARKETING 
 
 reasonable profits, to be both buyer and seller In 
 one transaction, or to engage in any activities to 
 manipulate prices. It is also proposed that any 
 shipper could consign his products to the manager 
 of the market, or to the supervising government 
 agent, who would have them stored, if necessary, 
 and sold at auction or by a commission merchant 
 and see that the proper return was made to the 
 shipper. Some persons object that the regulation 
 proposed is too drastic, but a certain amount of 
 government supervision is generally admitted to be 
 necessary. For example, in grading and inspecting 
 goods; settling disputes between buyer and seller, 
 and between dealers where no provision for arbi- 
 tration exists; in seeing that the market is kept 
 in a clean and sanitary condition; in gathering and 
 publishing figures as to the amount of goods on hand, 
 in transit, and as to prevailing prices; in supervising 
 activities of commission merchants; and in seeing 
 that the market is operated efliciently and that 
 all dealers received fair treatment. The proposal 
 that all shippers be enabled to ship to the market 
 with the assurance that they would receive fair treat- 
 ment is a good one. 
 
 Advantages. — Such central wholesale markets pos- 
 sess many advantages over the present system. 
 Among the advantages might be enumerated: Sav- 
 ing of perishable foodstuffs due to unloading on a 
 closed platform protected from the weather; saving 
 of foodstuffs due to having proper storage space at 
 hand ; saving of foodstuffs now lost due to cartage 
 
PHYSICAL MARKETING FACILITIES 57 
 
 from cars to store and from store to cars, for goods 
 going to out-of-town buyers; saving of carting ex- 
 pense, the only carting required being from wholesaler 
 to retailer, and from retailer to consumer, lessening 
 speculation by equalizing the supply by adequate 
 storage facilities, thus making far more uniform 
 prices; saving time of buyers by having all whole- 
 salers in one location; saving demurrage charges 
 and releasing cars more promptly due to a quicker 
 unloading by one management; shortening trade 
 channels as the retailers would buy directly from the 
 wholesale receivers; lessening unfair trade practices 
 and unreasonable prices and profits by government 
 regulation; preventing monopoly and securing co- 
 operation of all factors engaged in the wholesale 
 marketing of foods; securing efficient operation by 
 retaining competition and the incentive of private 
 profits ; and lowering the cost of handling foods by 
 efficient equipment and adequate facilities. Such 
 markets should lessen the cost of marketing foods 
 and so lower prices to the consumers and raise prices 
 to the producers. 
 
 Limitation. — Such markets would cure only a 
 part of the evils. Need would still exist for improver 
 ments in packing, loading, and transporting goods to 
 the city markets. Such markets would not materially 
 alter retailing methods, although some advocates 
 propose that retail markets be included in the plans 
 alongside the wholesale markets. Retail markets 
 might be desirable if space were available, but they 
 
58 MARKETING 
 
 would benefit principally the consumers living near 
 the market. 
 
 Difficulties in establishing central wholesale 
 markets. — It would be hard in many cities to find 
 locations large enough for the purposes, capable of 
 being easily connected with all rail and water lines 
 entering the city, and centrally located for distribut- 
 ing goods to the retail dealers. The location should 
 be not only large enough for present needs, but 
 should also be large enough to permit expansion of 
 facilities to meet the needs of an increasing popula- 
 tion. The establishment of such markets should 
 also involve a considerable capital outlay. It is also 
 argued that it would be unfair to property holders 
 in the old produce market sections to bodily move the 
 markets to new sections of the city. Much of the 
 opposition to the establishment of such markets 
 comes from the property owners in the old sections 
 who fear that much of the value of their property 
 would be destroyed as no other tenants could be 
 found who would pay equal rents. A real disadvan- 
 tage of such markets is that in case of destruction 
 of the market buildings by fire or other disaster 
 the food supply of the city would be seriously im- 
 perilled while the buildings were being replaced. 
 
 Etablishment of central wholesale markets for 
 foods. — The establishment of central markets have 
 been considered in many cities. A subsidiary of the 
 Southern Pacific Railroad has constructed adequate 
 physical facilities in Los Angeles, but this market 
 has connection with only one railroad system. The 
 
PHYSICAL MARKETING FACILITIES 59 
 
 Wabash Terminal in Pittsburgh (Pittsburgh and 
 West Virginia Railroad) provides facilities along 
 the plan outlined above for the Pittsburgh butter 
 and egg wholesalers, but there are three rather 
 serious criticisms of this terminal. First, it has 
 connections with only one road and this road ex- 
 tends only to the west, and does not have the best of 
 connections; second, there is no room for expan- 
 sion to take care of increased business; and third, 
 the coolers in this building take care of only the 
 short time needs of the dealers, goods to be stored 
 for a long time must be carted to the warehouses 
 in other parts of the city. A market has been pro- 
 vided at Atlanta by three railroads where most of 
 the dealers are located. The Linden station in Mem- 
 phis provides facilities for eight wholesale grocers 
 and one produce dealer, but this leaves most of the 
 perishable food dealers outside this station. The 
 fruits and vegetables arriving in Philadelphia over 
 the Pennsylvania railroad are unloaded on a plat- 
 form in West Philadelphia. Here the car lot receiv- 
 ers sell to the jobbers. This platform is scarcely 
 adequate to the present needs of the city, and does 
 not provide space for the jobbers so that most of 
 the produce is carted across the city to their stores. 
 None of these facilities fulfill the conditions pre- 
 scribed for public central markets as regards public 
 regulation and connection with all transportation 
 lines. Most of the produce dealers are in favor of 
 central markets having adequate facilities, but, of 
 course, differ regarding the details and the amount 
 
60 MARKETING 
 
 of public supervision that is desirable. It is to be 
 hoped that such markets will be established by pri- 
 vate or public capital. Undoubtedly better facili- 
 ties would already have been provided in many cities 
 except for the financial difficulties resulting from the 
 world war. 
 
 BIBLIOGRAPHY 
 
 A very large part of the books and articles bear- 
 ing on marketing contains more or less information 
 on the transportation and storage of goods. It 
 would be impossible to enumerate all such books 
 here. The reader is, howev'er, referred especially 
 to the references given at the end of the chapter on 
 Produce Exchanges and the Question of Speculation 
 (Chapter VIII), many of which describe the facili- 
 ties for handling certain agricultural staples. The 
 United States Department of Agriculture has also 
 published many useful bulletins. 
 
 There are a large number of books and periodi- 
 cals that bear on transportation. For the beginner 
 Johnson and Van Metre: "Principles of Railroad 
 Transportation," is recommended. 
 
 The following references bear more or less directly on the topic: 
 Federal Trade Commission: "Wholesale Marketing of Food," 1920. 
 Weld, L. H. D.: "The Marketing of Farm Products," Chs. 8 and 11. 
 Nourse, E. G.: "The Chicago Produce Market." 
 Duncan, C. S. : "Marketing," Ch. 8. 
 Hoover, Herbert: "Some Notes on Agricultural Readjustment and 
 
 the High Cost of Living," Saturday Evening Post, April 10, 
 
 1920. 
 Frost, Haywood: "Waste and Inefficiency add to all Consumers 
 
 Costs," Amer. Bus. and Nat. Accept. Journal, May, 1920. 
 
PHYSICAL MARKETING FACILITIES 61 
 
 "Annals American Academy of Political and Social Science" for 
 
 November, 1913 (vol. 50), contains several articles bearing on 
 
 this subject. 
 Pennington, M. E.: "Relation of Cold Storage to the Food Supply 
 
 and the Consumer," Annals of Amer. Acad, of Pol. & Soc. Sc, 
 
 July, 1913, (vol.48). 
 
 CHAPTER II— QUESTIONS 
 
 1. Make a list of everything that you eat for one day and place 
 
 opposite each item its probable source, e. g., coffee, Brazil ; 
 sugar, Cuba, etc. The state that leads in production or, if the 
 article is imported, the foreign country that leads in exports to 
 the United States may be taken as the probable source. 
 
 2. Is our railroad system adequate to our needs? What sugges- 
 
 tions can you make for the improving the methods of handling 
 freight. 
 
 3. How can the terminal facilities in our large cities be improved? 
 
 4. What is meant by a car shortage? Can a car shortage be pre- 
 
 vented ? If so, how ? 
 
 5. Why is our system of handling foodstuffs so expensive? 
 
 6. What has refrigeration meant to our cities? To our farmers? 
 
 What does it mean to you ? 
 
 7. What are the essential principles of the proposed central whole- 
 
 sale markets? Enumerate advantages and disadvantages. 
 
 8. If you live in a city, would the establishment of a central whole- 
 
 sale market for foods be practical in your city? If so, what 
 would be its advantages? If not, why? 
 If you live in the country, how would the establishment of such 
 markets in the cities help or injure your community? 
 
Chapter III 
 TRADE CHANNELS 
 
 Under the present system of market distribution 
 merchandise ordinarily passes through the hands of 
 one or more middlemen between the producer and 
 the consumer. The various middlemen who handle 
 an article between the producer and the consumer 
 constitute the trade channel or route. Different ar- 
 ticles of merchandise are marketed in different ways, 
 or pass through different trade channels, while the 
 method of marketing any article changes from time 
 to time. 
 
 Producer direct to consumer. — The shortest 
 trade channel is followed when goods pass direct 
 from the producer to the consumer. 
 
 Producer } Consumer 
 
 In a primitive society this method is in common 
 use, the different members of the tribe of village ex- 
 changing directly the products of the soil, of the 
 chase, or of the craftsman's art. In the early part 
 of the handicraft stage in England the consumers 
 either visited the shops of the producers or the pro- 
 ducers hunted up the consumers. It was, however, 
 more economical to have one man market the goods 
 
 62 
 
TRADE CHANNELS 63 
 
 of many producers than to have each producer leave 
 his loom or bench long enough to find buyers for his 
 wares. With the increase in quantity of manufactured 
 goods, the localization of industry, and the develop- 
 ment of large scale production the number of mid- 
 dlemen greatly increased. In spite of this fact many 
 articles still pass directly from producer to consumer. 
 In small towns and villages the farmers often sell 
 their fruits and vegetables direct to the consumers. 
 This is done to a limited extent upon the public mar- 
 ket even in the larger cities. In the smaller cities 
 the dairymen often operate the milk wagons and 
 sell their milk and butter direct to the consumers. 
 Many factories market their output by mail direct 
 to the consumers. This policy ordinarily involves 
 heavy advertising expenses. It appears that direct 
 selling is sometimes as expensive as selling through 
 middlemen but many manufacturers have adopted 
 direct selling because they have failed to secure a 
 satisfactory volume of business through the middle- 
 men. It is not improbable that in a small city one 
 distributor could deliver the milk more cheaply than 
 is done when each dairyman operates his own wagon. 
 
 Many manufacturers buy their supplies direct 
 from the producers. For example machine. and auto- 
 mobile manufacturers very often buy their steel direct 
 from the steel mills. Factories often dispose of their 
 product to the consumers through salesmen. The 
 salesman may be a canvasser who solicits business 
 from house to house or he may be a salesman solic- 
 
64 MARKETING 
 
 iting orders for large machines such as dynamos, or 
 threshing machines. The salaries and expenses, or 
 commissions, of such salesmen are an expense of mar- 
 keting but technically such salesmen are not middle- 
 men. 
 
 Another example of goods being sold direct to 
 the consumers by the producers is furnished by the 
 ice manufacturers who often place the ice in the do- 
 mestic refrigerators. 
 
 Some manufacturers have their own retail stores 
 and sell to the consumers through them. Such stores 
 involve all the problems of retail store management. 
 Such stores are limited in number and although 
 owned by the manufacturers should preferably be 
 considered as separate middlemen. 
 
 One middleman. — The next shortest trade chan- 
 nel is followed when the goods pass through the 
 hands of one middleman between the producer or 
 consumer. 
 
 Producer ----}■ Middleman \ Consumer 
 
 This Is the channel which many goods follow to- 
 day. Many factories supply their goods direct to 
 the retail dealers. This is often done with shoes and 
 clothing. Chain stores and department stores often 
 buy goods direct from the producers. Milk often 
 passes through the hands of only one middleman be- 
 tween the farmer and the city consumer. The same 
 is sometimes true of coal. Mail order houses often 
 
TRADE CHANNELS 65 
 
 buy their goods direct from the factories and sell 
 them to the consumer. The large mail order houses, 
 however, are coming to manufacture a large part of 
 their own goods. 
 
 Automobiles often pass through the hands of one 
 middleman — the "agent," or "distributor." The 
 same is true of oil and gasoline although in some 
 cases gasoline is sold by the refiners direct to the con- 
 sumers. 
 
 The manufacturer with a large or "full" line of 
 goods will more often sell direct to the retailer than 
 will the specialty manufacturer, who produces only 
 a few items. The expense of a salesman handling 
 many articles can be divided or spread among the 
 several items while all the expense of salesmen hand- 
 ling only one article must be borne by this one article. 
 In the latter case the expense may be so heavy that 
 it is unprofitable to keep the salesman on the road. 
 Thus a manufacturer of a full line of farm imple- 
 ments sells direct to the retailers through his branch 
 houses, while the manufacturer of a single implement 
 or class of implements sells through jobbers. 
 
 Two middlemen. — A very common trade channel 
 is followed when the goods pass through the hands 
 of two middlemen between the producer and the 
 consumer. 
 
 fBroker .T 
 
 Producer - - - -J Wholesaler LRetailer ----} Consumer 
 
 I Branch house ] 
 
 (^Commission Man j 
 
66 MARKETING 
 
 This channel is o^ten considered the most typical 
 channel for the distribution of merchandise in the 
 United States. The staple merchandise lines, gro- 
 ceries, hardware, drugs, and dry goods, are generally 
 said to pass through the hands of wholesalers and 
 retailers. As a matter of fact, such goods frequently 
 pass through the hands of at least three middlemen 
 between the manufacturer and the consumer. The 
 chain and department stores, however, often elim- 
 inate one middleman, the wholesaler, and purchase 
 their goods from the manufacturer through brokers 
 or sales agents. 
 
 The large meat packers and farm implement man- 
 ufacturers commonly have their own branch houses 
 and sell to the retailers through these branches. 
 Sometimes branch houses are owned outright and 
 sometimes they are separately incorporated and con- 
 trolled through stock ownership. Perhaps from a 
 legal viewpoint a branch house owned directly by the 
 manufacturer should not be considered as a separate 
 middleman. Such branches, however, involve a sep- 
 arate capital outlay, a separate force of employees, 
 and compete directly with independent wholesalers. 
 As they perform the same economic function and 
 incur similar expenses as the wholesalers we may ig- 
 nore the ownership and consider such branches as 
 separate middlemen. In districts where a manufac- 
 turer does not have his own branches he often sells 
 through independent jobbers. This is done by the 
 
TRADE CHANNELS 67 
 
 meat packers and farm implement manufacturers. 
 The latter often "job" their goods through other 
 manufacturers' branch houses. Thus a manufac- 
 turer of tillage implements may handle a grain drill 
 made by a second manufacturer, a wagon made by 
 a third manufacturer and so on. A full line of im- 
 plements is thus secured and as they are all handled 
 by the same sales force the expense of handling each 
 implement is reduced. It also enables the specialty 
 or short line manufacturers, who cannot afford to 
 maintain a large number of branches, to market their 
 product. Shortline producers are sometimes forced 
 out of business due to their inability to secure a sat- 
 isfactory volume of sales from other manufacturers 
 or from independent jobbers. 
 
 Farm products such as fruits, vegetables, and 
 poultry products, are sometimes consigned^ by the 
 farmers to city commission men who sell them to 
 the retail dealers. This is a common practice in 
 some cities, for instance in Philadelphia, where a 
 large quantity of New Jersey produce is handled in 
 this way. The consignment business for the market- 
 ing of farm produce has, however, generally fallen 
 into disrepute and is not now in general use. 
 
 Wholesale produce dealers at times send their 
 buyers into the producing sections and buy produce 
 from the growers, which they resell to the city re- 
 
 * Shipped by the owner to an agent to be sold on a commission 
 basis ; title to the goods remaining with the shipper until sold by the 
 agent or commission man. 
 
68 MARKETING 
 
 tailers. In this case the produce passes through the 
 hands of two middlemen. 
 
 Three middlemen. — The next longer route is fol- 
 lowed when the goods pass through the hands of 
 three middlemen. 
 
 fBroker . 
 
 T, J J Sales Agent... Wholesaler Jt, .. •, i ,-, 
 
 Producers^ . = )■ (Retailer )• Consumer 
 
 Buying Agent. . [ or Jobber ' ' 
 
 (^Local Buyer ... J ^ 
 
 Very commonly merchandise such as staple gro- 
 ceries, dry goods, and hardware passes through the 
 hands of a broker, selling agent, or buying agent, 
 before it reaches the wholesaler. Canned foods, for 
 example, are packed principally by small canners who 
 cannot afford to maintain elaborate sales depart- 
 ments. The same is true of many grocery special- 
 ties. For this reason they commonly employ brokers 
 to market their goods or turn their entire output over 
 to a sales agent to sell for them on a commission 
 basis. The brokers or sales agents sell to the whole- 
 salers. 
 
 The wholesale hardware dealers handle thousands 
 of different articles made by hundreds of different 
 manufacturers. It would be a difficult task for them 
 to keep in close touch with each of these manufac- 
 turers and to follow the daily price fluctuations for 
 each article. For this reason the wholesalers often 
 employ buying agents to purchase their supplies. 
 These agents represent several wholesalers and it is 
 
TRADE CHANNELS 69 
 
 their business to keep in close touch with the manu- 
 facturers and with market prices. 
 
 The textile mills are largely occupied with produc- 
 tion. Many of these mills are small or specialize in 
 a few kinds of cloth. For these reasons they often 
 turn the marketing of their cloth over to sales agents 
 or brokers. In the woolen industry the selling or 
 commission houses, which really control the mills, 
 and the selling agents, who are financed by the mills, 
 market most of the cloth.^ 
 
 Farm products are often bought from the farmers 
 by local buyers and resold by them to the city whole- 
 salers. These local buyers may be local storekeepers, 
 independent local buyers, producers cooperative sell- 
 ing organizations, or special buyers from the outside. 
 If the local buyers are employed by the wholesaler 
 who sells the retailer there would only be two mid- 
 dlemen between producer and consumer but in some 
 markets the wholesaler (or car lot dealer) sells to 
 the jobber, who sells to the retailer. In this case 
 the produce passes through the hands of three mid- 
 dlemen before reaching the consumer. If, however, 
 the wholesaler bought from an inpendent local buyer 
 the produce would pass through the hands of four 
 middlemen. 
 
 Four middlemen. — A still longer trade channel is 
 found when the goods pass <-hrough the hands of four 
 middlemen between the producer and the consumer. 
 
 'Cherington, Paul T.: the "Wool Industry," ch. 7. 
 
70 MARKETING 
 
 Producer 
 
 Sales Agent Broker Wholesaler ' 
 
 Local Buyer. . . .Broker Jobber 
 
 Local Buyer. .. .Wholesaler. . ..Jobber ^Retailer 
 
 Importer Broker Wholesaler 
 
 Local Shipper. . .Auction Wholesaler 
 
 Many manufacturers of groceries and dry goods 
 have their products marketed by sales agents. These 
 agents often do not maintain organizations in other 
 cities and depend on brokers to place the goods with 
 the wholesaler. 
 
 The local buyers of farm produce often effect 
 sales through brokers who are in touch with the 
 wholesalers. In some city markets such produce 
 passes through the hands of two middlemen before 
 reaching the retailers — the car lot receiver or whole- 
 saler, and the jobber. 
 
 Fruits (especially citrus fruits, grapes and boxed 
 apples) are sold at auction in many cities. The grow- 
 ers' association ship such goods to a local agent, or to 
 their own salaried representative, who has them sold 
 at auction. The buyers are, as a rule, wholesale deal- 
 ers for the reason that the minimum quantity sold is 
 generally too large for a single retail dealer to handle. 
 This makes four middlemen-growers selling associa- 
 tion, auction, wholesaler, and retailer. Wholesalers 
 (or car lot dealers) also frequently have the auction 
 sell such of their fruits as it handles. The auction is 
 not the owner of the goods and acts as agent for the 
 representative of the grower's associations or for the 
 wholesale dealer. In either case the fruits passes 
 through two hands betweeri the local shipper and the 
 
TRADE CHANNELS 71 
 
 retailer, unless the retailer buys on the auction. (See 
 Chapter VII for a fuller discussion of the operation 
 of the auctions). 
 
 Imported goods. — Goods produced in one country 
 and consumed in another often pass through the 
 hands of more middlemen than if consumed in the 
 country where produced. It is not, however, the pur- 
 pose of this book to deal with marketing methods 
 outside of the United States. Imported goods, after 
 reaching this country, pass through channels similar 
 to those followed by goods of domestic origin. Im- 
 ported foodstuffs are often bought from importers 
 by brokers in New York for wholesale dealers 
 located in interior cities. Such goods then pass 
 through the hands of four middlemen in the United 
 States — the importer, the broker, the wholesaler, and 
 the retailer. 
 
 Variation in Methods of Distribution. — The fore- 
 going are some of the more common channels fol- 
 lowed by goods on their way from the producers to 
 the consumers. There are, however, a great many 
 variations in the channels and very little uniformity 
 exists in distributing the same article. For example 
 50 per cent of the shoes are sold direct to the retail- 
 ers by the manufacturers, 42 per cent are sold to 
 wholesalers and jobbers, 2 per cent are sold direct to 
 the consumers, and over S oer cent are sold through 
 stores owned and operated by the manufacturers.^ 
 
 'Federal Trade Commission: "Report on Leather and Shoe In- 
 dustries," p. 167. 
 
72 MARKETING 
 
 The same manufacturer may in some sections of the 
 country sell direct to the retailers while in other sec- 
 tions of the country they sell through wholesale 
 dealers. Other manufacturers may sell to both job- 
 bers and retailers, some sales being made directly and 
 others through brokers. Some manufacturers claim 
 to sell only to jobbers and yet sell the large chain and 
 department stores on the ground that such stores 
 buy in large enough quantities to deserve the whole- 
 sale price. Some manufacturers adopt a policy of 
 marketing their goods through a certain channel and 
 adhere rigidly to this policy. Many others, however, 
 do not adhere rigidly to any one channel and sell to 
 anyone who will buy in sufficiently large quantities. 
 In other words the large buyer can often force the 
 sellers to accord him a jobbers status regardless of 
 the nature of his business. Perhaps this is as it should 
 be and quantity alone should determine the status of 
 the buyer. There are, however, many who take the 
 opposite view, and argue that a large retail dealer 
 should not be given any better price than the small 
 retail dealer. The merits of this contention will not 
 be discussed at this point. 
 
 A good illustration of the variations in the meth- 
 ods of distribution is furnished by a mail order house, 
 which manufactures a great many of its own goods, 
 buys other goods directly from the producers, others 
 through brokers or sales agents, and still others from 
 wholesale dealers. 
 
TRADE CHANNELS 73 
 
 Longer trade channels. — Goods often pass 
 through the hands of more middlemen than indicated 
 by the foregoing outline. For example a shipment of 
 Oklahoma eggs sold for a consumption in New York 
 passed through the hands of three middlemen in 
 Oklahoma — a local buyer, a country shipper, and a 
 car lot shipper — and four middle men in New York 
 — a broker, a car lot dealer, a jobber, and a 
 retailer.^ The same result is caused by sales within 
 the same stage of distribution; that is sales which 
 do not bring the goods any nearer to the consumers. 
 Such sales may be purely speculative or they may be 
 necessary and legitimate. During the past few years 
 many instances have been cited of the sale and resale 
 of the same article for purely speculative purposes, 
 for example, a car of produce being sold a half dozen 
 or a dozen times without being unloaded. Witness 
 the speculation in silk, sugar, etc., during the spring 
 of 1920. During the time the United States Foods 
 Administration was functioning it tried to prevent 
 such sales in foodstuffs and was to a large extent 
 successful. 
 
 Necessity for sales in same stage of distribution. 
 — There are many sales within the same stage of dis- 
 tribution which are necessary and legitimate. This 
 can be made clear by an illustration. A wholesaler 
 estimates that he will need 5,000 cases of peas to take 
 
 *A. B. Adams: "Marketing Perishable Farm Products," "Colum- 
 bia University Studies in History, Economics and Public Law," Vol. 
 72, p. 401, 
 
74 MARKETING 
 
 care of the season's trade. He therefore contracts 
 for this quantity through a broker. Toward the end 
 of the season he finds that he has sold fewer peas 
 than he expected and that he has a surplus of 1,000 
 cases in stock. He therefore notifies a broker to sell 
 these for him. The broker may find another whole- 
 saler who is short of peas and makes the sale. In 
 this case the peas have passed through the hands of 
 two wholesalers and two brokers before reaching the 
 retailer. This shows why sales within the same stage 
 of production are sometimes necessary. In actual 
 practice it is very difficult to distinguish between mis- 
 takes in forecasting sales and speculation. If the 
 wholesaler really thought his trade would take 5,000 
 cases it was an error of judgment or a change in 
 demand. If on the other hand, he bought more than 
 he expected to sell to the retailers because of an ex- 
 pected advance in price, it was a case of speculation. 
 
 Sale of raw and semi-finished goods. — ^What has 
 been said so far in this chapter refers to the market- 
 ing goods after they are in the final form for sale to 
 the consumers. Raw or partly finished materials may 
 pass through the hands of several different parties 
 before reaching the completed stage. Lumber may 
 pass through several hands before reaching the fur- 
 niture manufacturer, while cotton commonly passes 
 through the hands of several dealers and manufac- 
 turers before being made into clothing. In the steel 
 industry many of the larger companies are completely 
 integrated, owning the ore, fuel, and limestone for 
 
TRADE CHANNELS IS 
 
 the manufacture of iron and the necessary equipment 
 for turning out finished and semi-finished steel prod- 
 ucts. But the bars, sheets, or rounds must be sold to 
 other companies for the manufacture of tools, ma- 
 chinery or automobiles. The manufacturers of such 
 products may buy directly from the steel mills or may 
 obtain their goods through brokers or jobbers. A 
 considerable part of the marketing machinery of the 
 country is engaged in the marketing of raw or semi- 
 finished materials. The cost of materials to the man- 
 ufacturer of the finished product is thus to a consid- 
 erable extent made up of the selling expenses, and 
 profits of previous manufacturers and dealers. This 
 emphasizes the large part that marketing expenses 
 play in the final cost of goods to the consumers. 
 
 This book will deal primarily with the marketing 
 of goods which are ready for consumption — manu- 
 factured goods or farm produce. It should be 
 pointed out that marketing activity may work toward 
 one of two ends. First drawing together into a cen- 
 tral market goods produced in small quantities by a 
 large number of producers, e. g. eggs, wool, tobacco, 
 cotton, wheat, cheese, lumber, and cattle. Such arti- 
 cles are generally the product of farms, but there are 
 some which have undergone relatively simple manu- 
 facturing processes by small factories located near 
 the raw materials — for example; cheese, butter, lum- 
 ber, leather, etc. 
 
 This concentration process may be illustrated by 
 the following diagram : 
 
76 MARKETING 
 
 P[^ODVCE.Q5. 
 
 CHAQT m. 
 
 In the second place marketing activity may be 
 directed toward distributing goods from a common 
 point of production, or a central market, to a large 
 number of consumers. A given manufacturer may 
 distribute his product to millions of consumers 
 through thousands of dealers in all parts of the 
 United States. Thus Proctor & Gamble sell their 
 ivory soap through 250,000 or 300,000 retailers.' 
 This distribution process may be illustrated by the 
 following diagram: 
 
 "Frederick J. George: "Modern Sales Management," p. 70. 
 
TRADE CHANNELS 
 
 77 
 
 CE/NTDflL fYlflDKEiT. 
 
 CO/N^V/^EQS. 
 
 CHAQT W. 
 
 In case the manufacturer controls his own source 
 of raw materials or buys them in bulk from a very 
 few producers this chart represents the entire process 
 of market distribution. If, however, the raw material 
 comes from widely scattered sources both sets of 
 marketing activities are necessary to supply the con- 
 sumers. The diagram then resembles an hour glass. 
 
78 MARKETING 
 
 PDODV/CEBS 
 
 CEAITQ^L 
 
 COAI5Vyr\ED.3. 
 
 CHADT Y. 
 
 The method of marketing manufactured products 
 through the middlemen may be further illustrated by 
 the following diagram : 
 
TRADE CHANNELS 
 
 79 
 
80 MARKETING 
 
 CHAPTER III— QUESTIONS 
 
 1. Why are middlemen necessary? Why does American merchan- 
 
 dise pass through more middlemen today than a century ago? 
 
 2. Why do eggs pass through more hands than shoes? Would this 
 
 be true if we included the middlemen handling the hides and 
 leather of which shoes are made? 
 
 3. Why do the canners employ brokers to sell to the wholesale 
 
 grocers? Why do the hardware jobbers employ purchasing 
 agents ? 
 
 4. What are the common trade channels for the following: Auto- 
 
 mobiles, ice, milk, canned peas, hardware, plows, dry goods, 
 fresh fruits? 
 
 5. Should manufacturers' branch wholesale houses, and retail stores 
 
 be listed as separate middlemen? Why or why not? 
 
 6. Why are sales within the same stage of distribution sometimes 
 
 necessary? When are such sales purely speculative? 
 
Chapter IV 
 
 BROKERS AND SALES AGENTS 
 
 DEFINITION OF BROKERS, SALES AGENTS, AND 
 COMMISSION MERCHANTS 
 
 Broker. — An agent is one authorized to represent 
 and act for another, "brokers are agents whose reg- 
 ular business is to make contracts without having 
 possession of the goods or to negotiate for the pur- 
 chase of property or for loans or for insurance and 
 the like."i 
 
 A broker is then an agent who specializes in sell- 
 ing or buying for his principal without actually having 
 possession of or title to the goods, and who receives 
 his compensation in the form of a commission, a per- 
 centage of value, or a flat rate per unit of property 
 bought or sold. A broker's function is to make con- 
 tracts for the purchase or sale of property or to bring 
 buyers and sellers together and his commission is ordi- 
 narily earned as soon as a sale is made regardless of 
 whether the, goods are ever delivered or not. 
 
 Sales agent, — A sales agent is one who has the 
 right to make sales for his principal and generally 
 has much fuller powers than the ordinary broker. 
 A sales agent very often has the exclusive right to 
 
 'Huffcutt: "Elements of Business Law," p. 230. 
 
 81 
 
82 MARKETING 
 
 dispose of the entire product of his principal or the 
 right to handle all of the product sold in a certain 
 specified territory, as for example New York, New 
 Jersey, and Pennsylvania. 
 
 The work performed by sales agents differs in 
 different trades. The Federal Trade Commission 
 has defined a sales agent as follows for the canned 
 salmon industry: "A sales agent is a broker who has 
 the right to sell all or a specified part of a canner's 
 output, or to dispose of all of it except the portion 
 sold to certain persons or in specified places.^ This is 
 practically the same definition as given by Copeland 
 for a selling house in the textile trade. In the canned 
 foods markets a broker will very often do a general 
 brokerage business and at the same time act as sales 
 agent for one or more canners. In this case the 
 broker acting as sales agent does not ordinarily have 
 a national organization and so effects sales in all ter- 
 ritories, except that near his office, through other 
 brokers. 
 
 The product of many textile mills has been mar- 
 keted by so called selling houses. These houses are 
 really sales agents who either control or finance the 
 mills. The distinction between the selling house and 
 the selling agent in the woolen industry is stated by 
 Cherington^ as follows: "Briefly the distinction be- 
 tween the two is that the agency usually is financed 
 by the mill and performs the selling operations on an 
 
 'Federal Trade Commission: "Report on Canned Foods, Canned 
 Salmon," p. 22. 
 'Cherington, Paul T.: "The Wool Industry," p, 121. 
 
BROKERS AND SALES AGENTS 83 
 
 agency basis rather than as a regular commission 
 house." There has been a marked tendency in the 
 textile trade in recent years to eliminate the selling 
 houses and substitute selling agents, or brokers, or 
 for the mills to sell the wholesale trade direct. 
 
 Commission merchants. — A commission merchant 
 is one who receives goods belonging to another for 
 sale, who has control of the goods, and when the 
 goods are sold he must account to the owner for the 
 proceeds of the sale. A commission merchant is 
 sometimes called a factor. 
 
 The work of a broker at times closely resembles 
 that of a commissidn merchant. Both sell goods be- 
 longing to others fdr a commission. There is, how- 
 ever, at least in theory, a clear distinction. The 
 broker effects sales of goods which he does not have 
 in his possession and which he does not represent 
 himself as owning. On the other hand the commis- 
 sion man has the goods in his possession, makes de- 
 livery to the buyer, and the buyer may not know that 
 the goods are not the property of the commission 
 merchant. The broker is paid a commission by his 
 principal while the commission man collects for the 
 goods, deducts his commission and any expense and 
 remits the balance to the owner with an "account 
 sales." 
 
 This distinction is clear in theory but is not always 
 so in actual practice. The broker may have the goods 
 in his possession and may make deliveries to the 
 buyers. The broker may also make collections for 
 
84 MARKETING 
 
 his principal and adjust disputes with the buyers. He 
 may also receive goods for sale on consignment. 
 These are, however, extra or special services wnich 
 brokers may at times render in order to secure sat- 
 isfied principals and are not included in a strictly 
 brokerage business. In performing these services he 
 is in reality acting as a commission man, or factor, 
 rather than a broker. 
 
 Merchandising brokers. — Many brokers in addi- 
 tion to selling goods for others buy and sell goods 
 on their own account. This latter is a merchandising 
 and not a brokerage function. Brokers who engage 
 in merchandising have been called merchandising 
 brokers.* Many brokers do little or no merchandis- 
 ing, while others have come to do largely a merchan- 
 dising business. In such cases it would appear that 
 they should be considered as wholesale dealers con- 
 ducting a brokerage business "on the side." 
 
 Overlapping of activities. — It must be remem- 
 bered that men engage in business to make money and 
 not to conform their activities to any theoretically 
 defined field. If a man enters the brokerage business 
 and finds an opportunity to profitably handle some 
 goods on consignment he may be expected to handle 
 them. If he finds that he must render extra services 
 in order to satisfy his principals or clients he may be 
 expected to perform the services and if he sees an op- 
 portunity to make money by purchasing goods on 
 
 'Brokers handling merchandise as contrasted with stocks and 
 bonds are sometimes called merchandieS brokers. The terms mer- 
 chandising and merchandise should not be confused. 
 
BROKERS AND SALES AGENTS 85 
 
 his own account he will be likely to do so if he can 
 obtain the necessary capital. It is well to remember 
 this in the study of any given type of middlemen. 
 Their actual operations may not conform exactly to 
 the definition laid down for their particular business. 
 
 BUYING BROKERS AND AGENTS 
 
 In some trades the buyers employ buying or pur- 
 chasing agents to keep in close touch with market con- 
 ditions and to make purchases for them. Such agents 
 may only negotiate contracts for the purchase of goods 
 or they may inspect, receive and store the goods for 
 shipments to their principals. They may be paid on a 
 commission basis or receive a flat sum as so much per 
 month, the amount depending upon the services ren- 
 dered. Such buying agents are often used in the pur- 
 chase of hardware, dry goods, and women's ready 
 to wear clothing. These goods are manufactured to 
 a large extent by small specialty producers who are 
 unable to keep in close touch with all of the buyers 
 and as the producers are so numerous the buyers arc 
 unable to keep in constant touch with them. For 
 this reason the buyers located outside of the produc- 
 ing centers find it advantageous to employ buying 
 agents who are in close touch with the sources of sup- 
 ply and with actual market prices, and who can buy 
 the desired goods quickly and on advantageous terms. 
 They may be able at times to secure quantity dis- 
 counts which would be beyond the reach of the indi- 
 vidual buyer, — wholesaler, department store, or 
 
86 MARKETING 
 
 chain store. Some hardware jobbers purchase a con- 
 siderable part of their goods through such purchas- 
 ing agencies in order to get the special discounts 
 which such agencies are in a position to secure, while 
 others employ such agencies principally to ascertain 
 the actual prices at which goods can be purchased 
 but buy nearly all of their goods themselves. The 
 quantity discounts passed on by the purchasing 
 agency may be very important to the small jobber, 
 while the large jobbers may be in a position to obtain 
 such discounts on their own purchases. 
 
 In the speculative exchanges there must of course 
 be as many buying as selling brokers. Buying brokers 
 are also common in the purchase of fruits, vegetables 
 and imported groceries. Jobbers in small cities are 
 often unable to keep in daily touch with the large pro- 
 duce markets and so employ brokers to purchase a 
 goodly part of their merchandise. Small buyers even 
 in the larger cities sometimes employ brokers to pur- 
 chase fruits for them on the fruit auctions. The use 
 of such brokers saves the smaller buyers the time nec- 
 essary to sit through the daily sales. In fact many 
 such dealers can not afford the time to attend the 
 auction sales and without such brokers would be 
 forced to buy from the wholesale dealers who pur- 
 chase the fruit at auction. This practice also lessens 
 the number of buyers and hence the competition on 
 the auction and so has a tendency toward lower prices. 
 Wholesalers in interior cities sometimes employ 
 brokers in New York to buy imported goods for 
 them. 
 
BROKERS AND SALES AGENTS 87 
 
 The general method of operation followed by buy- 
 ing brokers or agents is not fundamentally different 
 from that followed by selling brokers and agents. 
 Their activities will not be separately considered in 
 this chapter. 
 
 FUNCTIONS OF BROKERS AND SALES AGENTS 
 
 Specialized independent salesmen. — Brokers and 
 sales agents are specialized independent salesmen. 
 They take the place of salesmen employed directly 
 by the seller of the goods. Their success depends 
 upon their ability to successfully negotiate sales and 
 to keep their principals satisfied. As a rule they con- 
 fine their activities to one line of merchandise or to 
 a very small class of articles. They thus may be- 
 come experts in the marketing of these lines and know 
 very intimately the supply of and demand for the 
 articles handled. 
 
 They are especially valuable in reaching wholesale 
 dealers located in small towns and to small producers 
 who, due to their size, would find the maintenance of 
 their own selling organizations very expensive. A 
 small manufacturer may turn the marketing of his 
 entire product over to a sales agent. The manufac- 
 turer may know little about marketing and his entire 
 time, energy, and capital may be needed In produc- 
 tion. The sales agent may furnish the most econom- 
 ical method by which a small manufacturer can mar- 
 ket his product. Perhaps he pays the sales agent 
 five per cent while the expense of maintaining his 
 
88 MARKETING 
 
 own sales department might be much higher. Dis- 
 satisfaction with such agents appears to come from 
 their failure to turn in orders to keep up with the 
 increasing capacity of the factories more frequently 
 than from the rate of commission charged. As the 
 business grows there is a tendency to do away with 
 sales agents and sell through several brokers. The 
 use of brokers is adapted to producers who are in a 
 position to exercise a general supervision over the 
 marketing of their product but who are not in posi- 
 tion to keep their own salesmen in constant touch 
 with the buyers in the different markets. Many 
 large producers who have their own salesmen often 
 employ brokers so that they will always have a rep- 
 resentative in every important market. Even manu- 
 facturers selling to the retail trade may employ 
 brokers to dispose of any surplus goods. 
 
 Giving information. — A very important service 
 performed by the brokers is the giving of market in- 
 formation and advice to their principals. The 
 brokers are in daily and hourly touch with price fluc- 
 tuations, they should be acquainted with the supply 
 and demand of each article handled, and should be 
 able to judge of the future trend of prices with some 
 degree of accuracy. Their advice to their principals 
 as to when to sell and what price to accept is some- 
 times very valuable. Many producers say that they 
 could dispense with the selling services performed by 
 the brokers but that the information and advice given 
 by the brokers alone justify the commissions paid to 
 them. 
 
BROKERS AND SALES AGENTS 89 
 
 Financing principals.-Another function very com- 
 monly performed by sales agents, and to a less extent 
 by brokers, is the financial aid extended to their prin- 
 cipals. It may at first appear anomalous for an agent 
 to finance his principal but nevertheless this is exactly 
 what often happens. The financial aid may take the 
 form of direct loans, the endorsement of the princi- 
 pal's notes, the advancement of money against the 
 shipment or storage of goods, the guaranteeing of 
 accounts resulting from the sale of goods, or the sup- 
 plying of permanent capital. 
 
 In the textile trades the selling houses dispose of 
 the product of the mills, and frequently endorse their 
 notes, guarantee their accounts, or directly advance 
 them money. The charge for selling the cloth may 
 be one to two per cent, the charge for endorsing the 
 mill's notes is one to two and a half per cent, and 
 the charges for guaranteeing the mill's accounts are 
 from two to two and a half per cent. Many of the 
 small southern cotton mills whose credit has not been 
 well established have been forced to pay three and 
 a half to four per cent for the services of the selling 
 house in the sale of their goods and the endorsement 
 of their notes. As the mills become larger and their 
 credit becomes better they can borrow directly from 
 the banks. The larger mills are also able to keep in 
 close touch with the cloth market. They then tend 
 to break away from the selling houses and sell 
 through brokers whose commission is much less, per- 
 haps only one-half of one per cent, or to establish 
 
90 MARKETING 
 
 their own selling offices. The selling house in order 
 to keep its business may purchase a controlling inter- 
 est in the mills.' 
 
 Other services performed by the brokers may in- 
 volve the collection of accounts, the making of ad- 
 justments in the case of disputes, of accepting goods 
 for sale on consignment, and the handling of goods 
 and making delivery to the buyers. A typical exam- 
 ple of the latter is the handling of pooled cars. A 
 pooled car contains small shipments for different 
 buyers forwarded to one consignee to get advantage 
 of the car load freight rate. The broker may act as 
 the consignee, have the car opened and see that the 
 goods are delivered to the proper parties. In looking 
 after the interests of his principals the brokers may 
 be called upon to render a variety of services which 
 are not in the strict legal sense, a part of the broker- 
 age business. 
 
 OPERATIONS OF BROKERS AND SALES AGENTS 
 
 Organization. — Brokers and sales agents may op- 
 erate as individuals, as partnerships, or as corpora- 
 tions. The size of their organization depends upon 
 the size and nature of the business transacted. Often 
 a broker conducts a strictly one man business with no 
 place of business except a desk in someone else's office 
 or in his home. Has "his office in his hat" is the 
 
 "Copeland, Melvin T.: "The Cotton Manufacturing Industry of 
 the United States," p. 216, and Cherington, Paul T.: "The Wool 
 Industry," pp. 117-127. 
 
BROKERS AND SALES AGENTS 91 
 
 trade expression. If the business is larger the broker 
 may have a single room for an office and employ a 
 stenographer and bookkeeper. As the business in- 
 creases the organization expands accordingly until we 
 find the large brokerage houses with suites of offices, 
 ample show rooms, and numerous salesmen, book- 
 keepers, and stenographers.' 
 
 Little capital required, — To conduct a strictly 
 brokerage business requires very little capital. All 
 that is needed is enough working capital to pay rent, 
 salaries and miscellaneous expenses until sales are 
 negotiated, deliveries made, and commissions col- 
 lected. This time varies from a few days to several 
 months according to the commodity handled. It is 
 often said, however, that to successfully conduct a 
 brokerage business one must have either a consider- 
 able amount of capital or credit as It is often neces- 
 sary to finance certain shipments of goods — e. g. 
 remit to the seller before collection is made. If the 
 broker engages in the merchandising business a much 
 larger capital is needed, but the amount needed is 
 often much less than would appear at first glance for 
 the reason that the goods are often stored in public 
 warehouses and almost their full value borrowed on 
 the warehouse receipts. 
 
 Selling ability necessary to success. — ^The success 
 ■oP a broker depends upon his ability to secure goods 
 for sale and make sales which are satisfactory to his 
 
 "The single building at 100 Hudson Street, New York City, 
 houses a veritable colony of brokers handling various kinds of 
 groceries. 
 
92 MARKETING 
 
 principals. Good connections with the buyers is one 
 of his most valuable assets. Personality plays a large 
 part in making sales, especially in the sale of stand- 
 ard articles where there is little variation in price, 
 and it is in the sale of such articles that brokers are 
 frequently found. As very little capital is required 
 to enter the business and as the profits of successful 
 brokers are very large, competition is generally keen. 
 A broker with a wide personal acquaintance among 
 the buyers, however, has a distinct advantage over 
 the broker whose acquaintance with the buyers is 
 limited. A man with well established relations with 
 a few large buyers may be able to sell more goods in 
 a morning than a new salesman can in a week. The 
 sellers want to secure the best representation for their 
 goods and so try to select as their representative the 
 broker with the best connections and the most selling 
 ability. This makes it difficult for new or unknown 
 brokers to enter the field as no selling broker can suc- 
 ceed unless he has goods to offer. This difficulty is, 
 however, mitigated by the fact that where there is 
 no exclusive) agency a seller may be willing to accept 
 satisfactory sales for his goods negotiated by any 
 reliable broker. Brokers trying to establish them- 
 selves at times split their commission with the buyer 
 or other brokers in order to make sales. For exam- 
 ple if their commission is two per cent they may give 
 one per cent to the buyer as an extra inducement to 
 buy. This extra one per cent may be all that is needed 
 to make the sale. The seller may get his quoted 
 
BROKERS AND SALES AGENTS 93 
 
 prices or the broker may induce him to give the buyer 
 a discount of one per cent. Old estabhshed broker- 
 age houses often regard such a practice as "unfair" 
 and opposed to trade ethics. It is, however, hard 
 to completely condemn such a practice, for without 
 it it would be more difficult for a new broker to es- 
 tablish himself in business. 
 
 Must know supply and demand.^In addition 
 to sales ability a successful broker should be thor- 
 oughly conversant at all times with the supply and 
 demand in his market. Brokers often keep in very 
 close touch with the needs of the buyers. Stones 
 have been told of the broker knowing more about the 
 stocks of goods in the hands of the buyers than they 
 themselves did. 
 
 Prices. — ^A broker is supposed to represent the in- 
 terests of his principal. If a broker represents a 
 seller he is supposed to watch out for the seller's in- 
 terests and make the most favorable sales possible 
 for him. It is thus the duty of the broker to get the 
 highest possible price for the goods sold. As a mat- 
 ter of fact, however, a broker is often more inter- 
 ested in making a sale than in holding out for the 
 highest price. For example, suppose a broker work- 
 ing on a two per cent commission is trying to close a 
 sale for 1,000 units of an article selling for $1.90 to 
 $2.00. If the sale is made at $2.00 his commission 
 will be $40 and if the sale is made at $1.90 his com- 
 mission will be $38. or only $2. less. The broker 
 very naturally does not wish to run the chance of 
 losing the sale for the sake of the $2.00 commission 
 
94 MARKETING 
 
 and hence may advise his principal to sell at $1.90. 
 From this example it can be seen that a broker's in- 
 terest is to make sales and a slight difference in the 
 selling price means very little to him. From this it 
 is plain that the broker's interest is not always iden- 
 tical with that of his principal. 
 
 Canners often suspicious of brokers. — ^Among the 
 vegetable canners there has been a somewhat wide- 
 spread feeling that the brokers have not always fully 
 represented their interests. It has been charged that 
 some brokers have tried to reduce the canners' price 
 quotations by sending them misleading market re- 
 ports. For example, a broker might report the price 
 of one certain sale as the prevailing market price, 
 while as a matter of fact the goods involved in the 
 sale may have been of poor quality or the sale may 
 have been made on special terms which the brokers 
 failed to mention. The broker in this way hoped to 
 get his principals to reduce their prices so that he 
 could undersell other brokers and increase his busi- 
 ness. If several brokers tried this scheme they might 
 lower the prevailing price considerably. Some of the 
 canners associations have taken steps to stop such 
 practices. When such a case of underquoting the 
 market has been detected, the facts and the name of 
 the broker have at times been sent to all members 
 of the association. As no broker can afford to be 
 singled out as an enemy to the canners this was a very 
 effective way of checking this practice.' 
 
 ' See Report of Federal Trade Commission on "Canned Foods, 
 Fruits and Vegetables," 1918, p. 80. 
 
BROKERS AND SALES AGENTS 95 
 
 Authority in fixing prices. — A seller may give his 
 broker the right to fix selling prices or may limit him 
 to sales made at prices fixed by himself. The prices 
 of many commodities are constantly fluctuating and 
 it is very difficult for the principal, especially if he is 
 located outside a large market, to keep the broker 
 constantly advised of v?hat he considers a fair price. 
 In such cases the broker may be instructed to go 
 ahead and solicit orders but to submit all offers to 
 the owner of the goods for approval. This involves 
 a considerable loss of time, especially if the buyer is 
 located in an out of the way community, and sales 
 may be lost due to inability of the broker to close the 
 sale immediately. To overcome this difficulty the 
 broker may make sales "subject to confirmation of 
 price" by the owner of the goods. Such sales become 
 binding contracts as soon as the owner confirms the 
 price. If the price fairly represents the market and 
 the broker regularly represents the owners of the 
 goods such sales are ordinarily confirmed as a mat- 
 ter of course. In other cases the broker may have 
 full authority to complete the contract for the sale 
 of the goods as long as the price is within certain 
 limits named by the seller. 
 
 The owner of goods may give the broker a free 
 hand in fixing the selling prices. This practice is, 
 however, much more common with sales agents than 
 with brokers. Sales agents have greater powers than 
 brokers, receive larger commissions, and have larger 
 interests in the success of the producers represented. 
 The smaller manufacturers, who are as a rule the 
 
96 MARKETING 
 
 ones who employ sales agents, are the very ones who 
 are unable to keep in close touch with market condi- 
 tions. For this reason they often give their sales 
 agents almost full authority in the marketing of 
 their product. 
 
 Tend to lower price. — The question may be asked 
 as to what effect the brokers have on prices. From 
 what has been said it would appear that they tend to 
 lower rather than raise prices. This is apparently 
 borne out by the fact that in the grocery markets 
 the wholesalers as a rule feel very friendly toward 
 the brokers and believe that they serve a very useful 
 function while many of the manufacturers are skep- 
 tical of their value and use them from necessity 
 rather than choice. 
 
 The Federal Trade Commission in its investiga- 
 tion of the canned salmon industry found that dur- 
 ing 1917 the median (average) price received by 
 the Pacific Coast brokers was eleven cents higher 
 on the goods handled on a merchandising basis than 
 on the goods handled on a brokerage basis. In the 
 eastern portion of the country the median price was 
 twenty-six cents higher on their own goods than on 
 goods owned by others and sold on a brokerage 
 basis. The Commission also found that the canned 
 foods brokers made much larger profits on merchan- 
 dising than on brokerage sales. In 1916 reports 
 from eight brokers showed that seven of them real- 
 ized from 1.8 to 20.7 per cent more profit on their 
 merchandising than on their brokerage business. In 
 eight months of 1917 the merchandising profits of 
 
BROKERS AND SALES AGENTS 97 
 
 the three brokers covered by the report exceeded 
 their brokerage profits by the following percentages : 
 3.0, 7.3, and 16.8.' 
 
 These facts certainly indicate that the brokers do 
 not generally secure as high a price for goods sold 
 for others as they do for their own goods. In other 
 words goods handled on a commission basis are sold 
 for less than could be obtained for the same goods 
 if they were owned by the brokers. These reports, 
 however, cover periods of rising prices, whether 
 similar profits would be made during a period of 
 stationary or falling prices is an entirely different 
 matter. During such periods the brokers likely make 
 relatively small profits on their merchandising busi- 
 ness and so limit such transactions. 
 
 Brokerage contracts. — The principal may make 
 a written contract with his brokers or sales agents 
 specifying the powers and duties of the brokers or 
 sales agents, the rates of commission to be paid, and 
 territory covered if exclusive territories are assigned. 
 Very commonly, however, no formal contract is 
 made, the broker acting under either a verbal agree- 
 ment or under conditions outlined in letters between 
 the two. Such agreements are generally made in 
 accordance with the common practices within the 
 trade and if a dispute arises over a point not spe- 
 cifically covered by the agreement it is settled in 
 accordance with the prevailing trade customs and 
 practices. Such customs and practices are generally 
 
 'Federal Trade Commission, Canned Foods: "Canned Salmon; 
 p. 56 (see also p. 67) ; "Fruits and Vegetables," p. 50. 
 
98 MARKETING 
 
 well understood by the men engaged in many trades, 
 and for this reason it is often felt that nothing is 
 gained by signing an elaborate, formal, written con- 
 tract. 
 
 NUMBER OF BROKERS 
 
 Articles sold. — It would be extremely difficult to 
 enumerate all of the different commodities sold by 
 brokers or to approximate the total number in the 
 United States. They seem to sell everything from 
 commercial paper to ships. They are common in 
 the sale of real estate, stocks and bonds, commercial 
 paper, cargo space on vessels, insurance, foreign 
 exchange, grains, fruits, vegetables, butter, eggs, 
 cheese, hay, cotton, canned goods, groceries, tex- 
 tiles, coal, steel, coffee, chemicals, and many other 
 articles. 
 
 The activities of brokers apparently center in two 
 classes of articles. First those articles produced by 
 a large number of small producers who are not in 
 a position to keep in touch with the markets and 
 sell direct to the wholesaler and retail dealers. In 
 this class are fruits, vegetables, canned goods, tex- 
 tiles, and coal. Second, articles not adapted to sale 
 by the common trade channels due either to their 
 bulk or to the limited number of buyers. Real es- 
 tate cannot be moved and coal is too bulky to be 
 moved oftener than is absolutely necessary. The 
 number of buyers for insurance policies, foreign 
 drafts, and steel billets is limited and highly spe- 
 cialized salesmen are needed for their sale. The 
 
BROKERS AND SALES AGENTS 99 
 
 jrokers^i^ing in articles falling in the second group 
 ^re-exp^^ti that they are thoroughly familiar with 
 ' smw h^«?i specialized markets. These brokers 
 furnish ^^^cellent example of middlemen highly 
 sp^^liz^^s to function and carrying on their op- 
 era^ons $^ja. very low rate of commission. Freight 
 Lfo»ar^^/may be regarded as performing a spe- 
 •'„:.^„^j^fe.^(.(.jojj jjj attending to the details of mak- 
 shipments, but they may engage the nec- 
 essary' cargo space through freight brokers; place 
 the marine insurance through insurance brokers, sell 
 the drafts through foreign exchange brokers; and 
 arrange with custom house "brokers" to attend to 
 the details and red tape of getting the goods through 
 the custom houses. They often find it cheaper to 
 employ such brokers than to attend to the detail 
 of all these operations themselves. 
 
 No acciurate figures available. — No accurate fig- 
 ures are at hand showing the total number of brokers 
 in the various trades. An accurate census is difficult 
 to take due to the lack of uniformity in the defini- 
 tion of the term and to the fact that many persons 
 styling themselves brokers do very little brokerage 
 business while many persons and firms not called 
 brokers do a considerable brokerage business. 
 
 The United States census for 1910 reports the 
 following numbers : 24,009 commission brokers and 
 commission men, 13,729 stock brokers, and 6,254 
 not specified brokers. 
 
 Number of brokers handling typical commodi- 
 ties. — Thomas' Grocery Register for 1919 lists be- 
 
100 MARKETING 
 
 tween 3,600 and 3,700 brokers handling some of 
 the various articles coming under the general head 
 of "groceries." These lists, however, include the 
 various branches of a single brokerage concern and 
 also many brokers in small towns who do very little 
 brokerage business and whose brokerage business 
 is often a "side-line." About 700 of these brokers 
 are members of the National Canned Foods and 
 Dried Fruit Brokers Association. 
 
 There are said to be from 800 to 1,000 brokers 
 in the country handling sugar. Copeland reported 
 39 cotton cloth brokers in New York City and stated 
 that there were many others in such cities as Boston 
 and Fall River.' Cherington '" reports 280 selling 
 agents or dry goods commission houses which handle 
 woolens and worsteds in New York, Boston, Phila- 
 delphia and Chicago. Over 80 per cent of the 
 canned salmon is marketed through sales agents and 
 brokers. The various produce exchanges of the 
 country have from 50 to 2,000 members each. Some 
 of these may not be brokers, but they are on the other 
 hand, brokers in these markets who are not members 
 of the exchange. 
 
 RATES OF COMMISSION 
 
 Rates generally small. — The rate of commission 
 charged by brokers generally varies from a small 
 fraction of one per cent to five per cent. Higher 
 
 'Copeland, Melvin T.: "The Cotton Manufacturing Industry in 
 the United States, 1912," p. 216. 
 
 " Cherington : ''The Wool Industry," p. 125. 
 
BROKERS AND SALES AGENTS 101 
 
 percentages are, however, not unknown. The com- 
 mission paid to sales agents may go considerably 
 higher than five per cent. The rate of commission 
 paid for selling different articles is generally pretty 
 well understood and fairly uniform in each market. 
 The rate depends upon the value of the articles sold, 
 the services rendered by the brokers, the amount 
 of competition among the brokers, and the common 
 practice in the past. 
 
 In the New York stock market the brokerage de- 
 pends upon the price of the stock bought or sold, the 
 rate varying from 7 j4 to 20 cents per share, accord- 
 ing to the price. The common rate on bonds is }i 
 of one per cent of the par value. 
 
 Rates on Chicago board of trade. — The following 
 are the minimum rates of commission on the Chicago 
 Board of Trade." On grain purchased outside of 
 Chicago from non-members to be shipped to Chi- 
 cago : wheat, % of one per cent with ^c. per bushel 
 as minimum; corn and rye one per cent with ^c. 
 per bushel as the minimum; oats one per cent with 
 5^c. per bushel as minimum. When purchases are 
 made from members these rates are somewhat lower, 
 as follows: wheat, ^2 of one per cent with J^c. per 
 bushel as minimum ; corn and rye % of one per cent 
 with J^c. per bushel as minimum; oats ^ of one 
 percent with ^c. per bushel as minimum. These 
 rates are to cover all incidental expenses incurred 
 in handling and financing the purchase and do not 
 
 "In effect Feb., 15, 1918, quoted from constitution and by laws 
 contained in annual report for 1917. 
 
102 MARKETING 
 
 apply when transactions are not financed. Members 
 in soliciting such business may employ "solicitors" 
 at a fixed salary or other members as "brokers" at 
 yic. per bushel. As the members have such grain 
 in their possession and as such grain may be con- 
 signed to them by country shippers this is a commis- 
 sion rather than a brokerage business. 
 
 Members may act as brokers and on strictly 
 brokerage sales where no financing is done the min- 
 imum rates are much lower. The rates depend 
 upon the nature of the transaction but the following 
 are typical. For sale or purchase by grade alone 
 for immediate or future delivery in store or in reg- 
 ular houses; wheat, corn or oats 10 cents per 1000 
 bushels in lots of 5000 bushels or over and 15 cents 
 per 1000 bushels in lots of less than 5000 bushels; 
 for rye, barley or flaxseed 25 cents per 1000 bushels; 
 for pork 2-5c. per barrel; for short ribs and lard 
 two cents per 1000 pounds. For purchase or sale 
 by sample or by sample and grade for immediate or 
 future delivery or "to arrive" or in car load lots in 
 any position: wheat, flaxseed and ground feed $1.00 
 per car; hay, straw or clover, millet, timothy seeds 
 $2.00 per car; ear corn $1.50 per car; seeds in less 
 than car load lots, two cents per bag. For purchase or 
 sale of grain C.I.F. for shipment by rail or water 
 yic. per bushel in lots of over 5000 bushels, and 
 J4c. per bushel in lots of less than 5000 bushels. 
 
 Rates on smaller exchanges. — The rates of com- 
 mission vary somewhat on the various produce ex- 
 changes. The following rates adopted by the Grain 
 
BROKERS AND SALES AGENTS 103 
 
 and Hay Exchange of Pittsburgh may be taken as 
 typical of the rates on the smaller exchanges : wheat 
 and rye one per cent with a minimum of 1 J/^ cents 
 per bushel ; shelled corn and oats one per cent with 
 a minimum of one cent per bushel; ear corn one 
 per cent with minimum of two cents per bushel; 
 barley two cents per bushel; hay five per cent with 
 minimum of $1.00 per ton; straw five per cent with 
 minimum of 75 cents per ton; bran, middlings and 
 mill feed S per cent with maximum of $1.00 and a 
 minimum of 75 cents per ton.^^ The rate on strictly 
 brokerage business in Pittsburgh is from J4 to J^ 
 of one per cent. 
 
 Change from vinit to percentages basis. — Before 
 the war the prevailing rates on most of the grain 
 exchanges were fixed in accordance with the number 
 of units sold — a fraction of a cent per bushel. But 
 with the increase in the price of the grains which 
 called for more money to finance the transactions 
 and with the increased operating expenses the rates 
 have in many instances been placed on a percentage 
 basis, with a minimum rate of so much per bushel 
 to protect the broker in case of a fall in price. This 
 movement to go from a flat rate per unit to a per- 
 centage basis has not been limited to the sale of 
 grain. When brokerage rates are on a percentage 
 basis an increase in the selling price of the goods 
 automatically increases the amount of brokerage. 
 The increase from this source during the war was 
 
 " Pittsburgh Grain and Hay Market Reporter, Aug. 6, 1^20. 
 
104 MARKETING 
 
 ample in most cases to cover the increased operat- 
 ing expenses of brokers. During a period of fall- 
 ing prices the brokerage received may decline more 
 rapidly than operating expenses and may offset the 
 extremely large profits made by many brokers dur- 
 ing the period of rapidly rising prices. 
 
 Rates on canned foods. — The prevailing rates of 
 brokerage for the sale of canned foods is two per 
 cent on the selling price.^* Although rates as low 
 as ^ of one per cent and as high as 7 per cent 
 have been reported. Sales agents ordinarily re- 
 ceive 5 per cent but rates as high as 10 and even 
 X^Yz per cent have been reported, while one large 
 salmon cannei^ pays only 4 per cent.^* 
 
 Rates on insurance and ships. — Marine Insur- 
 ance brokers are paid from 2^ to 5 per cent.^' 
 During the war, ship brokers were paid three qua-- 
 ters of one per cent but after demobilization and a 
 fall in the price of ships this rate was raised to one 
 and one quarter per cent. 
 
 Fertilizer brokers are paid from 10 cents per ton 
 to 1 J4 per cent of net sales. One exclusive selling 
 agent receives commission of from 2j^ to 10 per 
 cent.'' 
 
 " The Produce Reporter for 1920 gives 2H per cent as the cus- 
 tomary rate. 
 
 "Federal Trade Commission: ''Report on Canned Foods, Vege- 
 tables and Fruits, pp. 19 and 50 ; Canned Salipon, pp. 22-26. 
 
 "Hough: "Practical Exporting, 1919," p. 433. 
 
 "Federal Trade Commission: " Report on Fertilizer Industry," 
 pp. 7 and 8. 
 
BROKERS AND SALES AGENTS 105 
 
 Rates on cloth. — Cotton cloth brokers receive >4 
 of one per cent according to Copeland" but the Bu- 
 reau of Foreign and Domestic Commerce'* states 
 that the brokers generally are paid 1^ per cent 
 when selling cloth for export. Brokers buying cot- 
 ton cloth for foreign importers receive from 2 to 
 5 per cent, 3j4 per cent being a common rate. 
 English brokers are usually paid one per cent when 
 selling cotton cloth for export. The differences In 
 these rates seem to depend upon the services ren- 
 dered in different kinds of transactions. 
 
 Selling houses receive a high rate of commission, 
 the rate charged the Southern Cotton Mills as re- 
 ported by Copeland in 1911 was 3j4 to 4 per cent. 
 Cherington reports that there was no uniform rate 
 for the sale of woolens but that 2 per cent is the 
 prevailing rate for staple goods while the rate for 
 seasonable or style goods may be as high as five per 
 cent.'" 
 
 Rates on foodstuffs. — In the sale of fruits, veg- 
 etables and dairy products the brokers are often paid 
 on the basis of the number of units sold (or bought) . 
 The Produce Reporter for 1.920 reports that rates 
 vary so much that "it is inadvisable to say with any 
 degree of certainty what should be paid in the ab- 
 sence of agreement as has been done previously" 
 but reports the following as being the consensus of 
 
 "Cotton Manufacturing in the United States," p. 216. 
 ""Selling in Foreign Markets," pp. 514 and 516. 
 "Cherington, Paul T.: "The Wool Industry," p. 120. 
 
106 MARKETING 
 
 opinion as to the customary rates: apples $15. car, 
 10c. barrel, 5c. box, and 5c. cwt. if in bulk; potatoes 
 old $10. car, new $15. car; cantaloupes $25. car; 
 hay and straw $5. car; watermelons $10. car; table 
 grapes $25. car; etc. The common rates in the 
 Pittsburgh market are % to J^c. dozen on eggs; 
 %c. pound on cheese; and yi to J^c. pound on but- 
 ter depending on the quantity sold. 
 
 The California Lima Bean Growers' Association 
 pays its selling agents five per cent of the coast price 
 but requires them to pay sub-brokerage of one per 
 cent, and allow a cash discount of one per cent out 
 of this amount.^" 
 
 Rates on anthracite coal. — The brokerage act- 
 ually earned by the anthracite coal sales agents is 
 given by Mr. W. Jett Lauck, consulting economist 
 for the United Mine Workers of America, as fol- 
 lows: All sizes of coal, 21c. per ton in 1914 and 
 $1.62 per ton in 1920; chestnut coal, $1.19 per ton 
 in 1914 and $3.29 per ton in 1920.'^ 
 
 Other examples of brokerage rates might be 
 given but it is believed that the foregoing are suf- 
 ficient to give a good idea of the prevailing rates of 
 commission paid to brokers and sales agents for the 
 sale of various commodities. 
 
 Reasonableness of rates. — It is difficult to make 
 a general statement as to whether brokerage rates 
 are reascjpable or not. Relatively few figures are 
 
 '"Journal of Commerce, October 11, 1919. 
 '^Journal of Commerce, July 19, 1920. 
 
BROKERS AND SALES AGENTS 107 
 
 available showing the actual operating expenses of 
 various classes of brokers. It will be shown in the 
 following section that the net profits of the well es- 
 tablished brokers in some lines are very large. It 
 must be remembered, however, that a part of these 
 figures were gathered during a period of rising prices 
 and that they do not include the small brokers who 
 are just managing to make a living. 
 
 NET PROFIT OF BROKERS 
 
 The gross earnings of a broker depend upon his 
 success in making sales or purchases. The prevail- 
 ing rates of commission are ordinarily sufficient to 
 allow the efficient brokers to pay expenses and make 
 large profits. If a broker is successful his net profits 
 are large. If he is unsuccessful his net profits are 
 small. The field is highly competitive but success 
 is 'generously rewarded. 
 
 Hard to get average figures. — It would be very 
 hard if not impossible, to gather any figures that 
 would reveal the average net earnings of the brokers 
 in the various trades for the reason that there are 
 so many small, irregular, or part time brokers. In 
 the gathering of any figures these are likely to be 
 overlooked and even if found many of them prob- 
 ably would be unable to make an accurate report 
 of their earnings and expenses. Figures referring 
 to the net earnings of brokers are liable to cover 
 only the better established and more successful ones. 
 
108 MARKETING 
 
 Return for personal services and for capital. — In 
 the conduct of a pure brokerage business little capi- 
 tal is needed and the net profit is very largely a re- 
 turn for personal service. The capital invested is 
 so small that a calculation of the percentage of net 
 earnings on investment would be misleading if not 
 entirely useless. If, however, a merchandising bus- 
 iness is done or if many producers are financed, a 
 considerable amount of capital is required, in which 
 case the percentage of net profits earned upon the 
 capital investment is very significant. As a matter 
 of fact a broker often does some pure brokerage 
 business, some merchandising business, and perhaps 
 also finances or helps to finance, a certain number 
 of producers or shipments. In this case the net 
 profit is partly a return for personal services and 
 partly a return upon capital. The apportionment 
 of the net profits between personal services and cap- 
 ital would in many cases be extremely difficult and 
 can only be done after a full consideration of all the 
 facts in each case. As these facts are seldom avail- 
 able to an outsider such as apportionment is gen- 
 erally impossible. 
 
 Returns for personal services. — Perhaps the best 
 way to obtain a fair idea of a broker's net earnings 
 is to include interest upon the invested capital as an 
 expense and to consider the remaining net earnings 
 including salaries for the owners as a return for per- 
 sonal services. On the other hand the salaries of 
 the owners can be eliminated from expenses and the 
 percentage of total net profits upon capital computed. 
 
BROKERS AND SALES AGENTS 109 
 
 The elimination of the salaries of the owners from 
 "expense" is necessary in either case for the reason 
 that many brokers consider the net profits as the 
 returns for their personal services and so take the 
 bulk of the net profits out of the business as salaries 
 for themselves and not as dividends or "profits." 
 
 The Federal Trade Commission has published 
 figures showing the net earnings of a large number 
 of canned food brokers. These figures may be 
 taken as representative of the net profits made by 
 well established brokers in the grocery trade. After 
 allowing six per cent interest upon the investment 
 it was found that the average net earnings for the 
 personal services of the active owners of thirteen 
 canned salmon brokerage firms and eight general 
 canned food brokerage firms during 1916 and 1917 
 were as follows: 
 
 1916 1917 
 
 General Canned Food Brokers $37,416 $62,263 
 
 Canned Salmon Brokers 4-8,133 64,634 
 
 The largest firms were not included in computing 
 these averages and as most of the firms included had 
 only one or two owners active in the business it is 
 evident that they were handsomely rewarded for 
 their services in both of these years. 
 
 Returns on capital. — The Trade Commission has 
 also presented the percentages of net profit made by 
 these brokers upon the invested capital. The sal- 
 aries of the owners or officers, but not of employees, 
 arc included with the profits (eliminated from ex- 
 
no MARKETING 
 
 penses) for the reason explained above. The per- 
 centages of net profit were as follows :^^ 
 
 General Canned Per Cent. Net Profit 
 
 Food Brokers On Investment 
 
 1916 1917 
 
 Broker No, 1 119 174 
 
 " " 2 130 222 
 
 " " 3 114 130 
 
 " " 4 6 24 
 
 " 5 275 652 
 
 6 53 66 
 
 " " 7 272 520 
 
 " " 8 25 253 
 
 Average 101 148 
 
 Canned Salmon Brokers 
 
 Broker No. 1 110 77 
 
 2 21 34 
 
 3 534 773 
 
 4 31 90 
 
 5 38 37 
 
 6 29 44 
 
 7 38 147 
 
 8..' 218 170 
 
 9 39 100 
 
 " 10 148 93 
 
 " 11 119 124 
 
 " 12 20 18 
 
 " 13 14 18 
 
 Average 43 54 
 
 ''^ Federal Trade Commission: "Report on Canned Foods; Canned 
 Salmon," 1918, pp. 64-67. Similar figures are given on p. 53 of 
 the report on "Vegetables and Fruits" for another list of general 
 canned food brokers. As many of these figures are incomplete for 
 1917 they are not reproduced here. The percentages of net profit 
 on investment for 1916 vyere as follows: 211; 107; 41; 47; 78; 284; 
 321; 231; 57; 126; 69; 8; 47, and 35. 
 
BROKERS AND SALES AGENTS 111 
 
 These percentages show the high average net prof- 
 its of the canned foods brokers and the wide varia- 
 tion in the net profits made by different individuals 
 or firms. The reader should, however, be again 
 cautioned to bear in mind the fact that many brok- 
 ers have very little investment for which reason some 
 of these percentages have little significance. For 
 example canned salmon broker No. 3 had an invest- 
 ment of only $7,306. Similarly general canned food 
 broker number 5 had an investment of only $5,606. 
 On the other hand canned calmon broker number 2 
 had an investment of $385,377 in 1916 and canned 
 salmon broker number 5 had an investment of $306,- 
 253 during 1917. The average investment of the 
 canned foods brokers was $39,247 in 1916 and $43,- 
 781 in 1917 and of the canned salmon brokers 
 $112,459 in 1916 and $119,209 in 1917. 
 
 Earnings of Princeton graduates. — Figures of 
 the average earnings of the class of 1901 of Prince- 
 ton University, ten years after graduation, show 
 that the brokers were by far the most prosperous 
 group. The average salary of the brokers is given 
 as $18,900. while the next highest average salary 
 was $6,098 made by the manufacturers. These 
 figures are inconclusive for the reason that the num- 
 ber of members of each group is not shown so that 
 the average of any group may be seriously affected 
 by one or two exceptional individuals. 
 
 The figures presented above may be insufficient 
 to show large average net profits for brokers as a 
 class but they are believed to be typical of the net 
 
112 MARKETING 
 
 profits made by the successful and well established 
 brokers in prosperous years. 
 
 CONCLUSION AS TO USEFULNESS OF BROKERS. 
 
 Economy of brokers. — The brokers serve a use- 
 ful function in bringing buyers and sellers together 
 and in negotiating sales without actually handling 
 the goods. Ordinarily they sell in large quantities 
 without having the expense of warehousing, deliver- 
 ing, etc., for which reasons they can operate very 
 cheaply. It is economical in the distribution of 
 goods to reduce the moving, storing and handling 
 of goods to a minimum and it is apparently in the 
 interest of efficiency to substitute middlemen acting 
 on a brokerage basis for those acting on a mer- 
 chandising basis wherever possible. 
 
 The development of brokers should be encouraged 
 when they replace middlemen with higher operating 
 costs. It is an entirely different matter when instead 
 of acting as a substitute for less efficient distributors 
 they act as middlemen between existing middlemen 
 and so increase the number of middlemen between 
 the producer and the consumer. Due to specializa- 
 tion of function an extra middleman may tend to 
 decrease the total marketing expense but the author 
 believes that in the majority of cases the effect Is 
 just the opposite — to increase in the total expense. 
 
 Merchandising business not justified. — It Is hard 
 to find any economic justification for the merchan- 
 dising business done by the brokers. If the mer- 
 
BROKERS AND SALES AGENTS 113 
 
 chandising broker replaces the wholesaler and sells 
 the retail dealers direct then he is misnamed for he 
 is a wholesaler and not a broker. In the marketing 
 of some commodities the merchandising function 
 may be necessary between the producer and whole- 
 saler to adjust the supply of and demand for the 
 commodity, e.g. to prevent buying and selling be- 
 tween the wholesalers. Such commodities are, how- 
 ever, the exception and not the rule. The author 
 is convinced that the great bulk of the merchandis- 
 ing business done by the brokers (aside from the 
 business done in their capacity of wholesale dealers) 
 is purely speculative. 
 
 Encourage speculation. — A very serious criti- 
 cism of the brokers is that they encourage specula- 
 tive transactions. Brokers often do not stop to 
 think whether the sales being made pass the com- 
 modity on toward the consumer or not. Perhaps, 
 under the competitive system, they could not be ex- 
 pected to refuse to make sales or purchases because 
 such sales or purchases did not get the commodity 
 any closer to the consumer. Many brokers not only 
 do not discourage speculative sales but actually en- 
 courage people to speculate in order to earn 
 commissions on such transactions. Practically any ar- 
 ticle can be speculated in — potatoes, onions, tinned 
 milk, sugar, butter, eg^s, shoes, textiles, coal, steel, 
 etc. There is a great difference of opinion among 
 both business men and economists as to whether such 
 speculation serves any good purpose or not. The 
 public, however, unreservedly condemns such spec- 
 
114 MARKETING 
 
 ulation as inimical to its interests. It is generally 
 recognized by students of marketing that regulated 
 speculation in standard graded commodities on large 
 well organized exchanges, like the Chicago Board 
 of Trade, serves many useful purposes. The spec- 
 ulation in graded commodities on organized ex- 
 changes, however, is one thing while the speculation 
 in ungraded articles by private sales outside the reg- 
 ulations of organized exchanges is an entirely dif- 
 ferent thing. It is extremely doubtful whether the 
 latter type of speculation serves any good purpose 
 and much evidence tends to show that it Is opposed 
 to the interest of the public. This question of spec- 
 ulation is too big a subject, to be discussed fully in 
 this chapter, but if it be admitted that purely specu- 
 lative transactions are wrong, then many brokers 
 must come in for a good deal of condemnation for 
 not only being a party to but actually encouraging 
 such transactions. 
 
 We then heartily endorse the regular work of the 
 brokers in negotiating sales between the producers 
 and the wholesale and retail dealers or between 
 producers of different products, but we seriously 
 question the desirability of their merchandising busi- 
 ness and their business in effecting speculative sales. 
 
 BIBLIOGRAPHY 
 
 Federal Trade Commission: "Report on Canned Foods; Canned 
 Salmon," chs. 1, 3, 4, 5, and 6; "Vegetables and Fruits," chs. 
 1, 3, 4, and 6; "Report on Fertilizer Industry," pp. 6-9. 
 
 Bureau of Foreign and Domestic Commerce: "Selling in Foreign 
 Markets," parts of chs. 7 and 11. 
 
 Cherington, P. T.: ''The Wool Industry," ch. 7. 
 
BROKERS AND SALES AGENTS 115 
 
 Weld, L. H. D. : "The Marketing of Farm Products," chs. 5 and 6. 
 Copeland, Melvin T. : "The Cotton Manufacturing Industry in the 
 
 United States," 1912, ch. 11. 
 Nourse, E. G.: "The Chicago Produce Market," 1917, ch. 3, also 
 
 "Brokerage, 1910," ch. 1. 
 Alexander Hamilton Institute: "Marketing and Merchandising," 
 
 part 1, ch. VII. 
 
 CHAPTER IV— QUESTIONS 
 
 1. Define or distinguish broker, sales agent, commission merchant,. 
 
 and factor. What is a merchandising broker ? 
 
 2. What power does a broker generally have in fixing selling 
 
 prices? Do the operations of brokers tend to raise or lower 
 prices? Why? 
 
 3. Why does a broker sometimes handle goods? Collect accounts, 
 
 and finance shippers ? What is a pooled car ? Why are pooled 
 cars sometimes consigned to brokers? 
 
 4. What are common brokerage rates for the sale of canned vege- 
 
 tables? cotton cloth? butter? wheat? potatoes, and stocks? 
 
 5. Upon what does the success of a broker depend? What oppor- 
 
 tunity does the brokerage field offer the young man starting 
 in business? 
 
 6. If you had a small tomato cannery in Maryland would you sell 
 
 your product through brokers? Why or why not? If you em- 
 ployed brokers what authority would you give them in fixing 
 selling prices? If you did not employ brokers, how would you 
 dispose of your product? What would be the advantages of 
 employing a sales agent as against the use of brokers? 
 
 7. A very large part of the grocers' specialties are marketed 
 
 through brokers. A medium sized manufacturer of a breakfast 
 cereal is dissatisfied with his volume of sales and asks your 
 advice about selling the wholesale grocers direct? Would 
 such a change be desirable? Would it likely increase his 
 sales? Would it likely decrease the cost to the wholesaler? 
 Discuss. 
 
 8. Suppose the above manufacturer decides to employ specialty 
 
 salesmen to call upon the retailers? Would it be advisable to 
 retain the brokers? Why or why not? 
 
Chapter V 
 WHOLESALE DEALERS 
 
 Definitions. — ^A wholesaler may be defined as a 
 dealer who buys In large quantities and sells gen- 
 erally in smaller quantities, to other dealers. There 
 is no generally recognized distinction between the 
 wholesaler and the jobber. Formerly the jobber 
 was an irregular factor in the market who bought 
 "job" or odd lots and sold them to wholesale deal- 
 ers, or wherever he could sell them advantageously. 
 This distinction is still made in the shoe trade. Per- 
 haps he had no warehouse or regular place of busi- 
 ness and acted as a "free lance" in the market. 
 Later, however, he came to have a regular place of 
 business and to do business on very much the same 
 basis as the wholesaler and in many trades the names 
 came to be used interchangeably. In such standard 
 merchandise lines as groceries, hardware, drugs and 
 dry goods there seems to be no distinction and the 
 terms are now used interchangeably. The term 
 "job lot" is, however, still common in the textile 
 markets. 
 
 Grocers. — Thomas' Grocery Register distin- 
 guishes between strictly wholesale grocers — those 
 who buy and carry stocks and sell to dealers only, 
 without discounts and rebates of a profit sharing or 
 cooperative nature and who have no substantial re- 
 us 
 
WHOLESALE DEALERS 117 
 
 tail interest; and others who are not strictly whole- 
 - sale grocers. The latter classification includes stores 
 doing both a wholesale and retail business, chain 
 stores, supply houses, dealers in specialties and co- 
 operative houses which are given the same prices as 
 strictly wholesale dealers by some manufacturers. 
 The distinction between a wholesaler and retailer 
 is clear. A wholesaler is one who sells to other 
 dealers without a profit-sharing discount, while a re- 
 tailer sells to consumers. The quantity sold has 
 nothing to do with the classification — the whole- 
 saler may sell in fraction case lots to retail dealers 
 while the retailer may sell in dozen case lots to a 
 large consumer.^ Many wholesalers adhere very 
 strictly to this distinction and sell only to dealers, 
 and some manufacturers refuse to sell anyone but 
 strictly wholesale dealers. This distinction, how- 
 ever, is not always observed. The chain and depart- 
 ment stores although selling only at retail often buy 
 on the same or even a better basis than the whole- 
 salers. In the competitive grocery markets a buyer's 
 status seems to be determined solely by his buy- 
 ing ability. A manufacturer may claim to sell only 
 to wholesalers and yet for the purpose of purchasing 
 he naively classifies the large chain and department 
 stores as wholesalers. The large stores perhaps 
 
 'The author has often seen strictly wholesale grocers In the 
 smaller towns open a case of cereal and sell one or two, 10 or IS 
 cent packages to a retailer. Such grocers often buy in smaller lots 
 than even the smaller city department stores or chain stores. Yet 
 they are strictly wholesale, in that they sell only to other dealers, 
 and are so classed in the directories. 
 
118 MARKETING 
 
 deserve to buy on a wholesale basis, but why claim 
 to sell only to wholesalers and then class all large 
 buyers as "wholesalers"? This suggests that per- 
 haps the definition of ■ the wholesaler should be 
 changed to meet altered conditions. 
 
 Wholesaler and jobber. — In some trades there is 
 a distinction between the wholesaler and the jobber. 
 A distinction is often made, for example, in the 
 produce markets. In Philadelphia the car lot receiv- 
 ers of fruits and vegetables are known as wholesalers' 
 while the dealers buying from them and selling in 
 relatively small lots to the retail dealers, hotels, and 
 restaurants are called 'jobbers/^ The distinction 
 seems to be strictly observed and if the same 
 firm does both a wholesale and jobbing business it 
 feels entitled to two profits. Somewhat the same 
 distinction is made in the Chicago Produce Market. 
 "In a general way the term, 'jobber' is limited to 
 dealers in less than car lots, but the more prominent 
 jobber often purchases in a very large quantity. In 
 all cases he sells to the retailers."^ In Pittsburgh, 
 on the other hand, this distinction is seldom made. 
 The produce market in Pittsburgh is a yard market, 
 most of the produce being sold directly from the cars, 
 although most of the dealers have stores. Some of 
 them refer to their store business as 'jobbing' busi- 
 ness and the yard business as "wholesale" business 
 but the distinction is of little value for sales are made 
 from the cars in as small lots as from the stores. 
 
 "Nourse, E. G.: "The Chicago Produce Market," p. 28. 
 
WHOLESALE DEALERS 119 
 
 There are, however, a few "real jobbers" in the 
 market who buy from the car lot receivers and sell 
 to the retail dealers. 
 
 In the sale of shoes "the jobber proper usually 
 handles lots of shoes ordered by merchants but not 
 taken from the manufacturers and any over produc- 
 tion that may have resulted from a failure to sell 
 the entire output to wholesalers or retailers" •? 
 
 In this book the terms wholesaler and jobber will 
 be used interchangeable when referring to the stand- 
 ard merchandise lines — groceries, hardware, dry 
 goods, and drugs. 
 
 General vs. specialty wholesalers. — Wholesale 
 dealers may be classified as general, and specialty 
 dealers. The general wholesaler is one who handles 
 a full or complete line of merchandise, such as gro- 
 ceries or hardware. The specialty wholesaler is one 
 who handles only a few articles or a relatively small 
 group of articles, as flour, hosiery, or knit goods. 
 
 The general wholesaler is still common in the 
 handling of groceries and hardware. The hardware 
 jobber commonly handles over 10,000 items. A 
 jobber recently stated to the author that counting 
 sizes his concern handled 40,000 different items. A 
 wholesale grocer often handles from 5,000 to 10,000 
 different items. Some of the large grocery houses 
 are said to handle 40,000 items. A half century 
 ago the general jobber was common in the dry goods 
 trade but with the rise of the department stores and 
 
 ^Report of Federal Trade Commission: "Leather and Shoe In- 
 dustries," p. 168. 
 
120 MARKETING 
 
 the rapid increase in the use of ready to wear cloth- 
 ing the general dry goods jobber has been almost en- 
 tirely replaced by the specialty jobbers in the large 
 eastern markets, — New York, Boston, Philadelphia, 
 Baltimore, and Chicago; but Is still common in the 
 smaller cities. There are only two general dry 
 goods jobbers in New York compared with 98 spec- 
 ialty dry goods jobbers who handle woolen goods.* 
 The handling of such a large number of articles by 
 the general jobbers involves many serious problems 
 in purchasing, stock keeping, and selling, which will 
 be discussed later. 
 
 The specialty wholesalers are common in the hand- 
 ling of dry goods; flour; fruits and vegetables; but- 
 ter, eggs, and cheese; grain and hay; tobacco; etc. 
 It is not uncommon for a wholesaler to handle noth- 
 ing except flour, potatoes, or butter and eggs. The 
 merchandising brokers mentioned In a previous chap- 
 ter are really specialized wholesalers. Some of the 
 highly specialized wholesalers are known as car lot 
 dealers and handle only one or two commodities in 
 car lots, e. g. potatoes, or flour. They need no ware- 
 house and their business very closely resembles that of 
 a merchandising broker. 
 
 The problems of the specialty jobbers are differ- 
 ent In many ways from the general jobbers. They 
 have simpler buying, warehousing and selling prob- 
 lems. They are specialists in the merchandise 
 handled and can render a high type of service to 
 both the producers and retailers. 
 
 'Cherington, Paul T.: "The Wool Industry," ch. 9. 
 
TV HOLES ALE DEALERS 121 
 
 The distinction between the general and specialty 
 jobber is not always clear. The general jobber may 
 cut off certain classes of goods until he resembles 
 a specialty jobber and a specialty jobber may add 
 additional lines until he resembles a general jobber. 
 For example would a jobber handling different kinds 
 of fruits and vegetables in season together with 
 butter, eggs, and cheese be classed as a general or 
 specialty jobber? 
 
 Semi-jobbers. — Many dealers do both a whole- 
 sale and a retail business. Such dealers are often 
 called semi-jobbers. In the sale of hardware such 
 dealers are especially common and are found in large 
 numbers In the agricultural states in the South and 
 West. 
 
 Mail order jobbers. — There are a few mail order 
 wholesale dealers, such for example as Butler Bros., 
 In Chicago, and the Baltimore Bargain House, in 
 Baltimore. Such houses are helpful especially to 
 retailers In the rural communities who are in direct 
 competition with the various mail order houses. One 
 of the arguments used by wholesale mail order 
 houses is that they eliminate the expense of travel- 
 ing salemen — one of the largest expenses of the 
 ordinary jobber — and hence can sell cheaper than 
 other jobbers. Some of these mail order jobbers 
 do, however, employ some traveling salemen who 
 call upon the retailers occasionally. 
 
 Cooperative buying organizations. — In order to 
 meet chain store competition retailers have been rap- 
 idly establishing cooperative buying organizations, 
 
122 MARKETING 
 
 in the hope of obtaining their goods on a basis enab- 
 ling them to compete with the chain stores. These 
 organizations may simply consolidate orders so as 
 to obtain quantity prices or discounts or they may 
 obtain warehouses and conduct fully organized job- 
 bing establishments. The American Grocers So- 
 ciety, Inc., of Newark, N. J., is said to be owned 
 by 15,000 retailers, and to have branches at Wash- 
 ington, Savannah, Boston, New York, Syracuse, 
 Baltimore, New Orleans, Richmond, Albany, and 
 Pittsburgh. Its sales are reported to be about 
 $5,000,000 a year. The Merchants Grocery Co., 
 reports over 40 stores, mostly in the South. The 
 Girard Grocery Co., of Philadelphia, is one of the 
 older and better known cooperative jobbing con- 
 cerns. The Mercantile Cooperator of March 6, 
 1920, printed a list of 14 other groups of coopera- 
 tive wholesalers, having a total of 44 separate or- 
 ganizations or branches. More will be said about 
 these cooperative buying organizations in a later 
 chapter. The Standard Purveyors, Inc., is a co- 
 operative buying organization for New York restau- 
 rants. It claims to save its members 10 per cent 
 on the cost of supplies and reports a monthly busi- 
 ness of $200,000.' 
 
 Commission merchants. — The commission mer- 
 chant was defined in the chapter on Brokers and Sales 
 Agent (ch. IV) as one who receives goods from 
 others for sale, who has control of the goods and 
 when sold accounts to the owner for the proceeds of 
 
 'Neijii York Times, December 26, 1920. 
 
WHOLESALE DEALERS 123 
 
 the sale. Commission merchants are those who re- 
 ceive goods on consignment for sale. It has been 
 pointed out that the work of the brokers often re- 
 sembles closely that of the commission merchants, 
 but as the commission merchants generally have 
 warehouses and actually handle the goods as their 
 judgments dictate they will be discussed In this chap- 
 ter. In actual practice the same dealer may do a 
 commission business, a brokerage business, and a 
 merchandising business. 
 
 Commission men may handle any kind of goods. 
 Textiles, vegetables, fruits, grain, live stock, poul- 
 try, butter, eggs, chemicals, and cotton are some of 
 the articles that have very commonly been sold on a 
 commission basis. Farm products have, however, 
 more generally been sold in this way than any other 
 class of goods. This was formerly such a common 
 practice that all produce dealers came to be known 
 as commission merchants. This name still sticks to 
 the produce dealers although many of them now do 
 little or no commission business. 
 
 Decline in commission business. — Not nearly as 
 many goods are sold on a commission basis as for- 
 merly.^ There have been many reasons for the de- 
 cline In the commission business. Perhaps the most 
 important has been the fact that surplus stocks, or 
 
 ° According to a statement made some years ago by John Wana- 
 maker, until 1875 trade rules limited the sales of manufacturers to 
 commission men, and of commission men to jobbers. "Annals of 
 the American Academy of Political and Social Science," April, 1900, 
 sup. p. 121-135. 
 
124 MARKETING 
 
 goods which couldn't be disposed of in any other 
 way, have been shipped to commission men for sale 
 which has meant that the largest quantity of goods 
 have been consigned when there was a glut in the 
 market. This has meant that the prices received 
 were low and the shippers dissatisfied. Hence the 
 saying that "its a poor market when you have to 
 consign." Also as marketing methods became bet- 
 ter developed and better understood it was easier 
 for the producer to get in direct touch with the 
 wholesalers, jobbers, or retailers. On their part 
 the wholesalers have often gone direct to the pro- 
 ducers and bought outright. There have been 
 many charges of unfair dealings on the part of com- 
 mission men — fraudulent returns to shippers, sale of 
 the goods to themselves at unreasonably low prices, 
 etc' The commission men do not claim that there 
 have not been dishonest men in the commission busi- 
 ness, just as in any other business, but they do claim 
 that a large part of the trouble has lain with the 
 shippers, or with market conditions which the latter 
 do not understand. For example the goods may ar- 
 rive in such poor condition that they must be sold at 
 a low price. The shipper is loathe to believe that 
 his product was not of good quality. It is also 
 pointed out that many shippers consign their goods 
 only when it is impossible for them to dispose of 
 them in the regular way, which generally means that 
 
 ' On this point read Federal Trade Commission Report on 
 "W^holesale Marketing of Food," pp. 165-172. 
 
WHOLESALE DEALERS US 
 
 the market is glutted so that goods can only be sold 
 at exceptionally low prices. Again the market price 
 may fall while the goods are in transit. Small ship- 
 pers often grade their goods very carelessly and 
 pack them in whatever containers are at hand. Buy- 
 ers do not like to buy by guess and so pay more for 
 a standard product.* Dealers at times refuse to buy 
 outright from any shippers except those known to 
 ship good packs. This often means that poor packers 
 must consign their goods. 
 
 Persistence of commission business. — In spite of 
 all the complaints about the prices received for goods 
 sold on commission, considerable amounts of certain 
 products are still sold in this way. Small coun- 
 try buyers may ship such goods as eggs to a "con- 
 centrator," who makes up car lots, on a commission 
 basis. Live stock is still very largely consigned to 
 commission men. Much grain from the Northwest 
 is still marketed by commission men in Minneapolis 
 and Duluth while large quantities are sold on con- 
 
 * An actual incident will help to make this clear. A farmer near 
 an eastern city shipped his cantaloupes to a dealer to be sold on a 
 commission basis, telling'the dealer that they were the finest he had 
 ever grown. When the cantaloupes arrived they were packed in 
 barrels and boxes of various sizes. When these were opened it 
 was found that the cantaloupes were dirty, many of them were sun 
 burned, and all sizes were mixed together. It was very difficult to 
 sell them in competition with the western product, which came uni- 
 formly graded, of neat appearance, and packed in crates of uniform 
 size. The flavor may have been much better than the western can- 
 taloupes which are picked green, but the public buys largely on 
 looks. The commission man found it very hard to get any retailers 
 interested in the local'product and was unable to get a price which 
 was satisfactory to the farmer. 
 
126 MARKETING 
 
 signmcnt in Kansas City and Chicago.' There is a 
 continuous market for these products so that sales 
 can always be made. The prices are published and 
 widely distributed so that the buyers can know 
 whether they receive a fair price for the grade of 
 goods sold. A considerable quantity of butter is 
 still sold in New York on a commission basis.^" The 
 sale of New Jersey vegetables on a commission basis 
 in Philadelphia furnishes another example of the 
 continuance of the consignment business. Very little 
 southern produce is received in Philadelphia on a 
 consignment basis whereas a large part of the nearby 
 New Jersey produce is marketed in this way. The 
 reason given for the continued consignment of the 
 Jersey product is that the growers come into per- 
 sonal touch with the commission men and gain con- 
 fidence in their honesty. They are near enough 
 to visit the market frequently and see the conditions 
 in which their goods arrive and ascertain the actual 
 prevailing prices. It seems from these examples 
 that goods can be satisfactorily marketed on a com- 
 mission basis if the shippers can feel satisfied that 
 they are being given a square deal. 
 
 Assumption of risk. — The difference between out- 
 right sale and consignment is in the assumption of 
 risk. When the producer sells f.o.b. shipping point 
 he frees himself of any further risk and also gives 
 up any chance of any further profit. If he ships on 
 
 "Weld, L. H. D.: " Marketing of Farm Products," p. 84. 
 '"Weld, L. H. D.: "Marketing of Farm Products," p. 89. 
 
WHOLESALE DEALERS 127 
 
 a consignment he takes the risk of losses and also 
 has the chance of profiting by an increase in prices 
 or by fortunate sales. This is probably the reason 
 why more goods are shipped on consignment when 
 the quality is poor or the market glutted as the ship- 
 pers are then unwilling to accept the low price of- 
 fered and are willing to take the risk of a loss in 
 the hope of getting a better price In one of the cen- 
 tral markets. 
 
 Many states have passed laws regulating com- 
 mission men but they seem to have been of little use 
 in reviving the commission business. The practice 
 of some commission men of selling the shippers' 
 goods to themselves has been especially criticised. 
 The suggestion that there should be some public 
 marketing organization in the large cities to which 
 growers could consign their goods with the assur- 
 ance of getting honest treatment is not without 
 merit. 
 
 Rate of commission. — The rate of commission re- 
 ceived by commission men may vary all the way from 
 1 to IS per cent, but in the sale of farm products, 5, 7, 
 and 10, are the most common percentages, except on 
 the sale of large lots, (e. g. car loads) where the rate 
 is generally much lower. 
 
 The nvimber of wholesalers. — The number of 
 wholesale dealers handling various lines of mer- 
 chandise was stated as follows in 1913:" 
 
 "Nystrom: "The Economics of Retailing," pp. 387-389, quoting 
 from R. G. Dun Co.'s list as compiled by the Rapid Addressing 
 Machine Co. 
 
128 
 
 MARKETING 
 
 Foodstuffs: 
 
 Groceries 3,840 
 
 Produce 7,^85 
 
 Provisions 1,221 
 
 Fruit 1,831 
 
 Butter and eggs 1,194 
 
 Grain 1,210 
 
 Flour, Feed and Grain.. 1,572 
 
 Meats 781 
 
 Bakers 620 
 
 Coffee, tea and spices .... 547 
 
 Cheese 263 
 
 Honey 113 
 
 Fish 950 
 
 21,927 
 
 Wearing Apparel: 
 
 Dry Goods 725 
 
 Clothing 160 
 
 Hosiery i,ioS 
 
 Fancy Goods and Notions. 786 
 
 Notions and Toys 1,105 
 
 Men's Furnishings 315 
 
 Millinery 424 
 
 Hats and Caps 201 
 
 Boots and Shoes 522 
 
 Neckwear 315 
 
 Gloves 63 
 
 5,821 
 
 Hardiuare and House 
 Furnishings : 
 
 Hardware 928 
 
 Agricultural Implements... 240 
 
 Harness and Saddlery 314 
 
 Seed 597 
 
 Furniture 307 
 
 Carpets 83 
 
 Wall Paper 284 
 
 China, Crockery & Glass- 
 ware 340 
 
 Woodenware 131 
 
 Electrical Supplies 424 
 
 Glass, Oil and Paint 605 
 
 4,253 
 
 Drugs 668 
 
 Miscellaneous 
 
 Liquors and Wines 5,641 
 
 Stationery 391 
 
 Paper 905 
 
 Jewelers 815 
 
 Sporting Goods 423 
 
 Cigars and Tobacco 1,991 
 
 Leaf Tobacco 592 
 
 Sponges 37 
 
 Florists 1,76S 
 
 Junk 189 
 
 12,749 
 
 Grand Total" 44,750 
 
 ''There may be some duplication in this table as dealers hand- 
 ling more than one article or line of goods may have been included 
 in more than one class or group. 
 
WHOLESALE DEALERS 129 
 
 Thomas' Grocery Register for 1919 lists over 
 6,000 (6,051) wholesale grocers approximately two 
 thirds of whom are classed, as strictly wholesale. 
 This would mean about 4,000 strictly wholesale 
 grocers in 1919. For this year Dun's report shows 
 over 5,600 wholesale grocers of whom nearly 3,000 
 were rated at over $100,000 and about the same 
 number as doing a strictly wholesale business. 
 Thomas' directory. lists over 600 wholesale provi- 
 sion dealers, a very large part of this number, how- 
 ever, consists of the branch houses of the Chicago 
 meat packers; and over 1000 wholesale flour and 
 feed dealers. 
 
 Cherington gives the number of general jobbers 
 who handle woolen goods as 310. This is less than 
 half the number of dry goods jobbers given in the 
 above table, but the figure in the table may include 
 small jobbers who do not handle woolens or a cer- 
 tain number of specialty jobbers. 
 
 The United States census for 1910 gives the fol- 
 lowing number of wholesale dealers : Importers and 
 exporters, 4,905; jobbers, 3,181; other wholesale 
 dealers, 42,962. Excluding the importers and ex- 
 porters this was a total of 46,143 wholesale deal- 
 ers of all classes. This compares with a total of 
 44,750 shown in the above table for 1913. Allow- 
 ing for the wholesale liquor dealers put out of 
 business by prohibition and the increase in the num- 
 ber of wholesalers in other lines, we may estimate 
 the present number of wholesaler dealers of all 
 classes as approximately 45,000. 
 
130 MARKETING 
 
 This is one wholesale dealer to every 20 or 25 
 retail stores and according to the 1920 census fig- 
 ures, one wholesale dealer to every 24,000 people. 
 These figures do not include as wholesale dealers 
 the warehouses of manufacturers or chain stores. 
 
 SERVICES PERFORMED BY THE WHOLESALER 
 
 Much criticised. — In recent years the middlemen 
 have been much criticised by the pulbic. The public 
 to a large extent has in mind the wholesalers, al- 
 though it has no very clear idea of who the whole- 
 salers aie or what they do. To many people the 
 wholesalers appear as vague, rather intangible, per- 
 sons, who stand between the producers and retail- 
 ers and collect toll on all goods passing through 
 their hands. They do not know whether there is 
 one or half a dozen wholesalers back of the retailer, 
 but they are very strongly of the opinion that there 
 are too many wholesalers and that the profits taken 
 by them are unnecessary, or at least unreasonably 
 high. The public comes into direct contact with the 
 retailers and sees that they perform a necessary 
 function. The retailers also have a chance to de- 
 fend themselves and to show what useful functions 
 and services they perform. 
 
 The wholesalers, however, perform many services 
 that are useful, if not absolutely necessary, to the 
 present process of market distribution. The princi- 
 pal services performed by the wholesalers are : 
 
 1. Warehousing and distribution of goods to 
 the retailers in small lots ; 2% supplying the produc- 
 
WHOLESALE DEALERS 131 
 
 ers with ready made sales organizations; 3. Ex- 
 tending credit to the retailers ; 4. Educating the re- 
 tailers; 5. Making possible the existence of the 
 small community stores. 
 
 1 . Warehousing and distribution in small lots. — 
 Most retailers must buy their goods in relatively 
 small quantities. As a rule their capital is limited 
 and their warehouse space small. Even if they had 
 sufficient capital it would not be good business to 
 keep it tied up for long periods in idle stocks of 
 goods. Due to the high freight rates on less than car 
 load shipments and delays in transportation it is 
 desirable to have stocks of goods carried near the 
 retailers so that deliveries can be made cheaply and 
 quickly. Large full line manufacturers could pro- 
 vide warehouses conveniently situated for supplying 
 the retail dealers. Small or medium sized manu- 
 facturers can hardly do so, due to the lack of capital 
 or to the fact that their sales are too small to justify 
 the expense. When manufacturers have their own 
 branch houses and supply the retailers direct, they 
 are in reality performing a jobbing service. The 
 chain stores have their own warehouses from which 
 they supply their retail stores in much the same way 
 as the wholesalers supply the individual retailers. 
 The chain store may save the jobbers net profit, and 
 the expense of soliciting business, but it cannot avoid 
 the expense of receiving, storing, and delivering the 
 goods to the separate stores. This warehousing is 
 a real and necessary service. It may be debatable 
 whether it can be performed most efficiently by the 
 
132 MARKETING 
 
 wholesalers, by the manufacturers, or cooperatively 
 by the retailers, but it cannot be denied that it is 
 necessary and that when the wholesalers perform it 
 they render a very valuable service. 
 
 The manufacturer selling the retailer has thou- 
 sands of small shipments instead of a few large ones. 
 Warehouses must be bought or rented or arrange- 
 ments made with others to act as transfer agents if 
 the product is at all bulky; and a large part of 
 the country is covered. If all shipments are made 
 from one point the high freight rates on bulky prod- 
 ucts in less than car load shipments, will be ex- 
 tremely heavy if not absolutely prohibitive. 
 
 2. Furnishes manufacturers with a sales force. 
 — The wholesaler has a ready made sales organiza- 
 tion to offer to the producer. When a new factory 
 is organized it has the option of sending its own 
 salesmen to the retailers or of using the jobbers' ready 
 made sales organizations. It is much cheaper for 
 the small manufacturers to utilize the services of 
 the jobbers' selling organizations than to maintain 
 their own. The manufacturer is a specialist on pro- 
 duction while the jobber is a specialist on marketing. 
 It is often necessary for the small manufacturers 
 to devote practically their entire time and energy 
 to the problems of production and leave the market- 
 ing of their products to others. The simplest 
 method is to appoint sales agents or brokers to place 
 their goods in the hands of the wholesalers. The 
 next step is to build up a sales organization large 
 enough to sell the wholesalers direct. It is, however, 
 
WHOLESALE DEALERS 133 
 
 a much more serious matter to dispense with the 
 wholesalers and sell the retail trade direct. There 
 are approximately 60 retail grocers to one whole- 
 sale grocer, and 20 retail hardware stores to each 
 hardware jobber. (Many of the latter are semi-job- 
 bers who do a small wholesale business.) From this it 
 can be seen that a much larger sales force would be 
 needed to sell the retailers direct. The employment, 
 training, and supervision of this force is a much 
 larger matter than managing the small force neces- 
 sary to work the jobbing trade. 
 
 Manufacturers of large lines of goods (e.g., 
 Heinz's 57 varieties or a complete assortment of 
 shoes or suits), or whose product consists of large 
 articles, such as automobiles, can afford to sell direct 
 to the retailers. Manufacturers of short lines or 
 specialties, on the other hand, often find the expense 
 prohibitive. This is especially true outside of the 
 large cities, where a salesman can call on only a few 
 dealers in a day. If his sales to each dealer are 
 small his percentage of expense will be high, while 
 if he were selling a full line or expensive articles his 
 total percentage of expense might be within a rea- 
 sonable limit. This explains why some manufac- 
 turers sell the retailers direct while others sell 
 through jobbers. 
 
 If each manufacturer sent his salesmen to the 
 retailers the latter's time would be so occupied with 
 interviewing the salesmen that they would have lit- 
 tle time for other business. The ordinary retailer 
 is not in a position to keep in touch with all the 
 
'- 134 MARKETING 
 
 manufacturers whose goods he handles. To do so 
 properly would involve the maintenance of a fair 
 sized purchasing department. The amount of book- 
 keeping would also be greatly increased. 
 
 From a social point of view it is more economical 
 to have one jobbers' salesmen represent hundreds of 
 manufacturers than for each manufacturer to have 
 his own salesmen working the retail trade. 
 
 3. Extension of credit to retailers. — A great 
 many retail dalcrs operate very largely upon bor- 
 rowed capital. Many of them do not have financial 
 standing sufficient to enable them to get the neces- 
 sary funds from the local banks. The wholesalers 
 by selling them on credit enable them to stay in busi- 
 ness. The retailers have had to buy on credit be- 
 cause they have had to sell on credit. If they could 
 sell for cash they could pay their bills promptly, 
 but as long as they must sell on credit many of them 
 must buy on credit. A substantial part of the re- 
 tailers will, in all probability, have to buy their goods 
 on credit for many years to come. The wholesaler 
 in selling them on credit performs a service which 
 in many cases is necessary to their existence. The 
 manufacturer selling the retailers direct has the 
 problem of extending them credit. This Involves 
 not only capital but the necessity of passing on the 
 credit of Individual dealers and of collecting many 
 small accounts. 
 
 4. Education of the retailers. — The whole- 
 salers have come to realize that their interests are 
 bound up with the Interests of the retailers; that 
 
WHOLESALE DEALERS 135 
 
 if the independent retailers are forced out of busi- 
 ness that they will also be forced out of existence. 
 It, therefore, behooves the wholesalers to do all that 
 they can to help increase the efficiency of the indi- 
 vidual retailer so that they can meet the competition 
 of the chain and department stores. Many retailers 
 have entered the merchandising field with no par- 
 ticular training or education to fit them for such 
 work and many of them have been very inefficient. 
 The Federal Trade Commission reports that only 
 one out of every 25 rural implement and hardware 
 merchants has an adequate accounting system.^' 
 Many jobbers are trying to educate the retailers 
 in methods of stockkeeping, window display, book- 
 keeping, selection of goods, educating salesmen, ad- 
 vertising, etc. Most jobbers have come to realize 
 that it is not good business to oversell the retailer 
 on any particular article, or class of articles; that 
 the better policy is to help the retailer make a proper 
 selection of goods so that he can carry a well as- 
 sorted stock and use his capital to the best advan- 
 tage. 
 
 Some jobbers have reported that the retailers are 
 unappreciative, if not hostile, to their efforts to help 
 them; that the retailers feel that the wholesalers 
 are attempting to dictate to them how they should 
 run their businesses. If such reports are true they 
 show that the retailers and the wholesalers are not 
 properly cooperating. The retailers should be glad 
 of any help that will increase their efficiency as mer- 
 
 " "Annual Report for 1919," p. 37. 
 
136 MARKETING 
 
 chants. The wholesalers should render services and 
 give advice tending to do this in a spirit of helpful- 
 ness and in such a way as to avoid the impression 
 that they are attempting to dictate to the retailers. 
 
 5. Makes small community stores possible. — 
 The wholesaler Is necessary to the existence of the 
 local or community retailer. Large retailers who 
 have adequate capital, large warehousing facilities, 
 and who can afford an efficient purchasing depart- 
 ment capable of keeping In close touch with the 
 numerous brokers or manufacturers, can buy with- 
 out the use of the wholesaler. Manufacturers pro- 
 ducing a large or full line of a certain class of goods 
 can afford to maintain a large sales organization 
 and sell the retailers direct. Assemblers will, how- 
 ever, be necessary as long as the small local retailers 
 and the relatively small manufacturers exist. Mer- 
 chandise could apparently be distributed somewhat 
 more cheaply through fewer and larger retailers 
 without jobbers. The crossroads, village, and cor- 
 ner stores, however, offer many conveniences to the 
 consumers and as long as they demand such conven- 
 ient supplies, the jobbers will be necessary, unless 
 retailing is to be taken over by the large chain 
 stores. In so far as the Independent retailer Is of 
 service to and demanded by the public, just so far Is 
 the jobber necessary. 
 
 Services performed by the specialty wholesaler. 
 — What has been said above refers especially to the 
 general wholesalers although most of it ■ applies 
 equally to most of the specialty wholesalers. As a 
 
WHOLESALE DEALERS 137 
 
 rule the specialty wholesalers have warehouses and 
 supply the retailers with goods in small lots as 
 needed. They also sell on credit, supply the pro- 
 ducers with sales organizations and may also give; 
 useful advice to the retailers. Since the specialty 
 wholesalers handle a smaller number of articles they 
 can devote more attention to the sale of each pro- 
 ducer's goods. They can give the retailers better ad- 
 vice as to the selection of goods, changes in style, 
 and the prevailing market conditions. On the other 
 hand it is necessary for the retailer to deal v/ith 
 more jobbers to keep his line complete. 
 
 Specialty wholesalers who handle only one or two 
 articles in car lots, and have no warehouse facili- 
 ties, perform almost the same services as the broker. 
 In fact, this buyer very likely doesn't care, and per- 
 haps doesn't even know, whether the goods belong 
 to the dealer or to his principal. From this it is 
 seen that difFerent types of specialty jobbers may 
 perform different kinds of services. 
 
 Services performed by manufacurers' branch 
 houses. — ^The branch houses of the maunfacturers 
 are in reality specialized jobbing establishments 
 pushing the sale of one brand of goods. These 
 branches may be owned directly by the parent com- 
 pany, may be separately incorporated but operated 
 under the company's name, or may be conducted 
 under a different name and controlled by stock own- 
 ership. 
 
 The problems of these branch houses are similar 
 to the problems of the jobbers, except for the fact 
 
138 MARKETING 
 
 that their policies may be worked out for them at 
 the main office. They must receive and store goods, 
 solicit business, make shipments, extend credit to 
 the retailers, make collections and give advice. Un- 
 less the manufacturer produces an extensive line of 
 goods he may find that the expenses of his branch 
 houses are very high in relation to the value of the 
 goods sold. For this reason the branch house may 
 take the "agency" for supplementary lines to be han- 
 dled on a jobbing basis. In the farm Implement 
 business, for example, the branch houses of a manu- 
 facturer of tillage implements may handle a grain 
 drill made by a second company, a line of haying 
 tools made by a third company and so on. Thus 
 the salesmen while selling tillage implements also 
 sell grain drills and haying tools. This reduces the 
 selling expense for each line sold and also increases 
 the sales of tillage implements for the reason that 
 the retailers prefer to buy from concerns that can 
 supply them with a full line of implements. The 
 principal jobbers of farm Implements are the manu- 
 facturers' branch houses. Some of the smaller 
 manufacturers maintain their own branch houses in 
 the middle western agricultural states, while in other 
 sections of the country their goods are handled by 
 the branch houses of other farm implement manu- 
 facturers or by independent jobbers." Since farm 
 implements are bulky and the freight rates relatively 
 high west of the Mississippi River some manufac- 
 
 " There is in reality only one implement manufacturer who main- 
 tains branches in all sections of the United States. 
 
WHOLESALE DEALERS 139 
 
 turers maintain branches only cast of this river and 
 depend entirely upon branch houses of other manu- 
 facturers, or independent jobbers, to market their 
 implements in the western territory. Somewhat simi- 
 lar conditions prevail in the meat packing industry 
 where the branch houses of the meat packers handle 
 many articles not produced by slaughtering houses, 
 e.g. butter, eggs, cheese, etc. 
 
 PROBLEMS OF THE WHOLESALERS 
 
 The large number of articles which the general 
 jobber must carry in stock involves many difficult 
 problems in purchasing, stock keeping, and stock 
 turnover. These will be discussed in later chapters. 
 It is, however, appropriate, at this point to say 
 something of the problems of keeping up the sale 
 of all articles and all brands of goods. 
 
 Impossible to push all lines. — The general job- 
 bers carry thousands of different articles in stock and 
 it is a physical impossibility for their salesmen to 
 actively push the sale of each and every article at 
 all times. A jobber often carries similar goods for 
 competing manufacturers. If he pushes the sale of 
 one manufacturer's goods more actively than those 
 of another, the one whose goods are not pushed 
 may claim unfair treatment and if the jobbers do 
 not turn in a fair amount of business the manufac- 
 turer may be forced to work the retail trade direct. 
 This is especially true when the manufacturer is ex- 
 pending large sums in advertising. The failure of 
 the jobbers to turn in what the manufacturers con- 
 
140 MARKETING 
 
 sider a satisfactory volume of business, often forces 
 the manufacturers to employ specialty salesmen who 
 go to the retailers from time to time to solicit orders 
 which are filled through the wholesalers, or upon 
 which the wholesalers are allowed a profit. The 
 use of specialty salesmen adds to the cost of distri- 
 bution and brings the manufacturers in direct contact 
 with the retailers. This gives the manufacturers the 
 information needed in case they decide to sell the 
 retail trade direct and furnishes them with the nuclei 
 of the necessary selling organizations. 
 
 Leaders. — Most jobbers from time to time select 
 articles as leaders and instruct their salesmen to 
 push the sale of these articles. Thus the salesmen 
 may carry samples of the selected leaders and these 
 leaders may be changed each month or for each trip. 
 These leaders may be articles of exceptional value 
 to the retailer, articles that carry a large profit to 
 the jobber, articles which have been moving slowly, 
 or articles on which the jobber is overstocked. If 
 the sale of any particular leader is to be successful, 
 whether samples are carried by salesmen or not, it 
 is first necessary to "sell" the salesmen. It is a 
 well-known fact that salesmen are most successful 
 in selling those articles in which they are interested 
 and in which they see usefulness or value. There- 
 fore, if the sale of leaders is to be a success, it is 
 necessary to first call them forcibly to the attention 
 to the salesmen and to convince the salesmen that 
 they are of good quality or offer special values. Al- 
 though relatively few articles can be selected as 
 
WHOLESALE DEALERS 141 
 
 leaders the jobbers can in this way promote the sale 
 of new articles being introduced on the market or 
 the goods of manufacturers whose lines are selling 
 slowly. There are, of course, many standard arti- 
 cles for which the demand is established and which 
 sell regularly without being used as leaders. 
 
 CHAPTER V— QUESTIONS 
 
 1. What distinction was formerly made between the wholesaler 
 
 and the jobber? In what trade or trades is this distinction still 
 made? What distinction is sometimes made in the produce 
 markets ? 
 
 2. Why has the commission business declined ? What lines of goods 
 
 are still sold on a commission basis? 
 
 3. Enumerate the services performed by the general wholesalers. 
 
 What additional services may be performed by the specialty 
 wholesalers? 
 
 4. If the wholesalers were abolished what would be the effect on 
 
 the large retailers? On the small retailers? On the large full 
 line manufacturers? On the small specialty manufacturers? 
 Would the consumer be benefited? Why or why not? 
 
 5. A manufacturer of a limited number of small articles sold by 
 
 retail hardware stores has his product carried by the hardware 
 jobbers east of the St. Louis and North of Atlanta. His sales 
 are far below the capacity of his plant. To operate at a profit 
 he must either increase his sales or produce additional articles. 
 The latter policy will tend to high production costs. In order 
 to stimulate sales he considers advertising extensively to create 
 a consumer demand or of selling the retailers direct. Which 
 policy would you recommend? Why? What would selling 
 the retailers direct involve on the part of the manufacturer? 
 Would this be a cheaper method than the advertising cam- 
 paign? Would it be advisable to advertise extensively and 
 also sell the retailers direct? 
 
 6. Suppose this manufacturer writes the jobbers a courteous letter 
 
 explaining the situation and telling them that unless they in- 
 crease their sales of his product that it will be necessary for 
 him to sell the retailer direct. Would it be possible for the 
 
142 MARKETING 
 
 Jobbers to increase the sale of his products. If so, how? 
 Would it be worth their while to attempt to do so in this case? 
 7. A has been a successful retailer of clothing. He has sold his 
 business out for a nice profit and is looking for a, larger field. 
 He is offered a half interest in a well established whpi^sale 
 grocery house. The business is in the hands of an ej^perienced 
 man who is getting old and who desires to turn the manage- 
 ment of the business over to A as soon as A becomes thoroughly 
 familiar with its operation. The firm has for years earned 
 from six to ten per cent, on its capital. A is also offered a 
 large interest and a vice-presidency in a new hardware job- 
 bing concern which is just becoming established and needs ad- 
 ditional capital. No dividends have as yet been earned. The 
 company is in the hands of energetic young men who are thor- 
 oughly familiar with the hardware business. The sales of the 
 two concerns are about equal. Which offer should A accept? 
 Why? 
 
Chapter VI 
 
 WHOLESALE DEALERS {Continued) 
 MODIFICATION OF THE WHOLESALER'S SERVICE 
 
 Specialty salesmen. — The service performed by 
 the jobbers have, within recent years, been modified 
 in several respects. The employment of "specialty" 
 salesmen by the manufacturers is in reality a modi- 
 fication of the jobbers service, although in the gro- 
 cery trade such salesmen are no longer a novelty 
 and are now regarded as a regularly established 
 part of the marketing machinery. The orders ob- 
 tained by the specialty salesmen are sometimes 
 shipped in bulk to the jobber and distributed by him 
 to the retailers. In other instances the goods are 
 shipped direct to the retailers by the manufacturers 
 and are known as "drop shipments." The manu- 
 facturer also makes "drop shipments" to the re- 
 tailers upon request of the jobbers when the latter 
 are out of stock. 
 
 From the latter practice there has grown up in 
 recent years in the Middle West a type of whole- 
 saler known as the "drop shipper," who solicits or- 
 ders from the retail dealers, especially from the 
 medium sized department stores. The goods are 
 shipped direct from the factory to the retailers, or 
 are shipped in car lots to a central point where the 
 
 143 
 
144 MARKETING 
 
 car is opened and the goods forwarded to the buyer 
 in less than car lots.^ 
 
 The wholesalers and the manufacturers have not 
 always agreed concerning the use of specialty sales- 
 men. The manufacturers have often felt that the 
 business obtained by their salesmen was just so much 
 "velvet" for the wholesalers and that the latter 
 should appreciate this help and push the sale of 
 their goods with increased vigor. They have often 
 felt, however, that the jobbers did not push the 
 sale of their goods and only sent in what orders the 
 retailers voluntarily gave them. In some instances 
 the manufacturers have even claimed that the jobbers 
 not only did not push the sale of their goods but 
 actually induced the retailers to cancel orders ob- 
 tained by the manufacturers' salesmen in order to 
 substitute other goods carrying a larger percentage 
 of profit to the jobbers. 
 
 On their side the jobbers have claimed that many 
 of the goods sold by the manufacturers' salesmen 
 were refused by the retailers when delivery was ten- 
 dered. Mr. H. F. Thunhorst, general secretary of 
 the American Specialty Manufacturers' Association, 
 has stated that when this association was organized 
 in 1908 that 55 per cent of the orders could not be 
 delivered largely because the salesmen did not re- 
 quire the retailers to sign the orders, but due to the 
 work of this association the percentage of unde- 
 livered orders has dropped to 20 per cent.^ The 
 
 " Cherington, Paul T. : "The Wool Industry," p. 146. 
 ' Quoted in the Journal of Commerce of May 22, 1920. 
 
WHOLESALE DEALERS 145 
 
 jobbers have also claimed that the gross profit al- 
 lowed by the manufacturers was too small to cover 
 expenses and that it was necessary for them to push 
 higher profit lines of goods. Many of these matters 
 have been adjusted and the relation between the 
 manufacturers and jobbers are better than formerly. 
 On this point Mr. Thunhorst says, "We regret, 
 however, to say that we have not the cooperation 
 of either the jobber or retailer that we are entitled 
 to." 
 
 The I|hiladelphia plan. — In Philadelphia the 
 wholsale grocers were on the verge of elimination 
 due to the growth of the chain stores and of co- 
 operative jobbing organizations which supplied 
 many of the remaining independent retailers. To 
 help meet the situation the wholesalers established 
 a cooperative selling company which offered to do 
 the specialty selling for the manufacturers. The 
 idea was that by using cooperative specialty sales- 
 men and dealing with the manufacturers through 
 this company the wholesalers could profitably sell 
 the retailers on a basis enabling them to meet chain 
 store competition. The plan was soon copied in 
 Buffalo, Boston, St. Louis, Portland, Maine, and 
 other cities. It is reported to have been especially 
 successful in Buffalo and Boston. Some of the ob- 
 jects of the Boston selling company are: To furnish 
 the manufacturers with a large and closely controlled 
 selling force calling on the retail trade frequently; 
 to discourage "missionary" work on goods for which 
 the demand is well developed and which the retailers 
 
146 MARKETING 
 
 will order without solicitation; to discourage jobbing 
 brokers ; and to secure the cooperation of the whole- 
 sale grocery salesmen and the retailer in selling sales 
 company products.^ The plan has been discussed 
 by the Georgia Wholesale Grocers Association, but 
 the proposal was made that they go even further 
 and own chains of retail stores. 
 
 Manufacturing jobbers. — Many wholesalers have 
 entered the manufacturing field and manufacture, or 
 have manufactured for them, a part of the goods 
 sold. Such dealers are called manufacturing jobbers. 
 They may manufacture the goods in connection with 
 their jobbing business, may have separately organ- 
 ized factories, or may have the goods manufactured 
 for them by independent manufacturers. Some job- 
 bers buy unlabeled goods and have their own labels 
 put on the packages. In the purchase of canned 
 goods the jobber often reserves the right to have 
 the goods delivered under his own or under the can- 
 ner's label. It does not seem that jobbers who at- 
 tach their own labels to goods which they buy from 
 various producers or in the open market, should be 
 so classed as manufacturing jobbers, although this 
 is sometimes done. To be so classed the jobber should 
 manufacture the goods in his own plants or should 
 have them manufactured for him under a definite 
 contract and strictly in accordance with his specifica- 
 tions. If a manufacturing jobber can produce the 
 
 ' Winthrop E. Adams, President of Boston Wholesale Grocers 
 Association, quoted in the Journal of Commerce, April 1, 1920. 
 
WHOLESALE DEALERS 147 
 
 goods as cheaply as other manufacturers he can un- 
 dersell the non-manufacturing jobbers or he can 
 realize larger profits on the manufactured goods. 
 Also the demand for the manufactured or private 
 brand goods may be much larger and more widely 
 distributed than the demand for the goods handled 
 on a jobbing basis. For example, F. H. Leggett 
 & Co., may be able to sell their general line of gro- 
 ceries only in the territory tributary to New York 
 City, but their "Premier" salad dressing is sold over 
 a large part of the country, and it is even handled 
 by other jobbers and by chain stores who would not 
 ordinarily buy from this company. In the sale of 
 this salad dressing this company is a manufacturer 
 rather than a jobber. Another example is furnished 
 by Keen Kutter tools, which although the brand 
 of a St. Louis jobbing house are sold throughout 
 the entire country. 
 
 Wholesalers' brands.-r-A very large number of 
 wholesalers have come to have their own brands. 
 When a jobber establishes his own brand he enters 
 into direct competition with the manufacturers. 
 There have been two principal reasons for this step. 
 First, the margin of profit obtainable on the manu- 
 facturers' branded goods, the price of which is often 
 fixed to the consumer, was too small. Second, there 
 has been a marked tendency for the manufacturers 
 with well advertised brands to sell direct to the retail 
 trade. The jobber with his own brand is in a better 
 position to compete with them on an equal basis than 
 jobbers without brands of their own. These condi- 
 
148 MARKETING 
 
 tions have practically forced the jobbers to estab- 
 lish their own brands. 
 
 There Is quite a difference of opinion as to the 
 desirability of the jobbers' brands. No one can 
 object to the jobber putting the label on goods whlch^ 
 he himself manufactures, although the manufacturer 
 may claim that he should not enter the manufactur- 
 ing field. Perhaps little objection should be made 
 to the jobber using his own label on goods manu- 
 factured for him in strict accordance with his specifi- 
 cations and under his direct supervision. The placing 
 of the jobber's label on goods purchased In the 
 open market or on goods not produced under his 
 direct supervision Is, however, a different matter.- 
 
 Desirability of jobber's label. — The jobber claims 
 that his label is a benefit to the consumer as he Is 
 in a position to keep the quality of the product 
 more uniform than an individual producer. He is 
 in a position to do this as he can purchase goods at 
 any place and from any producer and can thus avoid 
 the poor product which an individual producer may 
 at times be forced to turn out due to defective raw 
 materials, labor troubles, etc. This applies with 
 especial force to canned goods which vary in quality 
 from year to year due to the weather In the various 
 canning districts. He may further claim that goods 
 under his brand reach the consumer cheaper than 
 goods of the same quality sold under a manufac- 
 turer's nationally advertised brand for the reason 
 that the latter goods bear a heavy charge for ad- 
 vertising. Some manufacturers ordinarily market 
 
WHOLESALE DEALERS 149 
 
 their product under their own brands, but are willing 
 to sell any surplus product to the jobbers for sale 
 under the latter's brands. Other manufacturers reg- 
 ularly brand only a part of their output and sell 
 the rest to the jobber for sale under the latter's pri- 
 vate brands. In case the manufacturer sells his en- 
 tire output to a jobber the latter may take an 
 unfair advantage of him and upon renewmg the 
 contract may ask for price concessions. If the 
 manufacturer loses the contract by refusing to grant 
 the concessions asked by the jobber he is without an 
 established outlet for his goods and must start at 
 the beginning and build up a market for his product. 
 It is also claimed that as the manufacturer is unknown 
 to the consumer, when his goods do not bear his 
 name, there is little incentive for him to keep up 
 the quality of the product. If true, this mea^is that 
 there is a tendency for the quality of the goods 
 sold under the jobber's label to deteriorate. 
 
 Goods should bear producer's name. — It is im- 
 possible to say from the evidence now available 
 whether the jobber's brand has an effect upon either 
 the price or quality of goods bearing such brands. 
 Without opposing the use of jobbers' brands it seems 
 to the author, that all goods so branded, which are 
 not produced within the jobbers' own plants or un- 
 der their direct control, should bear the name and 
 address of the producer and if produced in the job- 
 ber's own plant the label should so state. The 
 consumer has a right to know where and by whom 
 the goods arc produced and the producer has a right 
 
150 MARKETING 
 
 to have his name on his own goods. This would 
 not interfere with the development of the jobbers' 
 brands as the names of the producers could be rela- 
 tively inconspicuous. This policy is often followed 
 in packing fruits sold under an association label. 
 Each package bears the name and address of the 
 grower. This does not detract from the prestige 
 of the association's brand, but does allow responsi- 
 bility for inferior goods to be properly placed. This 
 same plan has been followed with other products 
 and its use could well be made general with goods 
 marketed under dealer brands. 
 
 THE wholesaler's GROSS PROFITS 
 
 Meaning of gross profit. — In the merchandising 
 business it is customary to consider gross profit as 
 the difference between the cost of goods to the mer- 
 chant and the price for which they are sold. The 
 expenses of conducting the business are deducted 
 from the gross profits and the remainder is the mer- 
 chant's net profit. The public is primarily interested 
 in the gross profit made by the merchant as this con- 
 tributes directly to the selling price of the goods. 
 The merchant, on the other hand, is primarily inter- 
 ested in the net profit as that is what he has left for 
 himself. He is only interested in gross profits as 
 the latter affects the net profits. Gross profits may 
 be expressed as a percentage of sales (selling price) 
 or of the cost of goods sold. The former method 
 seerris now to be the more generally used. Net 
 profits may be expressed in either of these ways or 
 
WHOLESALE DEALERS , 151 
 
 as a return per man, or as a percentage on the in- 
 vested capital. The merchants arc prirnarily inter- 
 ested in the two latter figures as they want to know 
 what they get for their services oyior their capital 
 hazarded in the business. / 
 
 Variation in gross profits. — The gross profits of 
 the wholesalers vary with the nature of the business 
 done, the amount of competition encountered, and 
 the ability of the individual concern. The gross mar- 
 gin of profit necessary in order to make a reasonable 
 net profit depends upon the rapidity with which the 
 capital can be turned, the size of the units dealt 
 in or the value of the individual sales, and the care 
 with which the goods must be handled. The dealer 
 in perishable foodstuffs can turn his capital much 
 more rapidly than the dealer in hardware. A con- 
 siderable part of the advantage gained in this way 
 by the perishable foods dealer is, however, offset by 
 the fact that (due to constantly changing prices) 
 many sales must be made at losses to prevent the 
 goods spoiling. The car lot dealer may turn his 
 capital more rapidly than the dealer handling his 
 goods through a warehouse. The car lot dealer also 
 deals in much larger units than the ordinary jobber. 
 For these two reasons he can operate on a much 
 smaller percentage of gross profit than the whole- 
 salers furnishing warehouse facilities and dealing 
 in smaller lots of goods. 
 
 Wholesale grocers. — The percentage of gross 
 profit made by wholesale grocers has commonly 
 been reported as 10 per cent of sales. As a matter 
 
152 MARKETING 
 
 of fact the percentage varies widely between differ- 
 ent grocers and on different articles. On staples it 
 may be much less than 10 per cent while on special- 
 ties it may be more than 25 per cent.* The typical 
 (modal) gross profit reported by the Harvard Bu- 
 reau of Business Research was 12 per cent in 1916 
 and 1917, llpercentin 1918 and 1919, and 8.8 per 
 cent in 1920. The highest gross profits reported to 
 this bureau by an individual grocer was 17.2 per cent 
 in 1917, 14.9 per cent in 1918, and 18.0 per cent in 
 1919, while the smallest gross profit was 7.7 per cent 
 in 1917, and 6.08 per cent in 1918, and 4.4 per^cent 
 in 1919. The gross profits of a number of large New 
 York and Chicago grocers, as reported by the Fed- 
 eral Trade Commission, for 1916 and 1917, varied 
 from 12.5 to 16.2 per cent. 
 
 Flour jobbers. — The average gross profits of a 
 small number of the car lot flour jobbers in the period 
 from 1914 to 1917 varied from 3.8 per cent in 1915 
 to 6.0 per cent in the first half of 1917. The aver- 
 age gross profits of the small lot flour jobbers during 
 this period varied from 7.8 per cent in the first half 
 of 1917 to 10.2 per cent in 1914. The gross profit 
 of less than car load flour jobbers in New York varied 
 from 4.8 per cent in 1918 to 8.4 per cent in 1914. 
 
 Shoe wholesalers. — The typical gross profits 
 made by 76 shoe wholesalers were equal to 17.6 per 
 
 *The percentage actually realized varies with changes in prices. 
 If prices rise while goods are in stock the profits are increased 
 while if they fall profits are decreased and actual losses may occur. 
 See Chapter XII for a fuller discussion of this point. 
 
WHOLESALE DEALERS 153 
 
 cent of sales in 1914 and 18.4 per cent of sales in 
 1917.' 
 
 THE wholesaler's COST OF DOING BUSINESS 
 
 Variation in expenses. — The Wholesaler's ex- 
 pense of doing business varies with the nature of 
 his business, the efficiency of the individual, and the 
 rapidity of the stock turnover. The specialty car 
 lot dealer commonly has expenses amounting to be- 
 tween 1 and -2 per cent of sales. Fifteen per cent 
 is given as typical for hardware jobbers, 12.75 per 
 cent for the wholesale druggists, and the expenses 
 of hat jobbers run even higher. It must not be as- 
 sumed that the cost of doing business is uniform for 
 all jobbers in a given trade or within a given market. 
 The expenses vary widely from one concern to an- 
 other. This fact should be constantly borne in mind. 
 Average or typical figures are, however, useful for 
 making comparisons and also for memory purposes 
 as all of the variations canot be carried in mind. 
 An average percentage of expenses is also 'useful 
 
 'The Federal Trade Commission in its report on tlie ''Leather 
 and Shoe Industries," presents 17 closely printed pages, showing the 
 gross profits made by individual wholesalers on the various types 
 of shoes handled for the years 1914, 1915, 1916, 1917, and 1918. 
 These profits varied from 0.8 per cent, of sales to 31.8 per cent, of 
 sales in 1914. In 1917 a few losses were reported, the largest being 
 equal to 17.2 per cent., while the profits ranged as high as 43.1 per 
 cent. At the end of this long table a short table is printed showing 
 the average percentages on cost realized on different grades of 
 shoes. These percentages vary from 14.9 to 23.7 in 1914, from 16.2 
 to 24.8 in 1917, and from 18.9 to 26.3 in 1918. The figures given 
 above as typical are the medians of these averages, expressed as 
 percentages of sales. 
 
154 MARKETING 
 
 to the merchants whose expenses are above the aver- 
 age as it warns them that their costs are above the 
 danger line and should be reduced.® 
 
 Wholesale grocers. — ^The large general jobbers 
 have a much higher expense of doing business than 
 the specialty jobbers. The large wholesale grocers 
 in New York and Chicago have a cost of doing busi- 
 ness of from 9j4 to 12j4 per cent of sales. The 
 wholesale grocers in the Tri-State territory (Penn- 
 sylvania, New Jersey and Delaware) report ex- 
 penses varying from 6 to 13 per cent. The average 
 cost of doing business in this territory is slightly over 
 8 per cent of sales, while the typical cost in the South 
 is given at 7 3^ per cent. Many of the smaller gro- 
 cers have a lower cost of doing business. Costs 
 as low as 5 per cent have been mentioned. This 
 does not necessarily mean that the wholesale grocery 
 business is one of increasing costs, but rather that 
 the smaller grocers handle principally the staple 
 goods which can be turned more rapidly, and that 
 they pay less to high priced officials. The author 
 has in mind such a firm in New York. The part- 
 ners come to the store early and spend the morn- 
 ing in filling the orders received the preceding day. 
 In the afternoon they go out as salesmen and call 
 on the retailers. The goods are delivered by hired 
 
 °A case where the dealer ha?* filled to do this was recently 
 called to the author's attention."' A Wmi-jobber of hardware al- 
 lowed his percentage cost of doing busmess to become so large that 
 his bank warned him that if it was not reduced his credit wou^be 
 cut ofiF. If the dealer had watched his percentage of cost it would 
 not have been necessary for an outsider to warn him of his danger. 
 
WHOLESALE DEALERS 155 
 
 truckmen and the only regular employee is a girl 
 bookkeeper. This firm handles little but staple gro- 
 ceries which can be turned rapidly. There are said 
 to be dozens of such firms in New York City. It is 
 easy to see that they have very low operating costs. 
 It is reported that the small wholesale grocers, 
 whether in the cities or rural districts, are getting 
 a larger and larger part of the business in staple 
 groceries. This means that fancy groceries play a 
 relatively larger and larger part in the business of 
 the large city wholesalers. 
 
 As the fancy groceries must be kept in stock 
 longer and be handled with more care the large 
 grocers have a correspondingly larger cost of doing 
 business.' 
 
 The Bureau of Business Research of Harvard 
 University reported the wholesale grocers' common 
 cost of doing business as 9.5 per cent of sales in 
 1 9 1 6, 9. 1 per cent of sales in both 1 9 1 8 and 1 9 1 9, and 
 9.2 per cent in 1920. The lowest cost reported by any 
 of this number was 6.7 per cent in 1916, 6.2 per cent 
 in 1918, and 4.4 per cent in 1919. The highest per- 
 
 ' It has been argued that tht relatively high cost of doing busi- 
 ness of the large grocery firms is due to the fact that their officers' 
 salaries and general warehouse shipping and overhead expenses 
 have increased faster than the sales — in other words, that th« whole- 
 sale grocery business is one of increasing costs or decreasing re- 
 turns. This, however, does not appear to be correct, for the simple 
 reason that in such a highly competitive field the firms which could 
 not hold their costs down would never have lived to become large. 
 The correct explanation seems to be that these large concerns are 
 handling a large percentage of fancy groceries many of which are 
 sold under their own brands. 
 
156 MARKETING 
 
 centages reported were 13.7 per cent in 1916, 14.8 
 
 per cent in 1918, and 14.7 per cent in 1919. These 
 figures covered the operations of over 100 grocers in 
 each of the three years.* 
 
 'These percentages were itemized as follows for 1918: 
 
 Lowest Highest Common 
 
 Item Per cent. Per cent. Per cent. 
 
 Total Salesforce Expense 0.41 4.88 2.2 
 
 Advertising 0.001 2.33 0.04 
 
 Other Selling Expenses 0.001 0.49 0.03 
 
 Total Selling Expense 0.48 7.59 2.4 
 
 Wages Receiving, Warehouse 
 
 and Shipping 0.29 2.88 1.1 
 
 Packing Cases & Wrappings 0.01 0.48 0.05 
 
 Outward fit, etc 0.01 2.2 0.4 
 
 Total Receiving, Warehous- 
 ing & Shipping 0.83 3.09 1.59 
 
 Executive Salaries (as buying)... 0.24 2.66 0.9 
 
 Office Salaries 0.25 1.57 0.7 
 
 Postage & Office Supplies 0.0"3 0.38 0.2 
 
 Telephone & Telegraph 0.01 0.14 0.04 
 
 Credit & Collection Expenses 0.001 0.37 0.04 
 
 Total Interest 0.42 3.29 1.5 
 
 Total Gen. Mgn. & Buying. . 1.19 3.92 2.0 
 
 Rent 0.12 0.94 0.35 
 
 Heat, Light & Power 0.02 0.4 0.06 
 
 Taxes (exemption bids.) 0.01 0.43 0.2 
 
 Insurance (exception bids.) 0.01 0.36 0.15 
 
 Repairs of Equipment 0.001 0.57 0.05 
 
 Depreciation of Equipment 0.01 1.39 0.14 
 
 Total Fixed and Upkeep 1.13 4.27 2.45 
 
 Miscellaneous 0.02 0.5 0.2 
 
 Losses from Bad Debts 0.01 1.71 0.22 
 
 Total Expenes 6.15 14.79 9.1 
 
 From "Bulletin No. 14," of Bureau of Business Research, Har- 
 vard University. 
 
WHOLESALE DEALERS 157 
 
 These costs include outward freight and total 
 payment of interest. These two items are often 
 omitted from expenses, outward freight, being con- 
 sidered a deduction from sales and interest being 
 taken care of from profits. These figures are all 
 taken from grocers who kept their accounts in ac- 
 cordance with a uniform system, or whose accounts 
 could be adjusted to the uniform system. From 
 this fact it is plain that they do not include the small, 
 cheaply operated wholesalers of the type mentioned 
 above. 
 
 Flour jobbers. — ^The average expenses of doing 
 business of a small number of car lot flour jobbers, 
 expressed in percentages of sales, were as follows : 
 1914, 1.6%; 1915, 1.4%; 1916, 1.7%; first six 
 months of 1917, 1.5%. The costs of the small lot 
 flour jobbers, who maintained warehouses and sold 
 in small lots, were much higher. Average percent- 
 ages for a much larger number of small lot flour 
 jobbers were as follows: 1914,6.8%; 1915,5.5%; 
 1916,5.6%; first six months of 1917, 3.5%.' From 
 these figures it can be seen that during this period 
 of rising prices the cost of doing business did not 
 increase nearly so rapidly as the price of flour. 
 
 Produce dealers. — The expenses of many whole- 
 salers and jobbers of fruits and vegetables and of 
 butter and eggs are between 3.5 and 7 per cent, al- 
 though the costs of jobbers dealing in small lots 
 
 ' Report of the Federal Trade Commission on "Flour Milling and 
 Jobbing 1918," p. 17. See also Commercial Wheat Flour Milling, 
 1920, p. 52 
 
158 MARKETING 
 
 may be as high as 10 per cent. The c.„ lot whole- 
 salers have costs of from 1 to 2 per cent. 
 
 Shoe wholesalers. — The average expciises of 52 
 shoe wholesalers was 13.8 per cent in 1914 com- 
 pared with an average expense of 13 per cent for 
 57 wholesalers in 1917.'" 
 
 THE wholesaler's NET PROFITS 
 
 Wholesale grocers. — The common net profit for 
 over 100 wholesale grocers in 1916, as reported 
 by the Harvard Bureau of Business Research, was 
 equal to 2.4 per cent of sales. The largest net profit 
 reported was 7.01 per cent and the greatest loss re- 
 ported was 1.1 per cent. In 1918 the common net 
 profit of the 145 grocers reporting to this bureau 
 was 1.75 per cent, while the largest net profit was 
 4.7 per cent and the largest loss was 0.9 per cent. 
 The common net profit of 159 grocers in 1919 was 
 1.9 per cent, the greatest profit was 5.5 per cent, 
 and the greatest loss was 2.5 per cent. During 1920 
 317 wholesale grocers reported an average loss of 0.4 
 per cent. The large New York and Chicago Whole- 
 sale grocers, during 1916 and 1917, had net profits 
 ranging from 1 to 7 per cent of sales. The average 
 being about 3.5 per cent in 1916 and 4.5 per cent in 
 1917. The percentage of net profits made by these 
 large concerns were greater than were realized by the 
 great majority of wholesale grocers throughout the 
 country. This probably is due to the fact that they 
 
 '" Federal Trade Commission Report on "Leather and Shoe In- 
 dustries," p. 154. 
 
WHOLESALE DEALERS 159 
 
 handle a larger percentage of fancy groceries and 
 goods under their own brands, than most of the 
 smaller concerns. • 
 
 Flour jobbers. — The car lot flour jobbers had 
 average net profits varying from 2.3 per cent of sales 
 in 1915 to 4.5 per cent for the first six months of 
 1917. The net profits of the small lot flour jobbers 
 varied from 2.4 per cent in 1915 to 4.7 per cent 
 during the first half of 1917. The average net 
 profits of New York Flour Jobbers varied from 
 1.4 per cent in 1918 to 3.5 per cent in 1916. 
 
 Shoe wholesalers. — The typical net profits of the 
 wholesale shoe dealers was 3.8 per cent in 1914 and 
 5.4 per cent in 1917." 
 
 Net profits on investment. — ^The percentage of 
 net profit earned upon investment is what the mer- 
 chant is primarily interested in. A merchant would 
 gladly cut his percentage of both gross and net pro- 
 fit on sales in half if by so doing he could increase 
 his stock turnover sufficiently to substantially in- 
 crease the percentage of net profit on Investment. 
 The public Is also interested In the percentage of 
 net profits on investment when It wishes to ascertain 
 ii the merchants have been "profiteering." 
 
 Increase during periods of rising prices. — Dur- 
 ig a period of rising prices there Is a tendency for 
 the increase In rent, wages, and overhead expenses 
 
 " These percentages are the differences between the typical gross 
 profits shown for 76 concerns and the actual average expenses of 
 52 concerns in 1914 and of 57 concerns in 1917. The average per- 
 centages for identical concerns might vary slightly from these 
 figures. 
 
160 MARKETING 
 
 to lag behind the increase in prices. This means that 
 the percentage of expenses on sales tends to decline. 
 If the percentage of gross profit on sales remains sta- 
 tionary the percentage of net profits on sales will be 
 increased. If the expenses of conducting the busi- 
 ness increase as rapidly as prices, the percentage 
 of net profit on sales will be stationary, but the 
 amount of net profits will be increased in the same 
 proportion as the increase in prices. If prices dou- 
 ble the amount of net profit will be doubled. As the 
 capital investment does not ordinarily increase as 
 rapidly as prices, the percentage of net profit on 
 investment is increased. If the amount of net profit 
 is doubled while the investment remains fixed the 
 percentage of net profit on investment will be dou- 
 bled. The opposite tendency operates during pe- 
 riods of falling prices. 
 
 During the war, speaking generally, the percen- 
 tage of net profits realized on sales by all classes 
 of dealers both wholesale and retail, either increased 
 or remained stationary. Declines were the excep- 
 tion. This meant greatly increased percentages of 
 net profits on invested capital. Whether this consti- 
 tuted "war profiteering" is a debatable point. The 
 consuming public very generally felt that it did. On 
 their side the dealers contended that they must make 
 extra profits during a period of rising prices to com- 
 pensate for losses incurred during a period of falling 
 prices. They further contended that their own liv- 
 ing expenses were increased by the rising prices and 
 that interest rates also advanced so that they should 
 
WHOLESALE DEALERS 161 
 
 make a larger percentage of net profit on their capi, 
 tal invested in the mercantile business. These rea- 
 sons, however, scarcely justified some of the profits 
 made during the period of war prices. 
 
 Wholesalers of groceries, shoes, and flour. — Un- 
 fortunately relatively few figures showing the percent- 
 ages of net profit on investment are available. The 
 Federal Trade Commission has, however, published 
 figures showing the percentage of net profits on invest- 
 ment realized by a few large wholesale grocers in 
 New York and Chicago for all or part of 1917 and 
 for 32 shoe wholesalers for 1918 and 1919. The per- 
 centages were as follows for the wholesale grocers: 
 12 months, 14.4 per cent; 10 months, 4.3 per cent; 
 6 months, 15.1 per cent, and 6 months, 10.4 per cent. 
 The shoe wholesalers had average profits of 22 per 
 cent in 1918, and 31 per cent in 1919. The average 
 percentages of net profit realized on investment by 
 the flour jobbers are shown by the following figures : 
 
 Per cent. Net Profit on Investment 
 1914 1915 1916 1917' 
 
 Per cent. Per cent. Per cent. Per cent. 
 
 Car Lot Jobbers 
 
 .. 37.S 
 
 24.3 
 
 31.S 
 
 60.7 
 
 Small Lot Jobbers. . . 
 
 .. 22.1 
 
 21.1 
 
 26.2 
 
 51.9 
 
 ' Six months. 
 
 
 
 
 
 THE FUTURE OF THE WHOLESALER 
 
 Threatened from both sides. — Many predictions 
 have been made that the wholesalers were doomed 
 and would soon be forced out of business. They 
 are threatened from both sides. Manufacturers 
 when they become large tend to build up their own 
 
162 M ARRET WG 
 
 selling organizations and go direct to the retail 
 trade/^ The large retailers also attempt to buy 
 direct' from the manufacturers. The department 
 stores, mail order houses, and chain stores are in a 
 great many instances able to do this successfully. 
 Wholesale grocers. — The recent rapid growth of 
 chain stores, and more recently, the organization of 
 cooperative jobbing houses by the retailers, have 
 threatened the very existence of the wholesale gro- 
 cers. Not only this, but they were faced with the 
 competition of the large Chicago meat packers who 
 were becoming very large factors in the sale of gro- 
 ceries before the agreement was made between the 
 packers and the Federal Department of Justice un- 
 der which the packers agreed to withdraw from the 
 sale of groceries.^^ Yet, in spite of all this compe- 
 tition the number of wholesale grocers does not 
 
 " A recent example is furnished by Proctor & Gamble, manufac- 
 turers of "Ivory" Soap, "Crisco" and other products, who an- 
 nounced in the early summer of 1920 that they would in the future 
 sell their products direct to the retailers. For some years they had 
 sold the retailers direct in the New York metropolitan district but 
 they threw the wholesale grocers into a furor when they an- 
 nounced a similar policy for the entire country. 
 
 "One packing company in 1917 handled $16,000,000. of canned 
 goods or more than twice the amount handled by the two largest 
 wholesale grocers in the country. In this year this same company 
 sold 16,000,000 pounds of rice. The packers were also becoming 
 large factors in the sale of sugar, cereals, cooking fats and many 
 other foodstuffs aside from meats, butter, cheese, eggs, fertilizers, 
 hides, wool, etc. The packers by supplying the retailers direct 
 through their branch houses have in many districts just about 
 forced the wholesalers to stop handling such products as cured 
 meats and lard. The competition of the packers was very hard 
 for the wholesale grocers to meet, due to the fact that the packers 
 
WHOLESALE DEALERS 163 
 
 seem to have been greatly diminished. On the other 
 hand, the number has not grown as it otherwise 
 would have done. The wholesale grocers seem to 
 be holding their ground fairly well, but they appear 
 to be losing relative to the increase in population 
 and the total consumption of groceries. If the 
 chain stores grow as rapidly in the next ten years 
 as they have during the last decade, it would seem 
 that many wholesale grocers would be forced out of 
 business and the sales of others reduced. 
 
 Position in sale of shoes. — The statement has 
 often been made that the great majority of the Ameri- 
 can shoe manufacturers were selling direct to the 
 retail trade. The Federal Trade Commission, how- 
 ever, gathered figures from 730 factories producing 
 over 293,000,000 pairs of shoes in 1917. More 
 than 42 per cent of these shoes were sold to whole- 
 salers or jobbers, 50 per cent were sold to the re- 
 tailers, over 5 per cent were sold through the 
 manufacturers' own retail stores, and 2 per cent were 
 sold direct to the consumers by mail or in other 
 ways. Some of the shoes sold to the wholesalers 
 and jobbers may have been for the export trade, but 
 these percentages show that the wholesalers are still 
 a very important factor In the marketing of shoes. 
 
 often manufactured the goods or bought them from the producers 
 on very advantageous terms and were able to distribute them 
 through their own private cars and branch houses. Prior to their 
 agreement to withdraw from the grocery field many persons were 
 seriously discussing the possibility of a food monopoly. See the re- 
 port of the Federal Trade Commission on the "Meat Packing In- 
 dustry." 
 
164 MARKETING 
 
 Position in sale of hardware. — Over five-sixths 
 of the retail hardware dealers purchase over one- 
 half of their goods from the wholesalers and over 
 one-fourth of them buy over 90 per cent of their 
 goods from the same source." 
 
 Position in sale of drugs. — It is said that the 
 wholesale druggists supply the retailers with 85 per 
 cent of the pharmaceutical specialties. They are 
 also important in the sale of proprietary medicines 
 and other goods sold by retail drug stores.^^ 
 
 Position in sale of dry goods. — It was estimated 
 in 1912 that about one-half of "dry goods" and 
 women's ready to wear clothing was handled by the 
 wholesalers. The jobbers handled considerably 
 more than half of the convenience goods and con- 
 siderably less than half of the shopping lines.^* 
 Stores with sales over $200,000 (pre-war) gener- 
 ally bought direct, but bought many fill-in orders 
 from the jobbers. Stores with sales less than $100,- 
 000 generally bought through jobbers, but often 
 bought some shopping goods direct. The general 
 dry goods jobbers have almost entirely disappeared 
 from the large eastern cities, but their places have 
 been taken by specialty jobbers. 
 
 Position in sale of produce. — The butter and 
 egg wholesalers are threatened by the competition 
 of the large meat pa'ckers, but as yet their number 
 
 "This statement is based on reports of 113 dealers made to the 
 Bureau of Business Research of Harvard University for the year 
 1919. See this Bureau's "Bulletin No. 21." 
 
 '=See "Federal Reserve Bulletin," v. 6, No. 11. 
 
 " Parlin, C. C. : "The Merchandising of Textiles," p. 26. 
 
WHOLESALE DEALERS 165 
 
 does not appear to have been greatly diminished. 
 The independent produce wholesaler has been 
 threatened by the organization of large selling or- 
 ganizations, such, for example, as the General Sales 
 Agency of America. There has also been much talk 
 of direct producer-consumer relations. Yet the pro- 
 duce wholesalers seem to do as large a business as 
 ever. 
 
 Position in sale of farm implements. — Most of 
 the farm implement manufacturers perform the 
 jobbing function themselves through their own 
 branch houses. "All of the large companies sold 
 95 per cent or more of their goods to retail dealers, 
 whereas some of the smaller companies sold more 
 than 50 per cent of their output to jobbers. . . . 
 About 90 per cent of the sales of all (26) com- 
 panies combined were made to (retail) dealers, 2 per 
 cent to the farmers, and the remainder to jobbers."^' 
 
 Wholesalers will continue to be important. — 
 The wholesalers have exhibited a marked endur- 
 ance and in spite of the different kinds of competi- 
 tion and the efforts to eliminate them made by both 
 producers and retailers they are still an important 
 part of the marketing machinery of the country. It 
 appears, however, that even if the number of whole- 
 salers has not decreased that they are handling a 
 smaller percentage of the total merchandise sold in 
 the United States than formerly. If the growth of 
 large producing and retailing organizations con- 
 
 " Federal Trade Commission: "Cause of High Prices of Farm 
 Implements," p. 121. 
 
166 MARKETING 
 
 tinues as rapidly in the future as in the recent past 
 it would seem that the percentage of merchandise 
 handled by the wholesalers must decline still further. 
 In the past, large organizations have been formed 
 for the production or marketing of goods, and yet 
 a large number of small concerns have continued to 
 exist and compete with them. Just as long as there 
 are small manufacturers on one side and small re- 
 tailers on the other some type of wholesale dealers 
 will be necessary. It does not appear that either 
 the small producer or small retailers are going to 
 disappear in the near future. The wholesalers may 
 therefore be expected to remain an important factor 
 in the marketing of merchandise. 
 
 BIBLIOGRAPHY 
 
 Alexander Hamilton Institute: "Marketing and Merchandising,'' 
 
 Part I, chs. 6, 7; Part II, chs. 1, 2, and 3. 
 Butler, Ralph Starr: "Marketing Methods," chs. 11, 12, 13 and 14. 
 
 6. 
 Weld, L. H. D.: "The Marketing of Farm Products," chs. 4, 5, and 6. 
 Cherington, Paul T. : "The Wool Industry," ch. 9. 
 Nourse, E. G.: "The Chicago Produce Market," chs. 2, 3, 4 and 5. 
 Federal Trade Commission Reports: 
 
 "Canned Foods: Vegetables and Fruits," chs. 3 and 4. 
 
 "Canned Foods: Canned Salmon," pp. 28-30. 
 
 "Leather and Shoe Industries," ch. S and pp. 167-169. 
 
 "Cause of High Prices of Farm Implements," pp. 20-29 and 
 120-122. 
 
 "Summary of Meat Packing Industry." 
 
 "Wholesale Marketing of Food,". 
 
 "Flour Milling and Jobbing," 1918, pp. 17 and 18. 
 
 "Commercial Flour Milling," 1920, pp. 51-54. 
 "Harvard University, Bureau of Business Research," Bulletins Nos, 
 
 5, 8, 9, 14 and 19. 
 Douglas, Archer W. : "Merchandising." 
 
WHOLESALE DEALERS 167 
 
 CHAPTER VI— QUESTIONS 
 
 1. What is the Philadelphia plan? What are its advantages and 
 
 disadvantages? 
 
 2. Why have so many jobbers adopted their own brands? Do the 
 
 manufacturers' brands or the jobbers' brands have the highest 
 quality? Which reach the consumer at the lowest price? 
 Which do you favor in your purchasing? 
 
 3. Should jobbers be allowed to place their labels on goods not 
 
 produced under their immediate supervision? Should all pack- 
 aged goods bear the name of the producer? Why or why not? 
 
 4. The Doe Wholesale Grocery Co., is located in a large city and 
 
 has a large trade. Recently, however, the company has noted 
 that the growth of chain stores and co-operative jobbing houses 
 has made it much harder to keep up the volume of sales. There 
 are many consumers' co-operative stores, and company stores 
 organized to sell the employees at slightly over the wholesale 
 prices. These two latter types of stores are anxious to patron- 
 ize the Doe Co., but the latter hesitates to sell them for fear of 
 arousing the ill will of the independent or unit stores who re- 
 gard the co-operative and company stores as " irregular" deal- 
 ers. What policy should the Doe Company pursue? Why? 
 
 5. The Smith Wholesale Dry Goods Company has a prosperous 
 
 business principally with the dry goods stores in the small 
 towns and with the rural general stores. There are several 
 department stores in the larger towns and cities in the terri- 
 tory covered by this concern that buy must of their goods 
 direct from the manufacturers but are willing to buy "fill in" 
 orders from the nearby jobbers. Should this concern solicit 
 this business? Should they accept "fill in" orders when re- 
 ceived? If so, at what price? 
 
 6. A manufacturer of low-priced shoes sells to some 100 whole- 
 
 salers, two salesmen being sufficient to handle the sales. 
 The concern is anxious to increase its sales and considers 
 selling the retailers direct or establishing a chain of retail 
 stores. What does each change involve? 
 
 7. A manufacturer of a line of breakfast cereals and special 
 
 flours has been selling his good? in bulk to wholesale grocers. 
 Recently he put out a line of branded packaged goods. He 
 has also packed goods for the jobbers' under the latters' 
 labels. His- own branded goods have shown encouraging 
 
168 MARKETING 
 
 sales and carry a larger profit than either the bulk goods or 
 those packed under jobbers' labels. He desires to increase 
 the sale of branded goods and considers employing specialty 
 salesmen and advertising his goods extensively. Do you 
 consider this a wise policy? Would it be better to establish 
 his own distributing warehouses in the trritory covered and 
 eliminate the wholesalers? Why or why not? Should he 
 continue to supply the jobbers with goods under their own 
 brands? 
 
Chapter VII 
 THE SALE OF GOODS AT AUCTION 
 
 Private and public sales. — Goods may be sold 
 privately by negotiation between buyer and seller or 
 publicly at auction to the highest bidder. The form- 
 er is the more common and widely used method, but 
 the latter is much more widely used than many peo- 
 ple suppose. 
 
 Goods sold at auction. — ^Auctions of second-hand 
 furniture, antiques, novelties, real estate, and live- 
 stock are very common. Every class of goods from 
 jewelry to railroads is auctioned off at forced sales. 
 Unclaimed freight is auctioned off by the railroads in 
 "old hoss" sales. The laws of many states require 
 that goods sold for charges, or in the settlement of 
 debts under certain conditions be sold at auction. A 
 very considerable part of the oranges, lemons, grapes, 
 bananas, pineapples, grapefruit, boxed apples and 
 some other fruits is sold at auction in the eastern 
 markets. Auction sales are also very important in 
 the sale of live stock, tobacco, furs, carpets, nuts, 
 olives, dried fruits and other articles. 
 
 Decline in auction sales. — The auction method of 
 selling is, however, apparently not as important in 
 the United States as formerly for the sale of raw 
 materials and standard merchandise. The use of 
 
 169 
 
170 MARKETING 
 
 auctions for the sale of such commodities appears 
 to be more general in England than in this country/ 
 
 The auction method of selling was formerly very 
 important in the United States for the sale of both 
 cotton and woolen goods, coffee, tea, cotton, hard- 
 ware, shoes and furniture. Cotton cloth was sold 
 at auction prior to 1816, or almost as soon as our 
 mills were prepared to turn it out in large quantities. 
 This was a common method of selling imported 
 goods, and was applied to textiles of domestic pro- 
 duction. The sale of cotton goods at auction con- 
 tinued in New York until 1897. In 1851, $7,500,- 
 000. worth of dry goods (2-3 foreign and 1-3 
 domestic) were auctioned off in New York. As time 
 passed cloth came to be sold by commission houses 
 and the auctions were used only for the sale of the 
 surplus goods. Due to the rapid changes of styles 
 the mills came to produce less and less surplus stocks 
 of staples during dull periods and with the develop- 
 ment of market organization the auction sales were 
 abandoned. They were revived for a limited use 
 during 1920-21. The sale of coffe, tea and cotton 
 was taken over by the organized produce exchanges. 
 
 Sale of wool at auction. — Wool is sold at auction 
 in many European cities, notably London, Liverpool 
 and Antwerp and in several cities in Australia. The 
 London auctions are the center of the world's wool 
 
 'In 1908 26 per cent, and in 1909 17 per cent of the foodstuffs 
 sold in the Halles Centrales, in Paris, France, were sold at 
 auction. — Federal Trade Commission, "Wholesale Marketing of 
 Food," p. 251. 
 
THE SALE OF GOODS AT AUCTION 171 
 
 trade. The sale of wool at auction was tried in New 
 York in 1894 but failed due to the variation in the 
 quality of American wools, the high handling costs 
 involved in the arrangement, and the poor manage^ 
 ment of the enterprise.' 
 
 Other Products. — Leaf tobacco is sold to the 
 manufacturers by auctioneers for the account of the 
 growers in the tobacco warehouses in the producing 
 sections. Auctions are important in the sale of furs. 
 The St. Louis auctions have been notably important 
 during recent years, the sales at the 1920 auction 
 amounted to over $27,000,000 or over two and 
 a quarter million dollars daily. Over eleven million 
 pelts were sold at the 1921 sales but due to the low- 
 er prices the sales amounted to sightly less than $11,- 
 000,000. The sales at the New York fur auction 
 in April, 1921, amounted to over $2,500,000. The 
 fruit auctions held regularly in the large eastern 
 markets are probably the most important of the 
 wholesale auctions at present held regularly in the 
 United States. The sale of rugs and carpets at auc- 
 tion has been revived. One company sold 174,000 
 bales of rugs and 9,000 rolls of carpet at its three 
 spring auctions in the spring and early summer of 
 1921. Many textile auctions were also held during 
 this period. 
 
 Characteristics of auction sales. — ^The most ap- 
 parent characteristics, of auction sales are that it is 
 open to the public and goods are sold to the highest 
 bidder. Anyone is free to attend and to make pur- 
 
 'Cherington, Paul T.: "The Wool Industry," pp. 66-72. 
 
172 MARKETING 
 
 chases in compliance with the rules under which the 
 sales are conducted. The fact that auction sales are 
 public would indicate that they are the fairest type of 
 sales. This is generally true but all too frequently 
 auctions have been manipulated by artificial bidding 
 by agents of the owner of the goods, or by combina- 
 tions among the buyers.^ 
 
 All prospective buyers should have an opportunity 
 of closely inspecting the goods offered for sale and 
 this is granted in most cases. If this opportunity is 
 not granted the buyers should be suspicious of the 
 goods offered for sale. 
 
 Gives full play to law of supply and demand. — 
 An auction sale is often said to give the freest play 
 to the law of supply and demand and hence to make 
 
 ' An instance of an auction which failed to establish a price 
 based on competitive bidding, and which has been criticised 
 as a ''fake," was that of raisins offered for sale by the California 
 Associated Raisin Co. on August 2, 1920. This company has so 
 nearly a monopoly of the raisin industry in the United States 
 that it has been the object of governmental investigation and 
 prosecution. Apparently to avoid fixing the prices of raisins for 
 the 1920 crop itself, it announced a public auction of 100 cars of 
 loose muscatel raisins to be held in New York City on August 2, 
 to fix the opening price. At this sale 150 cars were sold, 149 
 being bought by an independent raisin packer, in whose interest 
 it was to keep the price of raisins high. The first car was bought 
 by a wholesale grocer, but resold after the auction to the same 
 packer at an advance in price. Nothwithstanding the fact that 
 throughout most of the sale there was only one buyer, the latter 
 bid the price up on himself. See copies of The Journal of 
 Commerce for the last week of July and the first week of 
 August, 1920, especially the issue of August 7, 1920. The Federal 
 Trade Commission in its report on the "Wholesale Marketing 
 of Foods" (pp. 178-180), lists other ways in which auctiont have 
 been criticised for certain practices. 
 
THE SALE OF GOODS AT AUCTION 173 
 
 sales at exactly the prices dictated by this law. The 
 amount of goods for sale is known and competition 
 between the buyers is supposed to measure the de- 
 mand. As a matter of fact, however, demand seems 
 to be relatively more important at auction sales than 
 at private sales. An article is offered for sale — if 
 several want it and competitive bidding starts the 
 price will be forced up perhaps to an unreasonable 
 height. On the other hand if there is only one bid- 
 der he may buy the article for a song. This appears 
 to lead to widely fluctuating prices, which are in 
 many respects undesirable. There is always the pos- 
 sibility of the buyers uniting and refusing to bid 
 against each other. In such a case the owner of the 
 goods may be justified In bidding in his own goods. 
 In order to be successful there should be keen bid- 
 ding among the buyers and this element of competi- 
 tion is one of the chief characteristics of most auc- 
 auction sales. There should also be no withdrawal of 
 goods by sellers nor bidding in of their own offerings. 
 
 Auctions contrasted with sealed bids. — In many 
 ways an auction resembles the sale of goods to the 
 one submitting the highest sealed bid. In both cases 
 sales are made to the highest bidder and every one is 
 free to bid. There are, however, two important differ- 
 ences. First, the sealed bids are not public, and, sec- 
 ond, crowd psychology is lacking. The public bidding 
 and the crowd psychology are two of the chief char- 
 acteristics of auction sales. 
 
 Goods sold "as is." — Most goods sold at auction 
 are sold "as is" and the buyer has no recourse if he 
 
174 MARKETING 
 
 finds the goods not as good as he had supposed or if 
 he finds a defect in the goods not known at the time 
 purchased. An auction sale is a sale where the term 
 caveat emptor (let the buyer beware) fully applies. 
 At times goods are sold by sample or grade but gen- 
 erally the buyers have the right of carefully inspect- 
 ing the goods before bidding. 
 
 Establishment of price. — An auction sale is the 
 best way of selling goods for which there is no estab- 
 lished market or no ready guide as to value, as for 
 example, paintings or old furniture. The auction is 
 often resorted to for the sale of goods which must be 
 sold quickly and for which there is no well establish- 
 ed market price. This often means that such goods 
 are sold at a sacrifice but if two or more buyers want 
 the goods a very fair price may be received. In fact, 
 when two persons start to bid on the same article 
 their desire to outdo each other, or the fact that they 
 dislike to be outdone in public, may lead them to bid 
 the price above the fair market value. On the other 
 hand if bidding is not keen, goods may be sold very 
 cheaply. This hope of picking up bargains is in fact 
 one of the chief factors in bringing many people to 
 the auctions. 
 
 Formerly the prices of several staples were deter- 
 mined at auction, as is still the case in England and 
 Australia with wool, but as a rule auctions have been 
 replaced in the United States by the organized pro- 
 duce exchanges which seem to be better adapted for 
 this function. The auction is, however, a quick and 
 cheap way of selling more or less standardized goods 
 
THE SALE OF GOODS AT AUCTION \1S 
 
 at wholesale and is still largely used for the sale of 
 fruit. 
 
 The fruit auctions. — There are some twenty fruit 
 auctions in the United States, important ones being 
 located as follows:- New York, four; Chicago, two; 
 Boston, two; Philadelphia, Baltimore, Pittsburgh, 
 Cincinnati, Cleveland, Detroit, St. Louis, Kansas City, 
 Buffalo and Columbus, one each. Some fruit is sold 
 at auction in other cities e. g., Minneapolis, St. Paul, 
 New Orleans, Toledo Milwaukee and Denver.* 
 
 All but one of these are located in the East or 
 Middle West. Some of them handle other things 
 besides fruit, but fruit makes up the bulk of their 
 sales. 
 
 The kinds of fruit sold vary slightly from one 
 auction to another, but the principal kinds are: or- 
 anges, lemons, limes, grapefruit, grapes, bananas, 
 pineapples, and boxed apples. Most of the boxed 
 apples come from the far west. The other fruits 
 sold come principally from California, Florida or 
 foreign countries. 
 
 Graded vs. ungraded fruits. — Most of the fruit 
 sold by the auction companies is carefully graded. 
 In New York goods are sometimes auctioned from 
 sample without the buyer having an opportunity of 
 inspecting the entire lot. As a rule, however, the 
 buyers have the opportunity of inspecting each ship- 
 ment carefully and are not forced to buy by sample. 
 Advocates of the auction method of selling claim 
 
 'Information furnished by Mr. C. R. Hector, Manager Union 
 Fruit Auction Co., Pittsburgh. 
 
176 MARKETING 
 
 that the buyers have as good an opportunity of in- 
 specting the fruit as if it were purchased at private 
 sale and in most instances this seems to be true. A 
 common rule of the auctions is that all goods are 
 bought "as is" and that the buyer has no recourse if 
 he finds the goods are of poorer quality than he 
 thought when bidding. For this reason many claim 
 that only goods graded strictly according to recog- 
 nized standards can be successfully sold at auction. 
 On the other hand advocates of the auction method 
 of selling argue that this is not necessary as the buy- 
 ers have the same opportunity of inspecting the goods 
 sold at auction as the goods sold privately and that 
 they could buy goods, not carefully graded just as 
 safely at auction as at private sale. It is argued that 
 the eastern fruits and vegetables, which are not 
 usually as carefully graded as the western fruits, 
 could be successfully sold at auction. This might be 
 true if the system were once generally established but 
 several attempts to sell such fruits and vegetables at 
 auction have failed for reasons which will be dis- 
 cussed later. 
 
 Large volume of sales. — The business done by 
 many of these auctions is quite large. Three 
 New York auctions sold at pre-war prices about 
 $25,000,000 worth of goods yearly. At this writ- 
 ing the combined offerings of three auctions often 
 amount to over 100 cars daily and more than 200 
 cars are frequently advertised. All of the auctions 
 do not do as large a business as those in New York, but 
 it is not uncommon for the auctions located in other 
 
THE SALE OF GOODS AT AUCTION 111 
 
 large cities to sell 20 or 30 cars of fruit within a 
 few hours. In order to sell so rapidly the buyers 
 must buy in relatively large quantities and the var- 
 ious auctions have rules fixing the minimum quantity 
 that can be purchased. The Union Fruit Auction in 
 Pittsburgh, for example, fixes 20 packages as the 
 minimum for all goods except lemons for which the 
 minimum is 10 packages." 
 
 This rule in practice limits the buying to dealers 
 or to very large consumers. The time required to 
 attend these sales is so great that the buyers are gen- 
 erally limited to the wholesale dealers and a few of 
 the larger retailers. It is not uncommon, however, 
 for the large retailers to employ a broker to buy for 
 them or for several small dealers to pool their inter- 
 ests and have one of their members attend the sales 
 and buy for the entire group. As a rule anyone is 
 free to buy at these auctions and a credit for a short 
 period (e. g. 10 days) is extended to the buyers. 
 Unknown or unreliable buyers must pay cash. As 
 such fruit is ordinarily sold within a few hours or at 
 most within a few days after its purchase it is evi- 
 dent that the buyers need little or no capital of their 
 own. 
 
 Rates of commission charged by the fruit auc- 
 tions. — These auction companies charge the sellers 
 a commission on all sales made. The rates vary 
 
 ■ If often happens, however, that a small lot or "line" is re- 
 ceived in a car or that less than 20 packages of a large lot or 
 "line" is left after the former buyers take what they want. In 
 such cases these goods must be sold in less than the specified mini- 
 mum quantities. 
 
178 MARKETING 
 
 somewhat In the different cities and the rates charged 
 by a certain auction company may vary between dif- 
 ferent classes of goods or between different sellers. 
 The rates of commission vary from one per cent to 
 four or five per cent but the common rates are from 
 one and a half to two and one half per cent of the 
 sale price. In addition, some fruit auction companies 
 make an extra terminal or delivery charge of three 
 to five cents a package. 
 
 Services performed by the fruit auctions. — On its 
 part the auction company arranges the fruit by 
 brands for inspection, prints the catalogs, conducts 
 the sale, collects, and remits the proceeds to the 
 sellers. In some cities the fruit is also unloaded 
 from the cars by the auction companies. 
 
 Ownership of fruit auctions. — The auction com- 
 panies are generally owned by men in the trade and 
 operated for profit. The success of an auction de- 
 pends upon the ability to obtain large offerings of 
 well known brands of fruit and to attract large num- 
 bers of buyers. The affiliations of the auction com- 
 pany with the large dealers in the market is very im- 
 portant. Competition between the large dealers 
 interested in an auction company and others who are 
 not interested in it has often resulted in keen 
 rivalries to throw business to the auction or to 
 keep business away from it. In certain instances such 
 rivalries have led to the establishment of competing 
 auctions. The buildings in which the auction sales are 
 held in some cities are furnished rent free by trans- 
 portation companies. When the amount of business 
 
THE SALE OF GOODS AT AUCTION 179 
 
 transacted and the rates of commission charged are 
 considered it is commonly believed that many of the 
 auction companies earn very handsome profits on their 
 investments. 
 
 Suggestions for extension of auction sales. — The 
 fruit auctions have attracted considerable attention 
 among students of marketing. Some students have 
 been so impressed by the success of these auctions 
 that they have advocated their extension to other 
 commodities especially other fruits and vegetables. 
 A wholesale market operating at a cost of from 11-2 
 to 2 1-2 per cent, as many of the fruit auctions do, is 
 undoubtedly an economical selling method. It is 
 true that this does not cover the entire wholesale 
 marketing cost at present as the auction companies 
 do not ordinarily act as consignees so that the out 
 of town sellers must have local agents or representa- 
 tives to look after their interests. Further, the auc- 
 tions do not ordinarily place the fruit in the hands 
 of the retailers and a great deal of it must pass 
 through the hands of the wholesaler or jobber between 
 the auction company and the retailer. It is, however, 
 argued that the auction company could act as con- 
 signee for goods and remit the proceeds directly to 
 the country shipper and that slight changes in the 
 rules would allow the retailers to buy their goods 
 at auction. 
 
 Proposal for government supervision. — Some go 
 even further and say that the auctions should be 
 under government supervision, or that a public 
 representative should be present to whom growers 
 
180 'marketing 
 
 or dealers could consign their goods with the 
 assurance of getting a square deal and receiving the 
 actual market price on the day of the sale. There have 
 been a great many instances of growers being unable 
 to find a satisfactory market for their produce and 
 the suggestion of publicly supervised auctions^ to 
 which they, or the local buyers, could consign goods 
 at any time and feel assured of receiving the actual 
 market price, less a very small commission is worth 
 careful study and serious consideration. It must not 
 be supposed, however, that such auctions could re- 
 ceive small lots of ungraded goods directly from the 
 farmers for the sale of such goods would destroy the 
 economy of the auctions and defeat the purpose of the 
 plan. Neither must it be supposed that such auctions 
 would always assure the country shippers of a profits 
 able outlet for their goods. In case of a large supply 
 or a glut in the market, such goods might often sell 
 for less than the transportation costs. The yield of 
 fruits and vegetables is so dependent upon the wea-i 
 ther that there is apparently no way of accurately ad- 
 justing the amount grown to the needs of the city pop- 
 ulation at all times. Some improvement over the 
 present system which allows goods to rot on the farm 
 for lack of a market while the city consumers are pay- 
 ing high prices for similar goods should be possible. 
 The suggestion for publicly supervised auctions should 
 be seriously studied in this connection. The auctions 
 should be operated in connection with the central 
 wholesale markets discussed in Chapter II in case 
 these central markets are established. 
 
THE SALE OF GOODS AT AUCTION 181 
 
 A cheap method of selling. — Those advocating 
 the extension of the auction system are impressed by 
 the economy with which sales are made. Selling 
 goods at a cost of lj4 to 2>4 per cent is in reality 
 cheap. This low cost is made possible by the econ- 
 omy in the number of salesmen required. One auc- 
 tioneer can sell as many goods as a dozen or so sales- 
 men could at private sale. 
 
 Is the auction method a cheap way of buying ? — 
 The auction is a cheap method of seUing, but is it a 
 cheap method of buying? Purchasing at auction re- 
 quires a large amount of time on the part of the buy- 
 ers. At private sale the buyers can visit several deal- 
 ers, compare their prices and purchase an assortment 
 of fruits in a relatively short period of time, or can 
 order by telephone, while if purchases are made 
 at auction they must sit through a large part of the 
 session which may last for several hours. As fruits 
 must be bought almost daily this is a factor to be 
 reckoned with. It is evidently impractical for the 
 ordinary retailer to buy on the auction. He cannot 
 leave his store long enough. He must buy from 
 wholesalers or jobbers whose salesmen call on him 
 or with whom he can place his order by telephone, 
 or he must employ agents or brokers, to buy for him. 
 The only practical way for the small dealers. to buy 
 at auction is to employ brokers or agents who attend 
 the sales. These brokers must be paid a commission 
 of say one or two per cent or a few cents a case. Even 
 so this may be a cheaper method of distribution than 
 is now furnished by the present wholesale system. 
 
182 MARKETING 
 
 The auction's commission plus the buying broker's 
 commission together would only amount to 3 or 4 per 
 cent which is less than the present cost of supplying the 
 retailers. At any rate the suggestion for the ex- 
 tension of the auction system under conditions 
 allowing the free consignment of goods by country 
 shippers is worth careful study. In all such studies 
 the interest of the buyers as well as the sellers 
 should be considered. It seems that one reason why 
 the activities of the auction companies have not 
 grown more rapidly is the fact that the buyers will 
 not attend the sales if they can obtain desirable goods 
 as cheaply at private sale. In other words, other con- 
 ditions being equal, the buyers prefer to buy pri- 
 vately, and not take the time to attend the auctions. 
 Commodities adapted to sale at auction. — Those 
 advocating the extension of the auction method of 
 selling want it extended to the sale of all kinds of 
 fruits and vegetables (and some to many other com- 
 modities). To the layman it appears that bulk ap- 
 ples, sweet potatoes, and cucumbers are just as well 
 adapted to sale at auction as boxed apples, oranges, 
 and grapefruit. He can see no inherent difference in 
 the nature of these products. The opinions of the 
 men in the trade differ on this point. Some claim 
 that all fruits and vegetables could be successfully 
 sold at auction while others contend that this is en- 
 tirely impractical. The latter argue that vegetables 
 and eastern fruits are not standardized sufficiently 
 to permit their successful sale at auction for the rea- 
 son that the buyers can form no accurate idea of the 
 
THE SALE OF GOODS AT AUCTION 183 
 
 quality of the entire shipment from the inspection of 
 a sample or of a few packages. For example, 
 the Pittsburgh auction started to sell barreled apples 
 but the attempt was reported a failure due to the fact 
 that the barrels were "topped off". The auction ad- 
 vocates, however, reply that the buyers at auction 
 have as good an opportunity of inspecting the goods 
 sold at auction as the goods sold privately and can 
 buy ungraded goods just as safely at public as at pri- 
 vate sale. The buyers of the "topped off" apples 
 might have been "stung" just as badly if they had 
 bought goods privately from a wholesale dealer 
 (unless the dealer would allow a rebate) . Those op- 
 posed to extending the auction sales advance other 
 arguments, as for example, that the receivers often 
 do not have sufficient notice of the arrival of eastern 
 goods to allow the mimeographing of a catalog, or 
 that such goods are often received in such poor con- 
 dition that they must be sold immediately on ar- 
 rival and cannot wait their turn at auction. To such 
 arguments the auction advocates reply that in such 
 cases the auctioneer could go up and down the plat- 
 form or track and sell the goods direct from the car 
 doors. 
 
 It is pointed out that the attempts to sell barreled 
 apples, cantaloupes and other vegetables at auction 
 have generally proved failures and that the sale of 
 butter and eggs at auction in New York was discon- 
 tinued. If such products were sold exclusively at 
 auction the results very probably would have been 
 different. Nothing hurts a livestock auction more 
 
184 MARKETING 
 
 than to sell a few animals privately in advance of 
 the "sale." Buyers do not care to bid on left overs 
 and successful auctioneers often refuse to sell any 
 animals in advance of the auction. When surplus 
 vegetables are sold at auction the result could not be 
 expected to be the best and when new products are 
 offered at auction it naturally takes sometime to ac- 
 custom the buyers to the new methods. If all fruits 
 and vegetables were sold in this way the buyers 
 would take it as a matter of course. The question 
 is first, is such a change desirable and if so how can 
 it be best accomplished. 
 
 Effect of auction sales on prices. — There is a dif- 
 ference of opinion as to the effect of auction sales 
 on prices. Some contend that they lead to higher 
 prices while others argue just as strongly that they 
 lead to lower prices. Sellers can be expected to sell 
 in the way that they think nets them the highest price. 
 Some large dealers regularly have their goods sold at 
 auction while others regularly sell their goods priv- 
 ately. Still others use both methods; selling priv- 
 ately or at auction as seems desirable from time to 
 time. The California Fruit Growers Exchange, 
 with its highly developed selling organization, uses 
 the auctions in some cities while in other cities it sells 
 its fruit privately to the wholesale dealers. From 
 these facts it seems that the auctions have no marked 
 effect in either raising or lowering prices. 
 
 Fluctuating prices. — Another view is that the 
 auctions do not Influence the average prices but that 
 they lead to highly fluctuating prices. Auctions give 
 
THE SALE OF GOODS AT AUCTION 185 
 
 full play to the law of supply and demand. If the 
 supply is small and the demand strong prices soar. On 
 the other hand, if the supply is large and the demand 
 only moderate, prices slump. As one dealer express- 
 ed it he wouldn't have the nerve to ask the prices 
 sometimes received at auction. Following out this 
 idea it is contended that in times of scarcity the buy- 
 ers bid up the prices so high that the consumption 
 declines which causes a slump in prices with resultant 
 loss to both dealers and growers. 
 
 With auctions in operation outside prices tend to 
 follow the prices established at auction but it is ar- 
 gued that if the auctions did not exist prices would 
 not be subject to such wide and frequent fluctuations, 
 which are detrimental alike to the interests of grow- 
 ers, legitimate dealers, and consumers. Information 
 is not available to definitely prove that auctions do 
 increase the fluctuations in prices but the evidence 
 points that way. There are many advantages to 
 staple prices. Although the prices of perishable 
 foods must change frequently it seems that greater 
 stability, and not greater variation is what is need- 
 ed. The argument that auctions increase price fluc- 
 tuations seems to be the strongest argument that has 
 been made against this type of sales. 
 
 BIBLIOGRAPHY 
 
 Hartman, Heriry A.: "Experiences of an Auctioneer," American 
 
 Magazine, September, 1920. 
 Nourse, E. G.: "The Chicago Produce Market," pp. 17-18; 32-38. 
 Copeland, Melvin T.: "Cotton Manufacturing Industry in the 
 
 United States," p. 198 ff. 
 
186 MARKETING 
 
 Huebner, Grover C: "Agricultural Commerce," pp. 21-22 and 
 
 230-233. 
 Cherington, Paul T.: "The Wool Industry," pp. 66-72. 
 Weld, L. H. D.: "Marketing of Farm Products," Chapter 7. 
 Federal Trade Commission: "Wholesale Marketing of Food," 
 
 pp. 178-180. 
 
 CHAPTER VII— QUESTIONS 
 
 1. What are the characteristics of auction sales? 
 
 2. What can you say of the efficiency of the auction as a method 
 
 of selling goods? 
 
 3. Why was the sale of cotton, coffee, tea, and textiles at auction 
 
 discontinued ? 
 
 4. What are the disadvantages of the auction from the stand- 
 
 point of the buyers? 
 
 5. What effect do auction sales have on prices? Discuss. 
 
 6. Would it be advisable to make the auction method of selling 
 
 general for the sale of staple goods not handled by produce 
 exchanges? Explain your ansvfer. 
 
 7. A cooperative association of apple growers has adopted brands 
 
 and expects to hold the growers strictly to definite standards. 
 The apples are shipped in both boxes and barrels. In good 
 years the association will have several hundred cars for sale. 
 What will be the advantages of selling direct to wholesalers, 
 of consigning to commission men, and of having the goods sold 
 at auction? 
 
Chapter VIII 
 
 ORGANIZED PRODUCE EXCHANGES AND 
 THE QUESTION OF SPECULATION 
 
 Controversy Over the Produce Exchanges. — 
 The usefulness of the produce exchanges and the de- 
 sirability of their operations have been the subject of 
 a bitter controversy. Many students of economics 
 and business methods have pronounced the exchanges 
 to be one of the most efficient, if not the most effi- 
 cient, marketing method yet devised. Mr. Herbert 
 Hoover has said: "It is worth an exhaustive na- 
 tional investigation to determine whether an exten- 
 sion of a system of central markets would not afford 
 great help.^ 
 
 Spokesmen for the grain farmers on the other 
 hand, often denounce them. "The Chicago Board 
 of Trade, as now conducted, is the world's greatest 
 gambling institution." "No more infamous piracy 
 has been attempted or perpetrated on the much vic- 
 timized nation than the present bear raid in the Chi- 
 cago grain pit.'" The idea of those having such opin- 
 ions seems to be that the traders on these exchanges 
 unite in agreements to manipulate the market in such 
 a way as to depress the prices and hence to injure the 
 
 'Writing in Saturday E-vening Post of April 10, 1920. 
 
 " Senator Artliur Capper, of Kansas, quoted in the Neia York 
 Times of December S, 1920, and the "Nation's Business of De- 
 cember," 1920. 
 
 187 
 
188 MARKETING 
 
 farmers. It is the purpose of this chapter to explain 
 briefly what the exchanges are, how they operate, and 
 how their operations effect the prices of the com- 
 modities dealt in. 
 
 What are the produce exchanges? — ^A produce 
 exchange is an organization of dealers' in certain 
 commodities, which provides a market place where 
 the members meet at definite times and transact busi- 
 ness under the rules laid down by the organization. 
 In addition to providing a trading place and regulat- 
 ing the business dealings of its members a produce 
 exchange generally provides a method for settling 
 trade disputes, establishes uniform grades for the com- 
 modities dealt in, and gathers and distributes market 
 information. The exchange itself has no dealing in 
 the commodities handled by its members. Its func- 
 tion is simply to provide facilities for the transaction 
 of business and to regulate the business dealings of its 
 members. The member who does not obey the rules 
 of the exchange is subject to expulsion. Most of the 
 produce exchanges in the United States are corpora- 
 tions, incorporated either under the general corpora- 
 tion laws, or under special acts of the State Legisla- 
 tures. A few are voluntary associations.* 
 
 ^ Dealers as here used includes brokers and manufacturers. 
 
 'Duncan seems to consider all organized markets as exchanges. 
 He so considers auctions, stock yards, municipal markets, etc. 
 See Duncan, C. S.: "Marketing," ch. 7. The cooperative market- 
 ing organizations of farmers, discussed in a later chapter, are 
 often called exchanges. The author, however, considers only 
 definite organizations having regular places of business, where 
 the members make sales by grade or sample under definite rules 
 as organized produce exchanges. 
 
EXCHANGES AND SPECULATION 189 
 
 As stated above the members of exchanges are 
 dealers. They sell goods for country elevators, term- 
 inal elevators, country merchants, warehouse or any 
 one else who has goods for sale. They buy goods for 
 exporters, millers, manufacturers, or any one else 
 who wants to buy in large quantities. Owners of 
 large elevators, exporters, and manufacturers are 
 very frequently members of the exchanges so that they 
 can buy their own supplies and save the brokers com- 
 missions. These commissions are however, very 
 moderate as was pointed out in the chapter on Brokers 
 and Sales Agents. 
 
 Exchanges vs. auctions. — in some respects a pro- 
 duce exchange resembles an auction. In both goods 
 are offered for sale and may be bid for by those pres- 
 ent. In an auction the article goes to the highest 
 bidder unless the seller reserves the right to reject 
 all unsatisfactory offers. In an exchange there is 
 no obligation upon the owner or his broker to sell 
 at any price below the one at which the goods are 
 offered. In an auction the auctioneer does all the 
 selling while on an exchange any member is free 
 to make sales. Auctions and exchanges both may 
 deal in graded or ungraded articles but the exchanges 
 much more commonly deal in graded goods, for 
 which there is a world price. The auction is open to 
 the public while the exchanges is closed to all but its 
 own members as far as trading is concerned. Busi- 
 ness on the exchanges is carried on under much 
 stricter rules than on the auctions. This explains why 
 outsiders are not allowed to buy or sell on the ex- 
 
190 MARKETING 
 
 changes — they must limit trading to absolutely 
 responsible parties as all contracts must be scrupulously 
 fulfilled. , Auctions ordinarily deal only in "spot" 
 goods while exchanges often deal in both "spots" and 
 "futures," "futures" making up a large part of the 
 business of some exchanges. 
 
 History of produce exchanges. — ^The produce ex- 
 changes developed from the old markets and fairs. 
 For centuries sales were made after the buyer had in- 
 spected the goods. As long as actual inspection of 
 the goods was necessary business had to be transacted 
 where the goods could be assembled. Some two or 
 three centuries ago buying by sample became common 
 and the markets were moved into nearby inns or 
 cafes. From such locations it was logical for the 
 dealers to provide their own assembly place and to 
 exclude those who did not observe the established 
 rules in conducting business. Produce exchanges 
 are known to have existed in the sixteenth century. 
 In the United States organized prodjice exchanges 
 date back to the middle of the last century. The 
 Chicago Board of Trade was organized in 1848, 
 before a railroad had reached the city, and incor- 
 porated in 1859. The New York Produce Exchange 
 was organized in 1850 and incorporated in 1862. 
 The St. Louis Merchants Exchange assumed the 
 function of an exchange in 1854. The Milwaukee 
 Chamber of Commerce was granted a charter in 
 1868. The Kansas City Board of Trade was 
 organized in 1869 and the Minneapolis Cham- 
 ber of Commerce in 1881. The New York Cotton 
 
EXCHANGES AND SPECULATION 191 
 
 Exchange was organized in 1870 and the New 
 Orleans Cotton Exchange in 1871. 
 
 Some important exchanges. — The Chicago Board 
 of Trade and the Liverpool Corn Trade Association 
 are two very important grain exchanges, although 
 practically every large city in the United States and 
 many of those in other countries has its exchange. 
 The exchanges in Minneapolis, Winnipeg, and Lon- 
 don should also be mentioned. The New York. 
 Cotton Exchange, the New Orleans Cotton Ex-^ 
 change, and the Liverpool Cotton Association are 
 important exchanges for the sale of cotton. The 
 Chicago Butter and Egg Board and the New York 
 Mercantile Exchange are important in the sale of 
 butter and eggs. The Elgin Butter Board was for- 
 merly very important and for years the price of 
 butter established there was used as the basic price 
 throughout the country. This Board, however, fell 
 into disuse and was finally discontinued. ' There are 
 butter and egg exchanges in many cities but for the 
 most part they are only local markets. Ninety-seven 
 per cent of the coffee imported into the United States 
 passes through the Coffee Exchange of the City of 
 New York.' Sugar exchanges are located in New 
 York and New Orleans. The New York Produce 
 Exchange is an important exchange due to the num- 
 ber of different commodities sold upon its floor. 
 
 Commodities handled. — Some of the exchanges 
 provide facilities for dealing in only one commodity. 
 This is the case with the New York Cotton Exchange 
 
 'Duncan, C. S.: "Marketing," p. 14S. 
 
192 MARKETING 
 
 and the New Orleans Cotton Exchange. The Min- 
 neapolis Chamber of Commerce, the Duluth Board 
 of Trade, and the Kansas City Board of Trade han- 
 dle little but grain. On the other hand members of 
 the many exchanges deal in a variety of products. 
 The Chicago Board of Trade has four pits for fu- 
 ture trading where wheat, corn, oats, and provisions, 
 e. g. lard, ribs, pork — are dealt in. A large number 
 of products are dealt in by the members of the New 
 York Produce Exchange — grain, flour, hay, lumber, 
 naval stores, oils, tallows, greases, vinegar, dried 
 fruits, beans, etc., etc., but trading is generally only 
 in wheat.® The members of the Boston Fruit and 
 Produce Exchange deal in fruits, vegetables, butter, 
 cheese, eggs, provisions, poultry, game, groceries, 
 fish, etc' 
 
 Spot vs. future sales — The business on the pro- 
 duce exchanges may be divided into "cash," or 
 "spot" transactions, involving prompt delivery and 
 acceptance of the goods sold; and "futures," or 
 contracts involving future sales or purchases for de- 
 livery and acceptance at some specified time in the 
 future. Cash sales may be made from sample or by 
 grade. Tables are provided by most exchanges for 
 the display of samples and around these tables buyers 
 and sellers meet and carry on their business. The 
 exchange primarily provides a meeting place for 
 buyers and sellers but it also prescribes rules for the 
 
 'Carhart, E. R.: "The New York Produce Exchange," Annals 
 of Am. Acad, of Pol. & So. Sc, Sept., 1911. 
 
 'Weld, L. H. D.: "The Marketing of Farm Products," p. 265. 
 
EXCHANGES AND SPECULATION 193 
 
 conduct of business, provides machinery for the set- 
 tling of all trade disputes, and insures both buyer 
 and seller that they are dealing with responsible 
 parties. The exchange thus has advantages over the 
 old market places. The exchanges were organized 
 to facilitate the conduct of cash sales, future trading 
 being introduced comparitively recently. Future 
 trading in grain started on the Chicago Board of 
 Trade during the Civil War. Very little future trad- 
 ing is done on the smaller exchanges. The smaller 
 exchanges may simply conduct daily "calls." At a 
 specified time the members meet in the exchange 
 room. Information as to prices on the larger ex- 
 changes, receipts and visible supplies is posted. The 
 presiding officer calls for offerings which may be 
 posted on a blackboard. Members bid on the offer- 
 ings and whenever the price bid is as high as the price 
 asked a sale is made. If the price bid is below the 
 offered price no sale is made. For example a seller 
 may offer to sell a car of a certain grade of eggs at 
 60 cents a dozen. Another member may bid 58 cents. 
 No sale is made. The seller may then reduce his 
 price to 59 cents. If the bid is raised to 59 cents 
 a sale is made but if the bid is not raised no sale 
 is made unless the seller further reduces his price. 
 On these smaller exchanges it often happens that few 
 sales are made, the members coming together to find 
 out what the other members have for sale, what 
 other members want to buy and what the price tend- 
 ency is. When the "call" is completed for offerings 
 of all the commodities dealt in and for bids or in- 
 
194 MARKETING 
 
 quiries for any goods not offered by sellers, the meet- 
 ing is adjourned and the members retire to their 
 offices and stores where most of the actual business 
 is transacted. 
 
 It would seem that no valid objection could be 
 made to the cash business done upon the exchanges. 
 It certainly appears better to have such sales con- 
 ducted publicly under definite rules than privately 
 under no regulations. The belief, however, became 
 common a few years ago that the members met on 
 these exchanges and arbitrarily fixed prices. For this 
 reason the government intervened and ordered any 
 such practices stopped as they are held to be illegal. 
 The prices reported at present are the prices at which 
 actual sales have been made. The number of sales 
 made on many of the smaller exchanges is so small 
 that representative prices cannot be said to be estab- 
 lished and the local market quotations must be based 
 on private sales reported by the dealers. Aside from 
 the belief current at times that arbitrary prices were 
 fixed no* real objection has been made to the cash or 
 spot business of the exchanges. Real objection is, 
 however, made to future sales for It is the future 
 sales that most frequently involve the question of 
 speculation. The controversy about the produce ex- 
 ' changes hinges principally on the desirability of fu- 
 ture dealings, or speculation, and does not involve 
 the cash business. 
 
 Public prices. — ^The large exchanges really estab- 
 lish prices as the business transacted is large enough 
 to reflect actual conditions. The actual prices are 
 
EXCHANGES AND SPECULATION 195 
 
 widely distributed. They go out constantly during 
 trading hours by wire to brokers and newspapers in 
 all parts of the country so that they are easily and 
 quickly available to all interested parties. Buyers 
 and sellers can thus be informed and govern their 
 actions accordingly. 
 
 Standardization. — Commodities can not be bought 
 for future delivery until standard grades have been 
 established for the reason that the buyer would have 
 no assurance as to the quality of goods that would 
 be delivered to him. The process of marketing a 
 product is much simplified when the product has been 
 graded according to definite standards. One quali- 
 fication of a successful buyer is the ability to judge 
 quality. One reason so rnany consumers are poor 
 buyers is that they are unable to judge the quality of 
 the goods purchased. The same quality shoes may 
 be displayed in two windows at different prices but 
 the consumer often buys the more expensive shoe 
 because he supposes the quality is better. The price 
 cutter picks a standard article for his advertisements 
 for it is only on such an article that he can convince 
 all buyers that they are getting bargains. The price 
 of an unstandardized article varies widely to both 
 buyers and sellers. Not so with a standard article 
 dealt in on central exchanges. The price of No. 2 
 red winter wheat is almost uniform at any time. 
 Buyers will pay little if any more than the published 
 price and sellers will sell for little if any less than 
 this price. As the risk is less, dealers can handle 
 standardized goods on narrower margins. Standard- 
 
196 MARKETING 
 
 ization is then beneficial to both buyers and sellers. 
 Herbert Hoover has said, "If potatoes were stand- 
 ardized and sold on contract in a national market,, 
 protected from manipulation, three things would 
 result. First, there would be a daily national price 
 known to growers. Second, by the sale of a con- 
 tract for delivery the grower would be assured of 
 this price. Third, the contract and directions for 
 shipment would flow naturally to the distributor 
 where the potatoes were needed and thus the pres- 
 ent fearfully wasteful system would be mitigated."* 
 
 Since standardization was necessary to future deal- 
 ing the exchanges took the lead in prescribing definite 
 grades and providing inspectors. Much of this work 
 has been taken over by the state and national gov- 
 ernments. There is a considerable difference of 
 opinion as to how far standardization can be car- 
 ried. Grains, cotton, canned goods, hay, butter, 
 coffee and many other products have been fairly well 
 standardized and the work of adopting standards for 
 other commodities is going forward. It would be 
 extremely diflicult to adopt grades for highly perish- 
 able products for the reason that the quality depends 
 very largely on the ripeness of the goods. Tomatoes, 
 for example, might be one grade at rioon and an 
 entirely different grade in the late afternoon of a 
 hot summer day. Something in the way of establish- 
 ing definite grades can probably be done for all com- 
 modities but there are many products which could 
 scarcely be graded carefully enough to permit future 
 
 ' Writing in the Saturday Evening Post of April 10, 1920. 
 
EXCHANGES AND SPECULATION 197 
 
 trading. Doubtless if other products had been stand- 
 ardized they would have been dealt in on exchanges. 
 
 Contract grades. — Contracts for future sale or 
 purchase are made only by grade, the exchange pre- 
 scribing which are the contract grades. The Chicago 
 Board of Trade prescribes No. 2 red winter, No. 1 
 Northern Spring and No. 2 hard winter wheat. 
 When the quantity of any particular grade is limited 
 it is generally permissible to deliver other grades at 
 definite differentials in prices. This is done to make 
 it harder for anyone to "corner" the supply of any 
 given grade. Cotton is divided into many grades, 
 and an elaborate system is provided to show what 
 differentials shall prevail when other grades are de- 
 livered. In Duluth, No. 1 Northern Spring consti- 
 tutes the contract grade of wheat but No. 2 North- 
 ern may be delivered at 5 cents per bushel under the 
 price of the former.^ 
 
 Corners. — There should be a large quantity of an 
 article in existence before it is traded in for future 
 delivery. If there is only a small quantity available 
 one dealer may contract with other dealers to deliver 
 this article to him and then himself purchase the 
 entire available supply. When the delivery date 
 draws near the sellers find that this commodity is 
 unobtainable except from the buyer who can name 
 his own price. The buyer in such a case is said to 
 have "cornered" the market. It is extremely diffi- 
 cult, if not impossible, to corner the supply of one 
 
 'Huebner, "Annals of Amer, Acad, of Polit. & Soc. Sc," Sep- 
 tember, 1911, p. 8. 
 
198 MARKETING 
 
 of the great staples, such as wheat, for the reason 
 that the supply is too large. As the price rises in 
 the central market wheat is, drawn in from the sur- 
 rounding country and sellers may also import it from 
 abroad. If, however, the quantity of an article is 
 small it can be cornered. To prevent this many 
 exchanges have rules against cornering. It is just 
 as possible to corner the actual supply of a commodity 
 without exchanges as with exchanges. 
 
 Time of delivery. — Future sales are generally 
 made for certain future months. For example in 
 October future sales may be made for December, 
 May and July. The seller has the option of making 
 delivery upon any day during the month. He nat- 
 urally chooses the time when he thinks he can buy 
 the goods for delivery at the lowest price. If he 
 waits until the last day of the month delivery must 
 be made on that day. 
 
 Actual delivery. — From what has been said it is 
 apparent that a future sale made upon an exchange 
 contemplates an actual delivery of the goods. The 
 buyer has the right to demand the delivery of the 
 actual goods and the seller has the right to deliver 
 the actual goods. As a matter of fact the actual 
 goods are not delivered on most future contracts, the 
 contracts being settled by the payment of the dif- 
 ference between the prevailing and the contract price. 
 It is this fact that leads so many people to consider 
 future trading as gambling. The amount of wheat 
 sold for future delivery is many times the actual 
 amount produced. This, however, does not alter the 
 
EXCHANGES AND SPECULATION 199 
 
 fact that the contracts call for actual delivery of the 
 goods and thattsuch delivery is made when the buyer 
 so desires. Delivery is made by warehouse receipts. 
 It would, of course, be impossible to bring the actual 
 commodities to the floors of the exchanges for deliv- 
 ery. The rules of the various exchanges specify the 
 areas within which the goods must be located in order 
 to be offered for delivery and also the type of re- 
 ceipts which must be accepted by the buyer. 
 
 Bucket shops. — Bucket shops on the other hand 
 are gambling places pure and simple, where bets are 
 made as to future prices. Actual goods are not 
 handled and no deliveries made. Bucket shops are 
 illegal and are broken up when discovered. 
 
 Specvdation. — There is undoubtedly a good deal 
 of gambling represented by transactions made upon 
 the exchanges. The future trading in grain has for 
 several years exceeded twenty billion bushels, five- 
 sixths of which is done on the Chicago Board of 
 Trade. The future sales of wheat are some twelve 
 or fourteen times the average total wheat crop of 
 the country.^" A distinction should, however, be 
 made between gambling and legitimate speculation. 
 This distinction is hard to draw in practice but never- 
 theless exists. If the buyer expects to actually need 
 and accept delivery of the product contracted for, 
 the purchase does not vary in principle from the pur- 
 chase made by a wholesaler from a manufacturer 
 for the delivery of dry goods three or six months in 
 
 "See Federal Trade Commission: "Report on Grain Trade," 
 vol. 5. 
 
200 MARKETING 
 
 the future. If the seller has or expects to have the 
 product sold and to make actual delivery the sale 
 resembles the sale by a manufacturer to a dealer for 
 the future delivery of goods which he expects to 
 manufacture. It is furthermore much more certain 
 that the contract executed upon the organized ex- 
 change will be scrupulously fulfilled than the con- 
 tract made privately between manufacturer and 
 dealer. 
 
 On the other hand if a future sale is negotiated 
 on the exchange for the purchase of goods which the 
 seller does not expect to need and which he merely 
 hopes to resell at a profit, the transaction is closely 
 akin to gambling. It is, however, no more like 
 gambling than the purchase of a piece of land by a 
 hard headed farmer which he does not need and 
 merely hopes to resell later at a profit. The out- 
 sider who knows nothing of market conditions and 
 decides to take "a flier" on the "strength" of a "tip" 
 is undoubtedly a gambler. One of the greatest 
 evils of organized speculation is that it is so easy 
 for outsiders to speculate. The outsiders usually 
 know little or nothing of market conditions and the 
 chances are all against them. They come into the 
 market and lose their hard earned savings. Trying 
 to make easy money by speculation is opposed to 
 industry and thrift. It takes money that should go 
 to pay mortgages or buy better household furnish- 
 ings. Something should be done to make it more 
 difficult for such people — the so called lambs — to 
 
EXCHANGES AND SPECULATION 201 
 
 speculate. Perhaps elimination of dealing on mar- 
 gins would do this. 
 
 Advantages of speculation. — If speculation on or- 
 ganized produce exchanges is admitted to permit 
 certain serious evils why is it not abolished? The 
 reason is that speculation has certain advantages and 
 so far no plan has gained popular support which 
 would eliminate the evils and retain the advantages. 
 The advantages of speculation are hedging, the sta- 
 bilizing of prices, the certainty of prices, and the 
 equalization of prices between different markets. 
 
 Hedging. — Hedging is the name applied to tran- 
 sactions made upon the exchanges for the future sale 
 or purchase of commodities to offset or balance deal- 
 ings in the actual goods. For example, a country 
 elevator buys wheat from the farmers which it expects 
 to resell in the large terminal markets. If the price 
 should fall while the wheat was in storage or transit 
 the elevator would lose and if the drop was great 
 the elevator might be ruined. To prevent such a loss 
 the elevator resells the wheat on the exchange as soon 
 as it is purchased from the farmers. It is then pro- 
 tected from loss and is sure of its legitimate profit 
 for handling the grain. 
 
 The miller by hedging can protect himself from 
 fluctuations in price and so be free to devote his un- 
 divided attention to milling and insure himself of 
 the profit of his milling business regardless of fluc- 
 tuations in prices. To illustrate, a miller in January 
 sells flour for delivery in early June at a price based 
 on $1.50 wheat, which is the quotation for May 
 
202 MARKETING 
 
 wheat at the time the flour is sold. The miller may 
 then buy the wheat for May delivery at $1.50. When 
 May arrives he has his wheat at this price and as 
 far as this transaction is concerned it makes little 
 difference to him whether the price goes up or down. 
 If it goes up he prevents a loss. If it goes down he 
 loses the opportunity to make a profit. But he has 
 eliminated the risk of fluctuations in price, which is 
 what he desired. In actual practice the miller may 
 not want the grade of wheat that would be deliv- 
 ered on his future contracts. He may desire to 
 select his wheat from samples in order to choose the 
 exact grades which he needs for blending. He can 
 still eliminate most of the risk by hedging. He buys 
 say 10,000 bushels of wheat for May delivery at 
 $1.50. When May arrives let us suppose that wheat 
 has advanced to $1.60. The miller has then made 
 a profit of 10 cents a bushel on 10,000 bushels or 
 $1,000. As he does not want this particular grade 
 of wheat he takes his profit and buys the desired 
 grade in the cash market. As all grades ordinarily 
 advance in the same ratio the desired grades has also 
 advanced approximately 10 cents, so he has to pay 
 10 cents more for it and so uses the $1,000 profit 
 to pay the extra 10 cents. His profit offsets his loss 
 on the wheat but he makes his ordinary miller's profit 
 on the flour. On the other hand if the price had drop- 
 ped the miller would lose 10 cents a bushel on his 
 hedge, but would save 10 cents on the purchase of 
 cash grain, and so would still have his legitimate mil- 
 ler's profit on the sale of the flour. 
 
EXCHANGES AND SPECULATION 203 
 
 Mills instead of hedging sometimes take these 
 risks of price fluctuations themselves. The buyer 
 may feel that he is a good judge of market conditions 
 and hence can anticipate the trend of prices. When 
 he predicts correctly his mill makes large speculative 
 profits, but when he guesses wrongly his mill loses 
 heavily and may be thrown into bankruptcy by such 
 speculative losses. 
 
 Advantages of hedging, — Hedging is an advan- 
 tage because it enables dealers and manufacturers to 
 shift risk to the shoulders of professional speculators 
 or risk takers. The shifting of risk lessens the mar- 
 gins of gross profits which dealers must take. The 
 greater the risk the greater must be the gross profit 
 of the dealer. The dealer's gross profit is higher on 
 millinery than on hardware, and higher on flowers 
 than on groceries. The less the risk the smaller the 
 margin on which a dealer will handle a product. The 
 advantages of hedging are so well recognized that 
 even hostile critics recognize its advantages and do 
 not advocate its abolishment. They would abolish 
 purely speculative business but would leave the ex- 
 changes open for legitimate hedging transactions. 
 
 Risk taking. — Risk is inherent in all business tran- 
 sactions. The merchant may buy goods which he 
 cannot sell or prices may decline while the goods are 
 on his shelves. The farmer sows wheat, but un- 
 favorable weather may cut down his yield, or a 
 slump in prices may cause him to sell his wheat at a 
 loss. The manufacturer may have a strike or may 
 develop products which the public will not buy. Some 
 
204 MARKETING 
 
 risks can not be shifted to those whose business it 
 is to bear risks viz. the insurance companies. The 
 risks from fire, burglary, flood, employers' liability, 
 tornado, lightning, rain, hail, automobile and railroad 
 accidents, and some other contingencies can be cov- 
 ered by insurance. Most business men consider it 
 good policy to cover insurable risks by insurance and 
 it seems highly desirable that as many risks as pos- 
 sible be made insurable. The produce exchanges 
 provide what might be called insurance against a 
 change in price. When a risk can be insured against 
 its cost can be measured and hence no large profit 
 need be figured into cover this risk. Those granting 
 insurance base their charges on an actual knowledge 
 of the risks or on past experience. It appears to be 
 much more economical to have risk borne by those 
 who can average up risks in making their rates than 
 to have a number of successive manufacturers and 
 middlemen add large sums to their gross profits in 
 order to protect themselves against possible losses. 
 During the latter part of 1920 when prices were fall- 
 ing much was heard of cancelled contracts. Buyers 
 of textiles, sugar, canned goods, dried fruits, and 
 many other products very often refused to accept 
 delivery of the goods contracted for. Serious losses 
 were incurred by the sellers who had their contracts 
 cancelled and by buyers who accepted delivery of 
 goods bought at higher prices. If the men in these 
 trades had been able to hedge their purchases and 
 sales much less money would have been lost by the 
 manufacturers and dealers, fewer contracts would 
 
EXCHANGES AND SPECULATION 205 
 
 have been cancelled and much better feeling would 
 have prevailed. This suggests that future trading 
 might well be extended to other commodities, al- 
 though in many cases such trading would be imprac- 
 ticable due to lack of standard grades or the small 
 quantity of each product on the market. 
 
 Stabilization of prices. — It is argued by the advo- 
 cates of speculation that it serves to stabilize prices. 
 Without future trading it is argued that prices would 
 go much lower when the market is glutted and 
 much higher when the supply is small. Such 
 stabilization of prices is highly desirable. In the fall 
 when the crops are being marketed it holds prices 
 up and so benefits the growers. In the spring and 
 summer when the supply is getting low it holds prices 
 down and so benefits the consumers. Although prices 
 fluctuate widely upon the exchanges it is argued that 
 they would fluctuate much more widely without the 
 exchanges and future trading. In Russia where the 
 grain trade was unorganized, the peasant farmers 
 had no way of knowing the value of their grain and 
 had to sell it to the local merchants, for what the 
 latter were willing to pay. The merchants could not 
 hedge their purchases and were uncertain what prices 
 they would receive when the grain was finally gotten 
 to the large markets. To protect themselves they 
 paid the growers a very low price for the grain. It 
 is said that the Russian peasant often received only 
 from one-third to one-half of the price of wheat in 
 the large markets compared with 90 per cent received 
 by the American farmer. 
 
206 MARKETING 
 
 To understand how this result is accomplished it 
 is necessary to understand what is meant by "short" 
 and "long" trading. A short sale is a contract 'to 
 deliver something not in the possession of the seller 
 in the expectation of being able to buy it for deliv- 
 ery at a lower price than it has been sold for. The 
 manufacturer who sells 10,000 yards of cloth for 
 delivery six months from date has sold short. He 
 expects to produce the cloth at a cost below the sell- 
 ing price and so make a profit on the sale. The man 
 who contracts to supply an army camp with 1,000 
 bushels of potatoes in the expectation of going out 
 in the country and buying them at lower price has 
 .sold short. Just so the trader on the exchange who 
 sells 10,000 bushels of wheat for delivery six months 
 in the future does so in the expectation that the price 
 of wheat will drop so that he can buy the wheat for 
 delivery at a lower price than he sold it for. The 
 short seller is commonly referred to as a "bear" and 
 a falling market as a "bear" market. 
 
 The "long" trader is one who buys a commodity 
 to hold it for an increase in price. The man who 
 buys real estate, pig iron, coal, flour, canned goods, 
 silk, sugar or any commodity to hold it for an in- 
 crease in price is dealing on the long side of the mar- 
 ket. The public understands little of short sales and 
 when it speculates nearly always deals on the long 
 side of the market. The "long" trader is commonly 
 referred to as a "bull" and a rising market as a "bull" 
 market. '< 
 
 The professional traders in forming their opinions 
 
EXCHANGES AND SPECULATION 207 
 
 as to the trend of prices consider all the known fac- 
 tors affecting supply and demand. In the case of 
 wheat they consider the conditions of the crop in 
 all producing counJtries, the acreage planted, the 
 amount carried over from last year, the visible sup- 
 ply, the probable amount still in the hands of the 
 growers, the export demand from all importing 
 countries, and the rate at which the domestic mills 
 are purchasing. They thus form their opinions as 
 to probable conditions in the future and buy and sell 
 accordingly. As the crop conditions are affected by 
 the weather the prospects may change materially in 
 a short time. The report of rust in Saskatchewan 
 may cause a violent increase in price, while the news 
 of rains in Argentina may cause a drop in prices. 
 The news of an impending war may send prices up 
 as the armies will need wheat. Prices are also affect- 
 ed by the general industrial and financial situation. 
 Different traders attach different importance to the 
 same report. One trader considers a certain bit of 
 news important while another trader overlooks it 
 entirely. One trader considers himself better in- 
 formed as to actual conditions than others. Hence 
 a difference of opinion as to future prices and hence 
 future trading. 
 
 The farmers at times object bitterly to short sell- 
 ing, saying that it is equivalent to creating a large ad- 
 ditional supply and hence helps to depress prices. 
 They forget that the long buying similarly creates an 
 additional, if ficticious, demand and hence helps to 
 boost prices. If the price goes below what the 
 
208 MARKETING 
 
 traders consider the probable future price they are 
 always ready to buy. This prevents prices going as 
 low as they otherwise would. This speculative buy- 
 ing at low prices acts as a cushion for falling prices. 
 With commodities not subject to future trading this 
 cushion is absent, hence prices may fall much lower 
 than they would if future trading were possible. In 
 most commodities it is extremely difficult to specu- 
 late on the short side of the market. Hence practi- 
 cally all speculators are on the long side of the mar- 
 ket and when prices are rising speculation tends to 
 force prices up to excessive levels. Then when the 
 break comes short selling is impossible. No one 
 wants to buy in a falling market and hence prices 
 drop, and drop until they reach extremely low levels 
 with resultant loss to all owners of goods. With 
 commodities subject to future trading when the prices 
 go above what the traders consider warranted by the 
 facts they begin to sell. This selling, checks the 
 rising prices. This alternate buying and selling by 
 the traders is what is supposed to stabilize prices. 
 
 Many studies have been made that indicate that 
 speculation on the organized produce exchanges does 
 actually tend to stabilize prices. The skeptics on the 
 other hand contend that these studies are inconclu- 
 sive, that the exchanges do not prevent manipulation 
 of prices, and that they do not exert any marked ten- 
 dency toward stabilization of prices. The Federal 
 Trade Commission, which has made a most exhaust- 
 ive study of the entire grain trade, does not seem to be 
 entirely convinced that speculation does tend to sta- 
 
EXCHANGES AND SPECULATION 209 
 
 bilize prices. On this point, it says: "While the 
 Commission believes that speculation in wheat futures 
 is not an indispensable part of the marketing process 
 and may sometimes be highly injurious, the future 
 contracts may have a legitimate use for 'hedging.' 
 In this connection it is claimed that future trading 
 performs an insurance function where ordinary insur- 
 ance methods would not be practicable, and that 
 undue restriction of future trading, such as would 
 deprive the grain trade of this service, might result 
 in grain dealers requiring larger margins and conse- 
 quently result either in lower prices to the farmer or 
 higher prices to the consumer. Without now express- 
 ing an opinion on this subject, it appears that there 
 is a large volume of future trading that is mere 
 gambling, and involves a great economic waste."" 
 
 Certainty of prices. — Whether speculation does 
 stabilize prices or not it greatly increases the cer- 
 tainty of prices. It enables all interested parties to be 
 much more certain as to what prices will be in the 
 future and as to what changes in prices may be 
 expected. This is a decided advantage. 
 
 Equalization of prices between different mar- 
 kets. — Organized exchanges tend to make prices uni- 
 form over a wide area. If the price of wheat is 
 higher in Chicago than in New York traders will 
 buy in New York and sell in Chicago. If the Liver- 
 pool price is higher than the Chicago price by 
 more than enough to pay freight, insurance and 
 
 "Letter of Federal Trade Commission to the President, Decem- 
 ber 13, 1920. 
 
210 MARKETING 
 
 exchange costs of getting the wheat to Liverpool 
 traders will buy in Chicago and sell in Liverpool. In 
 this way prices are equalised except for transporta- 
 tion costs in all markets having exchanges. This 
 enables the western farmers to get the full Chicago 
 or Liverpool price for wheat less the costs and dealers' 
 profits incurred in getting it to Chicago or Liver- 
 pool. It also insures the English consumers of 
 getting wheat at the Chicago price plus cost of 
 getting it to England. This is a great advantage 
 as compared with products having local prices. 
 With the latter class of products prices may be very 
 high in one market, while in another market the goods 
 are rotting for lack of buyers. 
 
 Benefits of marketing system to farmers. — As 
 a result of standard grades, public prices, efficient 
 elevators and organized exchanges the American 
 farmers are said to receive a much larger percentage 
 of the price paid by the consumers for their grain 
 than for the products not handled by organized 
 exchanges. The farmers' cooperative grain market- 
 ing organizations seem to appreciate the advantages 
 of the exchanges and instead of abolishing them are 
 demanding membership in them so that they can sell 
 their own grain directly on the exchange floors. 
 
 Proposed remedies. — There are admitted to be 
 many evils connected with the produce exchanges. 
 Some have proposed that all future trading be abol- 
 ished. Germany at one time (law of 1896) prohib- 
 ited future trading but failed to realize the expected 
 benefits from the change and so rescinded the prohi- 
 
EXCHANGES AND SPECULATION 211 
 
 bition. Senator Capper proposes in a bill introduced 
 in the Senate in December 1920 to put an end to all 
 gambling by placing a tax of 10 per cent on the value 
 of all property covered by contracts for future deliv- 
 ery except contracts made by farmers, dealers or 
 manufacturers for actual delivery. The object of 
 this bill was very fine but if such a tax were enforced 
 it is probable that trading would be so restricted that 
 the market would become too narrow to afford sat- 
 isfactory facilities for hedging. The enforcement of 
 such a provision might in effect abolish all future 
 trading. Speculation or "playing the market" by 
 outsiders in the hope of making easy money is an 
 evil that should be stopped. Weld suggests that 
 brokers be prohibited from soliciting speculative 
 orders from outsiders and that all brokers be licensed 
 and their books be made subject to inspection by 
 public authorities.^^ A more drastic remedy would 
 be to prohibit all marginal dealings. Most specula- 
 tive transactions are carried on a margin. That is 
 the buyer or seller puts up the required margin, say 
 10 per cent, with the broker — who places the order 
 and provides whatever additional capital is needed 
 to finance the transaction. The prohibition of mar- 
 ginal dealings would certainly stop most of the spec- 
 ulative transactions by outsiders. 
 
 Much has been done to improve conditions by reg- 
 ulations of the exchanges and by state and national 
 laws, such as the Cotton Futures Act, but many 
 
 "Weld, L. H. D.: "Marketing of Farm Products," p. 359. 
 
212 MARKETING 
 
 evils still exist. So far no plan seems to have been 
 proposed which would abolish the evils and retain 
 the desirable features of the system. It seems cer- 
 tain that the exchanges themselves are powerless to 
 make adequate reforms for the reason that their 
 members, the brokers, receive a large part of their 
 commissions for handling purely speculative orders 
 for others. 
 
 Conclusions. — It has been impossible in the space 
 available in a book of this nature to cover all the 
 aspects of the produce exchanges and speculation. No 
 attempt hasf been made, for example, to describe the 
 actual methods in which sales are made and financed, 
 or to give any detail as to how the commodities are 
 handled and inspected. This chapter only attempts 
 to describe briefly the more important operations of 
 the exchanges and to outline a few of the problems 
 involved in organized speculation. It is hoped that 
 the reader will continue his study by consulting some 
 of the references listed below: 
 
 BIBLIOGRAPHY 
 
 American Academy of Political and Social Science: "American 
 Produce Exchanges," 1911, vol. 38. This volume is novf 
 somewhat out of date but contains one of the best collection 
 of articles on the produce exchanges. 
 
 Weld, L. H. D.: "The Marketing of Farm Products," chs. 13-17, 
 inclusive. 
 
 Brace, Harrison H. : ''The Value of Organized Speculation" 
 (Hart, Schaffner & Marx prize essay). 
 
 Atwood, Albert W.: "The Exchanges and Speculations," chs. 
 13-20, inclusive. Published by the Alexander Hamilton In- 
 stitute. 
 
EXCHANGES AND SPECULATION 213 
 
 Federal Trade Commission: "Report on the Grain Trade," 5 
 volumes. Also letter to the President of December 13, 1920, 
 in response to President's direction to inquire into the wheat 
 situation. 
 
 United States Bureau of Corporations: "Report on Cotton Ex- 
 changes." 
 
 Boyle, Jas. E.: "Speculation and the Chicago Board of Trade,'' 
 
 Emery, Henry C. : "Speculation on Stock and Produce Exchanges 
 of the United States," Columbia University Studies in History, 
 Economics, and Public Law, vol. 7 (1896). 
 
 Huebner, Grover G. : "Agricultural Commerce," chs. 3, 4, 6, 7, 
 and 14. 
 
 Usher, Abbot, Payson: "The Influence of Speculative Marketing 
 Upon Prices," American Econ. Revieiv, March, 1916 (vol. 6, 
 No. 1). 
 
 McHugh, . "Form, Development, and Economic Functions of 
 Grain Exchange," Annals of the Amer. Acad, of Polit. & 
 Soc. Sc, vol. 33, pp. 1-3S. 
 
 Duncas, C. S.: "Marketing," chs. 7-11. 
 
 Cherington, Paul T. : "The Elements of Marketing," ch. 10 (on 
 risks). 
 
 Hoover, Herbert: "Some Notes on*Agricultural Readjustment and 
 the High Cost of Living," Saturday Evening Post, April 10, 
 1920. 
 
 Hearing before Committee on Rules of the House of Representa- 
 tives, 63d Congress, second session, 1914, on the charge that 
 the Chicago Board of Trade Controls Price of Wheat to the 
 Farmer and Price of Flour to the Consumer. 
 
 Anderson, B. M., Jr.: "Factors of Safety When Prices Drop," 
 the Chase Economics Bulletin, December 1, 1920, pp. 23-29. 
 Published by the Chase National Bank. 
 
 Annual Reports of the Secretary of the Chicago Board of Trade. 
 
 Nevj York Produce Exchange Bulletin. 
 
 Price Current Grain Reporter. 
 
 The Nations Business: "Should We Smash the Exchanges," De- 
 cember, 1920. 
 
 Chicago Butter and Egg Board, et al.. Action Brought Under the 
 Sherman Law, 1914. 
 
214 MARKETING 
 
 Usher, Abbot, Payson: "History of Grain Trade in France," 
 
 1400-1710. 
 Legg, Chester, Arthur: "The Law of Commercial Exchanges.'' 
 Siebels, Wm. Temple: ''Produce Markets and Marketing." 
 
 QUESTIONS— CHAPTER VIH 
 
 1. Distinguish produce exchanges from auctions, farmers' markets, 
 
 and bucket shops. 
 
 2. What was the 'origin of the produce exchange. 
 
 3. Define spot and future sales. Which is the more often used 
 
 for speculative purposes? Why? 
 
 4. Enumerate the advantages and disadvantages of speculation 
 
 on organized exchanges. 
 
 5. Show how hedging enables risks to be shifted. Does this 
 
 cheapen the cost of marketing?' Why or why not? 
 
 6. Can you draw a line between speculation and gambling? 
 
 7. Does speculation tend to stabilize prices? If so, how? If 
 
 not, why? 
 
 8. Are the produce exchanges beneficial to the farmers? To the 
 
 consumers? Why or why jiot? 
 
Chapter IX 
 
 THE DEVELOPMENT OF RETAIL TYPES AND 
 METHODS 
 
 Importance of retailing. — A retail dealer is one 
 who buys goods for resale without alteration to con- 
 sumers. Concerns that buy goods for alteration may 
 also sell them at retail, e. g. restaurants or manu- 
 facturers selling direct te the consumers. Retailing 
 is the most familiar kind of selling and the retailer 
 is the most widely known type of middleman. Many 
 goods pass through the hands of no other middle- 
 man as for example shoes sold direct to the retail 
 dealers by the manufacturer and vegetables in towns 
 where the retailers obtain their supplies direct from 
 the farmers. There are over two millidn people 
 engaged in the retail business and there are about 
 one million retail stores in the United States. 
 
 THE EVOLUTION OF RETAIL TYPES 
 
 Fair and markets. — Retailing is the oldest type of 
 marketing, having its origin in the barter of primitive 
 peoples. With the development of trade came the 
 custom of meeting at certain times and places for 
 the purpose of buying, selling, and exchanging goods. 
 Here we see the origin of the fairs, market days, and 
 market places which are still important in many parts 
 of the world. The fair was originally a place where 
 
 215 
 
216 MARKETING 
 
 buyers and sellers met for the transaction of busi- 
 ness. The actors and other entertainers came to 
 amuse the crowds. In the United States the sale of 
 goods has been very largely eliminated and the fairs 
 consist principally of amusements and exhibits, al- 
 though many concerns will accept orders for goods 
 received as a result of the exhibits. In many coun- 
 tries, especially those somewhat backward in the 
 commercial development, the fairs are still very im- 
 portant in the marketing of goods. This was true, 
 for example, of Russia prior to the world war. 
 
 Itinerjuit merchants. — It was, however, impos- 
 sible for everyone to visit these fairs or market 
 towns for the purchase of goods. The itinerant 
 merchants visited these markets or fairs and pur- 
 chased goods which they carried through the country 
 selling to the people in their homes or bartering them 
 for goods which they could dispose of to advantage 
 at the market town or fair. This method is still 
 used in some primitive countries as for example in 
 Abyssinia.^ 
 
 Modern types of the itinerant merchant are fur- 
 nished by the peddler, the huckster, and the can- 
 vasser. The peddler is still found going from door 
 to door in our cities and in some rural sections. In 
 some cases merchants have iitted up almost complete 
 stores on motor trucks and supply their customers at 
 
 * It is interesting to compare the marketing methods in Abyssinia 
 ■with those in the United States. For description of methods in 
 Abyssinia, see United States Department of Commerce, Bureau of 
 Foreign and Domestic Commerce, miscl. series No. 81, "Selling in 
 Foreign Markets," pp. 226-230. 
 
RETAIL TYPES AND METHODS 217 
 
 their doors. The Jewell Tea Company, Inc., fur- 
 nishes an example of a company selling from house 
 to house on a large scale. This company sells 
 coffee, tea, baking powder, soap, etc., under its own 
 brands from wagons operating over 20,000 differ- 
 ent routes operating from 530 branches. The huck- 
 ster is notably important in the sale of fruits and 
 vegetables. Many of them have regular routes and 
 carry first class goods. They allow the housewives 
 to personally select their goods at their own doors. 
 The hucksters are important in disposing of goods 
 that must be sold quickly to prevent their spoiling. 
 They buy such goods cheaply in the wholesale mar- 
 kets and dispose of them quickly to the consumers at 
 reduced prices. They thus give the wholesale dealers 
 an outlet for such goods, prevent the goods from 
 spoiling, and enable the housewife to get cheaper 
 goods for canning or table use. 
 
 The canvasser or specialty salesmen may sell any- 
 thing from books to locomotives. They are impor- 
 tant in the sale of household goods, adding machines, 
 typewriters, life insurance, etc. Such salesmen may 
 be used to create a demand for new goods, to effect 
 sales in a highly competitive market, to handle goods 
 that are too highly specialized or too large to be 
 handled by the ordinary dealers, or to handle goods 
 appealing to only a small class of buyers. Salesmen 
 in this class range all the way from the ordinary 
 "agent" who succeeds through dogged perseverance 
 to some of the shrewdest and most highly trained 
 salesmen in the country. 
 
218 MARKETING 
 
 Specialty stores. — With the development of civil- 
 ization came a division of labor. Certain men came 
 to devote the greater part of their time to the pro- 
 duction of one thing, e. g. cloth, or shoes — and to 
 exchange or sell the surplus in order to obtain other 
 things needed by them. At first the consumers visited 
 the shops where the goods were produced to make 
 their purchases. Here was the origin of the 
 "shop" as a place to make purchases and also 
 of the term to "go shopping." The amount of 
 goods produced increased more rapidly than the 
 demand for such goods so that the producers had 
 to go out to find purchasers for their wares. This 
 took time and interfered with their regular work of 
 production. It was a natural development for sev- 
 eral neighbors to turn the sale of their surplus prod- 
 uct over to one of their number who possessed a 
 knack at selling. As this man's selling business in- 
 creased he stopped working as an artisan and devoted 
 his whole time to selling and what had formerly been 
 his workshop became his store. As these men sold 
 only one kind of merchandise they were specialty 
 merchants and their shops specialty stores. The 
 specialty store is thus older than the general or 
 department store.^ 
 
 The traveling salesmen. — ^Traveling salesmen 
 have not always called upon the retail dealers to 
 solicit business. The retailers formerly went to mar- 
 ket—Boston, New York, Philadelphia, Baltimore, 
 Cincinnati, St. Louis, Chicago, New Orleans and 
 
 'See Nystrom, Paul H.: "The Economics of Retailing," ch. 2. 
 
RETAIL TYPES AND METHODS 219 
 
 smaller jobbing centers — once or twice a year to buy 
 their goods. The first wholesalers were the exporters 
 and importers. In England these foreign trade 
 houses had developed organizations for gathering 
 domestic merchandise for export and for distributing 
 Imported goods. With the development of the fac- 
 tory system separate wholesalers and commission 
 houses came into existence. With the increase in the 
 quantity of goods competition became keener and the 
 wholesalers employed men to "drum" up trade by 
 inducing the retailers to visit their stores. The 
 "drummers" at first met the country merchants at 
 the hotels and by "being good fellows" tried to estab- 
 lish friendly relations. As competition got keener 
 the drummer took to the road, called upon the mer- 
 chants in their stores, and tried to secure their friend- 
 ship and their promises to visit his employer's whole- 
 sale store on their next visit to town. They soon 
 came to take orders for goods and so developed Into 
 traveling salesmen. The traveling salesmen really 
 came into existence In the decade preceding the Civil 
 War although prior to this time some wholesalers 
 had sent out men to make collections and secure credit 
 Information. Such men were first employed in the 
 years following the panic of 1837. There were rel- 
 atively few traveling salesmen prior to the Civil War. 
 The total number in the United States in 1861 was 
 said not to exceed 1,000.^ 
 
 General stores. — The general store developed In 
 the United States from the old trading post. When 
 
 ' Briggs : "Fifty Years on the Road." 
 
220 MARKETING 
 
 the country around the post was settled the settlers 
 came to the trading post for their supplies and it 
 was, therefore, necessary for the post to carry a 
 variety of goods to meet the demands of its custom- 
 ers. As the country was at first sparsely settled there 
 was in many communities only trade enough to sup- 
 port one store and hence this had to be a general 
 store. Although the specialty store was introduced 
 into this country from England a great many special- 
 ty stores seem to have developed from the general 
 stores or to have been started in competition with 
 the latter. As the population of a community in- 
 creased a village or town might support several 
 stores. Some of these stores might drop certain lines 
 of goods which proved relatively unprofitable or new 
 stores might be started to handle only one line of 
 goods — groceries, drugs, or dry goods. Competi- 
 tion from these specialty stores often forced the gen- 
 eral stores to drop certain lines and to increase their 
 stock in other lines so as to be able to compete with 
 the specialty stores. In this way many general stores 
 were forced out of existence or transformed into 
 specialty stores. In small towns general and specialty 
 stores often exist side by side but as the town 
 grows the general stores eventually disappear. The 
 general store is, however, still common in the rural 
 districts and in the more sparsely settled sections is 
 still the prevailing type. It is especially important 
 in parts of the South and the West. 
 
 Department stores. — The majority of department 
 stores have apparently developed from the specialty 
 
RETAIL TYPES AND METHODS 221 
 
 dry goods stores. It is not entirely clear as to just 
 when and where the first department store was started 
 in the United States. The Bon Marche in Paris is 
 credited by some authorities as being the first real 
 department store. The idea was soon copied in the 
 United States and the Jordan Marsh store in Boston 
 is credited by some with being the first American 
 department store. Others credit S. S. Houghton, a 
 general merchant from New Hampshire, together 
 with his brother-in-law, R. H. Macy, with starting 
 the first department store on 14th Street in New 
 York City, in 1858. Mr. Houghton's idea was to 
 start a country general store in the city. About 1870 
 he removed to Boston and opened a department store 
 in partnership with B. F. Button.* Other depart- 
 ment stores originated in the consolidation of sev- 
 eral specialty stores previously conducted separately 
 under one roof. The years following the panic of 
 1873 really marked the beginning of department 
 stores as an important factor in the retailing business 
 in the United States.* 
 
 The large department stores were made possible 
 by the growth of large cities and the development of 
 rapid transit facilities. With the falling prices fol- 
 lowing the Civil War new methods of retailing were 
 necessary. Merchants could no longer make money 
 by keeping goods. In order to continue to make 
 profits the shrewder merchants attempted to buy 
 
 * Cherington, "The Wool Industry," p. 225, quoting from Corset 
 and Underwear Review of February, 1914. 
 'See Nystrom: "Economics of Retailing," pp. 246-249. 
 
222 MARKETING 
 
 goods cheaper and to buy directly from the manufac- 
 turers. Prices were reduced, percentages of gross 
 profits lessened and net profits realized from quicker 
 stock turnovers. Advertising was employed to draw 
 customers to the store and a higher type of service 
 rendered in order to satisfy the customers. The de- 
 partment stores led in the introduction and develop- 
 ment of these methods. Much of the growth of the 
 department stores has apparently been based on bar- 
 gain sales and cut prices. The convenience to the 
 public of centrally located stores where all the needs 
 of the family could be purchased under one roof and 
 on one line of credit has also contributed much to 
 the growth of the department stores. In recent 
 years "service" has come to be more emphasized, 
 although "price" is still stressed by most stores. 
 
 Mail order houses. — The development of the 
 American railroads gave the country quick, safe and 
 cheap transportation and made possible the develop- 
 ment of the mail order method of doing business. 
 The mail order houses obtain most of their business 
 from the rural districts. Until quick and cheap 
 methods of transportation were available the rural 
 population could buy goods from distant cities only 
 on rare occasions and at considerable expense. It 
 was therefore necessary for them to buy from the 
 local merchants what goods were not produced at 
 home. The development of the mail service and the 
 increase in the circulation of periodicals made possible 
 wide spread advertising. The growth of the mail or- 
 der houses is based to a very large extent on large 
 
RETAIL TYPES AND METHODS 223 
 
 scale advertising. With the growth of education and 
 the extension of the reading habit came a desire for 
 more and better goods. With an increased prosperity 
 came a demand for a wider selection and a better qual- 
 ity of goods than were available at most of the coun- 
 try stores. The mail order houses really developed to 
 supply this demand. 
 
 Another factor contributing to the growth of mail 
 order selling was the great increase in the quantity 
 of manufactured goods. When the manufacturers 
 failed to find a satisfactory, outlet for their goods 
 through the regular trade channels they were will- 
 ing to sell the consumers direct or supply goods to 
 the mail order houses. 
 
 The oldest of the large mail order houses is 
 Montgomery Ward & Co., which started in Chicago 
 in 1872 to serve as a supply house for the farmers' 
 granges, — cooperative organizations of farmers 
 whose correct name was The Patrons of Husbandry. 
 
 Chain stores. — The phenomenal growth of the 
 chain stores during the past fifteen years has been 
 the most outstanding fact in the field of retail mer- 
 chandising. Acker, Merrall & Condit began busi- 
 ness in 1820, and Park & Tilford in 1840. Both of 
 these concerns now operate grocery chains in New 
 York City, but did not become chains at once. Park 
 & Tilford opened their second store in 1866. The 
 Great Atlantic and Pacific Tea Co., was started in 
 1859, The Jones Bros. Tea Co. in 1872, and the 
 F. W. Woolworth Co. in 1879. It was not, how- 
 
224 MARKETING 
 
 ever, until after 1900 that the chain stores began 
 their rapid growth. 
 
 Some of the chains grew from individual stores, 
 the proprietors starting additional stores as their 
 capital permitted. In other words, successful mer- 
 chants used a part of their profits to start branches 
 and when these branches became numerous enough 
 they were called "chains." Until a few years ago, 
 many successful merchants tried to expand their busi- 
 ness by increasing the size of their original stores. 
 Experience, however, seems to indicate that efficiency 
 can be maintained better in several small retail units 
 than in one large one. It appears that many 
 chains formed by the expansion of retail stores have 
 been successful, while corporations organized to es- 
 tablish chains of stores have often failed. Other 
 chains have been started by manufacturers to fur- 
 nish outlets for their goods. 
 
 Some of the chief reasons for the rapid develop- 
 ment of the chain stores have been their low prices 
 during a period when the cost of living was on the 
 increase; the convenience of the location of their 
 stores to the public ; and the efficiency of their man- 
 agement. 
 
 The low prices have been made possible by the 
 fact that most of the chain stores have operated on 
 an "economy" basis and that their size has enabled 
 them to buy direct from the manufacturers and 
 eliminate the jobbers' profit. 
 
 The self-serve stores. — A still further movement 
 toward the reduction of operating expenses is seen in 
 
RETAIL TYPES AND METHODS 225 
 
 the establishment of self-serve stores. We have been 
 familiar with the self-serve lunch rooms and cafe- 
 terias for some time. The "grocerteria," established 
 some five years ago in Inglewood, Calif., was one of 
 the first self-serve grocery stores to attract attention. 
 There were, however, self-serve stores before this, 
 as, for example. The Help Yourself (men's cloth- 
 ing) Store in Pittsburgh. One of the best known 
 chains of self-serve stores at the present time is the 
 Piggly Wiggly Stores, Inc. The first of these stores 
 was opened in Memphis, Tenn., on September 12, 
 1916. The number grew very rapidly, over 500 
 stores being opened prior to September 1, 1920. 
 These stores reduce the number of salesmen needed 
 to do a given amount of business. The company 
 claims that the average expense of doing business is 
 less than five per cent of sales. 
 
 CHANGES IN RETAIL METHODS 
 
 Conditions prior to Civil War. — The methods of 
 conducting retail stores have changed in many re- 
 spects during recent years. Prior to the Civil War 
 the general and specialty stores had the field to them- 
 selves. Mail order houses and large department 
 stores were unknown. There were relatively few 
 manufactured goods and the stores were not forced 
 to carry as wide a variety of goods as at present. 
 The needs of the people were few, compared with 
 present standards. Styles seldom changed and goods 
 could be kept for several years with little danger 
 of going out of style. There were few traveling 
 
226 MARKETING 
 
 salesmen and the merchants went to market once or 
 twice a year to purchase their merchandise. The 
 stores served as social centers to a larger extent 
 than at present. Speaking of the general store, 
 Nystrom says: "It was frequently the location of 
 the post office, and served as the village social cen- 
 ter for the men. The old box stove, the rickety 
 chair or two, the nearby barrels, and the sawdust 
 spit box, were the most universal furnishings that 
 equipped it, for its social services. Here politics 
 religion, and neighbors were discussed. It may not 
 be too much to say that here the tariff question, the 
 government bank, internal improvements, foreign 
 policies, and other important government matters 
 were ultimately settled. Certainly statesmen had to 
 reckon with the forces of public opinion generated 
 and cultivated around the stove of the country 
 store.'" 
 
 For several years prior to the Civil War prices 
 were rising. Goods not sold would be worth more 
 next month or next year. It might be more profit- 
 able to keep the goods than to sell them. Hence 
 the expression "keeping store" and "storekceping" 
 was often more or less of a lazy man's occupation. 
 
 Higgling over prices. — Very few storekeepers 
 marked their goods with plain prices and the one 
 price plan was almost unknown. Buying was a 
 matter of bargaining or higgling over price. When 
 the price was stated by the seller, the buyer would of- 
 fer a figure considerably lower and would try in every 
 
 " Nystrom, Paiil H : "The Economics of Retailing," pp. 23 and 24. 
 
RETAIL TYPES AND METHODS 227 
 
 way to make the dealer "come down." The price 
 agreed upon might be considerably lower than the 
 price first asked by the merchant. The relative 
 bargaining ability and perserverance of the two 
 would exert a considerable influence on the price 
 actually paid in the end. 
 
 Introduction of one price plan. — One of the first 
 prominent merchants to introduce the one price plan 
 and mark his goods in plain figures was John Wan- 
 amaker who introduced the principle in his store in 
 Philadelphia in 1876. Since this time the one price 
 plan has come into general use in many retail stores 
 but its use is even yet by no means universal. There 
 are many stores which do not mark their goods in 
 plain figures and who are not adverse to "cutting" 
 a price when necessary to make a sale. This prac- 
 tice seems to be more prevalent in the sale of goods 
 of relatively large value per unit, e. g. clothing. 
 
 Changed methods due to falling prices. — Follow- 
 ing the Civil War there ensued a period of falling 
 prices. The trend of prices was downward from 
 1865 to 1895 with the exception of a few years in 
 the early eighties. The retailers had to make their 
 profits by selling goods not by keeping them. If 
 goods were kept for any length of time they would 
 be worth less than when purchased. This led to 
 quicker stock turnovers and the carrying of smaller 
 and better assorted stocks of goods. The travel- 
 ing salesmen made possible more frequent pur- 
 chases, which meant that goods could be purchased 
 in smaller quantities. Intelligent merchants have 
 
228 - MARKETING 
 
 come to vtzYizrt that profits cannot be made by keep- 
 ing money tied up in goods which are not moving. 
 If a loss must be taken the quicker it is taken the 
 better, for the longer it is postponed the larger it 
 is likely to be. Intelligent merchants keep reducing 
 the prices of slow moving goods until they are sold. 
 The policy is now generally recognized as good mer- 
 chandising and yet there are still merchants who will 
 carry goods in stock indefinitely rather than sell 
 them below the original purchase price. 
 
 Increase in manufactvired goods. — During the 
 past sixty years the quantity and variety of manu- 
 factured goods have been constantly increasing. 
 Factory made goods have taken the place of goods 
 formerly made in the home. For example, ready 
 made clothing for both men and women in place of 
 garments made by the housewife; canned goods in 
 place of home canning; baker's bread in place of 
 baking days; factory shoes in place of those made 
 by the local cobblers; creamery butter in place of 
 the frequent churnings, etc. Many entirely new ar- 
 ticles have been manufactured and come into com- 
 mon use. For example, talking machines, kodaks, 
 typewriters, adding machines, breakfast cereals, all 
 kinds of electrical appliances, plumbing supplies, au- 
 tomobiles and accessories, etc. This increase in the 
 quantity and variety of manufactured goods has 
 meant that the retailers have been called upon to 
 carry a wider variety of goods. This has meant 
 greater care in selecting goods and making purchases 
 as a smaller quantity of each article can be carried 
 
RETAIL TYPES AND METHODS 229 
 
 in stock. This can only be done by frequent pur- 
 chases of small quantities of the various articles. 
 New stores have been called into existence to han- 
 dle new kinds of goods as the electrical shop and 
 the automobile accessory store, while the modern 
 drug store has furnished an outlet for many of the 
 newer articles. 
 
 Rapid changes in style. — Another change that 
 has affected retail methods has been the rapidity 
 with which styles change. The change in styles is 
 especially rapid in clothing and dealers handling 
 women's clothing are especially affected by it. The 
 type of merchandise carried by all classes of deal- 
 ers is however subject to change by changing methods 
 of living, new inventions, etc. For example the 
 automobile has largely eliminated the demand for 
 hammocks. The spread of information on sani^ 
 tation has created a widespread demand for fly 
 screens. The installation of electric lighting plants 
 by the farmers has caused a falling off in the de- 
 mand for fancy oil lamps but has given the rural 
 merchants a demand for electric lamps and othei 
 electric appliances. The rapidly changing styles 
 mean that the dealers must use greater judgment in 
 selecting their goods, and must buy in smaller quan- 
 tities. The risk involved is increased as poor judg- 
 ment in forecasting demand may mean a large loss. 
 Merchants do not like to carry style goods over 
 from one year to another and this fact partly ex- 
 plains the large price reductions in end of season 
 sales. From 1 895 to the spring of 1920 prices were 
 
230 MARKETING 
 
 increasing yet few of the better merchants liked to 
 carry goods over from one season to another. Not 
 only is the capital involved inactive but there is a 
 considerable risk of change in style. 
 
 Waste of changes in style. — The greater the style 
 risk the larger must be the retailers mark-up. Com- 
 pare for example, the percentage of mark-up made 
 by the retailer on heavy hardware or staple grocer- 
 ies with that realized on millinery. The consumers 
 must pay for the rapidly changing styles. The rap- 
 id change in styles involves a serious economic loss. 
 Not only are the prices of style goods high but the 
 goods are discarded before they are worn out. This 
 means that labor and raw materfals are constantly 
 being used to produce new goods to replace those 
 discarded. This labor and these raw materials 
 could be used to better advantage in producing goods 
 to satisfy other and more important wants. Some 
 economists and sociologists have been advocating the 
 standardization of clothing to prevent rapid changes 
 in style but so far their efforts seem to have- been un- 
 successful. Changing styles seems to have become 
 a national habit. Some dealers have encouraged 
 style changes in order to increase their sales. From 
 a broad economic view point such a policy is inde- 
 fensible. It must, however, be remembered that the 
 retailer supplies rather than creates demands and 
 that the changes in the style, type, or kind of mer- 
 chandise demanded by the consumers is a fact that 
 all retailers must consider in the conduct of their 
 business. 
 
RETAIL TYPES AND METHODS 231 
 
 Small size of purchases. — Consumers now buy 
 merchandise in much smaller quantities than form- 
 erly. People living in towns and cities now seldom lay 
 in a winter's supply of apples, meat, flour, or po- 
 tatoes. In the modern apartment houses there is 
 very little space to store supplies. Many families 
 now buy goods from day to day as needed. This 
 method of small quantity buying means more work 
 for the retailers, more salesmen, deliverymen, and 
 bookkeepers are required to handle an equal volume 
 of goods. This fact should be borne in mind when 
 comparing the services rendered by the present day 
 retailers with their predecessors of a half century 
 ago. 
 
 Increase in competition. — Another change has 
 been the increase in competition in the retail field. 
 The general stores and individually owned specialty 
 stores no longer have the field to themselves. They 
 are faced with competition from the department 
 stores, the mail order houses, the manufacturers 
 selling direct to the consumers and the chain stores. 
 This competition has forced the retailers to furnish 
 a higher type of service to the consumers or to sell 
 at lower prices. The department stores have, in 
 recent years given much emphasis to service. The 
 motto that "the customer is always right" is no 
 longer unusual. The chain stores have generally 
 emphasized price and have given little delivery or 
 credit service. The buying public is beginning to 
 understand that the price paid for goods covers not 
 only the physical cost of goods but the services ren- 
 
232 MARKETING 
 
 dered by the dealer. With the various types of 
 stores now in existence the urban public can to a 
 large extent take its choice of purchasing much or 
 little service. The future of the department and 
 chain stores may depend largely on the preference of 
 the public in this regard. 
 
 BIBLIOGRAPHY 
 
 Butler, Ralph Starr: "Marketing Methods," chs. 4, S, 6, and 8. 
 
 Nystrom, Paul H. : "The Economics of Retailing," chs. 1, 2, 3, and 
 4. 
 
 Douglas, Archer W. : "Merchandising." 
 
 Briggs: "Fifty Years on the Road." 
 
 Farquhar, A. B.: "My Sixty- four years in Business," articles pub- 
 lished in System, during 1920 and 1921, commencing Aug. 1920. 
 
 Rosenwald, Julius: "What we have Learned from 6,000,000 Cus- 
 tomers," American Magazine, July 1920, p. 34. 
 
 GENERAL BIBLIOGRAPHY ON RETAILING 
 
 Some of the best information on the various aspects of retailing 
 is found in the various business and trade papers. The 
 student of retailing should read as extensively in such papers 
 as his time permits. Among such papers might be mentioned ; 
 System, Printers Ink, Journal of Commerce, Retail Public 
 Ledger, Dry Goods Economist, etc. 
 
 Nystrom, Paul H.: "The Economics of Retailing." 
 
 Nystrom, Paul H.: "Retail Store Management." 
 
 Nystrom, Paul H.: "Retail Selling and Store Management." 
 
 Butler, Ralph S.: "Marketing Methods," Chapters 5-10. 
 
 Alexander Hamilton Institute: "Marketing and Merchandising," 
 Pt. I, Chapters 8-11; Pt. II, Chapters 4-7. 
 
 Federal Trade Commission: "Causes of High Prices of Farm Im- 
 plements." Chapters 1, 2, 5 and 6. 
 
 Cherington, Paul T.:"The Elements of Marketing," Chapters 10-18. 
 
 Cherington, Paul T.: "The Wool Industry," Chapter IS. 
 
 A. W. Shavp Co.: "Shaw Retailing Series." 
 
 Ivy, Paul W.: "Principles of Marketing," chs. 5-9 
 
 Harvard Bureau of Business Research: "Bulletins." 
 
RETAIL TYPES AND METHODS 233 
 
 Whitehead, Harold: "The Rexall Course in Salesmanship." 
 Weld, L. H. D.: "The Marketing of Farm Products," Chapter 20. 
 Frederick, J. George: "Modern Sales Management," chs. 27, 28, 
 
 and 29. 
 "Costs, Merchandising Practices, Advertising and Sales in Retail 
 
 Distribution of Clothing," Bureau of Business Research Norths 
 
 western University. Now being published by Prentice-Hall, 
 
 Inc. 
 Parlin, C. C. : "The Merchandising of Textiles." 
 Swinney, John B. : "Merchandising." 
 Ronald Press Company: "Merchandizing Manuals." 
 Hotchin, W. R. : "Making More Money in Storekeeping." 
 
 CHAPTER IX— QUESTIONS 
 
 1. What was the origin of the specialty store? Of the general 
 
 store ? Of the department store ? 
 
 2. What made possible the development of mail order selling? 
 
 Why have the mail order houses grown so rapidly? 
 
 3. Why have the chain stores grown so rapidly since 1905? 
 
 4. Contrast retailing methods of the present with those of 1850. 
 
 5. Why is there less higgling over prices than formerly? 
 
 6. How has the increase in the quantity and variety of manufac- 
 
 tured goods afifected retailing? 
 
 7. Why do styles change so rapidly? Is this desirable? If not, 
 
 how can such rapid changes be prevented? 
 
 8. Why do the consumers buy in such small quantities? Is this a 
 
 desirable practice from the standpoint of the consumer? Why 
 or why not? 
 
Chapter X 
 
 RETAIL TYPES 
 
 In the last chapter we discussed the evolution of 
 the various types of stores and their methods of do- 
 ing business. In this and the three following chap- 
 ters the present status of the various types of retail 
 stores will be discussed. 
 
 1. THE GENERAL STORE 
 
 A general store carries the various classes of 
 goods commonly used by its patrons. It differs 
 from the department store in its organization rather 
 than in the lines of goods handled. The classes of 
 goods handled by a general store vary with the needs 
 of the people from one section of the country to an- 
 other, but groceries, hardware, and dry goods are 
 practically always carried and a very large part 
 of the general stores also handle shoes, clothing, 
 hats, and farm implements. 
 
 Still important. — It was stated in the last chap- 
 ter that the general store was losing business to the 
 mail order houses and was being replaced in many 
 places by the specialty stores. It must not be sup- 
 posed, however, that the general store is a thing 
 of the past. There are from 150,000 to 175,000 
 general stores in the United States. The general 
 
 234 
 
THE GENERAL STORE 23 S 
 
 store is the second most numerous class of stores, 
 being exceeded in number only by the grocery stores. 
 Inability to carry assorted stock of goods. — One 
 of the chief reasons why the general store has been 
 losing business to the other types of stores has been 
 its inability to carry as well an assorted stock of 
 goods as its competitors. Having to carry many 
 classes of goods and yet having a relatively small 
 volume of sales it has been impossible for the gen- 
 eral store to carry as complete an assortment of 
 each class of goods as could be done by the respec- 
 tive specialty stores, handling the various classes of 
 goods. The large mail order house could offer a 
 wider selection of goods than the general store. 
 The general merchants very often failed to realize 
 that their customers were demanding a wider variety 
 and a better grade of merchandise and so often did 
 not seriously attempt to improve the quality and 
 variety of their stocks. 
 
 ADVANTAGES OF THE GENERAL STORE 
 
 The general store has several advantages when 
 compared with the specialty stores, mail order 
 houses, and department stores. 
 
 Convenience of its location. — The convenience of 
 its location gives the general store a distinct advan- 
 tage in the sale of those necessities and standard 
 goods which people buy frequently and in small lots. 
 Its location means that delivery is quicker and that 
 adjustments and exchanges can be made easily. 
 
236 MARKETING 
 
 Personal contact. — The general merchant has a 
 personal contact with his customers. This is a very 
 important advantage but one that many merchants 
 fail to fully capitalize. This personal contact gives 
 him the opportunity to render personal services, to 
 employ personal salesmanship, and to make friends. 
 
 Can base credit on exact knowledge. — The gen- 
 eral merchants have such an intimate knowledge of 
 their customers that they can base extensions of 
 credit on almost exact information. This enables 
 them to render very valuable services to their cus- 
 tomers through the extension of credit with the mini- 
 mum of risk to themselves. 
 
 Low operating expenses. — The general mer- 
 chants have a low cost of doing business. Their 
 stores are located on cheap land which means low 
 rent or a low investment in land and building to- 
 gether with low taxes and depreciation. The gen- 
 eral stores are generally situated where the cost of 
 living and wages are low. The cost of doing busi- 
 ness varies widely from one store to another but 
 the average for the general merchants was 15 per 
 cent in 1915 and slightly over 13 per cent in 1918.* 
 The decrease in the percentage was due to the in- 
 creased prices of the goods sold as the actual av- 
 erage expenses increased. Although some classes of 
 rural merchants have slightly lower percentages of 
 expenses, the expenses of the general merchants are 
 ordinarily lower than those of the city department or 
 
 'Federal Trade Commission Report on "Causes of High Prices 
 of Farm Implements," 1920, p. 260. 
 
THE GENERAL STORE 237 
 
 specialty stores handling similar lines of goods and 
 very probably lower than those of most mail order 
 houses. 
 
 DISADVANTAGES OF THE GENERAL STORE 
 
 The general store has three notable disadvantages 
 as compared with other types of retail stores. 
 
 Small stocks. — The gesneral store is unable to 
 carry a large and widely assorted stock of goods 
 and consequently is unable to supply all the demands 
 of its customers. 
 
 Small buying power. — Due to the necessity of 
 purchasing goods in small quantities the general 
 merchant is unable to secure quantity discounts or to 
 buy on the most advantageous terms. 
 
 Location poor for shopping trade. — The third 
 disadvantage grows out of the location of the gen- 
 eral stores in the village or at the country cross 
 roads. Such locations are excellent for the sale of 
 necessities or "convenience" lines but are very poor 
 for the sale of "shopping" lines. When people 
 want to select clothes, stoves, furniture, or any of 
 the various other articles coming in the class of 
 shopping goods, they want "to look around." They 
 want to go to the city or to a town having at least 
 three stores, where goods can be examined and 
 prices compared. This is especially true of women 
 and it must be remembered that women are coming 
 to buy a very large part of the merchandise sold by 
 retail stores. Even if the cross roads store carries 
 the identical article eventually purchased, many peo- 
 
238 MARKETING 
 
 pie will still go where they have the opportunity of 
 inspecting more goods prior to making the purcnase. 
 
 Inefficiency. — The general merchants have often 
 failed to fully utilize or exploit their advantages. 
 Much of their loss of trade has been due to their 
 inefficiency and their failure to keep abreast of ever 
 changing conditions. Very often they do not make 
 the proper selections of stock. As previously 
 pointed out, in the past they often failed to realize 
 that the farmers were demanding a better grade of 
 goods and newer types of merchandise, while they 
 continued to carry only the old familiar goods. Very 
 few of them have an adequate accounting system 
 and hence can only guess as to where losses occur 
 and where profits are made. The absence of ac- 
 curate records makes it difficult, if not impossible, to 
 adopt a proper "mark-up" policy, the selling prices 
 often being arrived at in the crudest of ways. 
 
 The poor management or inefficiency of the gen- 
 eral stores is not inherent and perhaps as a class the 
 general merchants are no more inefficient than some 
 other classes of retailers. When a general store is 
 efficiently managed its chances of success are as good 
 as those of many other types of stores. 
 
 Other rural stores. — There are many rural stores 
 which have the same problems as the general store 
 and yet which are not general stores. Many of 
 these handle two or more entirely separate lines of 
 merchandise and so can hardly be classed as specialty 
 stores. The lines of goods handled by such rural 
 stores vary widely. One dealer may handle hard- 
 
THE GENERAL STORE 239 
 
 ware, automobiles and lumber ; another may handle 
 hardware and farm implements; while a third may 
 handle furniture, grain and building materials. 
 Farm implements, for example are handled in con- 
 nection with all classes of goods from hardware to 
 general merchandise, while there are relatively few 
 exclusive or specialty implement dealers. This 
 means that, in many instances, the change from gen- 
 eral to specialty stores is not complete. Regard- 
 less of their classification, rural stores have many 
 problems in common. How to hold their trade in 
 competition with the mail order houses and city 
 stores is a question of interest to all rural merchants. 
 Effects of the autotnobile on the rural merchants. 
 — The introduction of the automobile into general 
 use has meant much to the rural population. It has 
 done much to destroy the isolation of American farm 
 life. It enables the farmers to visit their friends, 
 to see the movies, to attend meetings, etc. more fre- 
 quently. It enables them to get to town quicker 
 and, so to speak, moves them closer to town. It 
 enables them to visit the more distant towns and in- 
 creases the number of merchants from whom they 
 are able to buy. Farmers with automobiles com- 
 monly visit towns ten and fifteen miles away to make 
 purchases while to purchase special articles or to 
 attend special sales they will visit stores forty miles 
 from their homes. The use of automobiles is tend- 
 ing to concentrate business in the county seats and 
 other similar towns and to take it from the cross- 
 
240 MARKETING 
 
 roads and small village stores. If such stores sur- 
 vive it will likely be only for the sale of convenience 
 lines. 
 
 Opportunity of town merchants.— The concen- 
 tration of business in the towns gives the merchants 
 there an opportunity to expand their business and 
 operate on a much larger scale. Wide awake mer- 
 chants by judicious advertising, by special sales, by 
 bargain counters, and by rendering special types of 
 services to the farmers have been able to greatly 
 iticrease their sales. Careful selection of stock with 
 close attention to purchasing enables such stores to 
 carry large and well assorted stocks of goods and 
 to sell at prices that compare very favorably with 
 those obtainable anywhere else. The application 
 of efficient merchandising methods make possible the 
 building up of sales to very handsome proportions. 
 Instances have been reported of such merchants 
 building up sales running into the hundreds of thou- 
 sands of dollars annually while the million mark has 
 occasionally been passed. From this it can be seen 
 that it is unnecessary for the ambitious country boy 
 to go to the city to find an opportunity for success 
 in the merchandising field. 
 
 2. THE SPECIALTY STORE 
 
 The specialty store is a store that handles one 
 class of goods, as hardware, groceries, or hats. 
 There is quite a difference in the degree of speciali- 
 zation among specialty stores. Compare, for ex- 
 
THE SPECIALTY STORE 241 
 
 ample, the small number of items, handled by a hat, 
 cigar or candy store with the large number handled 
 by the modern drug or hardware store. Originally 
 the number of items handled by all specialty stores 
 was small but with the increase in the quantity and 
 variety of manufactured articles many specialty 
 stores have added more and more articles to their 
 stocks. Consider the development of the hardware 
 store. Fifty years ago "hardware" meant shelf 
 goods and such items as stoves and saddlery were 
 handled in separate stores.^ Contrast this with the 
 lines of goods handled by the modern hardware 
 store. Builders hardware, tin ware, stoves, cooking 
 utensils, nails, wire, cutlery, firearms, ammunition, 
 seeds, garden tools, rope, bolts, carpenters' tools, 
 kitchen furniture, small farming tools, woodenware, 
 blacksmiths' supplies, and paints are some of the 
 lines ordinarily handled by hardware stores at the 
 present time. The drug store handles about as 
 many different lines as the hardware store while the 
 modern department stores developed from the spec- 
 ialty dry goods store with its line of "dry goods," 
 notions, and women's clothing. 
 
 Recent tendency toward greater specialization. 
 — Of recent years there has been a tendency toward 
 greater specialization and strictly one line stores 
 have been established handling for example only 
 waists, hats, or hosiery. In some cases such stores 
 are organized as chains. Such highly specialized 
 stores make possible minute attention to the selection, 
 
 'Briggs: "Fifty Years on the Road." 
 
242 MARKETING 
 
 care and display of goods. They offer quick stock 
 turnovers and a relatively simple problem of man- 
 agement. On the other hand they have few articles 
 to bear the overhead expense and with such a small 
 number of items in stock their sales may be seriously 
 affected during dull seasons. Its the old case of 
 carrying all the "eggs in one basket." 
 
 Number of specialty stores.^It was pointed out 
 in the proceeding chapter that the specialty shop was 
 the oldest type of retail store. It is still the pre- 
 vailing type in the United States, and, if the spec- 
 ialty chain stores be included, it bids fair to continue 
 as such in the future. The number of specialty 
 stores in the Unted States in 1918 was given by the 
 J. Walter Thompson Co. as follows : — Only the 
 better known classes of dealers are given •? 
 
 Groceries 235,799 
 
 Hardware 49,426 
 
 Drugs 49,396 
 
 Shoes 49,152 
 
 Automobile Accessories 38,988 
 
 Garages, Repair Shops 44,085 
 
 Dry Goods 31,168 
 
 These figures are to be taken as only approxi- 
 mately correct. The total number of stores hand- 
 ling groceries — grocery stores, general stores, de- 
 partment stores, etc. — has been placed at 400,000. 
 The total number of retailers handling cigars and 
 tobacco has been placed at close to 500,000. 
 
 3 ((' 
 
 Population and Its Distribution/' 1918, pp. 198-203. 
 
THE SPECIALTY STORE 243 
 
 A more detailed list of the number of specialty 
 stores, compiled in 1913 is given in the footnote.* 
 
 Competitors of the specialty store. — The city 
 specialty store competes with the department store, 
 the chain store, and to a lesser extent with the mail 
 order house. The rural specialty store competes 
 with the general store, the mail order house, to a 
 certain extent with the city department and specialty 
 stores, and, in many parts of the country, with the 
 chain stores. The chain stores are in most in- 
 stances specialty stores but as their problems are so 
 different from those of the individually owned or 
 unit specialty stores that they will be considered sep- 
 arately. The individual specialty stores have cer- 
 tain advantages and certain disadvantages in 
 meeting the competition from other types of retailers. 
 
 Groceries 172,043 Confections 35,423 
 
 Butcher Shops 62,798 Lumber 29,669 
 
 Drugs 43,230 Milliners 26,843 
 
 Cigars and Tobacco 40,555 Stoves 22,177 
 
 Dry Goods 30,787 Jewelers 22,025 
 
 Bakers 25,788 Hardware 20,881 
 
 Clothing 22,713 Harness and Saddlery.. 20,084 
 
 Shoes 20,104 Glass, Oil and Paint. . . . 29,553 
 
 Carpets 19,316 Furniture 16,131 
 
 Grain 16,783 Feed, Flour and Grain. 19,839 
 
 Hats and Caps 16,240 
 
 From Dun's list, as compiled by the Rapid Addressing Machine 
 Co., quoted from Nystrom's "Economics of Retailing," which points 
 out that there are some duplications in the figures and that the 
 numbers cannot be added together to get a total. 
 
244 MARKETING 
 
 ADVANTAGES OF SPECIALTY STORES 
 
 Location. — The specialty stores often have an ad- 
 vantage over their competitors in the matter of lo- 
 cation. The corner store in the residential section 
 is ideally located for the sale of convenience lines. 
 They are however as a rule no more conveniently 
 located than the chain stores or than the general 
 stores in the rural districts. The department stores 
 must be centrally located and this means that they 
 are in the shopping district. People like to shop 
 where there are several stores close together and 
 the department stores are so situated. The down 
 town specialty stores are often just as conveniently 
 iocated for the shopping trade as the department 
 stores. In fact, they are frequently more accessible 
 than many of the departments in the large stores 
 for the reason that the customers do not have to 
 push through crowded aisles and wait on elevators. 
 This is especially important when only one or two 
 items are to be purchased. If several articles are 
 to be bought the one large store may be more conve- 
 nient. 
 
 ' Personal touch. — The opportunity of establish- 
 ing friendly relations with their customers is quite 
 an advantage possessed by the. small specialty stores. 
 People like to trade where they are known and called 
 by name. We all like to be remembered. A per- 
 sonal acquaintance with customers also facilitates 
 the extension of credit. It is quite an asset for a 
 dealer to remember the tastes of his customers, the 
 
THE SPECIALTY STORE 245 
 
 style of clothes they wear or the kind of food they 
 like. This applies particularly to men, who will fre- 
 quently go out of their way to trade with a dealer 
 they like. A few merchants have taken advantage 
 of this fact and card index their customers so as to 
 have always available information as to the kind of 
 goods each likes. On the other hand many spec- 
 ialty dealers fail to take advantage of their oppor- 
 tunity and do not make their customers feel any 
 more welcome than if they were in an automat or a 
 self-serve store. It may be objected that the heads 
 of the departments in a department store have the 
 same opportunity of establishing personal contacts 
 with their customers. To a certain extent they have. 
 They are, however, away from their departments 
 frequently on buying trips. They must take a large 
 part of their time supervising and training their 
 salespeople. Even if a specialty dealer has as large 
 a number of clerks it is much easier to make them 
 feel a part of the Organization and to secure their 
 cooperation in carrying out its policies. Then, too, a 
 department store secures principally the shopping 
 trade, and so draws its trade from a much larger 
 area. This means that more different people visit the 
 different departments while a specialty store is visited 
 more regularly by the same people. For these 
 reasons department heads have little opportunity to 
 establish personal relations with their customers. 
 
 Better assorted stocks. — ^The specialty store can 
 often carry a larger and better assortment of goods 
 in its line than the department store, general store, 
 
246 MARKETING 
 
 or mail order house. There are, however, many 
 exceptions to this statement. In many cases the 
 department store carries larger stocks in certain of 
 its departments than any of the competing specialty 
 stores. The specialty store does, however, offer the 
 opportunity for the careful study of its line and for 
 the purchase of goods especially suited to the needs 
 of its patrons. 
 
 Quicker stock turnovers. — Close attention to the 
 selection and care of stock together with careful 
 purchasing gives the specialty store the opportunity 
 of turning its stock of goods more frequently than 
 the larger store which cannot give such detailed at- 
 tention to all the different lines of goods handled. 
 This opportunity is however, often neglected. 
 
 Low operating expenses. — The specialty stores 
 commonly have a lower cost of doing business than 
 the department stores. Those in the residential 
 sections have lower rents. Those in the shopping 
 districts have rents comparable for the space occu- 
 pied with the department stores but apparently have 
 lower overhead expenses. The unit specialty store, 
 however, frequently has higher expenses than the 
 chain stores and this is one reason why they have 
 been losing so much business to the chain stores. 
 The rural specialty store certainly has or should 
 have as low or lower expenses than any of its com- 
 petitors, unless it be the chain store. The cost of 
 doing business by the different types of retail stores 
 will be discussed in a later chapter. 
 
THE SPECIALTY STORE 247 
 
 DISADVANTAGES OF THE SPECIALTY STORE 
 
 Little buying power. — As a rule the specialty 
 store buys in such small quantities that it is unable 
 to secure price concessions or quantity discounts. 
 In many lines it must still buy from the jobber while 
 its larger competitors, the chain and department 
 stores, buy direct from the manufacturers. The 
 specialty dealers through their associations may de- 
 cry such practices as unfair competition, but it gen- 
 erally goes on just the same. The specialty dealer 
 generally has his time so taken up with the manage- 
 ment of his store that he is not in a position to learn 
 of special bargains in job or odd lots which are 
 bought by the department, and chain stores. If a 
 manufacturer is in urgent need of* money and must 
 sacrifice goods to get it he goes to the large stores 
 which can pay cash and take a large quantity of 
 goods. The small store can only benefit from such 
 sales to the extent that the jobber passes on such 
 price concessions to him. 
 
 This disadvantage in buying is probably the great- 
 est handicap of the small specialty store. In the 
 grocery field it has become so serious that the deal- 
 ers realize that something radical must be done if 
 their businesses are to be saved. Hence, the in- 
 troduction of cooperative buying. The cooperative 
 jobbing houses were mentioned in Chapter V. 
 These cooperative jobbing houses have grown very 
 rapidly and by enabling the individual stores to pur- 
 chase their goods more cheaply may prove the sal- 
 vation of the small dealers. 
 
248 MARKETING 
 
 Stores not centrally located. — It was stated 
 above that the corner store was well located for the 
 sale of convenience lines. This means that it is 
 poorly located for the sale of shopping lines. The 
 neighborhood store is well located for the sale of 
 goods to people in the neighborhood but it is very 
 hard to draw customers from a distance, which 
 means that most of these stores can secure only a 
 relatively small volume of sales. The location of 
 such stores is an advantage but at the same time 
 imposes a limitation on growth. The easiest way 
 for a successful and energetic neighborhood mer- 
 chant to expand is by opening additional stores in 
 other neighborhoods. 
 
 Advertising. — The neighborhood store is at a 
 disadvantage in newspaper advertising for the rea- 
 son that it must pay for the entire circulation while 
 a very small percentage of the readers can be re- 
 garded as potential customers. It is, of course, pos- 
 sible to partially overcome this disadvantage by the 
 use of handbills and neighborhood papers, where 
 such exist. It Is also claimed by some that the spec- 
 ialty store in the shopping district cannot advertise 
 as advantageously as the department store for the 
 reason that It has only one line to advertise and that 
 is not in a position to utilize newspaper space or the 
 services of an expert advertising department to the 
 best advantage. 
 
 Poor management. — Poor management is not an 
 Inherent disadvantage of the specialty dealers but 
 It Is a fact that a very large proportion of the small 
 
THE SPECIALTY STORE 249 
 
 specialty dealers are very inefficient. Very few of 
 them have any special preparation for the manage- 
 ment of a store except that acquired in previous 
 "clerking" experience and many of them did not even 
 have such experience prior to entering business for 
 themselves/ Many retail dealers give little atten- 
 tion to stock-turnover. Many of them know little 
 about the proper display of goods. Few of them 
 keep full or adequate accounts and hence cannot fol- 
 low any scientific mark-up policy in making their 
 prices. Few of them have any scientific method of 
 keeping stock or of ordering goods. Most of them 
 have located their stores by guess without any care- 
 ful investigation as to the desirability of the loca- 
 tion. With these facts in mind the wonder is not 
 that the chain stores and mail order houses have 
 made such inroads on their business but that they 
 have been able to hold their own as well as they have. 
 Those specialty dealers who have employed scien- 
 tific merchandising principles in the management of 
 their stores as a rule have had little to fear from any 
 of their competitors. 
 
 Methods of increasing efficiency. — The specialty 
 stores can increase their efficiency by carrying smaller 
 stocks of goods and securing quicker turnovers, by 
 closer collections, by the use of modern accounting 
 methods, by careful training of salesmen and atten- 
 tion to customers, by better store services, and by 
 proper buying. The studies of the Harvard Bu- 
 
 5 For a fuller discussion of this point read Nystorm: "The Eco- 
 nomics of Retailing," 1919, pp. 319 and 320. 
 
250 MARKETING 
 
 reau of Business Research showed that the retail 
 grocers ordinarily have an average of 7.9 stock 
 turns a year, but that twelve turns a year are prac- 
 tical for the ordinary grocery store. Closer col- 
 lections mean smaller losses from bad debts and 
 more money with which to take cash discounts. 
 Proper accounting methods enable the merchant to 
 weed out unprofitable lines and to price his goods 
 properly. More attention to the training of sales- 
 men and the development of their interest and loy- 
 alty through prizes, conferences, bonuses, etc. will 
 lead to increased sales, better care of stock and more 
 attention to the customers. Retail salespeople 
 should learn to give customers real information 
 about the merchandise and to wait on them in their 
 proper turn. Better store service means keeping 
 the store clean, taking better care of stock, better 
 window displays, more care in displaying goods, 
 and care in laying out routes when delivery service 
 is furnished. When not waiting on customers the 
 salespeople should work on stock and not loaf. The 
 merchant should interview as many salesmen as 
 possible and learn all that he can from them but 
 should not allow them to induce him to overbuy. He 
 should strive to buy the proper goods in the proper 
 quantities. 
 
 CONCLUSIONS 
 
 It is estimated in later chapters that the mail 
 order houses obtain four per cent of the retail busi- 
 ness and the chain stores from seven to ten percent. 
 
THE SPECIALTY STORE 251 
 
 If the mail order sales be taken a* five per cent, the 
 chain store sales as ten per cent, and another ten 
 per cent be added for the sales of the department 
 stores, it is apparent that the independent specialty 
 and general stores, in spite of their general ineffici- 
 ency, still handle 75 per cent of the merchandise 
 sold at retail in the United States. With the spec- 
 ialty and general stores we include those stores 
 which handle two or three lines of merchandise (as, 
 for example, clothing and shoes; or hardware, farm 
 implements and automobiles) and yet which do not 
 handle the lines necessary to be classed as general 
 stores and which are not organized and managed as 
 department stores. The specialty; general; and 
 double and triple line stores are still in control of the 
 bulk of the retail trade of the country. The chain 
 stores, which are growing so rapidly, are organized 
 to operate a number of small stores. The large 
 retail stores, although serving a useful function, ap- 
 parently cannot replace the small stores. The re- 
 tail store exists solely to supply goods to the 
 consumers as needed and the small stores with their 
 convenient locations are better situated to do this 
 with many classes of goods than the large centrally 
 located stores. 
 
 CHAPTER X— QUESTIONS 
 
 1. Enumerate the advantages and disadvantages of the general 
 
 store, and of the specialty store. 
 
 2. What effect is the automobile having on the relative importance 
 
 of these two types of stores? 
 
 3. How has the small specialty store succeeded in holding such a 
 
 large part of the trade of the country, when so many of them 
 
252 MARKETING 
 
 are inefficient? VHW they continue to hold their present posi- 
 tion against the competition of the chain stores, department 
 stores and mail order houses? Why or why not? 
 
 4. Would it be in the interest of the public if the small neighbor- 
 
 hood stores were abolished and retailing concentrated in large, 
 centrally located stores? Discuss. 
 
 5. Clark Bros, conduct a general store in a town of 2,000 people. 
 
 They have the oldest store in the town. It is well known and 
 has enjoyed a large trade but of recent years it has been losing 
 trade to the specialty stores — ^grocery, drug, clothing and dry 
 goods — that have grown up with the town. Its sales of dry 
 goods, notions, shoes, and clothing have suffered especially. 
 Should it discontinue these lines and carry only groceries, harjj- 
 ware, farm implements, and seeds? Should it go further and 
 discontinue its grocery line and devote its entire attention to 
 hardware and farm equipment lines? Why or why not? 
 
 6. Clark Bros, also are coming to feel mail order competition 
 
 keenly, would the change of policy suggested above help them 
 to meet mail order competition? Can this store secure the 
 trade of farmers having automobiles and living from 10 to 
 30 miles away? Discuss. 
 
Chapter XI 
 
 RETAIL TYPES (Continued) 
 3. THE DEPARTMENT STORE 
 
 Definition. — The department store is a retail 
 store handling several classes of goods, (one of 
 which ordinarily is dry goods) each class being sep- 
 arated from the others in management, accounting, 
 and location. In other words a department store is 
 a store with a "departmental" organization. Most 
 of our department stores have developed from the 
 specialty dry goods stores and there is in actual prac- 
 tice no very clear distinction made between these 
 two classes of stores. In the smaller cities and 
 towns stores handling dry goods, notions and wo- 
 men's clothing are sometimes called "department" 
 and sometimes "dry goods" stores. The real dis- 
 tinction is in the organization and not in the lines of 
 goods handled. If such a store has the different 
 classes of goods separated with a manager for each 
 class and an accounting system that shows the sales, 
 expenses, and profits separately for each class of 
 goods, then it is a department store. If it does 
 not have such an organization it can not properly 
 be so classed. 
 
 The actual lines of goods handled vary widely 
 from one department store to another. Some of the 
 
 253 
 
254 MARKETING 
 
 department stores handle only dry goods, shoes, no- 
 tions, and women's clothing, while others handle 
 practically everything that is used by the modern 
 urban family — women's clothing, men's clothing, 
 children's clothing, shoes, hats, furniture, carpets, 
 household furnishings, stoves, dishes, dry goods, 
 books, toys, sporting goods, automobile accessories, 
 jewelry, toilet articles, candy, groceries, etc. 
 
 Importance. — Dun lists about 1,800 department 
 stores in the United States. The 1910 census re- 
 ported 9,000 department stores but apparently in- 
 cluded a large number of small town stores that are 
 sometimes called department stores but in reality do 
 not deserve this classification. The J. Walter 
 Thompson Co. gave the number of department 
 stores as 4,620 in 1918. Many of the large city 
 department stores have annual sales running into the 
 tens of millions of dollars. Nystrom states that 
 there are 100 department stores rated at over 
 $1,000,000 each. Parlin estimated that there were 
 in 1912, 1,140 "textile" or department stores hav- 
 ing sales of $200,000 or over. The department 
 store is of especial importance in the sale of dry 
 goods and women's clothing. It has been estimated 
 that they sell over 40 per cent of the total dry goods 
 and women's ready to wear clothing sold in the 
 United States.^ 
 
 Character of trade. — Most department stores are 
 
 iParljn, C. C: "The Merchandising of Textiles," p 26. He es- 
 timated that these 1,140 stores sell 43 per cent, of this class of 
 goods. There are also a number of smaller department stores. 
 
THE DEPARTMENT STORE 255 
 
 centrally located to secure the shopping trade and 
 their principal business is done in shopping lines. 
 They do some business in convenience lines for when 
 people go shopping they also purchase some of the 
 small household necessities, such as thread or groc- 
 eries. Some department stores have grocery de- 
 partments but it is rather unusual to find a 
 department store handling fresh meats. It has been 
 thoroughly demonstrated that the specialty and neigh- 
 borhood stores can successfully compete with the 
 department stores in the sale of convenience lines, and 
 the department stores have come more and more to 
 concentrate in the shopping lines — dry goods, cloth- 
 ing, shoes, hats and household furnishings of all 
 kinds. The convenience goods are generally where 
 the shoppers will see them on their way to look at 
 the shopping goods. 
 
 A woman's store. — The department store in pri- 
 marily a woman's store. It is arranged for shop- 
 ping — the goods are well displayed and so arranged 
 that the customers cannot fail to see them in passing 
 from one department to another. Most women 
 like to shop — to look at different goods and com- 
 pare their qualities, styles, appearances and prices-^ — 
 and the department stores usually cater to their likes 
 in this respect. On the other hand men usually dis- 
 like to shop. They do not like the crowded aisles 
 and the slow elevators. They prefer the smaller 
 specialty stores, easily accessible from the street 
 where their wants can be easily and quickly supplied 
 and where perhaps they can "pass the time of day" 
 
256 MARKETING 
 
 ■with the proprietor. Some department stores have 
 tried to cater to the men by establishing men's de- 
 partments with a truly masculine atmosphere and 
 advertising it as a man's shop. Such attempts have, 
 however, not always been successful. One authority 
 states that men's departments are more often success- 
 ful in the East than in the South or Far West, but 
 that 85 per cent of the men's furnishings sold by de- 
 partment stores are sold to women.'' 
 
 Changed living conditions. — The department 
 store owners realize that the women at present do a 
 very large part of the purchasing for the family. 
 This has come about as the result of changed living 
 conditions. A generation or so ago woman's time 
 was so taken up with home duties — cooking, baking, 
 sewing, washing, and the care of children that she 
 had little time for shopping and the husbands or 
 children of necessity had to buy many of the goods 
 used in the home. With the growth of manufac- 
 turing many articles formerly made at home came 
 to be made in factories. Practically all men's cloth- 
 ing is now purchased ready made. It is unusual 
 to find a city woman who even makes her husband's 
 shirts or socks. A larger and larger part of 
 the clothing for women and children is being 
 bought ready made and less and less made at home. 
 The same applies to food stuffs. Canned goods, 
 bread, cakes, pies, etc. are purchased already cooked. 
 It has been estimated that 60 per cent of the nation's 
 bread is now baked in commercial bakeries, which, 
 
 'Parlin, C. P.: "Merchandising of Textiles," pp. 20 and 21. 
 
THE DEPARTMENT STORE 257 
 
 if true, means that very few city housewives bake 
 their own bread. Machinery has lightened the re- 
 maining tasks — sweepers, washing machines, man- 
 gles and electric irons. Steam heated houses with 
 electric lights and modern plumbing appliances have 
 eliminated much of the work of attending to fires, 
 lamps and of carrying and heating water. The pur- 
 chase of factory made goods and the use of labor 
 saving devices is not limited to the city dwellers as 
 they are now coming into general use upon the farms. 
 The farmer's wife, however, still has a great deal 
 more work to do than her sisters in the towns and 
 cities. These changed living conditions together 
 with the smaller number of children in the modern 
 family have given women time to do a large part of 
 the family purchasing, a task which their husbands 
 were glad to dispose of and which they were equally 
 as glad to assume. 
 
 Importance of women as buyers. — ^Women now 
 select not only their own and their children's cloth- 
 ing but a considerable part of that worn by their 
 husbands. They buy most of the food and a very 
 large part of the house furnishings, although in the 
 purchase of the latter it is not uncommon for hus- 
 band and wife to shop together. It has been esti- 
 mated that women now buy 24 per cent of the men's 
 clothes, 90 per cent of the groceries and an average 
 of 75 per cent of all the goods used in the home. 
 These percentages, are perhaps only guesses by well 
 informed people and are apparently based on ur- 
 ban rather than rural conditions. They may, how- 
 
258 MARKETING 
 
 ever, be taken to show the importance of women 
 buyers to the present day merchant. 
 
 Characteristics of women as buyers. — Women 
 take more time to shop than men. They look at 
 more goods, visit more stores, and take longer to 
 reach decisions. It is said that women commonly 
 look at goods at three stores before buying. This 
 adds to the expenses of retailing and hence to the cost 
 of goods to the customers. "They also read de- 
 scriptions and note details more carefully. The 
 struggle of American families for social place and 
 for more complete satisfaction of a very wide vari- 
 ety of wants causes many women to think more of 
 the pennies than do men. For this reason, sales at 
 reduced prices mean rr\uch more to women than to 
 men."^ Women are, or think they are, better 
 judges of quality than men and hence rely more on 
 their own judgments and opinions and less on brands 
 and trademarks. 
 
 Service. — In catering to the shopping trade most 
 department stores have emphasized "service." They 
 have extended credit liberally, have filled telephone 
 orders, have installed extensive free delivery serv- 
 ices, have sent goods to the homes of their patrons 
 on approval, have made c. o. d. sales, have ex- 
 changed goods freely, and refunded the money in 
 case of dissatisfaction. In addition to such serv- 
 ices many department stores have installed special 
 equipment for the convenience of their patrons, e.g. 
 rest rooms, writing rooms, auditoriums, theatres, 
 
 ' Nystrom, Paul H. : "The Economics of Retailing," p. 33. 
 
THE DEPARTMENT STORE 259 
 
 children's play rooms, beauty parlors, restaurants, 
 children's barber shops, telephone booths, and in- 
 formation bureaus. A charge is made for the serv- 
 ices rendered by many of these but they are installed 
 or operated in most cases for the convenience of 
 their patrons rather than for profit. The depart- 
 ment stores wish to get people in the habit of visit- 
 ing them frequently and attempt to secure their 
 good, will by supplying as many of their needs as 
 possible. These services all increase expense and of 
 late there has been a tendency toward curtailment. 
 These expensive services are often the result of 
 competitive conditions. One store will install a new 
 facility or introduce an extra service and the others 
 will follow with similar or better facilities or serv- 
 ices. In the end expenses are increased with no 
 particular advantage to any store. 
 
 Competitors of the department stores. — The de- 
 partment stores compete with the large centrally 
 located specialty stores, with the small down town 
 specialty shops, with the chain stores, with the neigh- 
 borhood stores, to a lesser extent with the mail 
 order houses, and with the rural stores for the 
 country trade. The department stores have sev- 
 eral advantages as compared with their competitors. 
 They are also at a disadvantage in several respects. 
 The principal advantages and disadvantages are 
 summarized in the following paragraphs. 
 
260 MARKETING 
 
 ADVANTAGES OF DEPARTMENT STORES 
 
 Large purchasing power. — One of the principal 
 advantages of the large department stores is their 
 ability to purchase goods cheaply. Such stores buy 
 in large quantities and can often secure quantity dis- 
 counts or special prices. They very frequently buy 
 direct from the manufacturers and eliminate the job- 
 ber's profit. Then too many manufacturers will 
 make special concessions to have their goods sold by 
 large department stores because of the advertising 
 value of such sales. The department stores have 
 expert buyers who are good judges of qualities and 
 prices and who are on the lookout for any special 
 bargains in job lots, forced sales, or bankrupt stocks. 
 Most large department stores are in a position to 
 make cash purchases from manufacturers who must 
 sell goods at a sacrifice to realize money quickly. 
 They are in a position to buy odd lots, bankrupt 
 stocks, or to purchase a manufacturer's surplus 
 goods. Also they often buy in such quantities as to 
 have goods made to their order. If they can con- 
 tract for the entire output of a plant they are in a 
 position to demand a concession in price. 
 
 Location. — ^The central location of most depart- 
 ment stores is an advantage in securing the shopping 
 trade of people from all parts of the city and also 
 of out of town shoppers. The ability to make all 
 necessary purchases in one building and under one 
 roof is an advantage, especially in bad weather and 
 to persons who dislike spending a large, amount of 
 time and energy in shopping. The ability to buy all 
 
THE DEPARTMENT STORE 26i 
 
 kinds of goods on one line of credit is also quite a 
 convenience to customers as It saves the trouble of 
 opening different accounts and paying several 
 monthly bills . 
 
 Advertising. — The department stores arc the 
 largest users of newspaper advertising. It is said 
 that they practically dictate the news and editorial 
 policies of many of our metropolitan dailies. Be 
 this as it may, they are in a position to use adver- 
 tising space very economically. They draw trade 
 from almost the entire circulating area of most daily 
 papers and hence, pay for very little waste circula- 
 tion. It is also stated that as they have many lines 
 of goods to advertise space can be used to better 
 advantage and that the expense of advertising any 
 one line is less than that of a competing specialty 
 store having only one line to advertise. Certainly 
 when customers are brought to the store by adver- 
 tisements of goods in one department they frequently 
 make purchases in other departments. For this 
 reason department stores have often made use of 
 special sales and cut prices to attract people to their 
 stores. It has been stated that they often sell some 
 well known branded product at a very low price, 
 perhaps below cost, to attract people to their stores, 
 in the hope of selling them other goods. Many man- 
 ufacturers object to the sale of their products at cut 
 prices. The wisdom and ethics of such a merchan- 
 dising policy has often been questioned. The ques- 
 tion of "cut prices" will be discussed in a later 
 chapter. 
 
262 MARKETING 
 
 Delivery. — The large sales of a department store 
 make possible a well organized and efficient delivery 
 system. Undoubtedly a large department store can 
 operate a delivery system over a wide area much 
 more cheaply than a smaller specialty store, but as a 
 rule the specialty store is not called upon to operate 
 such an extensive delivery system. The liberal delivery 
 policy of most department stores is quite a conveni- 
 ence to their customers but as a rule they have higher 
 percentages of delivery expense than do the specialty 
 stores. 
 
 Expert supervision. — Department stores are 
 usually large enough to employ experts to manage 
 their various departments, to work out new merchan- 
 dising policies and to train employees. For this rea- 
 son the department stores are often in the lead in feel- 
 ing and meeting public needs, in introducing new 
 merchandising policies, and in working out new meth- 
 ods of stock keeping and display. They can afford to 
 employ high salaried men to manage their advertis- 
 ing, credit, and other departments. This often means 
 that these departments are more efficiently managed 
 than similar departments of smaller stores. 
 
 Centralized departments. — A department store is 
 in a position to realize certain economies from single 
 centralized departments, such as accounting, credit, 
 and advertising — serving the entire store. A single 
 credit department, for example, can be operated 
 more economically than would be possible if each 
 department had to employ a credit manager. A single 
 investigation of the standing of a prospective cus- 
 
THE DEPARTMENT STORE 263 
 
 tomer is sufficient. Smaller stores must accept more 
 risks, which means more losses from bad debts, or 
 must incur relatively larger expenses for the main- 
 tenance of a credit department. The same is said 
 to be true of the accounting and advertising depart- 
 ments. 
 
 Reputation. — Department stores derive certain 
 benefits from the fact that they are large and well 
 known. Some people like to trade with "big stores" 
 as they think it gives them a certain prestige among 
 their neighbors. They like to have the delivery 
 wagons of large and well known stores stop in front 
 of their houses. 
 
 DISADVANTAGES OF DEPARTMENT STORES 
 
 Can Get Only Shopping Trade. — The department 
 stores are located to secure the shopping trade which 
 means that they are poorly located for the sale of 
 convenience lines. The smaller specialty and neigh- 
 borhood stores have demonstrated their ability to 
 hold most of this trade. 
 
 Abuse of Services. — Many people take advantage 
 of the liberal service policy of the department stores. 
 
 "The customer is always right" policy is abused 
 by a certain number of people. The fact that depart- 
 ment stores are liberal in this respect causes many 
 people to make unreasonable requests and claims. 
 It is stated that many people have very small packages 
 delivered, that they ask that goods used for consid- 
 erable periods be exchanged or taken back, that they 
 
264 MARKETING 
 
 make c. o. d. purchases with no expectation of ac- 
 cepting the goods, and that they purchase goods on 
 approval with no intention of keeping them. Women 
 while shopping frequently see goods that they want 
 but know they cannot afford. It is said that some of 
 them will have the goods sent home in order to have 
 the delivery wagon stop at their doors and perhaps 
 also in the hope that they can find some way of paying 
 for the goods. Such purchases are nearly always re- 
 turned to the stores. Stories have also been told of 
 women having several rugs, curtains or other house- 
 hold furnishings, or even dresses sent home on ap- 
 proval, using them for teas or other social functions 
 and then having the stores send for them as .they have 
 decided that the goods are not what they want. 
 
 The practice of allowing women to select their 
 clothing and hats in their homes is an expensive one. 
 The women who has three dresses or hats sent home 
 with the expectation of keeping only one of them is 
 adding materially to the stores selling expenses. 
 This practice involves not only the expense of calling 
 for the rejected articles and of making the necessary 
 bookkeeping entries but the packing and handling 
 causes a very rapid depreciation in their value. Not 
 only this but such a practice forces the store to carry 
 a much larger stock of goods, for goods scattered all 
 over town in the homes of prospective buyers cannot 
 be shown or sold to others. A large enough stock 
 must be purchased to allow for the goods constantly 
 out of stock. Allowing customers to select goods in 
 their own homes may be very desirable from the 
 
THE DEPARTMENT STORE 26S 
 
 standpoint of the customer but it is very expensive 
 to the store. 
 
 Decentralization of policy. — In a large store with 
 such a large number of employees it is extremely dif- 
 ficult to have the store's policies carried out in all 
 departments at all times. The policy of the store 
 may be excellent but the actual practices existing in 
 certain departments may be very poor. The state- 
 ments or actions of certain employees may be just the 
 opposite of those callfed for under the store's policy. 
 
 Poor salesmanship. — The salesmanship found in 
 many department stores is very poor in spite of 
 special instructors to train the salespeople. In a large 
 store the salespeople have to be supervised by hired 
 employees, they are far removed from the owners, 
 and often feel very little interest in the success of 
 the store. Poor salesmanship is not an inherent dis- 
 advantage of the large department stores but the fact 
 remains that most of them have so far failed to obtain 
 as high an average standard of salesmanship among 
 their salespeople as is obtained by many specialty and 
 chain stores. Poor salesmanship may lose sales after 
 the best of advertising and window display have 
 brought prospective buyers into the stores. 
 
 Lack of personal touch. — There is little oppor- 
 tunity for personal relations, between buyer and seller 
 in the department store. The customer is seldom 
 "waited on" by the same salesperson, although a 
 saleswoman here and there does build up a group of 
 loyal customers. The opportunity of establishing 
 friendly relations with customers* is a distinct advan- 
 
266 MARKETING 
 
 tage to the small specialty store, but, as previously 
 explained, an advantage that they all too frequently 
 neglect. 
 
 Inability to cater to the ultra rich.— The depart- 
 ment store is a store for the masses. As a rule it can- 
 not build up trade in the exclusive lines demanded by 
 the rich. Catering to the whims of this class is really 
 the function of specialists and a very large part of 
 this trade goes to specialty sh^ops. Such shops can 
 better carry the kinds of goods desired, and furnish 
 the service and "exclusive atmosphere" demanded by 
 this class.* 
 
 High cost of doing business. — Due to the expen- 
 sive services rendered and the large overhead ex- 
 penses most department stores have high operating 
 expenses as compared with the small specialty stores. 
 Department stores, being centrally located, generally 
 Jiave high rents. They must be in the shopping sec- 
 tion and if this section moves the department stores 
 must follow. Such moves involve the purchase or 
 lease of expensive locations and often the carrying 
 
 * A department store does at times cater to such trade in certain, 
 lines of goods, but a special department often has to be created so 
 that a specialty store is really developed within the department 
 store. The Nenu York Times of Oct. 24, 1920, described the devel- 
 opment of such an antique department. This department not only 
 has its ovfn buyers and saleswomen but its own stockrooms, its own 
 packing rooms, its own packers, and even its own delivery wagons. 
 It develops its own policies and renders individual service to 
 patrons just as is done by the exclusive Fifth Avenue shops. Such 
 a department is really a specialty shop which happens to be 
 owned by a department store and located in its building. 
 
THE DEPARTMENT STORE 267 
 
 of old rents and leases for several years.^ The elab- 
 orate service rendered adds materially to expenses. 
 Such things as rest rooms and auditoriums occupy val- 
 uable space, while lunch rooms, and barber shops 
 may be operated at a loss. Liberal return and ex- 
 change privileges also increase costs. 
 
 Advertising expenses high. — The advertising ex- 
 penses of department stores are generally above 
 those of specialty stores. Department stores may 
 be able to utilize space to better advantage than spe- 
 cialty stores, but they, as a rule, advertise on a more 
 extensive scale than most specialty stores. The aver- 
 age advertising expense of department stores has 
 been estimated as 4 per cent of sales compared with 
 average expenses of from 0.8 to 2.9 per cent by 
 different classes of specialty stores. 
 
 Large delivery expenses. — High expenses are 
 also incurred in rendering liberal delivery services. 
 The department store may be able to operate a de- 
 livery system more economically than a small special- 
 ty shop could over the same territory. The small 
 
 ° Over 60 per cent, of the large and medium sized department 
 stores in New York (Manhattan Island), moved or went out of 
 business between 1906 and 1916. Of 30 such stores in New York in 
 1906, 11 had gone out of business, and 8 had changed their loca- 
 tions by 1915. Prior to 1906 the department stores were below 
 Twenty-third Street. Many of them were driven out of this sec- 
 tion by factories and moved north of Thirtieth Street. The factories 
 followed and threatened to force the stores to seek a new district. 
 A movement was started to save the shopping section and keep the 
 factories out of this district, which is bounded on the East by Third 
 Avenue, on the north by Fifty-ninth Street, on the west by Seventh 
 Avenue, and on the south by Thirty-first, Thirty-second, and Thir- 
 ty-third streets. — Journal of Commerce, Jan. 4, 1916. 
 
268 MARKETING 
 
 store, however, seldom covers such a large territory 
 and so has a lower percentage expense for delivery 
 service. 
 
 Lost motion. — There is a certain waste of time 
 in department stores due to the difficulty of always 
 apportionmg the proper number of employees to 
 each department. Department store employees are 
 generally more careless than those in a smaller store 
 who are under the Immediate supervision of the pro- 
 prietor. This carelessness leads to the loss, soilage, 
 bieakage, and spoilage of merchandise. 
 
 Expense of developing systems. — ^The depart- 
 ment stores must spend more money for the develop- 
 ment of systems. Statistics must be gathered and 
 compiled and experts employed to show the^progress 
 of the business and to devise methods and policies 
 for the future. Most small stores would undoubt- 
 edly be benefited by better accounting methods and 
 more attention to changing conditions and improved 
 store policies. The small merchant, however, is in 
 a position to know more about the condition of his 
 business and the demands of the customers from per- 
 sonal supervision of his store and contact with his cus- 
 tomers. The fact remains, nevertheless, that the 
 department stores actually have higher expenses in 
 this connection than the small stores. 
 
 Average expenses. — Sammons, Nystrom, and 
 Butler, all three, give the average cost of doing busi- 
 ness by department stores as between 26 and 27 per 
 cent. Stores in large cities often have even higher 
 
THE DEPARTMENT STORE 269 
 
 expenses.® This is considerably higher than the 
 average costs of most classes of specialty stores. 
 Stores located in the shopping districts, catering to 
 the shopping trade and competing with the depart- 
 ment stores in delivery, credit and other services 
 appear to have expenses approximately equal to 
 those of the department stores. The expenses of 
 most department stores are, however, consid- 
 erably higher than the expenses of most of the 
 specialty stores, chain stores, and mail order houses. 
 This high cost of doing business places the depart- 
 ment stores under a serious competitive handicap 
 and has undoubtedly operated to check the growth 
 of this class of stores. 
 
 A successful manager's advice. — In this connec- 
 tion it is interesting to note what the head of a large 
 department store operating on a cash basis has to 
 say about expense. "The greatest number of people 
 buy where they can get good goods and save money. 
 They need no other inducement. . • . The mer- 
 chant who offers good goods as cheaply as it can pos- 
 sibly be done is sure to grow fast and safely. For 
 although he may reap a lower percentage of profit 
 than his competitor, he will more than make this up 
 by the increase in the volume of business. A two per 
 cent profit on a turnover of ten millions is twice as 
 worth while working for as ten per cent on one mil- 
 lion. You can figure that for yourself. The strongest 
 
 'Nystrom, Paul H.: "Economics of Retailing," p. 67; Butler, 
 Ralph Starr: "Marketing Methods," p. 65; Sammons, Wheeler, 
 System, June, 1914. 
 
270 MARKETING 
 
 argument against fads (showy methods), however, 
 is not their uncertainty in bringing trade, but the 
 fact that they are so costly. . . . The offer, 'We 
 lay our rugs on your floor so that you may live with 
 them and see how you like them,' is one of them. 
 Or the invitation to, 'select your hats in your own 
 home' ! 
 
 "The customer always has to pay the whole cost 
 of an article from the time it is planned before 
 manufacture until it is delivered into his hands. Too 
 few of us think of that. For all the world is a cus- 
 tomer and should be interested in cutting foolish 
 costs. This brings me to the advice which I offer 
 those who are taking over the direction of business 
 undertakings, — ^whether these undertakings are large 
 or small: 
 
 "Keep down expense ! Keep down expense ! For 
 therein lies the profit to the merchant and the sav- 
 ing to the customer. Each reacts on the other.'" 
 
 THE PROBLEMS OF THE DEPARTMENT STORES 
 
 The department stores have the advantage of 
 being able to buy their goods cheaply, but most of 
 them have the disadvantage of finding it expensive 
 to sell them. The high operating expenses seem to 
 just about offset the low costs of the goods so that 
 the department stores and specialty stores compete 
 on more or less equal terms so far as selling prices 
 are concerned. 
 
 ' Mrs. Mollie Netcher Neuberger, Manager of the Boston Store, 
 Chicago, writing in The American Magazine of June, 1919. 
 
THE DEPARTMENT STORE 271 
 
 Problem of management. — ^The question of effi- 
 cient supervision and management is the department 
 store's most serious problem. Many of these stores 
 have grown so large that they have apparently out- 
 grown their organizations. The owners are crying 
 for more highly trained men and women with whom 
 to build up organizations capable of operating their 
 stores efficiently and economically. Yet, in spite 
 of all their efforts they seem to be unable to mate- 
 rially reduce expenses. 
 
 Do not attract the best type of employees. — It is 
 difficult to secure intelligent and energetic sales- 
 people. It is much more difficult to secure the neces- 
 sary number of properly trained men and women 
 for the higher positions, both in the merchandising 
 departments and in the general offices. The depart- 
 ment stores have not been attracting enough of the 
 right type of young people. Young people entering 
 business seem to feel that the department stores 
 offer them no opportunity for success and hence, if 
 ambitious, they look elsewhere for employment. 
 The complaint has been made that department store 
 employees are devoid of ambition or else feel that 
 the department stores offer them no opportunity 
 for advancement. This is especially true of girls. 
 It is said to be very difficult to find among their sales 
 forces girls who are willing to study and work for 
 promotion. Yet there is probably no other place 
 in the business world that offers the successful 
 woman as large a financial reward as the depart- 
 
272 MARKETING 
 
 ment stores.* Perhaps this attitude is due to the 
 fact that such stores have a large number of poorly 
 paid employees and relatively few highly paid em- 
 ployees. 
 
 Success generously rewarded. — Success in the 
 department stores is generously rewarded. Success- 
 ful department managers earn ten, twenty-five, and 
 even fifty thousand dollars per year. Competition 
 among the stores is keen for such people and as long 
 as their success lasts they are assured of highly re- 
 munerative employment. Ambitious young people 
 expecting to enter business should consider seriously 
 the opportunities offered by the department stores. 
 
 THE FUTURE OF THE DEPARTMENT STORE 
 
 A generation ago the department stores were 
 growing rapidly and were supposed to afford the 
 most efficient method of retail distribution. During 
 the last fifteen years they have grown very little as 
 a class and many stores have failed. The value of 
 their sales has increased, but this is due to increased 
 prices rather than the volume of goods handled. 
 There were many department store failures in the 
 year preceding the outbreak of the Great War.' 
 
 *0n this point read, "Women in $6,000 to $30,000 Jobs," Ameri- 
 can Magazine, July 1919. 
 
 ° In New York and Brooklyn for example, there were 36 large 
 and medium sized department stores in 1906. Nine others entered 
 the field prior to 1915. Of the 45 stores, 13 had failed, or quit busi- 
 ness prior to 1915, while S others had failed and been reorganized. 
 Several stores in New York were involved in the Claflin failure 
 and so the failures there during this decade can hardly be taken as 
 typical, but there were many failures in other cities. See Journal 
 of Commerce, Jan. 4, 1916 
 
THE DEPARTMENT STORE 21 Z 
 
 The chain store appears to be capable of more effi- 
 cient management and more economical operation. 
 The department store, however, has come to stay. 
 It serves a definite need in supplying shopping fa- 
 cilities. The chain store cannot supply such facilities 
 without encountering many of the same problems 
 now faced by the department stores as is shown by 
 the operations of the chains of department stores.'" 
 The department stores cannot be expected to at- 
 tain their former rate of growth unless they succeed 
 in creating more efficient organizations and reducing 
 their overhead expenses." 
 
 "The increase in the gross sales of typical department stores dur- 
 ing the past five years does not appear to be more than the increase 
 in the prices of the goods handled. 
 
 " At this writing many students of business are predicting a long 
 period of declining prices. If such a period occurs the department 
 stores may enter a new period of growth due to their ability to turn 
 their stocks quickly. The department stores had their origin and a 
 large part of their growth during a period of falling prices. Dur- 
 ing the ensuing period of rising prices they held their own by em- 
 phasizing service. When prices are falling the store buying direct 
 from the manufacturers is able to get the goods to the consumers 
 more quickly than the store buying from the wholesalers and hence 
 is able to pass price reductions on more quickly. This often enables 
 it to undersell the small store which must buy from the wholesalers. 
 
 CHAPTER XI— QUESTIONS 
 
 What factors contributed to the rapid growth of the department 
 
 stores a generation ago? Why has the growth been slower in 
 
 recent years? 
 What can you say of the importance and characteristics of 
 
 women as buyers? What use have the department stores 
 
 made of these facts? 
 
274 MARKETING 
 
 3. Enumerate the advantages and disadvantages of the department 
 
 stores. 
 
 4. The Brown Department Store located in a city of 500,000 has in 
 
 the past been prosperous but in recent years the rate of net 
 earnings has been decreasing. It is apparent that if some 
 change is not made that the store vyill fail in a few years. A 
 survey of the situation shows that competition is very keen. As 
 a result many free and expensive services are granted, such as 
 liberal credit, unlimited delivery, delivery of goods on ap- 
 proval, c. o. d. sales; also rest rooms, nursery, and special at- 
 tractions to draw people to the store. As a result overhead 
 expenses are high. The labor turnover is high and many of 
 the salespeople are poorly trained and indifferent to the inter- 
 ests of the store. The percentage of gross profits realized is as 
 large as ever and the volume of sales has been on the increase. 
 The percentage of expenses has been constantly increasing. 
 What policies should be pursued under the circumstances? 
 
 5. The Imperial Department Store is located in a city of 150,000 
 
 people. It has been very prosperous and has accumulated a 
 capital beyond its immediate needs. There does not appear to 
 be much opportunity for increasing the sales of the lines now 
 handled. The company considers opening a store in a smaller 
 city 75 miles away, where there are several stores but none up 
 to the standard of the Imperial. Another proposal is to add 
 additional lines of goods such as furniture. Due to the floor 
 space needed by a furniture department it would be necessary 
 to add one or two more stories to the building. At the present 
 time there are several specialty furniture stores in the town, 
 all of which are very conservative and somewhat old fashioned 
 in their methods. What would each of these changes involve? 
 Which would you recommend ? Why ? 
 
 6. Suppose the Imperial Department Store mentioned in the preced- 
 
 ing problem decides to expand the business at its present loca- 
 tion but hesitates to start a furniture department due to the 
 necessary capital outlay to secure the needed space, the slow 
 turnover, and the difficulty of securing a capable manager. 
 Instead it is proposed to install a men's department handling 
 men's shoes, clothing, hats, etc. At the present time the store 
 handles a small line of haberdashery but not men's clothing or 
 shoes. These departments can be placed on upper floors of the 
 present building or in rented first floor space in an adjoining 
 
THE DEPARTMENT STORE 275 
 
 building, leased at the prevailing street floor rates in the shop- 
 ping district. There are several specialty stores handling 
 men's furnishings but so far none of the department stores 
 have done so except on a very limited scale. Could the men's 
 department be made successful ? Would you advise starting 
 this department in preference to a furniture department? 
 Why or why not? If it is decided to install the men's de- 
 partment should it be started on an upper floor or should the 
 high rent be paid for the street floor location? 
 7. Another proposal for the Imperial Department Store is to start 
 a grocery department. At present the groceries are sold by 
 small specialty stores and a few large down tbwn grocery 
 stores. Chain grocery stores have recently appeared in the 
 town but as yet have not attracted much attention. What do 
 you think of the establishment of a grocery department? 
 
Chapter XII 
 RETAIL TYPES (Continued) 
 
 4. THE MAIL ORDER HOUSE 
 
 The mall order method of doing business grew 
 up contemporaneously with the department stores 
 to supply the needs of the rural population for a 
 greater variety and a wider selection of goods and 
 to furnish another outlet for the ever-increasing 
 number of manufactured articles. 
 
 Classes of concerns doing a mail order business. 
 — First, there is the manufacturer who sells his 
 product direct to the consumer, soliciting business 
 by advertising and correspondence, and receiving 
 orders by mail. 
 
 Second, there is the merchant, or middleman, who 
 buys goods made by others and sells them to the con- 
 sumers by mail. Such a concern may specialize on 
 a small line of goods, but the best known concerns 
 handle a full line of a certain class of merchandise 
 or several different classes of merchandise. 
 
 Third, there is the retail merchant who sells most 
 of his goods over the counter, but who receives a 
 certain amount of business through the mails. Sev- 
 eral city department stores have operated mail order 
 departments to cater to the out of town or rural trade. 
 Even the rural or small town dealer who is very 
 
 276 
 
THE MAIL ORDER HOUSE 277 
 
 bitter in his denunciation of the mail order houses 
 seldom refuses to make a sale simply because the 
 order was received by mail. 
 
 Fourth, there is the wholesale mail order dealer, 
 who sells goods to the retailers. 
 
 Fifth, any manufacturer or dealer who receives 
 orders for goods by mail may in a broad sense be 
 said to be doing a mail order business. A manu- 
 facturer may place orders for raw materials by mail 
 without waiting for the seller's salesman to call. A 
 wholesaler or a retailer may forward orders by mail 
 when out of stock or when salesmen call infrequently. 
 Practically every large business concern makes some 
 purchases or sales by mail and the total of business 
 done In this way by concerns not called mail order 
 houses is enormous. 
 
 Sixth, concerns advertising their goods in news- 
 papers, magazines, circulars or letters distributed by 
 the post ofEce, arc attempting to sell goods by mail. 
 The advertiser may request the reader to go to the 
 local dealer and ask for the advertised product or 
 he may request the reader to forward his order 
 for this product by mail. The difference is in the 
 method of delivering the product rather than In the 
 method of effecting the sale. 
 
 When all of these methods are considered it is 
 easy to see that the mail Is an extremely important 
 instrumentality in the making of sales. By the mail 
 order house, however, is generally meant the manu- 
 facturer or dealer who receives orders for goods 
 
278 MARKETING 
 
 direct from the consumers by mail. The mail order 
 method is contrasted with the "over-the-counter" or 
 the "personal salesmanship" method, the buyer or- 
 dering goods from a printed description without 
 having the opportunity of seeing the goods before 
 purchasing. It is such type of mail order houses 
 that are discussed in this chapter. 
 
 Importance of mail order business. — It has been 
 estimated that the direct to the consumer mail order 
 business amounts to 4 per cent of the total retail 
 business of the country and to 20 per cent of the 
 rural retail trade.^ These estimates cannot be taken 
 as altogether accurate and are presented only to give 
 an idea of the relative importance of the mail order 
 business. 
 
 The number of mail order houses has been placed 
 by Nystrom at over 2,500 of which 850 are rated at 
 over $100,000.^ A few facts about some of the 
 large mail order concerns may be interesting and 
 help the reader to appreciate the importance of the 
 
 ^ See Nystrom, Paul H. : "Economics of Retailing," p. 291. These 
 two percentages, however, appear to be too far apart. Over 40 per 
 cent, of the population of the United States is rural. If all of the 
 mail order business was obtained from the rural districts, which is 
 far from the truth, 4 per cent, of the total retail business would 
 equal only about 10 per cent, of the rural business. The fact that 
 the rural population has smaller per capita purchases due to pro- 
 ducing many things at home would hardly explain such a discrep- 
 ancy in the percentages. Evidently the total percentage of the 
 retail business done by mail is over four or the average percentage 
 of rural business is less than twenty. Certain rural communities 
 are, however, said to buy considerably more than 20 per cent, of 
 their goods by mail. 
 
 "Nystrom, Paul H.: "The Economics of Retailing," p. 290. 
 
THE MAIL ORDER HOUSE 279 
 
 mail order business. Sears, Roebuck & Company, 
 of Chicago, has over six million customers; Mont- 
 gomery Ward & Company, Inc., of the same city, 
 has about six million ; while the National Cloak and 
 Suit Company has 2,700,000 active accounts. The 
 plant of Sears, Roebuck & Company, in Chicago^ 
 covers thirty-seven acres and the. company has 
 branches and distributing warehouses in many other 
 cities. Montgomery Ward & Company, Inc., has its 
 main plant in Chicago and branches in Kansas City, 
 Portland, Ore., and Fort Worth, Texas. The Chi- 
 cago plant has 19,000,000 cubic feet of space, while 
 the Kansas City plant, with 47 acres of floor space, 
 is said to be the largest mercantile building west of 
 the Mississippi River. The National Cloak and 
 Suit Company has 1 5 acres of floor space in its plant 
 in New York City. Harris Brothers Company, for- 
 merly the Chicago House Wrecking Company, has 
 a plant in Chicago covering 20 acres. The sales of 
 these four concerns follow: 
 
 Name 1915 1919 
 
 Sears, Roebuck & Company*. . . .$106,228,421 $233,982,584 
 
 Montgomery, Ward & Co., Inc*. 49,308,587 99,336,053 
 
 National Cloak and Suit Co*. . . 17,371,650 39,449,986 
 
 Harris Bros. Company 3,841,596 4,886,288 
 
 Total for" Four Companies.... $176,750,254 $377,654,911 
 * Net Sales 
 
 Many of the other large mail order concerns do 
 not publish figures showing their sales. Mail order 
 
280 MARKETING 
 
 houses, in common with other types of merchandis- 
 ing concerns ordinarily give out few figures concern- 
 ing their merchandising business. Some mercantile 
 concerns appear to purposely refrain from publishing 
 figures from which their gross trading profits oper- 
 ating expenses, and rate of stock turnover can be 
 computed. 
 
 Many manufacturers sell direct to the consumers. 
 The Larkin Company and the National Cloak and 
 Suit Company are two well known examples. A 
 large number of such concerns are specialty manu- 
 facturers. They often produce articles for use on the 
 farm or in the home, e.g. cream separators, buggies, 
 washing machines, etc. The field, however, is broad 
 and practically every type of merchandise from fish 
 to houses has been marketed in this way. Some of 
 the large mail order merchants have gone into the 
 manufacturing business on a large scale. For ex- 
 ample, Sears, Roebuck & Co\. reported advances to 
 and investments in factories and branches of $33,- 
 067,611 on December 31, 1919, while Montgom- 
 ery Ward and Company, Inc., report that they have 
 factories manufacturing farm implements, vehicles, 
 harness, gas engines, cream separators, paints, food 
 products, candies, window shades, and automobile 
 tops ; and that they are interested in factories mak- 
 ing hosiery, bedding, women's wear, boy's clothing, 
 wall paper, and print paper. When the manufac- 
 turer sells the consumer direct, all middlemen are 
 eliminated. Many manufacturers who have adopted 
 this method have apparently done so, however, to 
 
THE MAIL ORDER HOUSE 281 
 
 secure a larger volume of sales rather than to elim- 
 inate the middlemen's profit. 
 
 Fraudulent practices. — There have in the past 
 been many concerns trying to defraud the public 
 through the mails. Due to the activities of the Fed- 
 eral Government in searching out and prosecuting 
 those using the mails for fraudulent purposes the 
 number of such concerns has decreased. There are 
 undoubtedly some such concerns still in existence 
 in spite of all that has been done by both govern- 
 mental and private agencies to exterminate them. 
 Most of the mail order houses, however, appear to 
 be just as honest as the concerns selling their goods 
 in any other way. The public has learned to trust 
 many of the mail order houses and is much less sus- 
 picious of such houses than it was a generation ago. 
 
 Certain mail order houses have, however, been 
 guilty of untruthful advertising. Complaints of this 
 nature have even been made against some of the 
 largest concerns. Such practices are, however, prob- 
 ably much less common among the reputable mail 
 order houses than among the local department and 
 specialty stores. The mail order houses do an in- 
 terstate business and use the mails extensively and 
 hence are under the scrutiny of the Federal Govern- 
 ment. Local stores are generally free from such 
 scrutiny. Advertising that would bring a large mail 
 order house into court would often go unnoticed if 
 done by local merchants. 
 
282 MARKETING 
 
 REASONS FOR THE GROWTH OF MAIL ORDER BUSINESS 
 
 It was pointed out in Chapter IX that the mail 
 order houses grew up principally to supply the rural 
 population with goods unobtainable at the local 
 stores knd that their growth was made possible by 
 quick and cheap transportation facilities. Such 
 transportation facilities made possible not only the 
 delivery of small shipments from a central point 
 quickly and cheaply, but made possible a much better 
 mail service. The improved mail service especially 
 the rural free delivery service contributed to the 
 growth of the reading habit and made possible wide- 
 spread advertising. The growth of the mail order 
 business depended largely upon such advertising. 
 
 Increased standard of living. — The standard of 
 living of the American people has increased mate- 
 rially during the past fifty years. The luxury of 
 one day becomes the necessity of the next. Increas- 
 ing prices of farm products during the past twenty- 
 five years has added materially to the prosperity 
 of the American farmer. Following the Civil War 
 the level prairies of the Middle West were settled 
 so rapidly that the amount of land under cultivation 
 increased more rapidly than population with result- 
 ant low prices. Since 1890, however, the population 
 has been increasing more rapidly than the area of 
 land under cultivation and the general trend of prices 
 has been upward since 1895. 
 
 New wants. — New wants were acquired from 
 reading, travel, and contact with others. It is hu- 
 man nature to want what we see others have. The 
 
THE MAIL ORDER HOUSE 283 
 
 children acquire new wants at school. The movies 
 have been an important factor in developing new 
 wants, especially for house furnishings and clothing.' 
 The same pictures are shown in Podunk as on Broad- 
 way. They have done much to nationalize styles. 
 It is said that there is now less difference in the kind 
 of clothes worn and merchandise purchased by peo- 
 ple in different sections of the country than ever be- 
 fore in our history. The automobile has been one 
 of the most important factors in creating new wants. 
 It increases travel, multiplies the trips to town, to 
 the movies, and to call on distant neighbors. It has 
 been observed that when a farmer buys an automo- 
 bile he generally increases his standards of living or 
 sells the automobile. The rural population has been 
 able to satisfy many of the new wants due to the 
 prosperity coming from the increased prices for 
 farm products. 
 
 Desired goods obtainable from mail order 
 houses. — The mail order house carried a greater 
 variety of goods than the rural stores and many peo- 
 
 ' The following illustration shows the effect of the movies on the 
 demand for clothing: "Every time there is a new movie play with 
 girls in pajamas in them, then the women's pajama business takes a 
 stride ahead. That was proved positively in 1916, when the pajama 
 business for women had its first boom at the time that Billie Burke 
 made a hit in the film play "Gloria's Romance." In it she appeared 
 in a nice little one-piece pajama suit and looked, as the women 
 said, a "perfect dear" in it. The effect was instantaneous. From 
 all over the country dealers sent in to the manufacturers saying: 
 "Send us Billie Burke pajamas. Our shops are crowded with wom- 
 en asking for thera." An interview with Sydney S. Samuels in New 
 York Times, December 5, 1920. 
 
284 MARKETING 
 
 pie were forced to buy away from home to get what 
 they wanted. The mail order catalog furnished the 
 farmer's wife a substitute for the shopping trips of 
 her city sister. The rural store was, however, partly 
 to blame for its loss of trade for it often did little to 
 increase the variety of goods carried in stock or 
 the efficiency of its merchandising methods. 
 
 Manitfacturers forced to sell by mail. — ^Another 
 cause contributing to the growth of the mail order 
 business was the great increase in the variety and 
 quantity of manufactured goods. If a manufac- 
 turer finds it difficult or impossible to sell his goods 
 through the regular trade channels he will very likely 
 be willing to sell direct to the consumers or to sup- 
 ply their goods to mail order dealers. 
 
 Low prices of mail order houses. — A very impor- 
 tant factor contributing to the growth of the mail 
 order business was the low prices at which the mail 
 order concerns offered their goods. They could 
 often undersell the local merchants. They featured 
 low prices in their catalogs and claimed to sell goods 
 cheaper than any one else. The catalogs of twenty 
 years ago were quite different from those of the 
 present time in this respect. When the farmers are 
 poor, price arguments are more potent than when 
 they are prosperous. Whether the mail order 
 houses really undersold the local merchants, when 
 delivery costs and services were considered or not, 
 they made their customers think that they did. At 
 the present time the mail order houses have not 
 
THE MAIL ORDER HOUSE 285 
 
 ceased to emphasize price, but many of them now 
 lay great emphasis on quality. 
 
 Manvif actiurers desire to control price to consum- 
 ers. — ^Another reason given for the growth of the 
 mail order method of selling goods is that certain 
 manufacturers adopted it in order to control the price 
 to the consumers. Middlemen do not always sell 
 at the prices designated by the manufacturers. 
 Manufacturers who desire to have their prices main- 
 tained may thus take the sale of their goods away 
 from the middlemen and sell direct to the con-, 
 sumers. 
 
 ADVANTAGES OF THE MAIL ORDER HOUSES 
 
 Ability to buy cheaply. — One of the principal ad- 
 vantages of the mail order houses, in comparison 
 with their competitors, is their ability to secure their 
 goods cheaply. The mail order houses buy in such 
 large quantities that they are in a position to buy 
 direct from the manufacturers and secure low prices 
 or special quantity discounts. They have expert 
 buyers who are constantly on the lookout for goods 
 that can be bought cheaply. They are generally 
 in a position to pay cash. They can thus get con- 
 cessions from manufacturers who must have cash 
 quickly. They can buy goods on which the manu- 
 facturers are overstocked. They can contract for 
 the entire output of factories. The tendency of large 
 mail order houses to manufacture their own goods 
 has already been mentioned. If such goods are 
 produced as cheaply as those made by other manu- 
 
286 MARKETING 
 
 facturers, the mail order house can eliminate the 
 selling expenses and profits of the manufacturer and 
 jobber and sell the consumer at lower prices or it 
 can retain both profits for itself. What probably 
 happens in most cases is that, regardless of factory 
 costs, the mail order houses try to price their goods 
 somewhat lower than the prices of similar goods 
 sold by the local merchants. 
 
 The low cost of doing business. — The mail order 
 houses have many economies in operation. They do 
 not need to be located in the heart of a city. A 
 location in the suburbs where land is cheaper and 
 rents arc lower serves their purpose just as well as 
 an expensive down-town location. They can use la- 
 bor more efficiently. Their clerks do not have to 
 show goods to customers. No time is lost in wait- 
 ing for patrons to make up their minds or in show- 
 ing goods to people who do not buy. A clerk in a 
 mail order house will handle several times the vol- 
 ume of business handled by a salesperson in an ordin- 
 ary retail store. Again as the clerks in a mail order 
 house do not come into contact with the customers 
 a cheaper grade of employees can be used than is 
 required by the ordinary retail stores. The mail 
 order houses have no expense for house to house 
 deliveries. 
 
 Many mail order houses give little or no credit 
 to buyers. Sales for cash involve no loss of interest 
 on "accounts receivable"; eliminate all losses from 
 bad debts; save the expenses of maintaining credit 
 and collection departments ; and reduce the expenses 
 
THE MAIL ORDER HOUSE 287 
 
 of keeping books. Sales for cash mean that the 
 company can pay cash for its purchases and hence 
 buy more advantageously. Many of the specialty 
 mail order houses, however, have liberal credit poli- 
 cies ("30 days free trial," "No cash with orders" 
 are familiar advertising slogans). Some of the 
 larger houses have introduced a limited credit pol- 
 icy and will now sell certain articles on the install- 
 ment plan. Sears, Roebuck & Co. reported accounts 
 receivable of $19,883,444 on Dec. 31, 1919, and 
 $47,797,134 on Dec. 31, 1920. Such articles are 
 generally items of relatively large value such as farm 
 implements and house furnishings. Credit sales are 
 sometimes used to stimulate business during dull sea- 
 sons. For example, farm implements may be sold on 
 credit during the winter, while during the busy spring 
 season cash may be required with all orders. Many 
 people, however, must buy on credit and the fact that 
 many mail order houses will not sell on this basis 
 causes them to buy from the local merchants. More 
 will be said about this later. 
 
 Quick turnovers. — The mail order houses can 
 handle a wide variety of goods without carrying 
 large stocks. Many large articles are shipped di- 
 rect from the factories and not carried in stock at 
 all. Again if goods are out of stock the orders 
 may be held until new shipments are received. Peo- 
 ple ordering goods by mail do not expect to receive 
 them immediately and hence are more patient in 
 case of delays than when buying from the local mer- 
 chants. The rate of stock turnover, however, does 
 
288 MARKETING 
 
 not appear to be any greater than that of efficiently 
 managed department and specialty stores.* 
 
 Development expenses. — The mail order houses 
 often have little expense for developing new articles 
 or designs or for introducing such articles upon the 
 market. They very frequently handle only stand- 
 ardized goods for which a widespread demand has 
 already been created. For example the large mail 
 order houses did not handle gasoline engines until 
 they were past the experimental stage and until they 
 had come into general use. They have taken no part 
 in the development of tractors and yet it is not un- 
 likely that when tractors become more perfect me- 
 chanically, when standardized types are developed 
 by experience, and when farmers become more fa- 
 miliar with their operation, that the mail order 
 houses will obtain a simple, standard model for their 
 customers. Such a policy reduces, their expenses, 
 but renders somewhat unfair a comparison of their 
 
 *The mail order concerns publishing their sales figures fail to 
 publish their cost of sales, so that the rate of stock turnover can not 
 be computed. If, however, the net sales be divided by the average 
 inventory a figure is obtained vrhich may be used in comparing the 
 operations of different years. For Sears, Roebuck and Company 
 this division gives the following figures: 1914, 7.3; 1915, 7.S; 1916, 
 6.8; 1917, 5.3; 1918, 4.3; 1919, 5.2, and 1920, 3.2. These figures 
 indicate a reduction in the rate of stock turnover. From 1916 to 
 1919 prices were rising and many dealers were buying somewhat 
 in advance of their immediate needs, in other words building up 
 inventories in anticipation of further price advances. Further dur- 
 ing much of this period the railroads were congested and deliveries 
 frequently delayed. This meant that larger quantities of goods had 
 to be carried in stock in order to supply customers promptly. A 
 serious slump in business was experienced during 1920. 
 
THE MAIL ORDER HOUSE 289 
 
 prices with those of the manufacturers who have 
 borne all the expenses of experimenting, advertis- 
 ing, and demonstrating. If new articles are to be 
 developed some one must bear the expense and the 
 complaint of the manufacturers that the mail order 
 houses shirk this expense and yet take advantage of 
 such work done by others, is perhaps, not without 
 some justification. 
 
 Advertising expense. — On the other hand mail 
 order houses have a high expense for advertising. 
 Catalogs must be sent to many people who do not 
 buy and many people buy only occasionally. It was 
 long ago realized that the expense of constantly 
 searching out new customers would be prohibitive 
 and that re-orders from regular customers must be 
 secured if the business was to be profitable. It is 
 said to cost $1.00 to print and deliver a large gen- 
 eral catalog. A single issue of 6,000,000 then costs 
 $6,000,000. The mail order houses also have heavy- 
 expenses for handling correspondence and assem- 
 bling orders. These expenses largely offset the 
 economies from low rents, efficient use of labor, 
 cheap clerks, quick turnovers, cash sales, and little 
 work in experimenting and developing new products. 
 It is doubtful if the total expenses of the mail order 
 houses are below the average expenses for many 
 other types of retailers. 
 
 Total expenses. — The total expenses of efficiently 
 managed mail order houses has been placed by 
 Sammons at about sixteen per cent of sales. The 
 expenses of Sears, Roebuck & Company has been 
 
290 MARKETING 
 
 given as IS per cent.^ The expenses, however, vary 
 widely between different houses. Nystrom reports 
 the following expenses for nine concerns: One, 
 16%; one, ISj^^; one, 20%; one, 22%; two, 
 24%; two, 25%, and one, 26%.° One large mail 
 order house is said to mark its goods for a 28 per 
 cent margin of gross profit. Such expenses are 
 below those of many city department stores, but no 
 lower than those of a great many specialty stores. 
 The rural dealers, however, feci most strongly the 
 competition of the large and efficient houses, as the 
 catalogs of the latter are widely circulated and com- 
 parisons are most frequently made with their prices. 
 The rural merchants can by eificient methods of 
 operation hold their expenses down to 16 per cent 
 of sales or even less. The average expenses of all 
 classes of dealers who handled farm implements, 
 which includes nearly all types of rural dealers, was 
 14.6 per cent of sales in 1915, and 12.6 per cent in 
 1918. Approximately 50 per cent of such dealers 
 already have operating expenses of less than 16 per 
 
 ° System, June 1914. In their reports Sears, Roebuck and Co. com- 
 bine the cost of goods and operating expenses. Assuming the gross 
 profits to have averaged 25 per cent, the expenses decreased from 
 less than 16 per cent, in 1914 to less than 12 per cent, in 1918, from 
 which point they increased to over 14 per cent, in 1919 and to ap- 
 proximately 25 per cent, in 1920. The gross profits however were 
 probably much below 25 per cent, in 1920 so that it is doubtful if 
 the percentage of expenses was more than 2 or 3 per cent, higher 
 in 1920 than in 1919. If the average gross profits were more or 
 less than 25 per cent the percentage of expenses would be changed 
 correspondingly. 
 
 ' "Economics of Retailing," p. 305. 
 
THE MAIL ORDER HOUSE 291 
 
 cent/ The mail order houses then have no advan- 
 tage of the rural dealers as far as operating ex- 
 penses are concerned. 
 
 Low prices. — Due to the ability to buy goods 
 cheaply and the relatively low cost of doing busi- 
 ness the mail order house can often sell at low 
 prices. One of the chief reasons why many people 
 patronize the mail order houses is because they can, 
 or think they can, buy goods more cheaply than is 
 possible from the local merchants. The local dealers 
 can often sell their goods as cheaply as the mail 
 order houses, but the opposite is undoubtedly true 
 in many cases. 
 
 Farm implements as an example. — During 1916 
 and 1918 farm implements sold by a lai-ge mail 
 order house cost the farmers on the average from 
 20 and 25 per cent less, after paying the freight, 
 than similar implements purchased from the local 
 dealers. During these years, when prices were ris- 
 ing, the saving on mail order goods seems to have 
 often been larger than usual, due to the fact that 
 the mail order houses advanced their prices more 
 
 ' Federal Trade Commission: "Causes of the High Prices of Farm 
 Implements," 1920, pp. 260 and 261. Sixty per cent of such dealers 
 reported expenses of 16 per cent or less in 1915 while 81 per cent 
 reported expenses of 16 per cent or less in 1918. The table from 
 which these percentages were computed did not include salaries for 
 all dealers as some of them did not pay themselves salaries. Under 
 the Commission's rule interest on borrowed funds was not included 
 in expense. If interest on borrowed funds and salaries for all deal- 
 ers had been included in expenses, it is safe to say that approxi- 
 mately SO per cent, of the rural dealers handling farm implements 
 would have had expenses of less than 16 per cent, of sales. 
 
292 MARKETING 
 
 slowly than the farm implement manufacturers and 
 local dealers. This saving refers to price alone. 
 There may be a difference in the quality of the goods 
 sold and the service rendered. The local dealers 
 may render more service by extending credit, giv- 
 ing advice, delivering goods on the farm, carrying 
 repair parts, making repairs, etc. Referring to 
 prices and services, an of&cial of a mid-western 
 dealers' association said: "I have always said that 
 I can take care of a difference of 10 or 15 per cent 
 because of the service I render, and because of be- 
 ing able to make more prompt delivery — but when 
 it comes to a difference of 25 per cent or 50 per 
 cent (in price) it is something to consider. You 
 can realize that it will take a lot of loyalty for farm- 
 ers to patronize their home dealers when they save 
 such a large difference in buying from mail order 
 houses."* 
 
 Freedom from local depressions. — The large 
 mail order house draws trade from a wide area and 
 hence is injured little by local depressions. The 
 merchant in the coal fields is injured by a strike of 
 the miners; the dealer in North Dakota is greatly 
 affected by a poor crop of spring wheat, and the 
 storekeeper in the Virginia apple belt loses trade 
 as the result of a killing frost. The mail order 
 houses can draw business from all sections and its 
 total sales are little affected by local conditions which, 
 however, may be very serious for the merchants in 
 these localities. 
 
 'Federal Trade Commission: "Causes of High Prices of Farm 
 Implements,' pp. 219 and 220. 
 
THE MAIL ORDER HOUSE 293 
 
 Drawing power of the catalog. — The catalogs of 
 the mail order houses are generally well written. 
 They often contain more specific information about 
 the goods offered than can be given by the retail 
 sales people. Instances have been reported of the 
 farmer after studying the mail order catalog being 
 able to give the local dealer information about his 
 own merchandise. A sad commentary, by the way, 
 on the local dealer. The mail order catalogs are 
 generally well illustrated and their descriptions clear 
 and lucid. A description often sounds better than 
 the article looks. A great many people find such 
 catalogs very interesting reading. The long winter 
 evenings afford the farmer's family ample time to 
 examine them carefully. The catalogs of the large 
 mail order houses are perhaps more read than any 
 other book on many American farms. Many people 
 would rather order from the catalog than to go 
 shopping. It certainly requires less physical energy, 
 a point not to be overlooked with the hard-worked 
 farmer's wife. 
 
 DISADVANTAGES OF MAIL ORDER HOUSES 
 
 Lack of personal touch. — One of the greatest 
 disadvantages of the mail order house is the lack of 
 personal touch with its customers. The relations 
 between the mail order house and its customers 
 must be impersonal. No friendly relations can be 
 formed. The customers cannot meet the sellers 
 personally. There is no opportunity for personal 
 salesmanship. It was pointed out above that the 
 
294 MARKETING 
 
 catalog had a great drawing power, and in some 
 respects was superior to the salesmanship of many 
 retail salespersons. Such a condition, however, only 
 exists because of the poor salesmanship existing in 
 many retail stores. Efficient personal salesmanship 
 is much superior to the impersonal salesmanship 
 of the catalog. 
 
 Customers cannot inspect goods before buying. 
 — The fact that the customers are unable to see the 
 goods before purchasing places the mail order 
 houses at a serious disadvantage. Many people 
 dislike to buy goods without seeing them. This ap- 
 plies especially to clothing, household furnishings, 
 and mechanical appliances. This fact probably ex- 
 plains why the mail order houses have received rela- 
 tively little business from the large cities. The 
 people may believe that they could save money by 
 patronizing a mail order house, but they are loathe 
 to risk the goods proving unsatisfactory. 
 
 Many mail order houses guarantee their goods 
 and give their customers the full right to exchange 
 or return any goods that are unsatisfactory for any 
 reason. Such exchanges, however, take time and, 
 while they are being made, the customer is without 
 the goods. Adjustments, exchanges, etc., also re- 
 quire a certain amount of correspondence which 
 many people dislike. Returns and allowances 
 appear to be quite an important item. The returns, 
 allowances, and discounts reported by Sears Roe- 
 buck & Company amounted to 5.7 per cent of their 
 gross sales in 1915 and 9.3 per cent in 1919. This 
 
THE MAIL ORDER HOUSE 295 
 
 increase was apparently due to the war and recon- 
 struction period. It was evidently hard to maintain 
 the quality of the goods or else the buyers became 
 harder to please during this period. 
 
 Delay in delivery. — Goods ordered by mail are 
 not received at once. To obtain goods in this way 
 people must anticipate their wants. This is incon- 
 venient and often difficult. The mail order houses 
 do a large part of their business in shopping lines, 
 although they sell large quantities of convenience 
 goods. Many people will anticipate their wants for 
 a part of their groceries, for example, but it would 
 be very hard to buy the exact amount of every par- 
 ticular item in this way. The local stores in carry- 
 ing stocks easily available to, the buyers perform 
 an almost indispensable service. The delay in de- 
 livery makes It impossible for the mail order house 
 to handle perishable goods as, for example, fresh 
 fruits and vegetables. Some farmers, however, find 
 it easier to order by mail than to make a trip to the 
 nearest store, but there is nevertheless a delay of at 
 least a few days. 
 
 Disadvantages of catalog. — It was stated above 
 that many people like to read the mail order catalog. 
 On the other hand there are people who find their 
 perusal tedious, and dislike to select goods from 
 them. Pictures, even if colored, often give a very 
 poor idea of how an article will look. It is often 
 difficult to form a very clear idea of the exact qual- 
 ity or construction of many goods from a printed 
 description. Many people will order from a catalog 
 
296 MARKETING 
 
 only as a last resort. Consulting the catalog is 
 very largely a matter of habit. Some people seldom 
 or never think of consulting the mail order catalogs, 
 while others seldom make an important purchase 
 without consulting them. 
 
 In periods of rapidly changing prices the catalogs 
 may involve either the loss of money or the loss of 
 trade. Catalogs are expensive and new issues cannot 
 be distributed every time prices change. While 
 prices are rising orders will be received for goods 
 at the prices given in the catalog. Such orders may 
 involve a loss, if filled. If refused, the house runs 
 the risk of being considered unfair and of repudiat- 
 ing its catalog. During a falling market the catalog 
 prices may appear high soon after the catalog is 
 issued. Such an appearance naturally curtails sales. 
 
 Can carry only standard goods. — The mail order 
 house must carry goods in wide demand. It cannot 
 carry goods suited to the needs of particular sections or 
 communities. This often places it at a disadvantage 
 compared with the local stores, which can select 
 goods adapted to the particular needs of their cus- 
 tomers. 
 
 Cannot render high type of service. — The mail 
 order house is not in a position to render many ser- 
 vices which can be rendered by the local merchants 
 — credit; delivery to the homes or on the farms;* 
 advice in selecting goods; assistance in setting up, 
 
 ' In certain cities the mail order houses have arrangements with 
 draymen to receive shipments and deliver the goods to the buyers. 
 The buyers must pay for the delivery but such an arrangement 
 gives them the benefit of lower rates. 
 
THE MAIL ORDER HOUSE 297 
 
 adjusting, and repairing machines ; carrying of repair 
 parts close to the farmers; etc. 
 
 Tends to destroy commxinity life. — This is an 
 argument of a different nature as it looks at the ques- 
 tion from a social viewpoint. It is argued that the 
 local store tends to draw people to a common point 
 and hence leads to the development of a social cen- 
 ter. The school and the church are frequently built 
 near the "store. Other stores appear and a village 
 develops. It is argued that if people ceased to come 
 together to purchase their supplies that a serious 
 blow would be struck at community life. The isola- 
 tion and loneliness of American farm life has been 
 one of its outstanding characteristics in the past. 
 It has often been stated that this was one of the 
 chief reasons causing young people to leave the farm 
 for the city. Anything that seriously hampers social 
 life in the rural districts should be opposed. It is, 
 however, difficult to judge of the truth of the argu- 
 ment that the mail order houses do seriously ham- 
 per such social life. It may be denied that local 
 stores are necessary for the development of social 
 centers. From what has been said it is evident that 
 the mail order houses can never entirely eliminate 
 the local merchants. It may also be argued that 
 villages and social centers have already developed 
 and that their existence would not be threatened by 
 a part of the local dealers going out of business. 
 The social changes produced by the automobile 
 must also be considered. It hap been stated that 
 the automobile is already taking' business from the 
 
298 MARKETING > 
 
 cross-roads and small village stores and concentrat- 
 ing it in the county seats and similar towns. The 
 automobile may also draw people together in larger 
 centers and eliminate the need of so many small so- 
 cial centers. ' 
 
 CAN THE RURAL MERCHANTS MEET THE MAIL ORDER 
 COMPETITION 
 
 It has been demonstrated that the rural merchants 
 can meet mail order competition. The mail order 
 houses have only two real advantages over the coun- 
 try merchants — ability to carry a larger assortment 
 of goods, and ability to obtain their goods more 
 cheaply. 
 
 Can carry carefully selected stocks.— The local 
 merchant cannot carry as large or varied stock of 
 goods as the large mail order houses. He can, 
 however, carry a stock especially selected to meet 
 the needs of his customers, while the mail order 
 house can handle only standard goods in wide de- 
 mand. By a careful selection of goods and without 
 increasing the total investment in stock, many rural 
 merchants could carry a greater variety of goods 
 than they have done in the past. This can be done 
 by buying a smaller quantity of each article and re- 
 stocking more frequently. For example, a merchant 
 can select the types and sizes of stoves especially 
 suited to the needs of his customers and carry one 
 of each type and size in stock. As soon as a stove 
 is sold another one is immediately ordered to take 
 its place. In this way the merchant gives his cus- 
 
THE MAIL ORDER HOUSE 299 
 
 tomers the exact type of stoves desired and yet does 
 not tie up a great amount of capital in this particu- 
 lar line of goods. The disadvantage of this plan is 
 that the merchant located at a distance from his 
 source of supply may not have the exact size or type 
 of stove desired by a particular customer in stock 
 just when the customer wants it. However, if out 
 of stock, the local merchant will receive the stove as 
 quickly as the mail order house could supply it and 
 in most instances a great deal quicker. 
 
 Can meet mail order competition with mail or- 
 ders, — The local merchant can also meet mail order 
 competition with mail orders. He can obtain cata- 
 logs from mail order houses which sell to the mer- 
 chants and when he hasn't the desired article in stock 
 he can offer to order it for his customer. He can 
 offer as quick delivery, as good a description of 
 the goods, and generally as low a price as the cus- 
 tomer could obtain if he ordered the goods himself 
 from a mail order house selling direct to the con- 
 sumers. As the merchant's offer relieves the cus- 
 tomer of the details of making out and mailing the 
 order, as the local merchant is responsible for the 
 delivery of the merchandise in good condition, and 
 perhaps also is willing to extend credit, he has more 
 than an even chance of making the sale. 
 
 Can render higher type of service. — The local 
 merchants are in a position to render many services 
 which are out of the reach of the mail order houses. 
 Orders by mail must generally be made without an 
 opportunity of previously inspecting the goods. The 
 
300 MARKETING 
 
 local merchant offers prompt delivery of goods, 
 while the person ordering by mail must wait several 
 days or weeks for his goods. This is especially 
 important in the case of necessities and of repair 
 parts. In the case of necessities ordering by mail 
 involves the forecasting of every need several weeks 
 in advance. Experience has repeatedly shown that 
 the great majority of people will not buy such goods 
 in this way if a more convenient source of supply is 
 available. Prompt delivery of repair parts is very 
 important. A farmer breaks a certain part of his 
 binder in the midst of harvest. A delay of a few 
 hours is expensive and a delay of a week may mean 
 the loss of a large part of his crop. The carrying 
 of such repair parts by the local dealer is a distinct 
 and valuable service. On their part, however, the 
 mail order houses claim that the local dealers seldom 
 carry a full line of repairs and are often unable to 
 furnish the particular part desired. In such cases 
 the mail order houses say that their ability to ship 
 such parts immediately by mail from conveniently 
 located warehouses gets the repairs to the farmers 
 quicker than the dealers can by ordering from the 
 manufacturers or wholesalers. 
 
 Exchanges and adjustments can be made much 
 more quickly when goods are purchased at home 
 than when ordered by mail from a distant city. 
 
 Extension of Credit. — Another service very gen- 
 erally rendered by the rural merchants is the exten- 
 sion of credit. It is a well-known fact that the 
 farmers have been accustomed to buy their supplies 
 
THE MAIL ORDER HOUSE 301 
 
 very largely on long term credits and many of them 
 could not have bought on any other basis. In the 
 one-crop sections of the West and South, payment 
 once a year is still the rule. It should, however, 
 be noted that during the great war many dealers 
 tightened up on their terms of credit (e.g. started 
 to charge interest) or went on a cash basis. Out 
 of 1,125 county agents reporting to the United 
 States Department of Agriculture, 498, or over 44 
 per cent, reported that during the war the dealers 
 tightened up on the credit extended to the farmers 
 on the purchase of farm operating equipment; while 
 only 54, or 4.8 per cent, of these reported a more 
 liberal policy on the part of the dealers. This policy 
 although made possible by the increased prosperity 
 of the farmer, was forced on the dealers by the 
 manufacturers who demanded more prompt payment 
 than formerly. Out of 7,399 rural dealers report- 
 ing to the Federal Trade Commission over 75 per 
 cent reported shortened credit from the manufac- 
 turers in the purchase of farm implements." Yet 
 the sale of goods on credit is still common among 
 the rural merchants. The farmer could not have 
 obtained this credit service from the mail order houses 
 even if some of them have come to sell on credit. 
 
 Higher cost of goods. — The rural merchants 
 often cannot obtain their goods as cheaply as the 
 mail order houses, who can buy in large quantities 
 direct from the manufacturers or can manufacture 
 
 '° Federal Trade Commission : "Causes of High Prices of Farm 
 Implements," p. 73. 
 
302 MARKETING 
 
 the goods in their own factories. By careful buying 
 the local merchants frequently can meet mail order 
 prices but very often they are unable to do so, even 
 when the transportation costs are added to the prices 
 of the mail order catalogs. They should, how- 
 ever, to a very large extent be able to over- 
 come this disadvantage In price by superior ser- 
 vices which they are able to render. The officer, 
 of a mid-western dealers' association was quoted 
 above as saying that he could take care of a differ- 
 ence of 10 or 15 per cent because of the service he 
 rendered and because of his ability to make more 
 prompt deliveries. Whether 10 or 15 per cent rep- 
 resents the actual value of the dealer's service to the 
 consumers or not It cannot be denied that the dealer 
 is able to render valuable services which In many 
 instances counterbalance the lower price of the mail 
 order house. 
 
 Appeal to loyalty. — Too often the local mer- 
 chants try to hold business by telling the farmers 
 that it is their duty to trade at home. This Is poor 
 policy as the farmers often have little in common 
 with the merchants and feel under no obligation 
 to support them. The farmer Is under no obliga- 
 tion to spend his hard-earned money at any particu- 
 lar place. The local merchants should realize that 
 if they want the farmer's business they must deserve 
 it on the quality and price of the goods sold and on 
 the services rendered. 
 
 Efficiency in rendering service only claim for ex- 
 istence. — The local merchants claim that "to the re- 
 
THE MAIL ORDER HOUSE 303 
 
 tail dealer belongs the retail trade." They regard 
 the mail order houses as being irregular or "illegiti- 
 mate" factors. They often refuse to purchase goods 
 from manufacturers who also sell to mail order 
 firms. The only claim that either the local store or 
 the mail order house has for existence is that it 
 renders a service more efficiently than any one else. 
 If the local dealer does not perform a useful ser- 
 vice as efficiently as can be done by others he has no 
 reason to be in business. If some dealers are driven 
 out of business by mail order competition some tem- 
 porary suffering may result, just as suffering may 
 follow the introduction of labor-saving machines 
 which throw men out of work. This, however, is 
 not an argument against the use of labor-saving 
 machinery. The mail order houses are too well 
 established to be longer regarded as experiments. 
 The sooner the dealers quit asking for sympathy 
 and go after sales on a business basis the better off 
 they will be." 
 
 THE FUTURE OF THE MAIL ORDER HOUSE 
 
 The mail order houses have had a rapid growth 
 and are now a well-established part of the merchan- 
 dising machinery of the country. There are, how- 
 ever, several indications that perhaps their period 
 of rapid growth is at an end. First, several depart- 
 ment stores have discontinued their mail order de- 
 partments. Second: the automobile tends to con- 
 
 " On this subject see Ch. VHI of the Federal Trade Commission's 
 Report: "Causes of High Prices of Farm Implements." 
 
304 MARKETING 
 
 centrate the rural trade in larger towns, where the 
 stores are able to carry larger stocks of goods. The 
 increased sales of the stores in these towns places 
 them in a better position to meet the prices of the 
 mail order houses. The automobile also enables 
 more people to visit the cities and increases the com- 
 petition between the mail order houses and the city , 
 stores. Third, the tendency of the large chain stores 
 to open branches in the smaller towns in the rural 
 districts. Such stores often buy on as advantageous 
 terms as the mail order houses and are able to sell 
 as cheaply and at the same time offer the consumers 
 a convenient source of supply and the opportunity 
 of inspecting goods before buying. It is true that 
 so far most such chains handle groceries, drugs, 
 novelties, or tobacco, which are perhaps not the most 
 important lines to the mail order houses. 
 
 CHAPTER XII— QUESTIONS 
 
 1. Mrs. Jones finds that after paying the transportation costs she 
 
 can obtain muslin for 10 per cent, less from a mail order house 
 than from a local dealer. What would be thj advantages and 
 disadvantages of buying from the mail order house as com- 
 pared with the local dealer? Would your answer be the same 
 is the case of groceries? shoes? hats? rugs? 
 
 2. Farmer Shultz finds that he can obtain a plow for 20 per cent. 
 
 less (after paying the freight) from a mail order house than 
 from the local dealer. Should he buy from the mail order 
 house? Why or why not? Would your answer be the same in 
 the case of a mowing machine? A gasoline engine? Nails? 
 A set of blacksmith's tools? 
 
 3. The Giant Mercantile Co. handles general merchandise in a 
 
 Kentucky town of 1,000 people. In recent years more and more 
 of its customers have been ordering goods by mail. The loss 
 of business is becoming serious. The farmers do not respond 
 
THE MAIL ORDER HOUSE 305 
 
 to the slogan "trade at home." The Giant Co. must purchase 
 practically all of its goods from wholesalers and is unable to 
 meet mail order prices (delivered) on many articles. Outline 
 the policies that this concern should follow to improve its 
 business. 
 
 4. The Farmers Supply Co. is located in a Kansas town of 5,000 
 
 population. It handles all kinds of farm operating equipment. 
 It handles well-known brands of implements and buys most of 
 its goods direct from the manufacturers. It has enjoyed a 
 large trade with the farmers for many years. Due to the high 
 prices existing in recent years more and more of the farmers 
 have been led, by the lower prices, to order farm equipment 
 from the mail order houses. Can the Farmers Supply Co. stop 
 this practice ? If so, how ? What policies should it pursue un- 
 der the conditions? 
 
 5. The Blank Department Store is located in a large city. It has an 
 
 old established mail order department. During the war it was 
 very hard to keep all the articles listed in the catalog in stock. 
 It was often necessary to substitute other articles for those or- 
 dered or to refuse the orders. After the war it was hard to 
 issue catalogs due to rapidly changing prices. Due to these 
 reasons the store stopped issuing catalogs and in place sends 
 out monthly folders advertising a limited list of articles. The 
 mail order business is much smaller than it was 10 years ago. 
 The managers are now debating whether to discontinue the 
 mail order department or to resume the issuance of catalogs 
 and conduct an active campaign to build a mail order business 
 large enough to be profitable? Which policy do you recom- 
 mend? Give your reasons. 
 
 6. The X Carpet Co. produces a standard grade of carpets and 
 
 rugs. It is dissatisfied with the sales made to the dealers and 
 considers marketing its product direct to the consumers by mail. 
 Would this be practicable? If so, outline methods to be fol- 
 lowed. If not, why? 
 
 7. The Creamery Co. produces a high grade of dairymen's supplies 
 
 but due to its poor marketing methods its sales have been de- 
 creasing. Could it stimulate its sales by advertising and direct 
 sales to the dairy farmers? Why or why not? Would your 
 answer be the same if the company manufactured a line of cos- 
 metics? A grocery line made up of baking powder, spices, and 
 soaps? 
 
Chapter XIII 
 RETAIL TYPES— (Continued) 
 
 5. THE CHAIN STORE 
 
 Definition. — By a chain store is meant a number of 
 stores under a common ownership and management. 
 The number of stores necessary to constitute a 
 chain is not clearly established. It would seem that 
 at least three stores are required to make a chain. 
 Thomas' Official Grocery Register considers that 
 five grocery stores constitute a chain. Perhaps' the 
 distinction between a chain store and any other store 
 is in the method of operation rather than in the 
 number of stores under a common ownership. A 
 company may own several stores, but if no common 
 policy is followed and each store is operated sep- 
 arately without using "chain store methods" the 
 common ownership may not class these stores as 
 a "chain." On the other hand a much smaller num- 
 ber of stores operating under a common policy, using 
 uniform methods of display and selling at "cut 
 prices" might be considered as a chain. 
 
 Growth of chain stores. — The growth of the chain 
 stores has been briefly sketched in a previous chap- 
 ter. Although not of recent origin they have had 
 their principal growth during the past fifteen years. 
 The rapid growth of this type of stores has forced 
 thousands of individually owned stores out of busi- 
 ness and has led some people to predict that none 
 except the very large unit or individual stores could 
 
 306 
 
THE CHAIN STORE 307 
 
 withstand their competition. Such predictions seem 
 to have been at least premature. The rise of the 
 chain stores has, however, been the most conspic- 
 uous recent development in the field of retail mer- 
 chandising. 
 
 The growth of the chain stores may be illustrated 
 by a few figures. The S. S. Kresge Co. had eight 
 stores in 1907 and 179 stores on May 1, 1920. The 
 McCrory Stores Corporation had 69 stores in 1911, 
 compared with 154 stores in 1919. The S. H. 
 Kress & Co. started in 1896 and had 145 stores at 
 the end of 1919. The Great Atlantic and Pacific 
 Tea Co. had 200 stores in 1905; 350 stores in 
 1910; 2,100 stores in 1915, and over 5,000 stores 
 at the end of 1920. The Kroeger Grocery and 
 Baking Co. had 68 stores in 1905; 145 stores in 
 1910, and over 1,000 stores in 1919, including both 
 grocery and meat stores. The sales of this chain of 
 stores increased from $2,743,000 in 1905, to $34,- 
 550,000 in 1919. The first Piggly Wiggly store 
 was opened on Sept. 12, 1916, and within three 
 years over 500 stores were in operation. The 
 United Cigar Stores started in 1901 and now has 
 over 1,200 stores. 
 
 Importance of chain stores. — There is hardly 
 a city of any size in the United States that does 
 not have at least one chain of stores and most of 
 them have stores operated by several chains. Some 
 estimates have placed the number of chain store 
 systems as high as 10,000. The exact number can- 
 not be given for the reason that no common defini- 
 
308 MARKETING 
 
 tion exists as to just what constitutes a chain and 
 new chains are being started so rapidly that any 
 figures that might be compiled would soon be out 
 of date. Perhaps an idea of the importance of 
 chain stores can be obtained by considering the sales 
 of a few typical systems. The figures are for 1919 
 and the sales are stated in thousands of dollars. 
 
 Name No. of Sales ^ 
 
 Grocery Stores: Stores ' 
 The Great Atlantic & Pacific Tea 
 
 Co 4,246 $194,647 
 
 American Stores Co 1,152 76,402 
 
 Kroeger Grocery & Baking Co 1,005 34,550 
 
 John T. Connor Co 200 8,454 
 
 Jones Bros. Tea Co. Inc. (including 
 Globe Grocery^ Stores Inc. and 
 
 Grand Union Tea Co.) 726 22,231 
 
 PigglyWiggly Stores Inc. (1920).. 500 •11,444 
 * Six months' sales. 
 
 Novelty Stores: 
 
 F. W. Woolworth Co 1,081 $1 19,496 
 
 McCrory Stores Corporation 154 11,487 
 
 S. S. Kresge Co 179 42,668 
 
 S. H. Kress Co 144 25,244 
 
 W. T. Grant Co. (Ic to $1.00 Dept. 
 
 Stores) 35 6,029 
 
 Other Stores: 
 
 Louis K.Liggett Co. (drug stores). 236 28,795 
 
 United Cigar Stores 1,200 61,874 
 
 J. C. Penny (Department Stores)".. 312 50,000 
 
 ' Some of these figures are approximate and all are not for the 
 same date. Some include stores established in the first few months 
 of 1920. 
 
 "000 omitted. 
 
 'J. C. Penny, System, Feb., 1921, Moody's Manual reports 197 
 stores with sales of $28,784,000. Penny's figures apparently include 
 affiliated stores. 
 
THE CHAIN STORE 309 
 
 Edward A. Filcne, President of Wm. Filene's 
 Sons Co., Boston, estimated that in 1918 there were 
 4,000 chains with 65,000 stores handling 6 per cent 
 of the total retail trade of the United States.* 
 
 An official of a grocer's association estimates that 
 IS per cent of all grocery stores in the country are 
 chain stores. This means over 30,000 chain stores. 
 Thomas' Grocery Register for 1919, lists 216 
 chains of grocery stores, some subsidiary companies 
 controlled by larger chains being included. Of these 
 216 chains, 55 are rated at over $100,000. There 
 are over 9,000 separate retail stores operated by 
 154 of these chains. The total number of sepa- 
 rate stores may be estimated at 10,000. If their sales 
 averaged $50,000 each their total annual sales would 
 amount to $500,000,000. The author does not 
 know how complete this list is, but noted several 
 omissions, so that the sales of grocery chains are 
 likely much above this figure. The majority of 
 these stores are located In the East, Middle West, 
 Upper South, and California. There are few chain 
 grocery stores in the northwest, none being reported 
 in Washington, Oregon, Idaho, Montana, North 
 Dakota, South Dakota or Nebraska and few in Min- 
 nesota and Wisconsin. This, however, does not mean 
 that chain store organizations with headquarters In 
 other States do not have stores in these States. 
 
 A chain store official has estimated that the sales 
 
 *See System, March, 1920. 
 
310 MARKETING 
 
 of the grocery, drug, and tobacco chains amounted 
 to over a billion dollars in 1920.' The estimated 
 sales of the grocery chains given above which covers 
 only a part of the stores, amounted to half this 
 amount. Allowing for the many grocery chains not 
 included in this estimate, for the drug and cigar 
 chains and for the many new stores opened during 
 the year this estimate appears to be conservative. 
 The sales of the chain stores handling such other 
 items as shoes, hats, clothing, hosiery, gloves, shirts, 
 candy, bread, foods (restaurants), sewing machines, 
 lumber, farm implements, fruits and vegetables, but- 
 ter and eggs, and other commodities would certainly 
 add several hundred million dollars more. From 
 these figures we may conclude that the chain stores 
 are selling between 5 to 10 per cent of the total 
 amount of merchandise sold by retailers. 
 
 CLASSES OF CHAIN STORES 
 
 Ownership. — Chain stores have been classified in 
 several different ways. As to ownership, chain stores 
 have been classified as retail, manufacturers', job- 
 bers', cooperative, and retail buying associations.^ 
 Perhaps strictly speaking the two latter classes 
 should not be considered chain stores. The coop- 
 
 5 Robert J. Smythe, of the Jones Bros. Tea Co., writing in the 
 Journal of Commerce of Oct. 30, 1920. 
 
 "As an example of the latter the American Druggist Syndicate, 
 an association of 16,000 retail drug stores, might be mentioned. — 
 Butler: "Marketing Methods," p. 84. 
 
THE CHAIN STORE 311 
 
 erativc stores are owned by the consumers and at 
 times are bound together through a common buying 
 organization. The cooperative stores will be dis- 
 cussed in a later chapter devoted to cooperative mar- 
 keting. 
 
 Retail chains. — The majority of our chains come 
 in the first class, retail organizations operating sev- 
 eral stores. Such chains generally operate their 
 own warehouses and perform the functions of the 
 wholesaler. As they become large they tend to en- 
 ter the manufacturing field. For example the Acme 
 Tea Co. prior to its absorption by the American 
 Stores Co. manufactured 10 per cent of the goods 
 sold. The Kroeger Grocery and Baking Co. has its 
 own bakeries, abattoir, candy factory, extract and 
 baking powder factory, and preserve factory. The 
 United Retail Stores Corporation which owns the 
 controlling interest in the United Cigar Stores, the 
 United Retail Stores Candy Stores, and Gilmers, 
 Inc., was organized to establish a system of manu- 
 facturing businesses and retail chain stores. The 
 Schulte Retail Stores Corporation operates three 
 cigar factories, the United Drug Co. manufactures 
 a very large part of the goods sold by the Liggett 
 Drug Stores, which it controls. The Jones Bros. 
 Tea Co. processes or manufactures a large part of 
 the goods sold by its stores and those of its sub- 
 sidiaries. Many of the retail chains, however, do 
 little or no manufacturing. 
 
 Manxifacturers' chains. — Among the manuf ac- 
 
312 MARKETING 
 
 turers' chains must be mentioned the stores of the 
 Winchester Co., the Singer Sewing Machine Co.; 
 many of the chains selling shoes, such as W. L. 
 Douglas, Hanan and Son, Regal Shoe Co., etc., and 
 many of the candy chains, for example, Huyler's, 
 Martha Washington, Nunnally, etc. A few years 
 ago many manufacturers started to establish their 
 own retail stores but they found that the amount of 
 capital required was so large and the problems of 
 management so serious that the number of such 
 stores did not increase as rapidly as had been ex- 
 pected. Some manufacturers, however, maintain 
 one or more stores in order to come into direct con- 
 tact with the consumers and to develop methods for 
 use by the retailers handling their products. 
 
 The McElwain Shoe Stores furnish an example of 
 a manufacturer's chain of wholesale stores. The- 
 branch houses of the Chicago meat packers or farm 
 implement manufacturers may be said to come in 
 the same classification. 
 
 Jobbers' retail chains. — The ownership of job- 
 bers' chains of retail stores is often concealed. 
 There is also a likelihood that the jobber will be- 
 come only a warehouse for his stores and the chain 
 come to be regarded as a retail chain. The wholesale 
 grocers, to prevent their own elimination by the chain 
 stores, have discussed the acquirement and operation 
 of their own chains of retail stores. The chain 
 started by a Chicago wholesaler Is reported to have 
 400 stores doing an annual business of $18,000,000. 
 
THE CHAIN STORE 313 
 
 Location. — Chain stores may be classed as nation- 
 al or local. Perhaps there is no chain that has stores 
 in every State, but there are several that have stores 
 in so many States that they deserve to be classed as 
 national chains. In this class might be mentioned 
 the Great Atlantic and Pacific Tea Co. ; F. W. Wool- 
 worth Co.; S. S. Kresge Co.; the United Cigar 
 Stores; the Schulte Cigar Stores; the J. C. Penny 
 Co. stores, the Jones Bros. Tea Co., the Liggett 
 Drug Stores, the Piggly Wiggly self-serve grocery 
 stores; the Thompson restaurants, the Wormser hat 
 stores, and others. Almost every city of any size 
 furnishes examples of local chains, handling either 
 groceries or drugs. Many chains spread out in the 
 territory surrounding the cities of their origin and 
 yet do not cover enough territory to be classed as 
 national chains. There are many such chains. The 
 American Stores Co., with stores not only in Phila- 
 delphia but in eastern Pennsylvania and the adjoin- 
 ing sections of New Jersey, Maryland and Delaware, 
 is an example of such a chain. 
 
 Wholesale. — Chain stores are generally considered 
 as being retail stores. In a sense, however, a whole- 
 sale concern with several branches located in differ- 
 ent cities and states might be considered as a chain 
 store. There are several such wholesale concerns, 
 for example, the National Grocer Co., Austin 
 Nichols Co., Butler Bros, and the National Drug 
 and Chemical Co., of Canada, Ltd. Several of the 
 cooperative houses mentioned in the chapter on 
 Wholesale Dealers might come in this category. 
 
314 MARKETING 
 
 Wholesale concerns, however, have problems different 
 from those of the retailers and are not ordinarily 
 thought of as chain stores. 
 
 Department stores. — Most chain stores are spe- 
 cialty stores. There are, however, a few chains of 
 department stores. The Associated Dry Goods Co. 
 owns nine department stores, several of them being 
 among the larger city department stores in the coun- 
 try. All but one are located in the east.' The May 
 Department Stores Co. controls four department 
 stores in middle western cities. The Hudson Bay 
 Co. is reported as establishing a chain of department 
 stores in Canada. Among the chains of small town 
 department (or dry goods) stores might be mentioned 
 the Penny Stores in the West, the Miller stores in 
 the Southern Appalachain district, and Gilmers, Inc. 
 (controlled by the United Retail Stores Corporation) 
 in the Carolinas and Virginia. 
 
 General stores. — The stores operated by the sup- 
 ply companies of some of the large mining companies 
 at their various mines may be considered as chains 
 of general stores. 
 
 KINDS OF GOODS HANDLED 
 
 Chains of stores are found handling almost every 
 conceivable type of merchandise from gasoline to 
 
 ' The controlled stores are J. N. Adams & Co., the Wm. Hengerer 
 Co., Buffalo ; Lord & Taylor, C. G. Gunther's Sons, and James 
 McCreery, New York ; Powers Mercantile Co., Minneapolis ; 
 Hahne & Co., Newark; Stewart Dry Goods Co., Louisville; and 
 Stewart & Co., Baltimore. 
 
THE CHAIN STORE 315 
 
 farm implements, from bread to sewing machines, 
 and from hosiery to hats. 
 
 Groceries. — Perhaps more chains of stores are 
 found handling groceries than any other class of 
 merchandise. The grocery chains have had a very 
 rapid growth during the past ten years and are still 
 growing very rapidly. Until a few years ago most 
 of the grocery chains were found in the East but 
 during the past six years they have spread west and 
 south until at present there are chains as far west 
 as California and as far south as the Gulf of 
 Mexico. 
 
 Drugs. — Many chains have been started for the 
 sale of drugs. The Liggett Stores, previously men- 
 tioned, are perhaps the most widely known. There 
 are local chains in almost every section of the coun- 
 try and in almost every city of any size. Among 
 such local, or sectional, chains might be mentioned 
 the Owl Drug Co. on the Pacific Coast, the Dow 
 Drug Co. in Cincinnati, the Squire Drug Co. in 
 Syracuse, and the May Drug Co. in Pittsburgh. 
 
 Five and ten cent stores. — The novelty, or as 
 familiarly called the five and ten cent stores, were 
 among the first chains to attract widespread atten- 
 tion. They do not seem to be growing quite as 
 rapidly as some other classes of chains at the present 
 time. The best-known of these chains are F. W. 
 Woolworth Co., S. S. Kresge Co., S. H. Kress Co. 
 and the McCrory Stores Corporation. The W. T. 
 Grant Co., operating one cent to one dollar stores, 
 might also be mentioned as coming in this class. 
 
316 MARKETING 
 
 Cigars and tobacco. — The United Cigar Stores 
 and the Schulte Retail Stores Corporation are among 
 the best-known chains handling cigars and tobacco 
 but there are several local or sectional chains. 
 
 Candy. — There are many chain stores handling 
 candy. Many of these are manufacturers' chains. 
 Among the candy chains might be mentioned 
 Huyler's, Reymers, (Pittsburgh), Martha Wash- 
 ington, U. R. S. Candy Stores, etc. 
 
 Shoes. — Many of the chains of shoe stores are 
 owned by the manufacturers. Among the better 
 known shoe chains are : W. L. Douglas Shoe Co., 
 Regal Shoe Co., Hanover Shoe Co., Hanan & Son,, 
 Sorosis Shoe Co., and Florsheim Shoe Co. 
 
 Hats. — Kaufman Bros., Truly Warner, Wormser, 
 and Sarnoff Irving are examples of chains of specialty 
 hat stores. 
 
 Restaurants. — There are many chains of restau- 
 rants. Some are national and some are local. The 
 Childs' Restaurants were among the first to attract 
 general attention. The Thompsoh and the Balti- 
 more lunch rooms are widely distributed. 
 
 Other lines. — Chains of bakeries and gasoline 
 stations are common. There seems to be one or 
 more chains handling almost every conceivable class 
 of goods. The Singer Sewing Machine Co. has an 
 extensive chain of stores for the sale of its machines. 
 The Winchester Co. has established a chain of retail 
 stores for the sale of sporting goods and other items 
 of hardware. The Union News Co has several 
 hundred news stands. The Mandan Mercantile Co. 
 
THE CHAIN STORE 317 
 
 operates a chain of farm implement stores and lum- 
 ber yards in the Dakotas. There are chains of stores 
 handling fruits and vegetables and other chains 
 handling butter and eggs. The Sherwin Williams 
 Paint Co. operates a chain of retail paint stores. The 
 list could be increased but enough examples have 
 been given to show the scope of the chain store field. 
 
 ADVANTAGES OF CHAIN STORES 
 
 Buying power. — The ability of the chain stores 
 to secure their goods cheaply is probably their most 
 important advantage and perhaps the only advantage 
 that is inherent in their operation. The origin of 
 many chains is, however, based on operating efficiency 
 rather than on the low cost of goods. The parent 
 store could buy no more cheaply than its competitors 
 except by the bargaining ability of the proprietor and 
 the taking of cash discounts. When several branches 
 were established the store Insisted on lower prices and 
 was in a position to secure quantity discounts. The 
 next step was to eliminate the wholesaler and buy di- 
 rect from the manufacturers through the latter' s 
 agents or brokers. In order to do this a wholesale 
 department was often organized as many manufac- 
 turers irefused to sell to any except wholesalers. 
 When several stores were in operation a wholesale or 
 distributing warehouse was necessary, anyway. 
 
 The buying ability of different chains varies widely. 
 Some of the smaller local chains may have to buy 
 on the same basis as other retailers. The large chains 
 are, however, able to buy on very favorable terms. 
 
318 MARKETING 
 
 They are able to buy in large quantities and pay cash 
 so that they are able to buy at "inside prices," or to 
 secure the largest quantity and cash discounts. They 
 are in a position to buy direct from the manufacturers 
 and hence buy on the same, or even better terms than 
 the wholesale dealers. They are able to pay cash 
 and hence can get price concessions from manufac- 
 turers who are forced to realize on goods quickly. 
 Some of the chain store organizations have very 
 efficient purchasing departments and skillful buyers 
 who strive to buy at the lowest possible prices. They 
 are on the lookout for bargains and odd lots and 
 may pick up goods in this way at exceptionally low 
 prices. Their buyers after securing the seller's low- 
 est prices may insist on some additional concession, 
 such as an extra commission or a forward dating of 
 the bill. The buyers may wait until the sellers are 
 extremely anxious to sell and then buy at a price 
 slightly below the market. The chain store buyers 
 seem to be a match for, if not superior to, any other 
 class of buyers in securing price concessions. 
 
 The large chain stores may be able to contract for 
 the entire output of certain factories and secure the 
 low prices obtainable in this way. The tendency of 
 some chain stores to manufacture their own goods 
 has already been mentioned. When goods are man- 
 ufactured the cost is presumably lower than it would 
 be if the goods were purchased from other manufac- 
 turers. 
 
 The manufacturers operating their own retail 
 stores can save the factory selling expense and also 
 
THE CHAIN STORE 319 
 
 the selling expenses and profits of the wholesaler, if 
 the class of goods sold ordinarily, passes through the 
 hands of wholesale dealers. If such manufacturers 
 have as low a cost of doing business as the competing 
 stores, the manufacturers can either keep these sav- 
 ings as profits or sell their goods cheaper than the 
 competing retail stores. 
 
 Quick turnovers. — Most of the chain stores se- 
 cure a quick stock turnover by efficient stock-keep- 
 ing methods. Accurate records are kept of sales, 
 purchases and often of inventories. The individual 
 stores carry relatively small stocks of goods as deliv- 
 eries are made frequently from the warehouses. This 
 policy enables the stores to always have fresh goods 
 in stock, which is an important factor in stimulating 
 sales. A quick turnover is of especial advantage dur- 
 ing a period of falling prices. The chain grocery 
 stores often turn their stock from six to twelve times 
 a year, including both the wholesale warehouses and 
 the retail stores. A stock turnover by the chain store 
 is equivalent to two turnovers when the goods are 
 handled by the wholesaler and the retailer. The 
 average turnover by wholesale grocers is given as 
 5.2 times per year. This means that it requires 70 
 days for them to make one complete turnover. The 
 average turnover by the retail grocers is given as 
 [7.9 times per year. This means a turnover every 
 46 days. Thus it requires 116 days for a complete 
 turnover by both the wholesaler and retailer. A chain 
 store operating its own wholesale warehouse and 
 turning its stock 7 times a year requires only 52 days 
 
320 MARKETING 
 
 to effect a complete turnover. The chain store thus 
 turns its stock in less than half the time required by 
 the wholesaler and retailer. Stated another way gro- 
 ceries sold through the chain stores reach the con- 
 sumers in less than half the time required when they 
 are sold by the wholesalers and retailers.* During 
 1919 the American Stores Co. turned its stock 9.3 
 times, the John T. Connor Co. (Boston), 7.2 times, 
 and the Kroeger Grocery and Baking Co., 6.2 times. 
 The five and ten cent novelty stores appear to have 
 a much slower rate turnover, turning their stock 
 only three to five times a year. 
 
 The advantage of quick stock turnovers is not in- 
 herent in the chain stores. An individually owned 
 store by using similar methods of purchasing, stock- 
 keeping and selling can turn its stock over as fast if 
 not faster than the chain stores. The fact that the 
 individual stores have not done so is due to their own 
 inefficiency. 
 
 Efficient Management. — Most of the chain stores 
 have been efficiently managed. The small ones are 
 under the direct supervision of the proprietor and 
 the large ones are big enough to employ experts to 
 manage the various departments and to work out 
 new and improved methods. The expert buyers have 
 already been mentioned. Such stores can also em- 
 ploy experts to train their salesmen, to handle their 
 advertising, their window displays, their stockkeep- 
 
 *When goods are manufactured or processed the chain stores' 
 turnover is equivalent to three turnovers. 
 
THE CHAIN STORE 321 
 
 Ing methods, their accounting systems, and their real 
 estate departments. 
 
 Such chains generally have their methods of win- 
 dow display and store arrangement standardized. 
 An expert works out window displays, for example, 
 which are used by all the stores. Such displays are 
 often better than those of the individual stores, as 
 the owners of the latter ordinarily do not have much 
 time to devote to such matters and besides they lack 
 the skill of the specialist. The same is often true 
 of advertising, stock display, store arrangement, etc. 
 
 Store managers. — In order to maintain efficiency 
 a chain must secure efficient managers for all its 
 stores. A good manager generally means a success- 
 ful store and a poor manager means a failure. It 
 is no easy matter to secure efficient managers for a 
 large number of stores. The growth of some chains 
 has been retarded by the time taken to secure and 
 train men to manage the new stores. It would seem 
 that the individual stores managed by their owners 
 would be more efficient than competing chain stores 
 managed by hired employees. It is proverbial that 
 an owner will give closer attention to business than 
 an employee. The chain stores, however, have gen- 
 erally met this problem by giving the managers an 
 interest in the success of the stores. The managers 
 are paid a small salary and given a certain percent- 
 age of the sales or profits. The managers of gro- 
 cery stores, for example, may be paid a salary of 
 $20 to $40 a week and in addition given a sum equal 
 to one per cent of the total sales. This gives the 
 
322 MARKETING 
 
 manager a very immediate interest in the sales of 
 the store and usually secures his close attention to 
 business. In addition to this the managers of such 
 stores are generally under very close supervision. 
 One large grocery chain has a supervisor to every ten 
 or twenty stores. 
 
 The chain stores have had their greatest develop- 
 ment in the sale of simple and well standardized lines 
 of goods, such as groceries, or in highly special- 
 ized lines such as cigars, candy, or men's hats. Rel- 
 atively few chains have undertaken the operation 
 of stores handling a large variety of more or less 
 complex goods, such as hardware, dry goods, jewelry, 
 and clothing. The management problem of such 
 stores are much more difficult. The chains that 
 have entered these fields have given the managers 
 large interests in the success of the stores, in some 
 instances making them partners. In this way close 
 attention to business and efficient management has 
 been secured. In the case of city department stores, 
 however, no very great benefits appear to be derived 
 from the centralized ownership of several stores. 
 The problem of managing such stores is not changed 
 by the ownership, although each store can benefit from 
 the experiences of the others and some methods may 
 be standardized. Perhaps, also, purchases can be 
 made on somewhat better terms, or a saving realized 
 in the pay of buyers, although such stores are gen- 
 erally large enough to buy on pretty good terms 
 while buying individually. 
 
 The efficient management of the chain stores is 
 
THE CHAIN STORE 323 
 
 not an inherent advantage. There is no reason why 
 the individually owned stores cannot be managed 
 with equal or greater efEciency. 
 
 Advertising. — The chain stores are in a position 
 to advertise to better advantage than the individual 
 stores. With stores in all parts of the city no waste 
 circulation is paid for when advertisements are car- 
 ried in the newspapers as in the case with the indi- 
 vidual stores. This, however, is an advantage only 
 to such chains as have several stores in the same 
 city. Shoe, drug, or candy chains with only one 
 store in a city are no better off, in this respect, than 
 any other centrally located specialty store. 
 
 The large chain stores are also in a position to 
 employ experts to handle their advertising. Some 
 chain stores are liberal users of newspaper space, at 
 times almost vying with the department stores in the 
 amount of space used. Other chains do little or no 
 newspaper advertising, depending almost entirely on 
 low prices, window displays, and posters to attract 
 buyers to their stores. 
 
 Rent. — Oftentimes the chain stores have an ad- 
 vantage over their competitors in the amount of rent 
 paid for their store locations. The large chains have 
 experts in charge of their real estate departments. 
 They lease their locations only after careful study. 
 Very often the people passing the prospective loca- 
 tion are counted for several days and their character 
 noted — whether shoppers, laborers, or office em- 
 ployees; whether on their way home from work, or 
 strolling for pleasure, etc. An excellent location for 
 
324 MARKETING 
 
 a cigar store, or a restaurant, might be a very poor 
 location for a grocery store. If the number and 
 character of the passers-by do not warrant the rent 
 asked the location is refused and if the profits of 
 any store do not justify the rent paid the location 
 will be given up. A location may be refused at one 
 time and rented a few years later because the num- 
 ber of people passing has increased. 
 
 The desired locations are often purchased or 
 leased for a long term of years. Handling many 
 such transactions the chain stores often drive better 
 bargains than the individual merchant who makes 
 only one or two real estate contracts during his busi- 
 ness career. The chain stores often have subsidiary 
 corporations to handle their real estate. The chain 
 stores also use space more advantageously. From 
 experience they know just how much space is needed 
 for a given volume of business and they refuse to 
 rent a room that is too large, or they will divide the 
 room and sub-rent a part of it. To secure desirable 
 locations it is often necessary to rent much more 
 space than is needed and some stores make a practice 
 of securing such locations and sub-renting the un- 
 needed space. This is especially true of stores such 
 as cigar and drug stores, desiring busy corner 
 locations. 
 
 Individual dealers cannot afford to employ ex- 
 perts as is done by the large chain stores, but there is 
 no reason why they cannot follow the same policies as 
 those used by the chain stores in selecting locations 
 for their stores. 
 
THE CHAIN STORE 325 
 
 Low cost of doing business. — The chain stores 
 very often have lower operating costs than many of 
 their competitors. They can often employ cheaper 
 employees than other stores due to the fact that their 
 methods are so highly standardized that little initia- 
 tive is required of their employees. The rapid stocic 
 turnover also does much to reduce the percentage cost 
 of doing busines for it allows a large volume of sales 
 to be made without increasing rent, heat, light and 
 other general expenses and ordinarily without a cor- 
 responding increase in the salaries of the salesforce. 
 This is equivalent to saying that a retail business can, 
 up to a certain point, be made a busines of decreasing 
 costs, although such a result is by no means always at- 
 tained by large stores. This subject is discussed at 
 greater length in the next chapter. The lower per- 
 centage cost of doing business makes possible lower 
 prices and the lower prices in turn tend to draw peo- 
 ple to the store and increase sales. A considerable 
 part of the success of many chain stores seems to be 
 due to this tendency. Low prices stimulate sales and 
 the increased volume of business helps to lower the 
 percentage cost of doing business and hence to make 
 possible the lower prices. 
 
 The advantages of cheaper labor, more rapid turn- 
 overs, cheaper rents, and judicious advertising do 
 much to reduce the cost of doing business. The low 
 cost of many chain stores is, however, to a large ex- 
 tent due to the fact that they operate on the economy, 
 cash-carry, or non-service basis. This is especially 
 true of the grocery chains. 
 
326 MARKETING 
 
 Non-service method. — All chain stores do not 
 operate on the non-service basis but this practice is 
 so common among them that it is commonly regarded 
 as the typical chain store method. The cash-carry 
 method saves all delivery expenses, eliminates the cost 
 of maintaining a credit department and making collec- 
 tions, prevents losses from bad debts, and reduces 
 the amount of necessary bookkeeping. Sales for cash 
 enables|the store to secure the cash discounts on pur- 
 chases and to save the interest on the capital tied up 
 in accounts receivable. In, the operation of grocery 
 stores these economies appear to amount to an aver- 
 age of 3 or 4 per cent of sales as compared 
 with stores furnishing credit and delivery services. 
 Many individual stores now operate on the economy 
 basis, many of them having adopted this method in 
 order to meet the competition of the chain stores. 
 
 Self-serve stores. — In the attempt to further re- 
 duce operating expenses the self-serve store was de- 
 veloped. , This method has been used for several 
 years in the cafeterias and has recently been intro- 
 duced in the operation of grocery stores. In such 
 stores the goods are placed on shelves in easy reach 
 of the customers and plainly marked with their prices. 
 The customers pass through the store, select the de- 
 sired goods and pay the cashier as they leave. No 
 salesmen are required. The cashier and the clerks 
 needed to replenish the stock on the shelves and to 
 keep the store in order are all that are needed except 
 for the work of guarding against pilfering, purchas- 
 ing, supervision, and general management. The 
 
THE CHAIN STORE 327 
 
 great saving under this system is the saving in the 
 salaries of the salesforce, which is the largest item of 
 expense in most retail stores. Such salaries amount 
 to from 5 to 8 per cent of sales in many retail 
 stores. The self-serve stores eliminate this expense 
 but substitute the expenses of a cashier and of attend- 
 ants to replenish the stock; make up packages of 
 goods that have to be wrapped, such as meats, cheese, 
 fruits and vegetables ; and to guard against pilfering. 
 It is difficult to make any general statement as to the 
 amount of the net saving. In some instances it seems 
 to be considerable, say 3 to 5 per cent of sales, 
 and in other instances it appears to be much less. If 
 the volume of sales is large and little trouble is ex- 
 perienced with pilfering the saving is likely to be 
 large. If this method makes possible lower prices, 
 these prices will likely stimulate sales and the in- 
 creased sales will tend to lower the relative cost of 
 doing business. This fact appears to explain the ex- 
 ceptionally low operating costs claimed by some self- 
 serve stores. 
 
 There are many of these self -serve stores, some of 
 them being individually owned and operated, but the 
 chain of Piggly Wiggly Stores, Inc., with a patented 
 name and system is probably the most widely known. 
 
 The Bynn Yann stores, of which there were 180 
 in 1920, attempted to reduce the wages of employees 
 in a different way.' The stock was so arranged that 
 the salesman could reach any article by taking only 
 
 " Journal of Commerce, April 9, 1921. 
 
328 MARKETING 
 
 a few steps. Another method of reducing the number 
 of salesmen was tried with the organization of the 
 "All Package" stores in 1915. The failure of both 
 of these concerns was apparently due to inefficient 
 management and too rapid expansion rather than any 
 defects in their ideas of handling goods. A great many 
 of the grocery chains attempt to reduce the quantity 
 of un-packaged goods. Merchandise that must be 
 weighed or measured results, not only in a waste and 
 deterioration of the goods, but consumes the time 
 of the salesforce. 
 
 Application of the self-serve method. — There is 
 nothing about the non-service or self-serve methods 
 that especially adapts them to use by chain stores. 
 They are considered under the discussion of chain 
 stores simply because they have been used principally 
 by the chain stores. They can be used just as well 
 by the individually owned and operated stores. The 
 self-serve method at first thought appears to be 
 limited in its application to standardized goods that 
 can be put in a few standard sized packages. But is 
 not any merchant who marks his goods in plain prices 
 and displays them so that the prospective customers 
 can examine them easily and without the assistance of 
 a salesperson making use of the same principle? In 
 the sale of many goods, however, the customers re- 
 quire some assistance or advice from the salesmen as 
 to sizes, fits, styles, or qualities. 
 
 Limitation on use of economy methods. — The 
 cash-carry method, when combined with low prices, 
 has become very popular. There are, however, many 
 
THE CHAIN STORE 329 
 
 people who desire delivery service, credit service or 
 both. The wealthy very often desire both. The poor 
 at times, must buy on credit, and the busy housewife 
 often desires delivery service. The cash-carry store 
 cannot cater to all members of the community. To 
 meet this situation, some merchants adopt the "three- 
 way" price plan. For example, goods may be priced 
 on a "credit carry" basis and a discount allowed for 
 all cash payments. A special charge, of say, ten or 
 twenty cents is then made for all deliveries. Under 
 this plan one charge is made for the goods, another 
 for credit, and a third for delivery. Other stores 
 use the "two-way" plan, one charge being made for 
 the goods and an extra charge for delivery, no special 
 charge being for credit when granted. Chain stores 
 sometimes adopt such methods but the individual 
 store has the advantage here as it should be in closer 
 touch with its customers and can adopt a method 
 especially suited to the needs of its patrons. 
 
 Reduces wholesaling expenses. — It has already 
 been stated that the large chain stores, commonly buy 
 direct from the manufacturers, but that they must 
 maintain wholesale warehouses and distribute the 
 goods to their retail stores. The expenses of opera- 
 ting a chain store warehouse and deliy^rv system is 
 much less than the cost of operating an independent 
 wholesale establishment. This is true because the 
 selling expenses, los^ from bad^ebts, and the ex- 
 penses of a credit and collection department are elim- 
 inated and^he expenses of management and delivery 
 are reduced. It is easy to see why the first three men- 
 
330 MARKETING 
 
 tioned are eliminated. According to the Harvard 
 studies^"* these expenses averaged over 2.5 per cent of 
 sales in the wholesale grocery business. The expenses 
 of management are reduced because the manager of 
 a chain store warehouse does not need to be as high 
 grade man as the head of an independent wholesale 
 concern doing an equal volume of business. There 
 are no salesmen to be supervised and no financial de- 
 partment to be managed. When a chain store has 
 several stores in the same city it is in a position to 
 effect a saving in the delivery of goods, due to the 
 fact that it can lay out its routes carefully. It can 
 arrange its deliveries so that all stores in one part 
 of the city receive their goods one day, those in an- 
 other section another day, and so on. The saving in 
 the expenses of management and delivery would likely 
 amount to 1 per cent of sales. Over against these 
 savings must go the expenses of the supervisors over 
 the various retail units and the cost of checking or 
 revising the orders from the local managers. The 
 net saving in the wholesale distribution of groceries 
 apparently averages about 3 per cent of sales, 
 or over one-third the average total expenses of the 
 wholesale grocers. 
 
 Total expenses of chain stores. — ^The total ex- 
 pense of the chain stores, at least of the larger ones, 
 include the expenses of the wholesale warehouses and 
 retail stores and sometimes of a certain amount of 
 manufacturing. In spite of this they are often lower 
 
 " See "Bulletins Nos. 9, 14 and 19," of the Bureau of Business Re- 
 search of Harvard University. 
 
THE CHAIN STORE 331 
 
 than the expenses of the individual retailers. In the 
 sale of groceries, for example, the Harvard studies 
 have shown the common operating expenses of groc- 
 ery stores as 16.S per cent in 1915 and 14 per cent in 
 1918" while the common expenses of the chain groc- 
 ery stores are reported to be from 10 to 14 
 per cent. The Piggly Wiggly self-service stores claim 
 expenses of less than 5 per cent but this figure does 
 not apparently include the expenses of operating 
 wholesale warehouses in all instances.^^ Th^ expenses 
 of the chain stores usually cover stores operating on 
 the economy basis for which reason they are not 
 strictly comparable with the expenses of individual 
 grocers furnishing a much larger amount of service. 
 After all factors are considered, the fact remains that 
 the chain stores ordinarily have lower total expenses 
 than the individually owned and operated stores. The 
 expenses of retailing will be discussed more fully in 
 the next chapter. 
 
 Low prices. — The ability to buy their goods more 
 cheaply combined with the lowei' operating expenses 
 enables most chain stores to undersell their competi- 
 tors. In fact, the growth of the chaiii stores has been 
 due largely to their low prices. It must not be infer- 
 red from this that they handle goods of a poor qual- 
 
 "See "Bulletins" Nos. 5 and 13. 
 
 12 The expenses of the American Stores Co. averaged 11.9 per 
 cent, in 1919 and 12.3 per cent, in 1918. The John T. Connor Stores 
 had expenses of 14.4 per cent, in 1919 ; while the expenses of the 
 Kroeger Grocery and Baking Co. amounted to 13.6 per cent, in 
 this year. These expenses apparently cover the expenses of re- 
 tailing, of the wholesale distribution, and of some manufacturing. 
 
332 MARKETING 
 
 ity. As a matter of fact, many of them handle goods 
 of a high quality. Some chains specialize on high 
 grade goods and others on medium or low grade 
 goods. Park and Tilford, for example, claim to have 
 the largest trade in high-grade groceries in New 
 York City. 
 
 The rapid rise of the chain stores in the grocery 
 field is explained partly by the fact that the rising 
 cost of living has forced many people to economize 
 on their grocery bills and has caused them to welcome 
 any stores that made such economy possible. If we 
 should have a long period of falling prices it will be 
 interesting to see if the grocery chains continue their 
 rapid growth. Their more rapid stock turnover may, 
 however, enable them to grow as rapidly as ever. 
 
 It must not be inferred that the prices of chain 
 stores are always lower than the prices of individual 
 stores. The opposite is not infrequently true. The 
 author's own observations indicate that the large 
 grocery chains generally have a marked advantage 
 over the small independent stores in the sale of staple 
 groceries but that many individually owned or unit 
 stores can meet their prices and very often undersell 
 them on fruits, vegetables, meats, butter, eggs, etc. 
 Many chains do not handle such perishable foods and 
 when handled such goods are often bought locally 
 which means that the chain stores cannot get the full 
 advantage of large concentrated purchases as they 
 can with staple or less perishable goods. 
 
 Cut prices. — Many chain stores follow the so 
 called "cut-price" policy. That is, they sell certain 
 
THE CHAIN STORE 333 
 
 well-known goods at very low prices to attract people 
 to their stores and give the impression of selling goods 
 cheaply. The wisdom and ethics of such a policy will 
 be discussed in a later chapter. This policy is, how- 
 ever, not limited to the chain stores. It has been 
 used extensively by the department stores as well as 
 by many other "cut-price" stores. The chain stores 
 only adopted a policy already widely used. 
 
 Private brands. — Some large chain stores are com- 
 ing to sell a large part of their goods under their own 
 brands. These brands will be an asset to the extent 
 that they become widely and favorably known. 
 
 DISADVANTAGES OF THE CHAIN STORES 
 
 DifBciilties in management. — The difficulties in se- 
 curing efficient management and close attention to 
 business from hired employees has already been men- 
 tioned. Most of the chain stores have, apparently, 
 been efficiently managed up to this time, but the dan- 
 ger of losses resulting from poor managers is always 
 present. Poor management has been the reason as- 
 signed for the failure of certain chain stores in the 
 past. It has previously been noted that companies 
 organized to launch a large chain of stores have gen- 
 erally failed, due apparently to the fact that efficient 
 organizations and trained store managers could not 
 be secured. 
 
 Danger of too rapid expansion. — A rapidly grow- 
 ing concern may be so carried away with the idea of 
 growth that it over-emphasizes the importance of size 
 
334 MARKETING 
 
 and under-emphasizes the importance of operating 
 efficiency. Failure is the natural result of such a pol- 
 icy. Rapidly growing concerns are always in danger 
 of being obsessed with the idea of size. 
 
 Lack of personal touch. — The chain stores are at 
 a disadvantage in establishing friendly relations with 
 their customers as compared with the individually 
 owned stores. A hired manager ordinarily does not 
 take quite the same interest in patrons as the propri- 
 etor. Besides managers are changed frequently in 
 some chains. Some chains standardize their stores to 
 such an extent that a manager or trained salesman 
 can be transferred from one store to another and 
 take up his duties in the new store without losing more 
 than a few minutes in getting his bearings. 
 
 Lack of personal service. — The chain store is in a 
 poor position to render individual or personal serv- 
 ice. There is little individuality in their stores. The 
 individual retailers are in a better position to supply 
 service — credit, delivery, advice, etc. — than the chain 
 stores. The chain stores must often lose business 
 simply because they cannot render the services de- 
 sired by some people. 
 
 Increasing efficiency of individual retailers. — The 
 increasing efficiency and antagonism of the individual 
 retailers is threatening the future growth of the chain 
 stores. The retailers are coming to realize that whin- 
 ing does no good and that chain store competition 
 can be met only by increased efficiency. Many retail- 
 ers have realized that the chain stores have succeeded 
 largely because of efficiency and that if they want to 
 
THE CHAIN STORE 335 
 
 succeed they can well afford to study and adopt chain 
 store methods. With the increasing efficiency of the 
 retailers the growth of the chain stores becomes more 
 difficult. There is no reason why an individual mer- 
 chant cannot manage his store just as efficiently as the 
 chain store, select his stock as carefully, display his 
 goods as well, and secure as rapid a turnover of stock. 
 When he does so, the only real advantage left to the 
 chain store is a lower cost of goods due to greater 
 buying power. The retailer is now trying to offset 
 this disadvantage by cooperative buying. If the co- 
 operative jobbing house succeeds in selling the individ- 
 ual retailers on a basis that will enable them to meet 
 the chain store prices there is no real reason why they 
 cannot hold their own with the chain store. The ques- 
 tion then becomes one of the relative efficiency of the 
 two types of dealers. 
 
 Danger of monopoly. — It is argued by some that 
 there is danger of the chain stores forcing the individ- 
 ual stores out of business and then consolidating to 
 form monopolies. Such a development in the grocery 
 business would mean a monopoly in the distribution 
 of food. It is true that the chain stores have been 
 growing very rapidly and also that there have been 
 several consolidations. The consolidation of the 
 Acme Tea Co., the Childs Grocery Co., the George 
 M, Dunlap Co., the Bell Co., and the Robinson & 
 Crawford, grocery chains to form the American 
 Stores Co. in 1917 was said to give the new company 
 almost SO pei cent of the grocery business in Phila- 
 delphia. The formation of the United Retail Stores 
 
336 . MARKETING 
 
 Corporation with control of the United Cigar Stores, 
 Gilmers, Inc. and the U. R. S. Candy Stores Inc. 
 into which one or two older chains were merged has 
 already been mentioned. The acquisition of "the 
 Riker Hegeman and the Riker-Jaynes drug chains by 
 the L. K. Liggett Co. and the later absorption of the 
 latter Company by the United Drug Company are 
 well known. The purchase of the Globe Grocery 
 Stores Inc., and the Grand Union Tea Co. by the 
 Jones Bros. Tea Co. Inc., furnishes another example. 
 There have been many similar consolidations but 
 there is no need to mention more of them here. 
 
 Such consolidations, however, do not show any im- 
 mediate danger of becoming monopolies. The Great 
 Atlantic and Pacific Tea Co. did not enter Philadel- 
 phia until the consolidation of five of the large local 
 chains to form the American Stores Co. After this 
 consolidation, however, several hundred stores were 
 opened by this company. It often happens that a 
 concern formed by the consolidation of several com- 
 panies does less business than the total formerly done 
 by the constituent companies. The retail business is 
 so easy to enter that it is difficult to see how it could 
 be monopolized. Large profits In any trade or indus- 
 try furnish the strongest inducement for others to 
 enter. 
 
 It was estimated above that the chain stores do 
 less than 10 per cent of the total retail business of 
 the country. From this It can be seen that any pre- 
 diction of a chain store monopoly is at least prema- 
 ture. It should, however, be noted that the chain 
 
THE CHAIN STORE 337 
 
 stores control a very much larger percentage of the 
 grocery business in some sections of the country and 
 that they are growing very rapidly. Looking at the 
 problem from a different angle, it is reasonably cer- 
 tain that the anti-trust laws would be called into use 
 if chain store consolidations should threaten to be- 
 come monopolies. 
 
 A case in point is the recent agreement between the 
 United States Department of Justice and the large 
 Chicago meat packers under which the latter agreed 
 to withdraw from the grocery business. The grocery 
 business of these packers was growing so rapidly that 
 many persons feared that they would drive the whole- 
 sale grocers out of business and seriously restrict com- 
 petition. The Department of Justice would certainly 
 act if consolidations of large chain stores would ever 
 threaten to monopolize the grocery business. But, 
 even granting that a monopoly should be formed for 
 the retailing of foodstuffs, it is certain that if 
 not broken up by law, it would be regulated as a 
 public utility. Food is certainly as essential as trans- 
 portation, gas, or electricity and the only reason that 
 food dealers have not already been classed as public 
 utilities and regulated accordingly is that competition 
 among them has been so strong that the public has 
 felt that it was better protected by such competition 
 than it would be by the regulations of a public com- 
 mission. During the past few years there have been 
 ,not a few who have advocated price fixing and other 
 regulations for all manufacturers and dealers in food- 
 stuffs similar to those now governing the operation 
 
338 MARKETING 
 
 of such industries as have already been classed as 
 public utilities. 
 
 CONCLUSIONS AS TO CHAIN STORES 
 
 The chain stores have grown rapidly because on 
 the one hand they carry goods in locations convenient 
 to the buyers and sell at low prices, and on the other 
 hand because they offer profits large enough to attract 
 a high grade of managerial ability as well as the 
 capital necessary for their expansion. In the retail 
 distribution of goods, an organization with a large 
 number of small units is more convenient to the con- 
 sumers than an organization operating a single large 
 unit. It also appears that the numerous small units 
 are easier to supervise and capable of more efficient 
 operation than the single large unit. The chain stores 
 are growing so rapidly that it is very difficult to make 
 any kind of a prediction as to their future. The co- 
 operative jobbing houses owned by the Individual 
 grocers are also growing rapidly. If they succeed 
 in selling the retailers on a basis that will more nearly 
 allow the latter to meet chain store prices, the growth 
 of the chain grocery stores may be checked. If, on the 
 other hand, the cooperative jobbing houses fail in 
 this, the continued growth of the chain stores may be 
 expected. The chain stores in the future must meet 
 increasing efficiency on the part of the unit stores. 
 
 CHAPTER XIII— QUESTIONS 
 
 1. Why have the chain stores grown so rapidly in recent years? 
 
 Why are most chains composed of specialty stores? 
 
 2. What are the different classes of chain stores? 
 
THE CHAIN STORE 339 
 
 3. Enumerate the advantages and disadvantages of chain stores. 
 
 4. What part of the retail trade is now controlled by the chain 
 
 stores? What do you think of the future growth of chain 
 stores ? 
 
 5. The Jones Grocery Co., located in the down town section of a 
 
 city of several hundred thousand people, specializes in high- 
 grade groceries, meats, fruits and vegetables. A very large 
 part of its sales are made on credit and the goods delivered. 
 The same prices are charged on cash-carry as on credit-de- 
 livery sales. There is no further room for growth in the pres- 
 ent location and the company considers opening a chain of 
 twelve or fifteen stores in the better class residential sections 
 and the nearby suburbs. Would such expansion be advisable? 
 What advantages would result from such expansion? What 
 problems would have to be faced ? If such stores were opened 
 should they be operated on the present plan? On the cash- 
 carry plan? Or on a two-way or a three-way plan? 
 
 6. The Cohen Dry Goods Co. is located in a western city of 50,000 
 
 people. It handles dry goods, notions, and women's ready-to 
 wear clothing. It has been successful and has the necessary 
 capital for expansion. Would it be preferable to expand the 
 present store into a department store or to establish a chain of 
 small dry goods stores in the smaller towns within a radius of 
 200 miles? What problems would be faced in each case? 
 
 7. The International Harvester Co. manufactures practically a full 
 
 line of farm implements. It has its own warehouses and sells 
 to retail dealers in all parts of the country. At the present 
 time, by an agreement with the Department of Justice, its sales 
 are limited to one dealer in each town. It has been suggested 
 that it establish its own retail stores. Would this be advisable ? 
 What would be the advantages and disadvantages of such 
 stores ? 
 
 8. The wholesale grocers are threatened by the growth of the chain 
 
 stores. It is proposed that the wholesale grocers establish 
 their own retail stores in sections where the chain stores have 
 as yet had little growth, thus checking the growth of the chain 
 stores and saving themselves. Discuss this proposal. 
 
 9. Competition between the grocers in X, a town of 5,000 people, 
 
 is very keen. The stores give practically unlimited credit and 
 delivery service. As yet no chain stores have appeared in the 
 
340 MARKETING 
 
 town. Would it be advisable for the Sunbeam Grocery Store 
 to adopt some economy methods before the chain stores make 
 their appearance? Why or why not? If such a change is de- 
 cided upon what method would you recommend, cash-carry, 
 three-way, or self-serve? 
 
Chapter XIV 
 
 EXPENSES AND PROFITS OF RETAIL 
 MERCHANTS 
 
 Importance. — Few subjects are of greater import- 
 ance to the retail merchants than their expenses and 
 profits. An accurate knowledge of their expenses is 
 necessary to the intelligent 'pricing of their merchan- 
 dise. The dealer who does not know his expenses 
 may sell his goods on such a basis as not' to allow a 
 fair profit. Such a policy, if continued, will sooner 
 or later lead to failure. Many failures may be traced 
 to just such a policy, or rather the lack of policy. On 
 the other hand the dealer who is ignorant of his 
 operating expenses may place too high a price on his 
 goods. In this case he will either overcharge the buy- 
 er and lay himself open to a charge of "profiteering," 
 or he will lose business to other dealers having lower 
 prices. A knowledge of his cost of doing business 
 will allow him to discontinue lines upon which compe- 
 tition will not allow him to make a fair profit. 
 
 A study of his cost of doing business will also warn 
 the merchant when his expenses are too high. ^ com- 
 parison of his costs with those of other dealers hand- 
 ling the same class of goods, will show the dealer 
 when his expenses are dangerously high and also serve 
 as a stimulus in the reduction of the expense percent- 
 age. When information is available a dealer may 
 
 341 
 
342 MARKETING 
 
 compare his own percentage of expenses with the 
 average of similar dealers or for the average of a 
 group of the more efficient stores. Many dealers would 
 have been saved from failure if they had made such 
 comparisons. 
 
 Poor accounting methods of the dealers. — In 
 spite of the importance of accurately knowing their ex. 
 penses very few of the smaller dealers have in the 
 past taken any interest in the subject. Most of them 
 have been content at the end of each year to ascertain 
 their net worth.^ 
 
 Some have not even taken the trouble to do this. 
 Very few small retailers have In the past kept books 
 from which their expenses and profits could be accu- 
 rately determined. The Federal Trade Commission 
 estimated that only one out of every twenty-four of 
 the 30,000 retail dealers handling farm implements 
 had accurate records of their business^ Conditions 
 have been almost as bad among other classes of deal- 
 ers. Within the past few years, however, a greater 
 interest has been taken in accounting and the percent- 
 age of the retail dealers keeping adequate records is 
 much larger than a few years ago. Trade associa- 
 tions, business periodicals, and government agencies 
 have done much to arouse interest in the subject. The 
 necessity of filling out income tax returns however, 
 
 ^ Net worth is the difference between the concern's assets and lia- 
 bilities. Capital stock, surplus, undivided profits; and proprietor- 
 ship accounts are not included as liabilities. 
 
 ' Federal Trade Commission : "Causes of the High Prices of Farm 
 Implements," 1920, p. 235. 
 
EXPENSES AND PROFITS 343 
 
 has probably done more than anything else to force 
 the small retailers to keep books. When the exemp- 
 tion was lowered during the war most of the retail 
 merchants were required to make returns. For this 
 reason many retailers installed accounting systems for 
 the first time in 1918 and 1919. 
 
 In fairness to the retailers it must be stated that 
 most of the larger stores and some few of the more 
 efficient smaller stores have for many years kept full 
 and satisfactory records of their business. 
 
 DEFINITIONS 
 
 Gross profit, or gross trading profit, is the differ- 
 ence between the net sales and the cost of the goods 
 sold. Freight and cartage incurred in getting the 
 goods into the store are generally included as a part 
 of the cost, of the goods. Trade discounts are de- 
 ducted from list prices in arriving at the cost of the 
 goods. There is no uniformity in the method of hand- 
 ling cash discounts. Some accountants hold that the 
 taking of cash discounts is a financial, and not a 
 trading matter, and that cash discounts taken should 
 be excluded from gross profits and added to net trad- 
 ing profits in arriving at net Income. Other account- 
 ants argue that cash discounts are allowed by most 
 wholesalers and manufacturers and that most dealers 
 take all or a part of these discounts regularly in the 
 course of business and hence the cash discounts actual- 
 ly taken should be treated in the same way as trade 
 discounts and deducted from the invoice prices in 
 arriving at the cost of the goods. 
 
344 MARKETING 
 
 Expense of doing business. — The expense or cost 
 of doing business is made up of the various operating 
 expenses, salaries of employees and of the owners 
 Tvhen they are active in the business, rent, delivery 
 expense, advertising expense, depreciation, repairs, 
 office supplies,, light, heat, power, losses from bad 
 debts, etc. There is a lack of uniformity among deal- 
 ers as to the items included as expense and a consider- 
 able difference of opinion exists among accountants 
 as to whether certain items should be so included. 
 
 Some dealers pay themselves salaries and others 
 get their remuneration from a distribution of profits 
 or the payment of dividends. From the standpoint 
 of the individual dealer it perhaps makes little dif- 
 ference what account is debited, but for the sake of 
 uniformity it is generally agreed that reasonable 
 salaries for the owner or owners active in the business 
 should be included as an operating expense. 
 
 Property and license taxes are generally included 
 as expense. Income taxes, however, are by their very 
 nature a distribution of income and cannot properly 
 be included as an operating expense. 
 
 Rent actually paid for buildings occupied is a part 
 of expense. Rent on buildings owned by the dealer is 
 sometimes also included as an expense. This was 
 done in several of the studies conducted by the Har- 
 vard Bureau of Business Research for the sake of 
 uniformity. In such cases rents on owned buildings 
 were included as expenses but the values of the build- 
 ings were excluded from investment. 
 
EXPENSES AND PROFITS 345 
 
 Is interest an expense ? — There is a great differ- 
 ence of opinion as to the propriety of including in- 
 terest on the capital investment as an expense. It is 
 argued on the one side that the business man has no 
 assurance of earning interest on his investment, that 
 unless he conducts his business efficiently he has no 
 right to receive interest, and hence that interest should 
 come out of the "profits" and not be included as an 
 operating expense. On the other hand it is argued 
 that interest should be included as an expense for the 
 reason that if the installation of labor-saving equip- 
 ment is contemplated the interest on the investment 
 must be compared with the saving in wages. It is 
 further argued that interest on borrowed funds must 
 actually be paid and hence is just as much an expense 
 as the wages of the salesforce; and that interest on 
 the owned investment should be included as an ex- 
 pense for the reason that no "profit" is made until 
 the invested capital has received a fair rate of inter- 
 est. 
 
 At first thought it might appear that interest act- 
 ually paid on borrowed funds should be included as an 
 expense while interest on the dealer's own capital 
 should not be so included. Such a practice, however, 
 renders difficult the comparison of statements of dif- 
 ferent dealers for the reason that the proportion of 
 borrowed capital varies. An illustration will make 
 this clear. A has a total investment of $10,000 of 
 which $8,000 is owned and $2,000 borrowed. B 
 has an investment of $10,000 but borrows $8,000 
 and owns only $2,000. At 6 per cent A pays $120 in- 
 
346 MARKETING 
 
 terest a year while B pays $480. For the purposes of 
 comparing the accounts of different concerns, bor- 
 rowed and owned capital should be considered to- 
 gether. 
 
 In some of the earlier studies conducted by the Har- 
 vard Bureau of Business Research interest was not 
 included as an expense, but in the recent studies in- 
 terest on both borrowed funds and owned capital is 
 included as an expense. In the investigations con- 
 ducted by the Federal Trade Commission interest 
 on owned capital is excluded from expense. In some 
 investigations interest on short-term loans has been in- 
 cluded in expenses and in others such interest has been 
 excluded, the borrowed funds being considered as a 
 part of the investment. 
 
 Net profit. — Net profit, or net trading profit, is the 
 difference between gross profit and the total expense 
 of doing business. 
 
 Form of profit and loss, or income, statement. — 
 Profit and Loss, or income statements are drawn up 
 in a variety of forms. The following is a very com- 
 mon one : 
 
 Gross Sales $51,000 
 
 Less Returns and Allowances 1,000 
 
 Net Sales $50,000 
 
 Inventory at beginning of period 10,000 
 
 Purchases 35,000 
 
 $45,000 
 
 Less Inventory at end of period 9,000 
 
 Cost of goods sold 36,000 
 
 Gross Profit $14,000 
 
EXPENSES AND PROFITS 347 
 
 xpenses: 
 
 Salaries and -wages of employees 
 
 Salaries and wages of officers and owners 
 Rent 
 
 
 Etc 
 
 
 Xotal Expenses 
 
 10,000 
 
 
 Net Profit 
 
 Add other income $1,500 
 
 $ 4,000 
 
 Deduct any other expense. 500 
 
 Net Other Income 
 
 1,000 
 
 Net Income 
 
 $ 5.000 
 
 The different expense items should be grouped in 
 such a way as to show total selling expense, total buy- 
 ing expense, total delivery expense, etc., or to show 
 the total expenses for store operation, for use and 
 maintenance of property, and for management. 
 
 The above profit and loss statement shows a gross 
 profit of 28 per cent of sales ($14,000 divided by 
 $50,000) ; total expenses of 20 per cent of sales 
 ($10,000 divided by $50,000) ; and a net profit of 
 8 per cent of sales, ($4,000 divided by $50,000). 
 The net income includes the results of non-merchan- 
 dising activities and should be compared with the in- 
 vested capital rather than with the sales. The net 
 profit can properly be compared with the capital used 
 in the merchandising business. If this capital were 
 $20,000 then 20 per cent net profit was earned on 
 the investment. 
 
 Source of information. — Until recently very little 
 accurate information was available showing the ex- 
 penses and profits of retail merchants. Such infor- 
 
348 MARKETING 
 
 mation has, however, been gathered for different 
 classes of retailers during the past few years by var- 
 ious trade associations, publishing concerns, research 
 bureaus, and government commissions and bureaus.' 
 
 The figures used in this chapter are taken from the 
 bulletins of the Bureau of Business Research of Har- 
 vard University, the reports of the Federal Trade 
 Commission, and the financial statements of various 
 companies as published in Industrial sections of 
 Moody's and Poor's manuals. 
 
 It should be noted that the stores from which in- 
 formation has been obtained have as a rule been above 
 the average size, although some reports have been 
 received from very small stores. It is usually the 
 larger stores that have books from which satisfactory 
 profit and loss statements can be obtained. This fact 
 should be borne in mind while reading the following 
 pages. 
 
 Sales basis for percentages. — Some accountants 
 advocate the use of sales, and others the cost of the 
 goods sold, as the base for computing the percentages 
 of gross profits, operating expenses, and net profits. 
 The use of sales as the basis for computing such per- 
 centages has, however, been generally adopted and 
 win be used In this chapter. Some of the reasons 
 why the sales basis has been generally adopted are 
 that the remuneration of salesmen, allowances to 
 customers, and mercantile taxes, are commonly com- 
 puted on selling price and not cost price. The same 
 
 ' The work of System in gathering and publishing such informa- 
 tion is deserving of especial mention. 
 
EXPENSES AND PROFITS 349 
 
 base is almost universally used in computing the 
 percentages of operating expanses. It would be 
 somewhat more logical to compute the percentages 
 of gross profit on the cost of the goods for the 
 reason that the selling price is made up in part of 
 the gross profit. A uniform basis, is however, de- 
 sirable. Confusion follows the calculation of gross 
 profits on one basis and expenses on another basis. 
 It is far better to use the same base in computing 
 all of these percentages. 
 
 GROSS PROFITS 
 
 The gross profit realized by an individual mer- 
 chant depends upon the mark-up policy, the prices 
 actually realized, and the fluctuations in the prices 
 of the goods handled. 
 
 The mark-up policy varies with the class of 
 goods handled and with the price policy of individual 
 merchants. The percentage of mark-up is ordinarily 
 higher on shoes than on groceries and higher on 
 millinery than on shoes. The percentage of mark- 
 up is ordinarily higher on fancy than on staple 
 groceries and larger on high-priced than on medium- 
 priced shoes. The reasons for such differences are 
 obvious. The mark-up policy also varies widely 
 between different merchants. The merchant faced 
 with keen competition or who has a low cost of 
 doing business may use a lower percentage in figur- 
 ing his selling prices than the merchant with less 
 competition or with higher operating expenses. One 
 dealer marks his shoes to sell on a 50 per cent profit 
 
350 MARKETING 
 
 basis, another on a 33% per cent basis, and a third 
 on a 25 per cent basis. A pair of shoes costing 
 $4.00 would be marked $8.00 by the first dealer, 
 $6.00 by the second and $5.33 by the third. 
 
 Prices realized. — The average percentage of 
 gross profit realized by a merchant depends upon 
 the prices actually received when the goods are sold. 
 Goods may be marked for a high percentage of 
 gross profit but if reductions must be made to sell 
 a large part of them, the average gross profit will be 
 reduced. The merchant marking the shoes at $8.00 
 may have average gross profits little or no higher 
 than the merchant marking his shoes at $5.33, for 
 the reason that he is forced to resort to cut price 
 sales to move a considerable part of his stock. The 
 merchant handling the goods having a high style risk 
 ordinarily marks them to realize a high percentage 
 of gross profit. The prices of the goods not sold 
 within a reasonable time are reduced until they are 
 sold. This sacrifice of stock due to a change of 
 styles adds materially to the prices that must be 
 charged for the goods when they are first received. 
 The greater the style risk — the fancier the article or 
 the more extreme the style — the larger must be the 
 percentage of mark up. On the other hand merchants 
 handling staple goods for which there is a steady 
 demand and little danger of a change of style need 
 not price them for such large gross profits. 
 
 Price fluctuations. — Fluctuations in prices are an 
 important factor in determining the average gross 
 profits actually realized by dealers. During a period 
 
EXPENSES AND PROFITS 351 
 
 of rising prices gross profits are increased and dur- 
 ing a period of falling prices gross profits are de- 
 creased by changes in prices. The value of goods 
 in stock is increased by an increase in prices and 
 decreased by a fall in prices. The large profits made 
 by many dealers during 1917, 1918 and 1919 were 
 due to the general increase in prices during these 
 years. Few subjects were as vigorously debated during 
 the war as the justification of the dealers selling 
 their goods on the basis of current prices, or re- 
 placement costs. This subject cannot be discussed 
 in this chapter but it cannot be denied that the prac- 
 tice is common. Dealers have their gross profits 
 increased by selling goods on the basis of replace- 
 ment costs while prices are rising, and have them 
 decreased by selling on this basis while prices are 
 falling. 
 
 Variation in gross profits. — Due to the difference 
 in mark-up policies, in the prices actually realized, 
 and to the amount of goods in stock during a change 
 in prices, there is a wide variation in the percentages 
 of gross profits realized by different dealers handl- 
 ing the same class of merchandise. The variation 
 in the gross profits realized by the various classes 
 of rural merchants who handled farm implements 
 during 1915 and 1917 is shown by the following 
 figures taken from the books of typical dealers.* 
 
 ' Federal Trade Commission : "Causes of High Prices of Farm 
 Implements," p. 240. Cash discount on purchases are not included 
 in gross profits. 
 
352 MARKETING 
 
 'Percentage of Gross Profit Number of dealers in each group 
 
 On Sales 191S 1917 
 
 Under 10 12 6 
 
 10-12 16 20 
 
 13-15 28 36 
 
 16-18 56 52 
 
 19-21 57 60 
 
 22-24 38 56 
 
 25-27 18 30 
 
 28-30 9 28 
 
 Over 30 4 9 
 
 Total number of dealers.. 238 297 
 
 In 1915; 24 per cent of the dealers had gross 
 profits of less than 16 per cent and 13 per cent of 
 them had gross profits of over 24 per cent. In 1917, 
 20 per cent of the dealers had gross profits of less 
 than 16 per cent and 23 per cent had profits of over 
 24 per cent. 
 
 The variation in the gross profits realized during 
 1918 and 1919 by shoe retailers may be shown by 
 the following percentages of gross profit made by 
 typical dealers.* 
 
 Percentage of Gross Number of Stores 
 
 Profit on Sales JQiS jgig 
 
 Under 20 1 1 
 
 20-24 10 11 
 
 25-29 13 13 
 
 30-34 45 37 
 
 35-39 20 25 
 
 Over 40 > 6 S 
 
 Total number of Stores 95 95 
 
 "Bureau of Business Research of Harvard University, Bulletin 
 No. 20, p. IS. 
 
EXPENSES AND PROFITS 353 
 
 Almost one-half of the dealers in 1918, and over 
 one-third of them in 1919 realized gross profits of 
 30 to 34 per cent inclusive. This indicates that a 
 very large number of dealers realized approximately 
 33 per cent on sales (50 per cent on cost price). In 
 1918, one-fourth of these shoe dealers had gross 
 profits of less than 30 per cent and 27 per cent of them 
 had gross profits of 35 per cent or over. In 1919, 26 
 per cent of these shoe retailers had gross profits below 
 30 per cent, while 34 per cent had gross profits of 35 
 per cent or more. 
 
 Average gross profits. — In spite of the difference 
 in the gross profits realized by different merchants 
 handling the same class of goods, average figures are 
 useful. Such averages are also necessary in making 
 many comparisons. The average gross profits real- 
 ized by the various classes of rural dealers handling 
 farm implements during 1915, 1916, 1917, and 1918 
 were as follows:' 
 
 Class of Dealers Percentages 
 
 Year 1915 1916 1917 1918 
 
 Implement 17.2 18.0 19.1 18.1 
 
 Implement and Hardware 20.4 22.0 21.2 21.4 
 
 Implement and Automobile 13.5 13.1 16.3 17.3 
 
 Implement, Hardware & Automobile.. 17.5 18.8 17.8 20.2 
 
 Implement and Lumber 19.8 20.3 22.5 21.2 
 
 General Merchandise 19.3 19.9 20.2 20.5 
 
 Implements and Miscl. Lines 16.9 17.2 17.2 19.4 
 
 Average all Classes 18.1 18.8 19.0 19.9 
 
 "Federal Trade Commission: "Causes of High Prices of Farm 
 Implements," p. 237. Cash discounts on purchases not included. 
 
354 MARKETING 
 
 The average gross profits realized by retail dealers 
 in shoes, groceries and hardware, together with the 
 lowest and highest gross profits reported in each 
 class, are as follows:' 
 
 Percentages of Gross Profits 
 No. Average or 
 
 Class of Dealers Stores Year Common Loiu High 
 
 Hardware 218 1917 & 1918 26.5 12.8 40.2 
 
 Hardware 155 1919 27.1 10.3 41.1 
 
 Grocery 253 1914 & 1915 21.0 14.6 27.9 
 
 Grocery 197 1918 16.9 10.5 26.0 
 
 Jewelry 100 1919 40.1 20.1 56.6 
 
 Shoe 197 1919 33.1 19.3 45.6 
 
 Drug 187 1919 34.0 20.6 50.1 
 
 Additional information is available as to the gross 
 profit realized by shoe retailers. The Federal Trade 
 Commission has published detailed figures gathered 
 from a large number of retailers showing the aver- 
 age costs, selling prices and gross profits on different 
 kinds of shoes during the years 1914, 1917 and 1918. 
 From these figures it appears that the average gross 
 profit amounted to 32.4 per cent in 1914 and 33.8 
 per cent in 1918.* 
 
 The common gross profits of different types of 
 retail shoe stores are as follows :^ 
 
 ' Harvard Bureau of Business Research, Bulletins Nos. S, 12, 13, 
 20 and 21. The average used is the mode. 
 
 * Federal Trade Commission: "Report on Leather and Shoe In- 
 dustries," pp. 124-153. The averages given are medians expressed 
 as percentages of sales. 
 
 'Harvard Bureau of Business Research; Bulletin No. 10. 
 
EXPENSES AND PROFITS 355 
 
 Type of Stores Percentage 
 
 Low Priced Shoe 25.7 
 
 Medium Priced Shoe 26.6 
 
 High Priced Shoe 34.8 
 
 Shoe Department of Department Stores 28.1 
 
 Chain Stores 28.4 
 
 The gross profits of two of the large 5 and 10 
 cent chains have in recent years varied between 30 
 and 33 per cent. The gross profits of three of the 
 large chain grocery stores are between 16 and 17 per 
 cent." 
 
 OPERATING EXPENSES 
 
 Causes of variation in expenses. — There is a great 
 difference in the expenses of retail stores handling 
 different classes of goods. There is also a great dif- 
 ference in the expenses of different stores handling 
 the same class of goods due to differences in operating 
 efficiency and volume of sales; location of store; and 
 services rendered to customers. 
 
 Operating efficiency and volume of sales. — The 
 merchant who operates his store efficiently — uses 
 labor advantageously, space economically, selects his 
 stock wisely and turns it often, and possesses selling 
 ability — will have much lower operating expenses 
 than the merchant who is careless, lazy, or otherwise 
 inefficient. The percentage of expense is affected by 
 the volume of sales. The sales of two stores having 
 similar expenses may differ widely. For example, 
 "two exclusive farm implement stores located in the 
 
 ^'^ Figures from the Industrial section of Moody's Manual. 
 
356 MARKETING 
 
 same town in South Dakota during 1915 had approx- 
 imately equal expenses, and yet one store had sales 
 considerably more than double that of its competitor. 
 When the total expenses were expressed as percent- 
 ages of sales the store with the smaller sales had 
 expenses over 20 per cent, while the store with the 
 larger sales had expenses of less than 9 per cent." " 
 Both of these stores paid approximately the same rent 
 and presumably had locations of about the same size 
 and desirability, yet one dealer, due apparently to 
 superior salesmanship, was able to do more than 
 twice the volume of business done by the other with- 
 out incurring larger total expenses. In regard to sales- 
 force expense the Harvard Bureau of Business Re- 
 search says: "It appeared that salesforce expense 
 generally was about one-half as great in proportion 
 to net sales in the retail hardware stores that had 
 a high volume of sales of merchandise per salesper- 
 son as compared with the retail hardware stores with 
 a small volume of annual sales of merchandise per 
 sales person. There is also a tendency for the hard- 
 ware stores with larger total sales to have lower 
 total expenses. The common total expenses of stores 
 with annual sales of less then $30,000 was 23.9 per 
 cent, while the common total expenses of stores with 
 annual sales of over $60,000 was 18.9 per cent. This 
 is, however, only a tendency, as some of the stores 
 with small sales have low expenses and vice versa. It 
 
 "Federal Trade Commission: "Causes of High Prices of Farm 
 Implements," pp. 261 and 262. 
 
EXPENSES AND PROFITS 357 
 
 is further pointed out that there is a direct connec- 
 tion between rate of stock turnover and total expenses. 
 Retail hardware stores having a stock turnover of 
 less than 1.8 times per year commonly had total 
 expenses of 25 per cent, while those stores with a 
 stock turnover greater than 2.2 times per year had 
 common expenses of 19.3 per cent of sales.^^ 
 
 It must not be inferred from these facts, however, 
 that the large store always has lower expenses in 
 relation to sales than the small store. Just the oppo- 
 site is often true. The small store may secure just 
 as high a volume of sales per salesperson, just as 
 much selling ability, just as rapid stock turnover, and 
 a closer attention to details than the larger store. 
 
 "The figures show that among the (shoe) 
 
 stores operating at low total expense many are doing 
 a small volume of business. If the small retailer 
 adjusts his salesforce so as to secure an adequate vol- 
 ume of sales per salesperson, and has average advan- 
 tages in other respects, he can hold his own in 
 competing with larger stores."^^ 
 
 In regard to retail grocery stores this Bureau 
 reports: "The lowest expense ratios were not found 
 in the largest stores, nor the highest in the smallest 
 stores. The greatest variations were commonly be- 
 tween stores of approximately the same size oper- 
 ating under similar conditions in a single locality."" 
 The retailer's percentage of expense depends upon 
 
 '? Harvard Bureau of Business Research," Bulletin No. 21. 
 "Harvard Bureau of Business Resarch," Bulletin No. 10, p. 35. 
 "Bulletin No. S. 
 
358 MARKETING 
 
 the relation of sales to the number and wages of em- 
 ployees, expenses for rent, etc., and the rate of stock- 
 turn and not upon the size of the. store. 
 
 Location of stores. — Stores located in the rural 
 sections generally have • a lower percentage of 
 expenses than the city stores. Stores located in the 
 residential section of a city often have lower expenses 
 than similar stores located in the high-rent, down- 
 town section of the same city, although the volume 
 of sales and stock turnover of the down-town store 
 may frequently give it the lower expenses as measured 
 in percentages. The lower expenses of the rural 
 stores are due principally to lower wages, lower 
 rents, and lower taxes. The average percentage 
 of expenses of farm implement dealers in the North- 
 ern Prairie States (Minn., N. D., and S. D.) in 
 1915 was 11.3, as compared with average expenses 
 of 17.8 per cent for similar dealers in the East North 
 Central States, and 19.9 for those located in the 
 Rocky Mountain and Pacific Coast States." The 
 expenses of the small city stores are commonly said 
 to be from 2 to 4 per cent less and those in large 
 cities from 1 to 3 per cent higher than those in 
 the rural districts. This is, however, only a tendency, 
 for as pointed out above great variations in expenses 
 occur between dealers in the same locality. 
 
 Services rendered. — The operating expenses vary 
 with the services rendered to the customers. The 
 
 '° See Federal Trade Commission : "Causes of High Prices of 
 Farm Implements," pp. 262-264. 
 
EXPENSES AND PROFITS 359 
 
 store furnishing delivery and credit services has, 
 other things being equal, higher expenses than the 
 store operating on the cash-carry plan. The more 
 service rendered, other things being equal, the greater 
 will be the expense. The stores handling fancy gro- 
 ceries generally have higher expenses than other 
 grocery stores because of the services performed in 
 catering to their customers. The stores handling high- 
 priced shoes ordinarily have higher expenses than the 
 stores handling cheap shoes, due at least in part to 
 the services that must be rendered in connection with 
 the sale of high-priced shoes. 
 
 Wide variation in expenses. — ^A chain of stores 
 with average operating expenses of IS per cent has 
 one store with expenses of only 6 per cent and an- 
 other with expenses of 28 per cent. The Harvard 
 Bureau of Business Research reports a chain shoe 
 store with expenses of 9.9 per cent and another with 
 expenses of 57.6 per cent. This Bureau found gro- 
 cery stores with expenses ranging from 10.4 to 25.4 
 per cent ; hardware stores with expenses varying from 
 11.4 to 36.3 per cent; drug stores with expenses as 
 low as 17.9 and as high as 42.9 per cent; and individ- 
 ually owned shoe stores with expenses ranging from 
 13.6 to 25.6 per cent. These were the extremes 
 and were presumably reported by stores operating 
 under unusual conditions. A new store without an 
 established trade and with heavy advertising expenses 
 may have a very high percentage of expense. On the 
 other hand an efficiently managed store with a very 
 
360 MARKETING 
 
 desirable location may report a very low percentage 
 of expense. Even if these extreme cases be ignored, 
 there is very little uniformity in the operating ex- 
 penses of merchants handling the same class of goods 
 and operating under similar conditions. Many per- 
 sons have assumed that there was little difference in 
 the expenses of merchants handling the same class 
 of merchandise (or of the costs of manufacturers 
 producing the similar products} , once the exceptional 
 cases were eliminated. Nothing could be farther 
 from the truth. The cost of doing business varies 
 widely between different merchants and the cost of 
 production varies widely between different manufac- 
 turers. The Federal Trade Commission has pub- 
 lished figures showing the operating expenses of a 
 large number of rural merchants who handle farm 
 implements. The number of such merchants with 
 different percentages of expense in 1915 and 1917 
 is shown on the next page.^° 
 
 Any person thinking that there is a marked uni- 
 formity in the expenses of similar dealers, once the 
 extreme cases are eliminated, should study this table 
 
 " Report on the "Causes of the High Prices of Farm Implements,'' 
 p. 262. It is estimated that these figures cover one-fourth of the 
 dealers handling farm implements who had books from which sat- 
 isfactory profit and loss statements could be taken. All of these 
 merchants handled farm implements but most of them also handled 
 other classes of goods. The fact that all of these merchants did not 
 handle identical classes of goods would account for but a slight 
 part of the variation. Interest is not included as an expense and 
 salaries are not inserted for the owners of concerns who did not 
 pay themselves salaries. 
 
EXPENSES AND PROFITS 361 
 
 Percentages of 
 
 Total Expenses Number of Dealers 
 
 1915 1917 
 
 Under 5 8 9 
 
 5-7 IS 24 
 
 8-10 39 61 
 
 11-13 43 73 
 
 14-16 50 66 
 
 17-19 46 42 
 
 20-22 14 12 
 
 23-25 8 5 
 
 Over 25 IS 5 
 
 Total Number of Dealers 238 297 
 
 carefully. The average expense in 1915 was 14.6 per 
 cent. Yet only 21 per cent of the dealers had ex- 
 penses falling with the modal group — 14 to 16 per 
 cent, and only 58 per cent of the dealers had expenses 
 within 4 per cent of the average, that is from 1 1 to 19 
 per cent, inclusive. In other words, 42 per cent of 
 the dealers had expenses of less than 1 1 or more than 
 19 per cent. The variation was almost as marked in 
 1917. 
 
 Average expenses.: — In spite of the wide variation 
 in expenses, averages are necessary for comparative 
 purposes. The average operating expenses of the 
 various classes of rural merchants who handled farm 
 implements in 1915, 1916, 1917 and 1918 are shown 
 on the following page." 
 
 The decrease in these percentages is due to the 
 
 ^"^ Federal Trade Commission : "Causes of the High Prices of 
 Farm Implements," p. 260. Salaries are included for the owners 
 of all stores. Interest is not included. 
 
362 MARKETING 
 
 Class of Dealers Average Percentages of Expenses 
 
 1915 1916 1917 1918 
 
 Implement 14.8 15.6 13.8 11.5 
 
 Implement and Hardware 16.7 15.9 14.6 13.5 
 
 Implement and Automobile 9.5 8.2 10.6 9.7 
 
 Implement, Hardware & Automobile. 14.8 14.6 13.1 15.2 
 
 Implement and Lumber 13.2 13.5 13.0 11.2 
 
 General Merchandise 15.0 14.9 12.8 13.2 
 
 Implement and Miscl. Lines 13.8 12.7 11.7 12.5 
 
 Average All Dealers 14.6 14.0 13.0 12.6 
 
 fact that the expenses did not increase as rapidly as 
 the price of the merchandise handled. 
 
 Average expenses of general stores. — The aver- 
 age operating expenses of general stores in 1918, as 
 reported by the Federal Trade Commission was, 13.2 
 per cent. The Harvard Bureau of Business Research 
 .reports the average (modal) expenses for 11 S stores 
 of this class as 15.5 per cent in 1918. This figure, , 
 however, includes 2.2 per cent expense for interest. 
 If this interest be excluded the average would be 13.3 
 per cent as compared with 13.2 per cent reported by 
 the Federal Trade Commission. 
 
 Drug and jewelry stores. — The average expense 
 of 187 drug stores was 27.6 per cent, including inter- 
 est of 3.1 per cent in 1919. The average expenses 
 of retail jewelry stores, including 4.6 per cent interest, 
 was 32.3 per cent in 1919. 
 
 Average expenses of grocery stores. — The aver- 
 age (modal) expenses of conducting retail grocery 
 stores was 16.5 per cent in 1914 and 1915 excluding 
 interest; and 14.0 per cent in 1918, including inter- 
 est. These averages are based on reports from 253 
 
EXPENSES AND PROFITS 363 
 
 stores in 1914 and 1915 and 197 stores In 1918.'' 
 It was pointed out In the preceding chapter that some 
 of the large chain grocery stores had expenses of from 
 12 to 14 per cent. It must, however, be remembered 
 that this includes the expenses of the wholesale ware- 
 houses as well as the retail stores and, apparently In 
 some instances, also the expenses of operating bak- 
 eries, etc. 
 
 Average expenses of shoe stores. — Considerable 
 information has been gathered showing the operating 
 expenses of retail shoe stores. This information Is 
 summarized on the following page : 
 
 There Is a considerable difference in these average 
 percentages, due primarily to the grade of shoes 
 handled. The stores handling low, medium, or pop- 
 ular priced shoes, prior to 1918, had average 
 expenses of 20.3 to 22.7 per cent. The stores handl- 
 ing a general line of shoes had average expenses of 
 slightly over 26 per cent. Those handling high- 
 priced and military shoes had average expenses of 
 28 to 30 per cent. The average expenses of the shoe 
 departments of department stores and of the chain 
 stores were generally between these percentages indi- 
 cating that different grades of shoes were handled. 
 It is noteworthy that the average expenses of the 
 chain stores were no lower than the average expenses 
 of other types of stores. The percentage of expenses 
 appears to have been lower In 1918 and 1919 than 
 in the preceding years due to the great increase In 
 
 18 Harvard Bureau of Business Research, Bulletins Nos. 5-13. 
 
364 MARKETING 
 
 A-verage 
 Percentages 
 of Expenses 
 
 Number of Excluding 
 
 Type of Store Stores Period Interest 
 
 Low Priced* 1911-1917 20.5 
 
 Medium Priced* 1911-1917 20.3 
 
 Popular Pricedt 4 1914 22.7 
 
 Popular Pricedt 9 1915 22.3 
 
 Popular Pricedt 9 1918 19.8 
 
 High Priced* 1911-1917 28.8 
 
 General Linet 53 1914 26.3 
 
 General Linet 61 1917 26.2 
 
 Militaryt 4 1915 30.0 
 
 Militaryt 4 1917 27.9 
 
 Shoe Dept. of Dept. Stores* 1911-1917 23.5 
 
 Shoe Dept. of Dept. Storest 9 1914 30.0 
 
 Shoe Dept. of Dept. Storest 9 1917 25.6 
 
 Chain Stores* 17§ 1909-1914 24.6 
 
 Syndicatet 4 1914 23.7 
 
 Syndicatet 5 1917 26.6 
 
 Not Stated:!: 197 1919 21.1 
 
 * Harvard Bureau of Business Research, Bulletin No. 10. The 
 average used is the mode. 
 
 f Federal Trade Commission: "Report on Leather and Shoe In- 
 dustries," p. 152. 
 
 % Harvard Bureau of Business Research: Bulletin No. 20. The 
 average used is the mode. 
 
 § 184 stores. 
 
 the prices of shoes. The average of 21.1 per cent 
 reported by the Harvard Bureau for 1919 is appar- 
 ently made up from the expenses of stores handling 
 different grades of shoes. With interest included, the 
 average expense for 1919 was 24.0 per cent. 
 
 Average expenses of hardware stores. — The 
 average (modal) expenses of hardware stores as 
 reported by the Harvard Bureau of Business Research 
 
EXPENSES AND PROFITS 365 
 
 was 20.6 per cent for 1917 and 1918, and 21.0 per 
 cent for 1919. The average for 1917 ai>d 1918 was 
 based on reports from 218 stores located in 39 States 
 and Canada. The average for 1919 was based on 
 reports from 155 stores. These averages are con- 
 siderably higher than those reported by the Federal 
 Trade Commission for mixed farm implement and 
 hardware stores. It must be remembered, however, 
 that interest on both owned and borrowed capital and 
 rent on all store buildings whether rented or owned 
 are included in the expense as reported by the Har- 
 vard Bureau. To get the figures on a comparable 
 basis it may be estimated that one-third of the dealers 
 own their store buildings and hence one-third of the 
 average rent expense and all of the interest may be 
 deducted from the Harvard figure. This reduces the 
 average expense to 16.8 per cent for 1917 and 1918 
 and to 17.1 per cent in 1919. This compares with 
 average percentages for mixed farm implement and 
 hardware dealers, as reported by the Federal Trade 
 Commission, of 14.6 per cent in 1917 and 13.5 in 
 1918. If one-half of the business of these mixed 
 dealers was in hardware, the expenses of handling the 
 hardware business was about 15.5 per cent for each 
 year, or about one per cent less than the expenses 
 reported by the Harvard Bureau." This difference 
 
 19 This percentage can be estimated, due to the fact that the ex- 
 penses of the exclusive implement stores are given separately and 
 is based on the assumption that the expense of handling imple- 
 ments is the same in exclusive implement and in mixed implement 
 and hardware stores. 
 
366 MARKETING 
 
 is due to the fact that! nearly all of the mixed imple- 
 ment and hardware stores are located in the rural 
 districts, while many of the stores covered by the 
 Harvard study were located in cities. 
 
 Expenses of novelty stores. — Figures published 
 in Moody's and Poor's manuals show the average ex- 
 penses of the Kresge and McCrory chains of 5 and 10 
 cent stores to have varied from 24 to 29 per cent 
 during the past few years. The relative high expense 
 of these stores is apparently due to the small average 
 sale. The average sale made by the stores of the 
 F. W. Woolworth Co. is reported to be 13 cents. 
 
 NET PROFITS 
 
 The net profit, or the net trading profit, is the 
 difference between the gross profit and the total 
 operating expense. As there is a wide variation in 
 both the gross profits and expenses of different dealers 
 it is evident that there must be a wide variation in the • 
 net profits of similar dealers. The dealers with high 
 expenses, or with exceptionally low gross profits may, 
 and in fact often do, have a loss in place of a profit. 
 
 The net profits or losses as reported for retail gro- 
 cery, hardware and shoe dealers are shown on the 
 next page.^° 
 
 These net profits of four of the large chain gro- 
 cery stores during 1919 varied from 2 to 5 per cent 
 of sales. The net profits of four of the well-known 
 
 '" As given by the Harvard Bureau of Business Research. 
 
EXPENSES AND PROFITS 367 
 
 chains of 5 and iO cent stores during 1914 and 1915 
 varied from 6 to 10 per cent, and during 1918 and 
 1919 from 3.S to 9 per cent. 
 
 Percentages of Sales 
 
 <3 
 
 Type of Store J^, § ^^ t^S^I^ 
 
 Grocery 253 1915 11.0 3.3 2.5—5.5 
 
 Grocery 197 1918 9.3 6.1 2.3 
 
 Hardware 218 1917-1918 11.1 10.2 6.0 
 
 Hardware 155 1919 17.4 4.9 5.8 
 
 Jewelry 100 1919 22.6 7.6 
 
 Shoes 197 1919 24.7 2.5 9.0 
 
 Drug 187 1919 19.4 6.3 6.3 
 
 Variation in net profits of shoe stores. — The 
 variation in the net profits of retail shoe stores is illus- 
 trated by the following figures as reported by the 
 Harvard Bureau Business Research. 
 
 Percentag 
 
 !s of net 
 
 Number 
 
 of shares 
 
 ■profits {or loss) 
 
 1915 
 
 
 1919 
 
 Net loss . 
 
 
 5 
 
 
 3 
 
 Net profit 
 
 0- 3 
 
 8 
 
 10 
 
 If (( 
 
 3- 5 
 
 23 
 
 
 15 
 
 (( li 
 
 6-8 
 
 17 
 
 
 19 
 
 tl n 
 
 9-11 
 
 21 
 
 
 20 
 
 " " 
 
 12-14 
 
 13 
 
 
 15 
 
 U tl 
 
 15 and over 
 
 8 
 
 
 13 
 
 95 95 
 
 Net trading profits of rural dealers. — The relative 
 number' of rural dealers who realized different per- 
 centages of net profit, or loss, on sales, during 1915 
 
368 MARKETING 
 
 and 1917 is shown In the table given below. AH 
 of these dealers handled farm implements, but 
 most of them also handled other classes of merchan- 
 dise.^*' 
 
 Percentages of net trading Number of Dealers 
 
 profit, or loss, on sales 191S 1917 
 
 Loss: 
 
 Over 3 14 4 
 
 3-1 IS 2 
 
 Profit: 
 
 1-3 56 50 
 
 4-6 60 80 
 
 7-9 34 69 
 
 10-12 29 47 
 
 13-15 10 23, 
 
 Over 15 3 17 
 
 Total No. of Dealers trading. .221 292 
 
 Average per cent net profits of 
 
 all dealers 3.5 6.0 
 
 Thirteen per cent of these dealers had trading 
 losses in 1915 compared with only 2 per cent in 
 1917. In 1915, over 25 per cent of these merchants 
 had net trading profits of from 1 to 3 per cent, 27 per 
 cent had profits ofi from 4 to 6 per cent, and 35 per 
 cent had profits of 7 per cent or over. In 1917, 17 
 per cent had trading profits of from 1 to 3 per cent, 
 nearly 28 per cent had trading profits of from 4 to 6 
 per cent, and 53 per cent had trading profits of over 
 6 per cent. 
 
 " Federal Trade Commission : "Causes of High Prices of Farm 
 Implements," p. 267. 
 
EXPENSES AND PROFITS 369 
 
 NET INCOME 
 
 The net income is more significant in the case of 
 these rural dealers than the net trading profits for 
 the reason that cash discounts on purchases were not 
 considered in arriving at the net trading profits. The 
 cash discount on the purchase of farm implements is 
 large. The rate is now commonly S per cent, but 
 until a few years ago much higher rates were com- 
 mon. The cash discounts on the purchase of farm 
 implements were as important to most dealers as 
 the net trading profits. The net trading profits of 
 the exclusive implement dealers averaged 2.5 per 
 cent of sales in 1915, while the "other income" aver- 
 aged 3.8 per cent. The "other income" was made 
 up almost exclusively of cash discounts on purchases 
 and interest received on notes given by the farmers 
 in payment for implements. The "other income" was 
 not as important in the sale of other classes of 
 merchandise, as in the sale of farm implements, but 
 nevertheless was an important source of revenue to 
 practically all dealers covered by the table on page 
 368. The average percentages of net trading profit 
 and net income were as follows : 
 
 Percentages of Sales" 
 Net Trading 
 
 Profit Net Income 
 
 1915 3.S 6.2 
 
 1916 4.8 7.4 
 
 1917 6.0 8.S 
 
 1918 7.3 9.7 
 
 " Federal Trade Commission: "Cause of the High Prices of Farm 
 Implements," pp. 266-270. The average percentages of net income 
 
370 MARKETING 
 
 Net income earned on total investment. — The 
 dealer Is primarily interested in the percentage of net 
 income that he makes on the capital invested in 
 the business or in the amount of money that he 
 realizes for his personal services. The public and 
 the student of economics may also be interested in 
 the return which the dealers make on their investment, 
 and for their personal services, in order to form an 
 opinion as to whether they have been underpaid or 
 overpaid for the services which they perform. 
 
 The number of rural dealers realizing different per- 
 centages of net income on the total investment is 
 shown on page 371. Borrowed funds are included as 
 investment but the interest paid for the use of such 
 funds is excluded from operating expense in ar- 
 riving at the net income. 
 
 In 1915, 3.3 per cent of the dealers reported hav- 
 ing lost money; 21 per cent of them had net Incomes 
 of less than 6 per cent on the total investment; 33 per 
 cent had net incomes of from 6 to 11 per cent; and 
 
 realized on sales by the various classes of rural dealers were as 
 follows: 
 
 Class of Dealer Percentages of Sales 
 
 1915 1916 1917 1918 
 
 Implement 6.2 6.3 9.1 9.8 
 
 Implement and Hardware 6.2 8.9 9.0 10.6 
 
 Implement and Automobile 5.5 6.3 7.7 10.6 
 
 Iipplement, Hardware & Automobile. 4.9 6.1 6.4 6.8 
 
 Implement and Lumber 9.5 10.5 12.3 12.0 
 
 General Merchandise 7.7 8.4 10.3 9.6 
 
 Implement and Miscl. Lines 5.3 6.3 7.5 8.7 
 
 Average all Classes 6.2 7.4 8.5 9.7 
 
EXPENSES AND PROFITS 371 
 
 Percentage of Net Income, Total Number of Dealers^ 
 
 or loss, on total investment 191S 1917 
 
 Losses 7 2 
 
 Profits: 
 
 Less than 2 17 S 
 
 3- S 28 S 
 
 6-8 32 19 
 
 9-11 37 52 
 
 12-14 25 44 
 
 15-17 17 40 
 
 18-20 18 26 
 
 21-23 10 23 
 
 24-26 6 16 
 
 Over 26 12 38 
 
 Total Number of Dealers 209 273 
 
 Average per cent Net Income 9.0 14.7 
 
 42 per cent of them earned 12 per cent or more on 
 the invested capital. In other words, about 1 dealer 
 out of 33 suffered a loss in this year. Also one dealer 
 out of every five failed to earn a fair rate of interest 
 (6 per cent) on the investment. One dealer out of 
 every 3 earned from 6 to 1 1 per cent on the invest- 
 ment and two dealers out of every five earned over 
 12 per cent on the money invested in the business. 
 
 In 1917, less than 1 per cent of the dealers re- 
 ported losses and but 5 per cent of them earned 
 less than 6 per cent on the investment. Twenty-six 
 per cent of the dealers earned from 6 to 1 1 per cent 
 and 68 per cent earned 12 per cent or over. In 1918, 
 80 per cent of the dealers, or over 4 out of 5, had 
 
 " Federal Trade Commission : "Causes of the High Prices of 
 Farm Implements," p. 272. 
 
372 MARKETING 
 
 net incomes equal to 1 2 per cent or more on the in- 
 vested capital. Both 1917 and 1918, however, were 
 years of exceptional prosperity. The larger net in- 
 comes in these years were due to the fact that 
 operating expenses did not increase as rapidly as 
 prices and gross profits, and also to the fact that many 
 dealers realized large profits on merchandise carried 
 over from previous years and sold at prevailing prices, 
 or at least at prices that yielded much more than the 
 normal rate of profit. The reader may consider that 
 the figures mean that many of the dealers were guilty 
 of "war profiteering" in these years, but they cannot 
 take these years as normal. The Trade Commission 
 took 1915 as a normal year. The rural dealers were 
 not affected by war prosperity in this year and their 
 1915 net incomes were taken to serve as a basis for 
 comparison of net incomes earned during the war. 
 The net incomes earned in 1915 may, therefore, be 
 taken as fairly typical of the net incomes earned by 
 the rural dealers in "normal" times. 
 
 Chain stores. — The net profits, or net incomes, 
 of four of the large grocery chains during 1918 and 
 1919 varied from 10 to 40 per cent of the invest- 
 ment. During the same years the net incomes of 
 some of the well known 5 and 10 cent chains varied 
 from 6 to 28 per cent, 11 per cent appearing to be 
 the most common figure. 
 
 Net income earned on own investment. — Many 
 people think of net income in relation to the invest- 
 ment actually owned by the merchants. From the 
 standpoint of the individual merchant it is more im- 
 
EXPENSES AND PROFITS 373 
 
 portant to know what he earned on his own Invest- 
 ment than what he earned on all the funds used in 
 the business. Except in cases of necessity, a mer- 
 chant will not borrow money unless he believes that 
 he can use it in such a way that he will have a margin 
 left for himself after the payment of interest. We 
 would thus expect the average percentage of net 
 income on the dealer's own investment to be higher 
 than the average percentage on the total investment. 
 In computing the percentages of net income on the 
 owned investment the interest paid on the borrowed 
 funds was included as an expense and the borrowed 
 funds excluded from investment. The average per- 
 centages of net, income realized by the rural dealers 
 on total investment and on owned investment were 
 as follows:^* 
 
 Percentages of Net In- Percentages of Net In- 
 come on Total Invest- come on Oi/med In- 
 ment. Interest ex- vestment. Interest 
 eluded from included as an 
 Year Expense Expense 
 
 1915 9.0 9.5 
 
 1916 11.2 12.0 
 
 1917 14.7 16.5 
 
 1918 17.7 20.S 
 
 Return for the personal services of the dealers. — 
 The Federal Trade Commissions has also reported the 
 average net return per the personal services of the 
 rural dealers. The return for the personal services 
 of the dealers was arrived at by including wages of 
 
 " Federal Trade Commission : "Causes of the High Prices of 
 Farm Implements," pp. 270-275. The average percentages of net 
 
374 MARKETING 
 
 employees, Interest on borrowed funds and estimated 
 interest on the owned investment as expenses and 
 excluding salaries of the owners or officers of the 
 various stores from expenses. There is a difference 
 of opinion as to what rate of interest should be al- 
 lowed on the owned investment due to the difficulty 
 of estimating the hazard or risk to which the capital 
 is subjected. For this reason the average net return 
 for each class of dealer was shown, after allowing 
 7 per cent interest on the owned investment and 
 
 income on the total investment and on the owned investment for the 
 various classes of dealers were as follows: 
 
 Averages Percentages of Net 
 Class of Dealers Income of Total Investment 
 
 1915 1916 1917 1918 
 
 Implement 9.2 8.4 14.5 18.0 
 
 Implement and Hardware 7.6 11.7 13.2 17.8 
 
 Implement and Automobile 13.3 16.3 18.9 28.1 
 
 Implement, Hardware & Automobile. 8.3 10.5 13.9 13.4 
 
 Implement and Lumber 10.1 11.5 14.7 16.1 
 
 General Merchandise 10.5 10.2 13.8 16.1 
 
 Implement and Miscl. Lines 9.2 12.2 16.7 18.6 
 
 Average of all Classes 9.0 11.2 14.7 17.7 
 
 Percentages on Oixined Investment 
 
 Implement 9.7 9.2 18.1 23.3 
 
 Implement and Hardware 7.7 12.3 14.0 19.6 
 
 Implement and Automobile 17.9 20.5 25.7 34.2 
 
 Implement, Hardware & Automobile. 10.7 13.0 16.9 14.8 
 
 Implement and Lumber 11.1 11.8 15.9 16.9 
 
 Implement & General Merchandise. . 11.1 10.5 15.1 18.1 
 
 Implement and Miscl. Lines 9.4 12.6 18.5 22.2 
 
 Average All Classes 9.5 12.0 16.5 20.5 
 
EXPENSES AND PROFITS 375 
 
 also after 10 per cent interest on the owned invest- 
 ment.^= 
 
 i_ Average Return per store Average Return per store 
 
 § after alloiuing 7% interest after alloiuing 10% interest 
 
 '^ on investment on investment 
 
 -4915 $3,307 $2,244 
 
 1916 4,320 3,206 
 
 1917 6,767 5,561 
 
 1918 9,305 7,974 
 
 The figures shown are the average returns 
 for the personal services of the owners of each con- 
 cern, but are not the average return per man for the 
 reason that some concerns have more than one 
 owner, or officer, active in the business. The aver- 
 age return per man would be somewhat below the 
 above figures. If we estimate that there was an 
 average of one and one-half men (partner or offi- 
 cer) active in each store, then in 1915 the average 
 return per man was slightly over $2,000 after paying 
 7 per cent on the owned investment and about 
 $1,500 after earning 10 per cent on owned invest- 
 ment. In the rural sections where the stores were 
 located these would certainly have been considered 
 good salaries in this year for the type of men oper- 
 ating these stores. The returns were notably higher 
 in the later years, but 1915 is taken as the normal 
 year. 
 
 25 Federal Trade Commission : "Causes of the High Prices of 
 Farm Implements," p. 277. Similar averages are shown for dealers 
 handling different classes of goods in each of the four years. The 
 figures presented here are the averages for all dealers covered by 
 the investigation. 
 
376 MARKETING 
 
 THE FAILURE RATE AMONG RETAIL MERCHANTS 
 
 Several prominent merchants have said that of 
 every 100 people who enter the mercantile business 
 only 2 to 4 succeed and that the others either vege- 
 tate or fail. 
 
 System's studies. — ^A study of the business fail- 
 ures in Waterloo, Iowa, covering a period of 30 
 years, made by the publishers of System showed 
 that 45 per cent of the retail dealers went out of 
 business within five years after entering business. 
 A similar study in Grand Rapids, Michigan, showed 
 that a retail merchant has less than five chances out 
 of ten of staying in business ten years, and less than 
 three chances out of ten of staying in business fif- 
 teen years. The studies in these two cities showed 
 that the failure rate was almost as high among 
 manufacturers and wholesalers as among retailers. 
 A study was made in another city for a period of 
 30 years. It covered 1,327 factories, 492 whole- 
 salers, and 2,550 retailers. It showed that 62 per 
 cent of the factories, 5 1 per cent of the wholesalers 
 and 58.6 per cent of the retailers failed within 30 
 years.^* 
 
 Nystrom's Oshkosh study, — Nystrom made a 
 study of the changes among retail dealers in Osh- 
 kosh, Wis., from 1890 to 1912. He included deal- 
 
 "See: "What Can We Do About the Business Death Rate,'' 
 System, January, 1916; "Will You Have A Business in 1924?" 
 System, January, 1917; and "When Will My Business Die?" 
 System, October, 1917. 
 
EXPENSES AND PROFITS 377 
 
 ers handling groceries, shoes, dry goods, men's 
 clothing, hardware, furniture and drugs. There 
 were 145 such merchants in Oshkosh in 1890, and 
 172 in 1912. Of the 145 dealers in business in 1890, 
 only 18 were in business in 1912. Of the 201 who 
 entered business between 1890 and 1900, only 39 
 were in business in 1912. In all 526 people had cm- 
 barked in the retail business during these 22 years, 
 out of which number 354 had dropped out prior to 
 1912. The causes of discontinuing business were 
 determined for 201 of these 354 people. These 
 causes were listed as follows: Death, 24; ill health, 
 1 ; bankruptcies handled by the courts, 6 ; sold out 
 probably at loss, 27; sold out at gain, 14; retired 
 with competences, 5; failures or fizzles, 124. Of 
 the 153 others who dropped out it is concluded that 
 most of them just quietly slipped out of sight. If 
 they had caused serious losses to others, or if they 
 had been very successful, they would have been re- 
 membered. It is pointed out that Oshkosh is a 
 typical middle-western city. Similar studies were 
 made in other middle-western towns and similar re- 
 sults were obtained. Nystrom, therefore, believed 
 that the conditions found in Oshkosh were typical 
 of conditions throughout the middle West. 
 
 From these facts Nystrom concludes that people 
 are constantly entering the retail business with small 
 amounts of capital saved from other occupations, 
 which is consumed or lost in a few years. For this 
 reason, he believes that the retail business is partly 
 parasitic as more capital seems to flow into retailing 
 
378 MARKETING 
 
 from other sources than flows out of it into other 
 industries. "Most failures in the retail business are 
 simply closed out in a quiet, informal way, and the 
 public never learns just what the financial situation 
 was. A new man with new capital seems to be 
 ready to slip in and try his fortune as soon as the 
 old dealer steps out."^^ In many cases the creditors 
 lose nothing, the dealers quit when they have lost 
 all or part of their capital. Very few of such cases 
 reach the bankruptcy courts. Dun's reports from 
 1911 to 1920 show failures varying from 0.38 per 
 cent of the firms listed for the year 1919, to 1.32 
 per cent of the firms listed in 1915. In nearly all 
 years the number is less than 1 per cent. Yet they 
 count as failures only those cases where the credi- 
 tors lose something. In some years, however, the 
 names taken off their lists have amounted to 20 per 
 cent of the total number of names listed. 
 
 Conflict of statements. — On the one hand we have 
 figures covering rural merchants, showing that in 
 1915, a supposedly normal year, only one out of 
 every 33 dealers lost money, and that only one out 
 of every five of the remaining dealers earned less 
 than 6 per cent on the capital invested in the business. 
 The percentages are after the inclusion of salaries 
 for all the dealers in expenses. On the other hand, 
 we are told that most people entering the retail busi- 
 ness soon lose all or a part of their capital and drop 
 out of business. If only one out of every 33 dealers 
 
 "Nystrom, Paul H.: "The Economics of Retailing," Ch. 18. 
 
EXPENSES AND PROFITS 379 
 
 is losing money it certainly does not appear that 
 most dealers lose all or a part of their capital in a 
 few years. Can these statements be harmonized? 
 They can to a very large extent. 
 
 Limitation on figures. — The figures given above 
 showing percentages of net income earned by differ- 
 ent dealers on the invested capital during 1915, were 
 taken from the books of over 200 rural dealers lo- 
 cated in all parts of the United States. It is esti- 
 mated that this is one-fourth of the total number of 
 dealers who handled farm implements in that 
 year who had books from which satisfactory profit 
 and loss statements could be taken. These figures 
 would then apparently be typical of the conditions 
 existing among the rural dealers. It must, however, 
 be remembered that it is usually the larger and more 
 efficient dealers who realize the necessity of keeping 
 books and who have suflicient education to enable 
 them to keep satisfactory records. These figures 
 then do not include a fair proportion of the small. 
 Ignorant, or inefficient dealers and should be taken 
 as representing conditions among a class of rural 
 dealers who arc slightly above the average in 
 efficiency. 
 
 In the second place Nystrom's figures include re- 
 tail grocery stores, which seem to have a higher 
 failure rate than most other classes of retailers. 
 Competition among grocery stores is generally very 
 keen. The grocery business is easy to enter. It 
 requires little capital to start a grocery store. It 
 seems that a large part of those who desire to enter 
 
380 ^ MARKETING 
 
 the merchandising field without experience or educa- 
 tion to fit them for such an undertaking, choose the 
 grocery business. The author's observations lead 
 him to believe that the failure rate is much higher 
 among grocery stores than among most other types 
 of retail stores. David Pender, who operates a 
 chain of grocery stores in Norfolk, Va., says: "I 
 cannot recall one competitor who was in business in 
 Norfolk when I first started 20 years ago, who is 
 still in business to-day."^* The author recently visited 
 a town in one of the older agricultural states which 
 has had a slow and steady growth. This town has 
 had 20 or more grocery stores for at least 20 years. 
 He was told that there was only one retail grocer 
 there who had been in business for over eight years 
 and this man was known to live very economically. 
 Yet many of the retailers handling hardware, cloth- 
 ing, furniture, dry goods, shoes and drugs had been 
 In the same business for 10 or 20 years, and in some 
 instances even longer. 
 
 Conditions among other classes of merchants. — 
 Conditions among hardware stores, dry goods 
 stores, men's clothing stores, jewelry stores, shoe 
 stores and drug stores seem to be somewhat better. 
 More capital is required to start a business and few 
 people will embark in such enterprises without some 
 knowledge of the merchandise to be handled and 
 the conditions in "the trade." It is true that the 
 firm names change frequently. It is a well- 
 
 " Writing in System, March, 1921. 
 
EXPENSES AND PROFITS 381 
 
 known fact that the American people are con- 
 stantly changing from place to place and from 
 one business to another. People no longer follow 
 the same occupations all of their lives and train their 
 children for the same occupations. Young men de- 
 sire to enter business, farmers move to town, travel- 
 ing men marry and desire to "get off the road," so 
 they can live with their families, merchants decide 
 to enter the manufacturing business, others desire 
 to retire, and still others want to move to other 
 towns. All of these changes, as well as old age and 
 death may lead to changes in firm names. In some 
 cases the retiring member may sell out at a profit and 
 in other cases at a loss — but most of them have 
 made living wages (or profits) while in business. 
 
 The measure of success. — It is well known that 
 most people spend practically all that they earn. 
 Few people become wealthy. Most of us simply 
 make a living whether we be mechanics, profes- 
 sional nysn, or business men. Most retail stores are 
 not large enough to make their owners really wealthy 
 even if successfully operated. For these reasons 
 it seems hardly fair to say that most retailers soon 
 fail and that retailing is a parasitic industry. It must 
 be remembered that many people enter the retail 
 business with little capital and that most of their 
 capital is accumulated from earnings. It must also 
 be remembered that the failure rate is almost as high 
 among manufacturers^ and wholesalers as among re- 
 tailers. 
 
382 MARKETING 
 
 BIBLIOGRAPHY 
 
 Federal Trade Commission: 
 
 "Causes of the High Prices of Farm Implements," ch. 6. 
 "Report on Leather and Shoe Industries," ch. S. 
 "A System of Accounts for Retail Merchants." 
 
 Bulletins of Harvard University, Graduate School of Business Ad- 
 ministration, Bureau of Business Research. 
 
 Industrial Sections of "Moody's and Poor's Manuals." 
 
 Nystrom, Paul H.: "The Economics of Retailing," chs. S and 16. 
 
 System: Many very interesting articles have been published. See 
 especially series of articles by W. Sammons, "Keeping up With 
 Rising Costs;" "What Can We Do About the Business Death. 
 Rate?" by Stanley A. Dennis, Jan. 1916; "Will You Have a 
 Business in 1924?" by Stanley A. Dennis, Jan. 1917; and 
 "When Will My Business Die?" by Stanley A. Dennis, October 
 1917. 
 
 Bureau of Business Research, Northvyestern University, "Costs, 
 Merchandising Practices, Advertising and Sales in Retail 
 Distribution of Clothing." On the press at this writing. 
 
 CHAPTER XIV— QUESTIONS 
 
 1. Why have so few retail merchants kept adequate records in the 
 
 past? 
 
 2. Explain the variation in the percentages of gross profits re- 
 
 alized by similar dealers. 
 i. Why do the operating expenses of similar dealers vary so wide- 
 ly? Of what use are average percentages of expenses? 
 
 4. Distinguish net, trading profit and net income. Explain the wide 
 
 variation in the net profits of similar dealers. 
 
 5. Is retailing a parasitic industry? Discuss. 
 
 6. How do you account for the frequent changes in ownership of 
 
 retail stores ? Do most of the dealers quitting business fail ? 
 
 7. Is this constant changing of ownership of retail stores due to too 
 
 keen competition or to inefficiency? Is it beneficial to the pub- 
 lic? Why or why not? 
 
 8. What are the principal causes of failures among retailers? 
 
 How can the number of retail failures be reduced? 
 
Chapter XV 
 
 PURCHASING, STOREKEEPING, AND 
 STOCK TURNOVER 
 
 Success in business depends upon the efficient use 
 of land, labor and capital. This chapter deals with 
 the use of capital employed to carry stocks of goods 
 and tries to show how it can be used more efficiently. 
 Business consists largely in the purchase of goods or 
 services for resale in the same or changed forms. 
 In purchasing, the object is to buy the goods in such 
 a way as to reduce the "out of stock" reports to the 
 minimum and to keep the amount of stock on hand 
 as small as practicable. The manufacturer pur- 
 chases, or produces raw materials, changes the form 
 of these materials and sells the completed products. 
 The less capital he has tied up in raw materials, work 
 in process, and finished products without shutting 
 down his plant or losing business due to inability to 
 make prompt deliveries, the less is his expense for 
 warehouse space, and the less capital is needed to 
 operate the business. The merchant buys goods for 
 resale in the same form. His business is to sell 
 goods and not to speculate. He can make profits 
 only by the sale of goods. Some merchants, espe- 
 cially wholesalers, carry on a certain amount of spec- 
 ulative business by buying goods in excess of imme- 
 diate needs in the expectation of higher prices. It 
 is impossible for merchants to entirely avoid some 
 
 383 
 
384 MARKETING 
 
 speculative profits or losses, as the market prices of 
 goods often change while the goods are in stock. It 
 should be the object of most merchants, however, to 
 reduce the speculative element to a minimum.* 
 
 Object of purchasing. — The object of purchasing 
 is to tie up just as little capital as possible in stocks 
 and yet never be out of the goods desired by the 
 customers. In other words to always have all of 
 the necessary articles in stock and yet never to be 
 overstocked in any of them. This is perhaps an ideal 
 that is impossible of attainment in actual practice 
 and yet an ideal that should always be kept in mind 
 and striven for. 
 
 Out of stock orders. — ^When goods are out of 
 stock either business is lost or extra expense is in- 
 volved in filling orders. The wholesaler can handle 
 orders for goods out of stock in several ways. He 
 can go out and buy from other wholesalers. This 
 is a very common method but generally little or no 
 profit is made on such transactions. He can substi- 
 tute other goods for those ordered. This is a prac- 
 tice to be followed only when the merchant is sure 
 that the goods substituted will, be entirely satisfac- 
 tory to the buyer. He can have the goods shipped 
 direct to the buyer from the manufacturer by mail 
 or express. He can notify the buyer that the goods 
 arc out of stock and that they will be shipped as soon 
 
 * We say ''most" merchants for the reason that it is necessary for 
 some merchants to carry a part of the seasonably produced farm 
 products for considerable periods in order io equalize consumption 
 throughout the year. 
 
PURCHASING AND STOCK TURNOVER 385 
 
 as received. This should be done only in, case the 
 merchant believes that the buyer could not obtain 
 the goods any quicker from another source. None 
 of these methods should be used if the buyer will be 
 injured thereby. They all involve a IcJss of profit 
 or extra expense and show the importance of always 
 having goods in stock. 
 
 Stockkeeping. — Most merchants and manufac- 
 turers buy many goods more or less regularly and 
 try to have the goods arrive as needed. In order to 
 know when to order goods the buyer should know 
 the quantity of each article in stock and the rate at 
 which the stock is being moved. This involves an 
 adequate stockkeeping system. The highly special- 
 ized or the small dealer may be in close enough 
 touch with his stock to have this information con- 
 stantly in mind without the necessity of any formal 
 stockkeeping system. For most dealers and manu- 
 facturers, however, some .stockkeeping system is 
 highly desirable. Such a system should serve as an 
 intelligent guide in buying and also enable the value 
 of the goods on hand to be ascertained at any time 
 quickly and cheaply. 
 
 The perpetual inventory. — ^The perpetual inven- 
 tory is one of the methods that has been devised to 
 meet these requirements. Under this system the 
 buyer can tell at any time the quantity of each ar- 
 ticle in stock. Every time goods are received or sold 
 the proper entry is made and the quantity on hand 
 carried forward. For example the record of a cer- 
 tain size of steel trap may show the quantity on hand 
 
386 MARKETING 
 
 as 24 dozen. An order is received for 4 dozen and 
 the balance in stock, 20 dozen, is entered in the col- 
 umn showing the balance on hand. The buyer can 
 at any time tell by a glance at this column the quan- 
 tity on hand. The time required to receive a ship- 
 ment of goods from the factory or wholesaler can 
 be approximated for each article. The number 
 likely to be sold during this length of time should 
 constitute the minimum quantity that it is safe to 
 carry in stock before placing an order for more 
 goods. This minimum number should be entered on 
 the stock record and as soon as the balance on hand 
 is reduced to this figure an order should be placed at 
 once for more goods. The size of the order will 
 depend upon the time necessary to obtain the goods, 
 the rapidity of the sales and the quantity discounts 
 obtainable. When the proper size for the purchase 
 is determined it can also be entered on the stock 
 record. The placing of .orders then becomes largely 
 a clerical matter. As soon as the minimum quantity 
 is reached an order is at once placed for the quan- 
 tity shown as the amount to be purchased. The 
 stock clerks can furnish this information daily to the 
 buyer who places the necessary orders. This meth- 
 od of buying is applicable only to staple articles in 
 regular demand. It will be shown later that the de- 
 mand for many articles is very irregular. 
 
 Advantages of nearby source of supply. — Other 
 conditions being equal the buyer should buy as close 
 home as possible for the reason that goods can be ob- 
 tained quicker and hence can be bought in smaller 
 
PURCHASING AND STOCK TURNOVER 387 
 
 quantities. This ties up less capital in stocks of 
 goods on hand. This may be of such importance 
 that it is good policy to buy from the seller located 
 in the same city even if the goods could be obtained 
 at slightly lower prices from a more distant source. 
 
 Xtem gtBoK No . 
 
 Mmimum^ Quan-t-ity to Qrde>-. Nfendm^ ■. 
 
 , ■ReCElP-rs. 
 
 (AM -te Bala-nce.) 
 
 XSSUE5. 
 
 S/)L/)NC&. 
 
 Saitt Qoiwtitv A' 
 
 Da-fa Q<ia^V'fy /jr^iiu-n-t- 
 
 Bgte Ik^arriiiiy flmo.Jn-f'- 
 
 Chart 7 
 
 SPECIMEN FORM FOR PERPETUAL INVENTORY 
 
 Perpetual inventory not always practical. — The 
 advantages of the perpetual inventory were outlined 
 above. In spite of its advantages the necessary cler- 
 ical labor is often so large as to render its use im- 
 practical. This is true with many retail stores. The 
 perpetual inventory may be practical for retail stores 
 dealing in articles sold in fairly large units, such as 
 
388 MARKETING 
 
 suits, dresses, hats, shoes, furniture, etc. A carbon 
 copy of each sales slip goes to the proper clerk who 
 deducts the quantity sold and carries the quantity on 
 hand forward. With such goods the clerical ex- 
 pense may not be prohibitive. In handling such 
 large articles it may, however, be cheaper to count 
 the goods on hand frequently than to keep the per- 
 petual inventory. The disadvantages of this method, 
 however, is that if the count is neglected or made 
 carelessly the merchant may run out of certain styles 
 or sizes before he knows it. A perpetual inventory 
 may also be practical for the dealers carrying open 
 and duplicate (or reserve and show) stocks. For 
 example the cigar store can make an entry every time 
 new boxes of cigars are opened and placed in the 
 show cases. A method which saves the expense of 
 keeping the perpetual inventory and yet informs the 
 buyer when to place orders for more goods is to sep- 
 arate and label the minimum quantity of goods that 
 it is safe to have in stock without placing additional 
 orders. For example if this quantity is one case, 
 this case is placed on the bottom and marked with a 
 red label so that the merchant knows when he opens 
 this case that it is time to place an order for addi- 
 tional goods. If one-half case is the minimum quan- 
 tity, one half of the goods are taken out of a case 
 which is again tied or nailed up and labeled. Such 
 a method may be adequate for many merchants, and 
 also for certain small manufacturers. 
 
 Pvurchasing vs. ordering. — ^A distinction is some- 
 times made between purchasing and ordering and 
 
PURCHASING AND STOCK TURNOVER 389 
 
 some large concerns have separated the two duties 
 and placed them in the hands of different men.^ It 
 is the duty of the purchasing agent or buyer to an- 
 ticipate the demand for goods with a variable de- 
 mand while it is the duty of the orderer to place 
 orders for those goods having a fairly constant or 
 regular sale. The orderer places orders for such 
 goods as the stock records indicate are needed or as 
 they are requisitioned by the production department. 
 His object is to buy in as small quantities as prac- 
 tical to properly meet the needs of his concern. The 
 buyer, on the other hand, often feels that his useful- 
 ness rests on his ability to secure low prices. The 
 danger is that he will over-emphasize price. He 
 may buy from the concern with the lowest price over- 
 looking the better service rendered by another con- 
 cern. A low price may also lead him to overbuy 
 and thus tie up capital for unreasonable lengths of 
 time. 
 
 Unbalanced inventories. — Such overbuying leads 
 to unbalanced inventories. The object should be to 
 carry all items in stock in approximately the propor- 
 tions in which they are sold or needed by the factory. 
 A departure from this policy may be profitable when 
 the price is exceptionally low and the concern has 
 ample capital or when an increase in price is antici- 
 pated. As a rule, however, goods should be pur- 
 chased in the proper proportions. For example a 
 concern manufacturing an article requiring $4.00 
 
 ''Douglas, A. W. : "Merchandising,'' p. 7. 
 
390 MARKETING 
 
 worth of steel, $3.00 worth of wood, $1.00 worth of 
 brass, and $1.00 worth of rubber, should buy the 
 four raw materials in approximately this ratio. If 
 $900,000 is tied up in stocks of raw materials the 
 inventory should ordinai:ily show approximately 
 $400,000 worth of steel, $300,000 worth of lum- 
 ber, $100,000 worth of brass, and $100,000 worth 
 of rubber. If instead the inventory shows $300,- 
 000 worth of rubber, $200,000 worth of brass, 
 $200,000 worth of lumber and only $200,000 
 worth of steel, it is evident that $1,000,000 must 
 be spent for steel and lumber before all of the brass 
 is used up, and $1,800,000 must be spent for steel, 
 lumber and brass before all of the rubber is con- 
 sumed. This is certainly an unwise use of capital 
 and one that may lead to failure or may embarass 
 the concern if it becomes necessary to borrow large 
 sums from the banks. 
 
 Qualifications for successful buying. — From 
 what has been said it is evident that wise buying is 
 no easy matter. The qualifications for a successful 
 buyer may be summarized as follows : a thorough 
 knowledge of the sources of supply; familiarity with 
 prevailing prices and the probable future trend of 
 prices; and bargaining ability. The buyer should also 
 be a good judge of quality. Before the buyer 
 can intelligently utilize these qualifications he must 
 know the quantities in which the various articles 
 should be purchased. Manufacturers often manu- 
 facture goods 6 to 12 months before they are bought 
 by the ultimate consumers. Wholesalers frequently 
 
PURCHASING AND STOCK TURNOVER 391 
 
 place orders for goods from 3 to 9 months before 
 they are delivered. Many retailers also buy many 
 goods considerably in advance of delivery. In or- 
 der that goods may be manufactured or purchased 
 in the proper quantities it is necessary that the future 
 demands be forecasted with some degree of accu- 
 racy. In the case of staple goods with a steady de- 
 mand the sales records will serve as a basis for fu- 
 ture orders. In case sales are on the increase, or 
 decrease, this fact should also be considered in plac- 
 ing orders. Sales must of course be considered in 
 the number of units and not in dollars. The demand 
 for many articles fluctuates and such fluctuations 
 must be considered in buying such articles. The 
 problem of the buyer, or the executive in charge of 
 the store or factory, is to anticipate such fluctuations 
 and forecast future demands. 
 
 Changes in demand. — ^The rapid changes in the 
 style of many articles of clothing, especially women's 
 clothing, are well known and give the dealers in 
 such articles especially serious problems in buying. 
 Retailers located close to the source of supply often 
 buy small lots of style goods for the early season 
 trade and as soon as the demand is felt out, re-ord- 
 crs arc placed for the bulk of the season's goods. 
 The risk involved in the handling of style goQds 
 adds to the expense of both wholesalers and retail- 
 ers and consequently to the prices to the consumers. 
 The success or failure of many dealers in the cloth- 
 ing and dry goods trades depends upon their success 
 or failure in forecasting consumer demand, as or- 
 
392 MARKETING 
 
 ders must often be placed with the mills and garment 
 makers months before the goods are delivered. 
 Many failures are attributed to poor buying. 
 
 The demand also changes due to changing cus- 
 toms, our changed methdds of living, our improved 
 ideas of sanitation and cleanliness, and our improved 
 standard of living. The demand for baby cradles 
 has almost ceased as the American baby is no longer 
 rocked to sleep. The use of the automobile has 
 caused a marked decline in the demand for porch 
 swings but has created a demand for all kinds of 
 automobile accessories. Our improved ideas of 
 sanitation and cleanliness has created a demand for 
 window and door screens, and white-lined refrigera- 
 tors. The installation of electric lighting plants by 
 the farmers has increased the demand for small dy- 
 namos, gasoline engines, wire, electric lighting fix- 
 tures as well as electric irons, vacuum cleaners and 
 other appliances operated by electricity. With the 
 increased standard of living comes a larger demand 
 for paint, for paint is a sign of progress ; for more 
 and better clothing; and for better house furnishings. 
 Even the people in the small towns are buying period 
 furniture — Queen Anne, etc. The old folding-bed 
 is gone and the present tendency is away from metal 
 beds. 
 
 Few articles in steady demand. — There are rela- 
 tively few articles for which the demand is steady 
 over a long period of years. Even with foodstuffs 
 the demand changes. Note the introduction of 
 breakfast cereals, powdered milk, new canned foods. 
 
PURCHASING AND STOCK TURNOVER 393 
 
 and the substitute of packaged goods for bulk goods. 
 Oatmeal may be the same whether sold in packages 
 or bulk but it makes a difference to the merchant in 
 purchasing as to the quantities of each that should 
 be bought. The wooden tubs and pails have gone 
 out of use in the kitchen because of their weight and 
 the iron kettle and skillet arc following for the same 
 reason. Such changes, however, are slow. . The 
 demand for the old product grows less each year 
 while the demand for the new product shows a cor- 
 responding increase. The buyer should buy the pass- 
 ing product in smaller quantities each year until it 
 is eventually "closed out." Care should be taken 
 not to have a quantity of such products in stock after 
 the demand has stopped for they can be disposed of 
 only at a loss. The demand for corn knives de- 
 creases with the increased use of corn binders but 
 fluctuates from year to year. Yet the demand for 
 many old articles is remarkably persistent. Sears, 
 Roebuck & Co. reports that a considerable demand 
 still exists for congress gaiters and that in 1919 they 
 sold 500,000 percussion caps for muzzle-loading 
 rifles. Old flat-irons are still used and in the South 
 there is still some demand for No. 7 stoves and stove 
 furniture, although this size is rapidly going out of 
 use. The demand from the South is largely from 
 the negroes who still want a small, cheap stove. 
 Douglas points out that some people continue to 
 want "old-fashioned" things. Such wants perse- 
 vere "in certain districts, notably portions of the 
 South, the Philadelphia district, some sections of the 
 
394 MARKETING 
 
 Appalachian mountains, and some rural districts of 
 New England, long after they have died out in 
 other parts of the country."^ 
 
 Local demands. — The demands of consumers are 
 influenced by their economic position, race, sex, age, 
 climate, occupation, and sectional customs. The 
 merchant must consider all of these factors in select- 
 ing stock suited to the wants of his customers. It 
 was pointed out in a previous chapter that the ability 
 of the local merchant to do this was one of his ad- 
 vantages over the large mail order house or depart- 
 ment store. It is well known that there are many 
 stores in our large cities that cater to the trade of 
 certain nationalities, e.g. the Italian trade, the Jew- 
 ish trade, etc. The stock carried by a general store 
 in South Carolina differs in many respects from that 
 carried by a general store in North Dakota. The 
 difference in climate causes different types of cloth- 
 ing to be sold in the two States. The type of farm 
 equipment also differs widely In the two States. The 
 cotton of South Carolina is largely a hand crop, 
 calling for small tools while the spring wheat of 
 North Dakota is largely a machine crop, demand- 
 ing heavy machines. The clothing handled by a 
 store catering to the laboring class differs from cloth- 
 ing sold by another store in the same town catering 
 to the professional class. An increase in the pros- 
 perity of a store's patrons changes the type of goods 
 demanded, a fact that some merchants have been 
 slow to realize. The demand varies from one sec- 
 
 ' Douglas, Archer W.: "Merchandising," p. 55. 
 
PURCHASING AND STOCK TURNOVER 395 
 
 tion to another with the tastes of the people. For 
 example, a store in Wisconsin whose customers are 
 of German and New England extraction will have 
 a much larger demand for bakery cakes than a simi- 
 lar store in Tennessee whose customers eat hot bread 
 and fewer cakes, and bake most of these themselves. 
 Other local conditions must also be considered. For 
 example, the people in the alkali plains of the west 
 do not buy aluminum cooking utensils ; and the people 
 of California do not buy rugs with floral designs, 
 presumably because they have all the flowers they 
 want outdoors.* 
 
 Seasonable demands. — The demand for many ar- 
 ticles varies with the season. An open winter de- 
 creases the number of overcoats, ice skates, and sleds 
 sold. A hot summer increases the sales of palm 
 beach suits, electric fans, refrigerators, and ice cream 
 freezers. A hot summer decreases the sale of 
 lawn mowers for the reason that a hot summer is 
 also a dry summer when the grass needs little cut- 
 ting. A wet summer causes the grass to grow and 
 Increases the demand for lawn mowers. The de- 
 mand for some such Items, e.g., lawn mowers, varies 
 as much as 50 per cent from one year to another.* 
 The demand for agricultural machines varies with 
 the crops, which depends to a very large extent on 
 the season and on prevailing prices. A good wheat 
 crop increases the sale of binders, a dry year de- 
 creases the sale of mowing machines but increases 
 
 *Rosenwald, Julius, writing in American Magazine of July, 1920. 
 "Douglas, Archer W.: Merchandising," p. 59. 
 
396 MARKETING 
 
 the sale of corn knives as more corn is cut to make 
 up for the shortage in hay; a low price of cotton 
 decreases the acreage planted and hence the number 
 of cotton hoes sold. To illustrate the number of 
 grain binders, harvesters, and headers manufactured, 
 varied as follows in census years: 1899, 233,542; 
 1904, 108,810; 1909, 129,274; and 1914, 215,- 
 386.* It must also be noted that if the sale of 
 seasonable goods is light during the first half of the 
 season, later favorable weather will seldom make 
 up for the dull business and the season will be poor. 
 For example if the winter is mild until January and 
 few overcoats have been sold, a cold February will 
 not make up for the poor business for the reason 
 that most men will make their old coats finish the 
 winter. Similarly most people who go into the first 
 half of August without purchasing an electric fan 
 will get along the rest of the summer without one 
 unless exceptionally hot weather follows. This 
 means that the sale of many seasonable goods de- 
 pends primarily upon the weather during the early 
 part of the season. 
 
 Such goods must be made by the manufacturers 
 and bought by the middlemen In anticipation of the 
 demands. Is there anyway by which such season- 
 able demands can be predicted with any degree of 
 
 ° "United States Census Reports," as compiled by the Federal 
 Trade Commission. See report on "Causes of High Prices of Farm 
 Irnpleraents," p. 44. Similar variations are shown for many im- 
 plements. The variation in the number of implements manufac- 
 tured depends in part on the demand from farmers bringing new 
 land under cultivation and the demand from foreign countries. 
 
PURCHASING AND STOCK TURNOVER 397 
 
 accuracy? The United States Weather Bureau does 
 not attempt to forecast the weather more than a 
 week in advance. It has, however, been noted that 
 the weather tends to run in cycles. A study of 
 weather over a long period of years is therefore val- 
 uable. 
 
 Can the weather be foretold several months in 
 advance? — The Committee on Statistics and Stand- 
 ards of the Chamber of Commerce of the United 
 States of America has been working on this question 
 and the following quotations are taken from its re- 
 ports : 
 
 "The extremes of rainfall show a tendency to re- 
 cur within the thirty-five year period. There arc 
 more years above or near the average (rainfall) 
 than below it. The wet years have a tendency to 
 flock together, as have the dry ones, but there are 
 rarely more than two dry years associated together. 
 
 The probabilities therefore, are that three aver- 
 age wet years are likely to be succeeded by two drier 
 ones, and the drier ones in turn by three or more 
 wetter ones. It will also be found that the months 
 of April, May and June . . . correspond in 
 the proportion of their rainfall to that of the average 
 of the entire year. . . . There is also the same 
 method of forecasting as to the probabilities of the 
 coming months as have been set forth in the case of 
 the years. . , . (In case of an unusually dry 
 spring) there is first the general caution and conser- 
 vation to be observed in such a probable contingency 
 as to sales, commitments, credits and the like, and 
 
398 MARKETING 
 
 then specific instances as affecting the purchase and 
 sale of certain lines, for instance there would be a 
 curtailment of purchases in goods that sell best in 
 wet weather. The conclusion would be also that the 
 corn crop would be hurt by the drought and this 
 would result in a probable diminution in the sale of 
 corn buskers, etc. Like all statistics those of rainfall 
 do not tell the whole story a'nd are not, therefore, 
 absolutely safe guides. * 
 
 Cold and warm seasons. — "The so-called aver- 
 age, or what are known as 'mean' temperatures are 
 worse than worthless for all business purposes, as 
 they are thoroughly misleading. Years in which 
 there are the most violent differences in extremes 
 of temperature show mean temperatures within a 
 few degrees of each other. . . . For the pur- 
 poses of this report, therefore, there have been chosen 
 the extreme temperatures of both heat and cold. 
 . . . . In order to have some basis of reckoning, 
 those winters where the temperature falls below zero 
 (at St. Louis) are regarded as 'cold^, whilesummers 
 recording temperatures above 100 degrees are classed 
 as 'hot.' The study . . . seems to establish 
 very definitely the relation ... of maximum 
 temperatures in summer with deficient rainfall. 
 . There does not seem to be any connec- 
 tion between temperature and precipitation in win- 
 ter. A very cold winter may be either a wet or a 
 dry one. There does not seem to be any relation 
 between a hot summer being followed by a cold 
 winter, but in the main, cold winters seem to be sue- 
 
PURCHASING AND STOCK TURNOVER 399 
 
 ^cool summers. The flocking together of 
 appears to be confined to two of them 
 lese are likely to be succeeded by a 
 Ithree to four summers of more mod- 
 pre. In other words it is fairly safe 
 very hot summer being succeeded in 
 Fone of more moderate temperatures. 
 ^e have then sufficient data to form a 
 /orking theory in regard to the relations 
 oTTJuyifiess and temperature. It is not and cannot be 
 of absolute exactness but it has been 
 found dependable about 80 per cent of the time. It 
 must be remembered, however, in the sale of season- 
 able goods . . . that other factors than the 
 weather enter largely into consideration," — such for 
 example as fashion and the stocks in the hands of the 
 retailers.' 
 
 Application of principles to purchasing. — The 
 buyer, or purchasing agent, should consider all of 
 the factors affecting demand. He should consider 
 the gradual changes due to whatever cause, and the 
 seasonal fluctuations in demand due to the prosper- 
 ity of the people, styles, or to the weather. The 
 trend of the sales is helpful in ascertaining a gradual 
 change in demand. More retailers could profitably 
 
 ' Special Bulletins: "Relation of Weather and Business in Regard 
 to Rainfall," February 14, 1919; and "Relation of Weather and 
 Business in Regard to Temperature," November 7, 1919. Studies 
 were based on the weather at St. Louis, but the cycles are believed 
 to be similar over a large part of the United States, although the 
 amount of rainfall and the degree of heat and cold are different in 
 different sections. 
 
400 MARKETING 
 
 use such figures. There are plenty of statistics and 
 forecasts available to aid the buyer in forecasting 
 general business conditions. In manufacturing or 
 buying goods with a seasonable demand the quantity 
 in the hands of the middlemen must be considered. 
 The retailer considers what he has in stock in plac- 
 ing orders, the wholesaler must consider the stocks 
 in the hands of the retailers, and the manufacturer 
 must consider the stocks in the hands of both whole- 
 salers and retailers-. For example, one summer may 
 be cool so that the retailers carry over large stocks 
 of ice cream freezers. The study of the weather 
 cycle and also of business prosperity may indicate 
 that the sale of freezers will be much heavier the 
 next summer. Yet the number of freezers in the 
 hands of retailers may be so large that the whole- 
 salers should buy very conservatively. The quan- 
 tity of goods in the hands of dealers may be reported 
 by the salesmen of the firm desiring the information. 
 Anticipating demands. — Very often the buyer 
 must act without any statistical information and with 
 little specific information of any kind before him. 
 It is thus important for him to understand the psy- 
 chology of the buyers and be able to note changes 
 almost before they take place. For example a buyer 
 for a wholesale hardware concern early one spring 
 observed that two out of three women on the street 
 were wearing furs and that many of those in auto- 
 mobiles wore fur coats. He placed larger orders 
 for steel traps than ever before and the next winter 
 could supply the retailers with traps after his com- 
 
PURCHASING AND STOCK TURNOVER 401 
 
 petitors' stocks were exhausted. This buyer knew 
 that a heavy demand for furs meant high prices and 
 that high prices for furs would stimulate trapping 
 and hence the demand for traps. A very large part 
 of the small furbearing animals (muskrats, coons, 
 skunks, etc.) are caught by the boys in our farming 
 States. Trapping is a side issue with most of these 
 boys and the extent to which they trap depends very 
 largely upon the prices paid for furs. The buyer 
 of traps should also consider the weather during 
 the previous winter for if there had been heavy 
 floods and snows he would know that many traps 
 had been carried away or lost.* This ability to 
 sense changes in their early stages is an important 
 asset to buyers and may be the basis for so-called 
 "hunches." These "hunches" if based on actual ob- 
 servations and a comprehension of the psychology 
 of the buyers, and not on a mere guess, may often 
 serve as useful helps in buying. A method of as- 
 sistance in anticipation demands, which is applicable 
 to retail stores, is to require the sales people to fill 
 out slips when goods asked for are not in stock. 
 A tabulation of this information will indicate the de- 
 velopment of new demands. 
 
 STOCK TURNOVER 
 
 Meaning of stock turnover. — Goods are received, 
 placed in stock, sold and delivered from stock. 
 When all of the goods received have been sold and 
 
 'Douglas: "Merchandising," pp. 72-74. 
 
402 MARKETING 
 
 delivered the stock is said to have been turned over. 
 If a newsboy buys 20 papers and goes out on the 
 street and sells them he has turned over his stock 
 one time. A dealer however seldom sells all of his 
 stock before buying additional goods. Most dealers 
 receive shipments of goods frequently while sales 
 are being made constantly. Stock turnover must 
 then be measured by the length of time required to 
 move the average quantity of goods in stock. It is 
 generally spoken of as the number of times that 
 goods are bought and sold within a given period, as 
 six stock turns per year. In calculating the rate 
 of stock turnover the cost of sales (purchases with 
 inventory adjustments) is divided by the average in- 
 ventory (average value of goods in stock). Thus 
 if the cost of sales during the year is $12,000 and 
 the average value of goods in stock $2,000 the stock 
 has been turned six times. Many retail dealers do 
 not keep perpetual inventories and take physical in- 
 ventories only once a year, usually on January first. 
 If the stock on hand at this time fairly represents 
 the average quantity on hand during the year, the 
 average of the inventory at the first and last of the 
 year may be satisfactorily used in computing the 
 rate of stock turnover. If the stock on hand when 
 the inventory is taken is unusually small, due to the 
 seasonal nature of the business or to the fact that 
 stocks have purposely been reduced to facilitate the 
 taking of the inventory, the average value of the 
 two inventories cannot properly be used in comput- 
 ing the rate of stock turnover. If the stock is 
 
PURCHASING AND STOCK TURNOVER 403 
 
 commonly low on January first, inventories may be 
 taken at other times. Some concerns take monthly 
 inventories, which is a desirable practice if the ex- 
 pense is not too great. 
 
 The manufacturer's tvimover. — Since the manu- 
 facturer changes the form of the materials which he 
 buys before he resells them and since he increases 
 their value by this addition of labor, the rate of cap- 
 ital turnover may be more significant than the rate 
 of stock turnover. A manufacturer can measure his 
 capital turnover by dividing the cost of goods sold 
 by either his working capital or his total investment. 
 The first method gives the number of times per year 
 that the working capital is turned while the second 
 method shows the rapidity with which the total in- 
 vestment is turned. The rate of working capital 
 turnover is perhaps of greater importance as the 
 efficiency of working capital can be increased more 
 easily than can that of the fixed investment. The 
 efficiency with which fixed investment is used 
 should, however, not be overlooked. Some manu- 
 facturing concerns undoubtedly invest too much cap- 
 ital in buildings and machinery, which are needed 
 only during periods of exceptional prosperity. The 
 criticism has been made that many manufacturers 
 invested too large a part of. their war profits in ex- 
 tending their plant facilities. All manufacturers 
 can profitably devote their attention to the efficient 
 use of the working capital used to carry stocks of 
 raw and finished goods and of extending credit to 
 
404 MARKETING 
 
 buyers. Proper purchasing and store keeping meth- 
 ods will tend toward an economical use of capital. 
 
 The variation in the rate of turnover of different 
 types of manufacturers may be illustrated by flour 
 millers and farm implement manufacturers. The 
 flour mills turn their entire capital on the average 
 from 2.6 to 5.7 times per year while the farm im- 
 plement manufacturers average turning their entire 
 capital only 0.6 times per year.* 
 
 Importance of rate of stock turnover to dealers. — 
 One of the chief objects of careful purchasing and 
 stockkeeping is to increase the rate of stock turnover, 
 for the rate at which the stock is turned is one of the 
 principal factors determining the operating expenses 
 and hence the net profits. Stores with a high rate of 
 stock turnover generally have lower expenses than 
 similar stores with a low rate of stock turnover. The 
 wholesale grocery stores with over six stock turns per 
 year generally had expenses 1.9 per cent lower than 
 the wholesale grocery stores that turned their stock 
 less than 4.5 times per year. Similarly retail grocery 
 stores with a high rate of stock turnover had ex- 
 penses 3 per cent below similar stores with a low 
 rate of stock turnover. Retail shoe stores that 
 turned their stock 2.5 or more times per year had a 
 saving in their expense for interest equal to 2.5 per 
 
 ' See Federal Trade Commission reports: "Causes of High Prices 
 of Farm Implements," 1920, pp. 118 and 310; "Commercial Wheat 
 Flour Milling," 1920, pp. 72 and 76. These ratios are obtained by 
 dividing the sales by the total ir.vestments. If the profits had been 
 eliminated, which it seems to the author should have been done, the 
 ratios would have been somewhat reduced. 
 
PURCHASING AND STOCK TURNOVER 405 
 
 cent of sales as compared with similar stores which 
 turned their stock less than 1.3 times per year." 
 
 A merchant by increasing the rate of stock turnover 
 may increase his sales without a corresponding in- 
 crease in expenses. Also by using better purchasing 
 and stockkeeping methods he can carry a much 
 smaller stock of goods and do the same volume of 
 business. In the latter case a part of the capital tied 
 up in the stock will be released. This increased 
 capital may be used to carry additional lines of 
 goods or invested elsewhere. If most of the stock 
 is purchased on credit such a reduction will decrease 
 the debts of the concern and enable more cash dis- 
 counts to be taken ; or in case the money is borrowed 
 from the banks will lessen the amount of interest 
 paid. 
 
 Some of the expenses of merchants are fixed 
 while other expenses vary with the sales. This 
 statement is, of course, only relatively true, for 
 sales can generally be increased somewhat without 
 adding another salesman, while if sales arc increased 
 sufficiently a larger building must be obtained and 
 a larger organization maintained, which will in- 
 crease practically all expenses. 
 
 Retail hardware dealers as cin example. — The 
 effect of an increased rate of stock turnover on net 
 profits may be illustrated by the expenses of retail 
 hardware stores. The figures used are those report- 
 ed by the Bureau of Business Research of Harvard 
 
 1" Figures reported by the Harvard Bureau of Business Research, 
 See "Bulletin" Nos. 13, p. 15 ; 14, p. 21 ; and 20, p. 18. 
 
406 MARKETING 
 
 University, for the years 1917 and 1918." The 
 common selling expenses were 6.S per cent, the com- 
 mon delivery expenses 0.9 per cent, the common 
 buying expenses, 1.0 per cent, and the common losses 
 from bad debts 0.5 per cent. It may be assumed 
 that all of these expenses, which total 8.9 per cent, 
 vary with sales. The management expenses aver- 
 aged 3 per cent, and the fixed and upkeep expenses 
 (including interest), 7.5 per cent, or a total of 10.5 
 per cent. It may be reasonably assumed that by in- 
 creasing the rate of stock turnover most stores 
 could increase their sales considerably without in- 
 creasing these expenses. The remaining expenses 
 are reported as miscellaneous expense, which average 
 0.8 per cent. We may assume that half of the mis- 
 cellaneous expenses vary with sales and that the other 
 half are fixed. The total variable expenses are then 9.3 
 per cent and the total fixed expenses 10.9 per cent.^^ 
 Consider the case of a hardware dealer with average 
 expenses, who in a given year had sales of $24,000, 
 cost of sales, $18,000, and who turned his stock 
 twice during the year. The variable expenses of 
 this dealer were $2,232, the fixed expenses $2,616, 
 and his total expenses, $4,848. His gross profit 
 was $6,000 ($24,000 less $18,000), and his net 
 profit $1,152 ($6,000 less $4,848). 
 
 "See "Bulletin No. 12." 
 
 " The common total expenses were reported by the Harvard 
 Bureau as 20.6 per cent, while the total of the figures reported as 
 common for the various items of expense did not add up to exactly 
 this figure. 
 
PURCHASING AND STOCK TURNOVER 407 
 
 Now consider that this dealer during the next 
 year by the application of more efficient merchan- 
 dising methods, increased his sales to $36,000 with- 
 out increasing the average amount of stock on hand. 
 The cost of the goods sold would be $27,000, his 
 gross profit $9,000 while he would have turned his 
 stock three times. The total variable expenses 
 would be $3,348. As the size of his stock was not 
 increased he would not need any more space or any 
 more fixtures, so that his expenses for rent, light, 
 repairs, depreciation, taxes on property, and insur- 
 ance would be the same as the previous year. As 
 the stock has not been increased the payments of 
 interest would not be any larger and might, in fact, 
 be smaller as the goods were sold more promptly 
 and presumably could be paid for sooner. The man- 
 agement expenses would likely be increased very 
 little. The total fixed expenses would then be ap- 
 proximately the same as the previous year, or $2,616. 
 His total expenses would be $5,964, and his net 
 profit $3,036 ($9,000 gross profit less $5,964 total 
 expense). This dealer has increased his net profits 
 from $1,152 to $3,036 by turning his stock one 
 more time during the year. In actual practice it 
 may be hard to increase sales so rapidly without 
 decreasing the percentage of gross profit.^^ 
 
 " This increase in business could not, of course, go on indefinitely 
 without increasing the fixed charges. If the business continued 
 to grow a larger building would have to be secured which would 
 increase the expenses for rent, heat, repairs, depreciation, taxes, etc. 
 Management expenses would also soon have to be increased. Dur- 
 ing the time that such changes were being made the fixed expenses 
 
408 MARKETING 
 
 If this dealer was unable to increase his volume 
 of sales due to the location of his store or to com- 
 petition, he could still profit by an increased rate of 
 stock turnover. In the first year his average stock 
 on hand was worth $9,000 at cost. Suppose that 
 in the second year he did the same volume of busi- 
 ness but reduced his average stock to $6,000, which 
 would mean that he turned his stock three times. 
 Such a reduction in the size of his stock would de- 
 crease the amount of interest paid. It would also 
 mean that less space would be needed. This might 
 enable him to rent a smaller building or sublet a part 
 of his present location. He could thus decrease 
 his expenses for rent, heat, light, insurance, repairs, 
 depreciation, taxes, etc. Less labor would be re- 
 quired to care for the smaller stock and to wait on 
 customers in the smaller quarters. In this case his 
 total expenses would be decreased and his net profits 
 correspondingly increased. 
 
 Stock turnover cannot make a profit out of a loss. 
 — The importance of stock turnover has at times 
 been over-emphasized. Stock turnover alone cannot 
 turn a loss into a profit. This calls to mind the old 
 story of the merchant who was told that he was 
 losing a dollar on each item sold. "Oh, that's all 
 right," he replied, "I make it up because I sell so 
 many of them." Stock turnover cannot be considered 
 independently of expenses. Considering stock turn- 
 might increase even more rapidly than the sales. Until such 
 changes have to be made the dealer, however, can profit by in- 
 creased sales resulting from quicker turnovers." 
 
PURCHASING AND STOCK TURNOVER 409 
 
 over and gross profits alone may be misleading. 
 For example, a merchant may have a turnover of 
 one article of twelve times a year and an average 
 gross profit of 10 per cent. The gross profit on the 
 investment in the article is 120 per cent per year. 
 He may be able to turn his stock of another article 
 only three times a year and have a gross profit 
 of 25 per cent. His gross profit on the investment 
 in the second article is 75 per cent per year. 
 He may conclude that the first article is the more 
 profitable. This may or may not be the case. The 
 expense of handling each article must be considered 
 before the net profits on the two articles can be as- 
 certained. If the expense of handling the first ar- 
 ticle is 9 per cent, his net profit on each turn would 
 be 1 per cent and the total net profit, 12 per cent 
 a year. If the expense of handling the second article 
 is 21 per cent, the net profit on each turn would be 
 4 per cent, and the total net profit 12 per cent or 
 exactly the same as on the first article. 
 
 Cutlery and nails as an example. — The gross 
 profits and expenses on different articles handled by 
 the same merchant vary widely. The gross profit can 
 generally be ascertained, but in stores without a 
 departmental organization it is very difficult to accur- 
 ately determine the expense involved in handling dif- 
 ferent articles. Compare high grade cutlery and nails 
 handled by a retail hardware store. The cutlery may 
 carry a gross profit of 50 per cent, while the gross 
 profit on the nails may be only 7 }i per cent. A large 
 line of cutlery must be carried and sales are irregular. 
 
410 MARKETING 
 
 It may be impossible to turn the stock of cutlery more 
 than twice a year. Nails, on the other hand, can 
 generally be obtained on short notice from a nearby 
 jobber, so that relatively small stocks need be car- 
 ried. They are in regular demand and it may be 
 possible to turn them 18 times a year. As to the 
 relative expense of handling the two lines, it is evi- 
 dent that the cutlery must be handled carefully, 
 kept wrapped or in a glass show case, and rubbed 
 frequently to prevent rusting, while the nails are 
 kept in the kegs or dumped into bins in inconspicuous 
 parts of the store. The cutlery also may be given 
 space in the show windows and advertised in the 
 newspapers. The nails sell without either of these 
 expenses. Also in selling cutlery, It must be shown 
 to the customers and the salesmen must wait while 
 the customers make their selections. With nails, on 
 the other hand, the salesman need only weigh out 
 the quantities of the different kinds and sizes de- 
 sired by the customers, who know what they want 
 before they enter the store. It is evident from these 
 facts that the expenses of selling nails is much less 
 than the expenses of selling cutlery. It may, how- 
 ever, be difficult to determine accurately just what 
 this difference amounts to in the ordinary store. 
 Suppose it is determined that the cost of handling 
 nails is 5 per cent, while the cost of handling cut- 
 lery is 30 per cent. The gross profit on the cutlery 
 is 100 per cent per year and the expenses 60 per 
 cent, so that the total net profits is 40 per cent on the 
 investment in cutlery. The annual gross profit 
 
PURCHASING AND STOCK TURNOVER 411 
 
 on the nails is 135 per cent, and the expenses 90 
 per cent. The total net profit is equal to 45 per 
 cent of the investment in nails. In this case nails 
 are actually more profitable than cutlery in spite of 
 the low gross profit realized on their sale. 
 
 Stock turnovers of different classes of dealers. — 
 It is evident that the stock can be turned much more 
 rapidly in some classes of stores than in others. 
 The newsboy may be able to turn his stock several 
 times a day, while thi butcher and the green goods 
 grocer may be able to turn their stocks within a 
 few days. On the other hand, dealers in goods that 
 can be sold at only certain seasons, such as farm 
 implements, can turn their stock only a few times 
 a year. The same is true of dealers who must carry 
 large assortments of goods to supply the needs of 
 their customers. Hardware, jewelry, and shoe deal- 
 ers come in this class. The average number of stock 
 turns per year realized by different classes of 
 dealers, together with the highest and lowest rate 
 reported by dealers in each class is shown below. 
 The rate of stock turnover obtained by a group of 
 the more efficient stores is also shown for several 
 classes of stores. Merchants whose rate of stock- 
 turn is below this latter figure should try to increase 
 their efficiency until this rate is attained. The figures 
 are those reported by the Harvard Bureau of Busi- 
 ness Research and for each case are based on re- 
 ports from a large number of dealers. 
 
412 
 
 MARKETING 
 
 NUMBER OF STOCKTURNS PER YEAR 
 
 Type of Store 
 
 Retail Grocery 
 
 Retail Grocery and Meats.. 
 
 Retail Grocery 
 
 General Merchandise 
 
 Retail Drug 
 
 Retail Hardware ... 1917 & 
 
 Retail Hardware 
 
 Retail Jewelry 
 
 Retail Shoe 
 
 Retail Low Priced Shoes. . . . 
 Retail Medium Priced Shoes 
 Retail High Priced Shoes.. . . 
 Shoe Dept. of Dept Stores. . . 
 Retail Chain Shoe Stores... 
 
 Wholesale Grocers 
 
 Wholesale Grocers 
 
 Wholesale Grocers 
 
 (l)Reports cover period from 1912 to 1917, inclusive. 
 
 
 
 
 
 Rate by 
 
 
 
 
 
 More 
 
 
 
 
 
 Efficient 
 
 Year 
 
 Loin 
 
 High 
 
 Commor 
 
 Stores 
 
 1915 
 
 3.5 
 
 23.8 
 
 7.0 
 
 12.0 
 
 1915 
 
 7.0 
 
 26.0 
 
 9.0 
 
 14.0 
 
 1918 
 
 1.8 
 
 27.1 
 
 7.9 
 
 
 1918 
 
 0.9 
 
 13.1 
 
 2.4 
 
 
 1919 
 
 1.1 
 
 7.4 
 
 2.3 
 
 2.8 
 
 1918 
 
 0.9 
 
 5.8 
 
 1.8 
 
 2.5 
 
 1919 
 
 1.1 
 
 6.8 
 
 2.1 
 
 2.5 
 
 1919 
 
 0.3 
 
 
 1.1 
 
 
 1919 
 
 0.8 
 
 4.8 
 
 1.8 
 
 
 (1) 
 
 0.6 
 
 4.8 
 
 1.6 
 
 
 (1) 
 
 0.7 
 
 5.1 
 
 1.7 
 
 
 (1) 
 
 0.9 
 
 2.3 
 
 1.5 
 
 
 (1) 
 
 0.9 
 
 3.1 
 
 1.5 
 
 
 (1) 
 
 1.1 
 
 4.6 
 
 1.7 
 
 
 1916 
 
 2.8 
 
 11.6 
 
 5.7 
 
 
 1918 
 
 2.5 
 
 19.0 
 
 5.2 
 
 Over 6 
 
 1919 
 
 2.2 
 
 14.6 
 
 5.2 
 
 Over 6 
 
 NUMBER OF TURNOVERS OF WORKING CAPITAL 
 PER YEAR 
 
 Class of Dealer" 1915 ipi6 igij IQ18 
 
 Implement 1.97 1.99 2.19 2.84 
 
 Implement and Hardware 1.46 1.49 1.77 1.88 
 
 Implement and Automobile 3.27 3.55 3.52 3.55 
 
 Implement, Hardware and Automobile 2.40 2.19 2.69 2.53 
 
 Implement and Lumber 1.46 1.38 1.49 1.62 
 
 Implement and General Merchandise 1.51 1.50 1.66 1.88 
 
 Implement and Miscellaneous Lines.. 2.10 2.26 2.55 2.58 
 
 Average All Classes 1.83 1.89 2.16 2.25 
 
 "Federal Trade Commission: "Report on Causes of High Prices 
 
 of Farm Implements," p. 274. ' 
 
PURCHASING AND STOCK TURNOVER 413 
 
 Turnover of working capital. — When goods are 
 sold on credit the rate of stock turnover fails to re- 
 veal just how efficiently capital is used for the reason 
 that the capital may be tied up in "accounts receiv- 
 able" for several weeks or months after the sales 
 iiave been made and the goods delivered. For this 
 reason the rate at which the working capital in the 
 business is turned may be a more significant figure. 
 
 When the stock of goods on hand is low on Jan- 
 uary first and inventories are not taken at other 
 times, it is impossible to accurately calculate the 
 rate of stock turnover. Farm implements are sold 
 principally during the spring and fall and the stock 
 in the hands of the retail dealers on January first 
 is below the average on hand during the year. The 
 Federal Trade Commission found it impossible to 
 calculate the average rate of stock turnover for the 
 various classes for rural dealers handling farm im- 
 plements, as their balance sheets were made up for 
 January first. Instead it calculated the average 
 number of turnovers of working capital per year. 
 As a very large part of the sales of these dealers 
 are made on credit, the turnover of working capital 
 probably is a better index of their efficiency than 
 the rate of stock turnover. The average number 
 of turnovers of working capital per year for a large 
 number of rural dealers handling farm implements 
 is shown above. From a study of these figures 
 it can be seen that the capital Invested in automobiles 
 was turned more rapidly than that invested in any 
 other class of merchandise handled by these dealers. 
 
414 MARKETING 
 
 This may be explained by the fact that fewer auto- 
 mobiles need be carried in stock and that relatively 
 few sales arc made on long credits. The capital 
 invested in implements shows the next most rapid 
 turn, followed by the capital invested in general 
 merchandise, hardware, and lumber in the order 
 named. The figures are shown on page 412. 
 
 BIBLIOGRAPHY 
 
 Douglas, Archer W. : "Merchandising," chs. 2-8, inclusive. 
 
 Chamber of Commerce of the United States of 'America, Special 
 Bulletins: "Relation of Weather and Business in Regard to 
 Rainfall," and "Relation of Weather and Business in Re- 
 gard to Temperature." 
 
 Rosenwald, Julius: "What We Have Learned from 6,000,000 
 Customers," American Magazine, July, 1920. 
 
 "Bulletins" of the Harvard Bureau of Business Research. 
 
 Federal Trade Commission: "Report on the Causes of the High 
 Prices of Farm Implements," pp. 117-119; and 273-74. 
 
 On the perpetual inventory and stockkeeping see various books 
 on cost accounting and industrial management. The follow- 
 ing are typical: Kester, Roy B.: "Accounting Theory and 
 Practice," vol. II, chs. 3 and 13; Nicholson, J. Lee: "Cost 
 Accounting Theory and Practice," ch. 7; Jones, "The Ad- 
 ministration of Industrial Enterprise," ch. 17; Diemer: 
 "Industrial Organization and Management," ch. 5 and 6 ; 
 Parkhurst: "Applied Method of Scientific Management," ch. 
 5, etc. 
 
 Nystrom, Paul H.: "Retail Store Management," chs. 5, 7, and 8, 
 and "Economics of Retailing," ch. 3. 
 
 Swinney, John B.: "Merchandising," pt. II, ch. 7. 
 
 Hotchkin, W. R.: "Making More Money in Storekeeping," chs. 10 
 and 20. 
 
 Twyford, H. B.: "Purchasing." 
 
 Field, C. C: "Retail Buying." 
 
 A. W. Shaw Co.: "Purchasing Problems." 
 
PURCHASING AND STOCK TURNOVER 415 
 
 CHAPTER XV— QUESTIONS 
 
 1. What is the object of purchasing? Distinguish purchasing and 
 
 ordering. What are the qualifications of a successful buyer? 
 
 2. What is a perpetual inventory? What is its use? What is its 
 
 relation to buying? What is meant by a balanced inventory? 
 
 3. Why does demand change? What factors must manufacturers 
 
 of the following articles, consider in estimating the demand 
 for next season: silk? carpets? automobiles? paints? and grain 
 binders? 
 
 4. What is stock turnover? How calculated? What is its im- 
 
 portance to the merchant? Show how an increase in rate of 
 turnover affects net profits. Distinguish stock and capital 
 turnover. 
 
 5. The buyer of women's ready to wear clothing for a department 
 
 store located in an eastern city has made it a practice to buy 
 about one-half of the expected season's needs before the sea- 
 son opens and the remainder during the season. This lessens 
 the risk of buying styles which are poor sellers and also re- 
 quires less capital. If an advance in price is expected he buys 
 more than SO per cent in advance, while if prices are falling, 
 he buys less than SO per cent. What policy would you recom- 
 mend for the following season? 
 
 6. The Jones Grocery Store sells 5 cases of a certain brand of 
 
 soap per week. By buying in 100 case lots a discount of 2.3 
 per cent can be secured. Should 100 cases be bought at once ? 
 Why or why not? 
 
 7. The Consolidated Manufacturing Co. uses 5 cars of coal per 
 
 week when the plant is running at normal full time capacity. 
 Coal can often be bought somewhat cheaper in the early sum- 
 mer than during the winter. The company has storage space 
 sufficient for 200 cars. What factors should the purchasing 
 agent consider in determining the amount of coal that he will 
 buy during the early summer. 
 
 8. Williams is buyer for a wholesale hardware concern. He must 
 
 place orders with the manufacturers in the fall for goods which 
 he hopes to sell to the retailers the following spring. What 
 factors should he consider in determining the quantities of 
 ice cream freezers, lawn mowers, electric fans, window screens, 
 and hammocks to be purchased? 
 
 9. The Giant Wholesale Grocery Co. has its business divided into 
 
 eight departments — canned goods, cereals, etc. In charge of 
 
416 MARKETING 
 
 each department is a manag«r who buys all the goods in his 
 department, and fixes their selling prices. Each manager has 
 practically full authority in making purchases, the only limita- 
 tion being that exceptionally large purchases which require 
 large sums of money are passed on by the board of directors. 
 Each manager is judged by the profit which his department 
 shows. Physical inventories are taken twice a year. At 
 other times, the buyer must take an actual count to determine 
 the specific quantity of any article in stock. This concern has 
 a stock turnover of only four times a year. What changes in 
 the methods of purchasing and stockkeeping would you suggest? 
 
Chapter XVI 
 
 COOPERATIVE MARKETING 
 
 Meaning of cooperation. — Cooperation may be 
 defined as joint action by a number of people for 
 the purpose of advantageously manufacturing, buy- 
 ing, or selling goods, or engaging in other activities, 
 for their mutual benefit. 
 
 Classes of cooperative enterprises. — ^There are 
 several classes, or types, of cooperative enterprises, 
 the principal ones being: Productive cooperative 
 enterprises, as the ownership and operation of man- 
 ufacturing plants by the workers; distributive coop- 
 erative enterprises, as the joint ownership and opera- 
 tion of the marketing machinery by the consumers 
 or producers; financial cooperative enterprise, as 
 banks and building and loan associations; and coop- 
 erative insurance enterprises. Distributive coopera- 
 tion alone comes within the scope of this book as 
 the other types of organization are not primarily 
 concerned with marketing. The cooperative factory 
 has to market its product but under the present mar- 
 keting system such a factory would have substantially 
 the same marketing problems as any other factory and 
 so its problems need not be discussed separately. 
 
 There are three types of distributive cooperative 
 enterprises. First, the buying organizations of con- 
 
 417 
 
418 MARKETING 
 
 sumers which generally operate cooperative stores, 
 or buying clubs; second, selling organizations of 
 farmers or other producers; and third, cooperative 
 enterprises among dealers, such as cooperative job- 
 bing houses, cooperative delivery companies, etc. 
 
 1. consumers' cooperation 
 
 By consumers' cooperation is meant the ownership 
 and operation of the marketing machinery by the con- 
 sumers. 
 
 Object. — The object of most cooperative stores is 
 to reduce the cost of living. The cooperative stores 
 attempt to reduce the cost of living by eliminating 
 the middlemen and securing their profits for the con- 
 sumers, and making goods pass as directly as possible 
 from producers to consumers. The plea for the 
 establishment of such stores is based primarily on 
 the expensiveness and inefficiency of our present 
 marketing system. It is argued that the evils of the 
 present methods are due to the profit system and that 
 the evils can be removed only by removing the cause. 
 The profit system is said to lead to high prices, poor 
 quality, deception of the buyers, and forcing the 
 sales of goods carrying large profits regardless of 
 whether the buyer has a use for them or not. Coop- 
 erative stores attempt to reduce the cost of goods 
 to the consumers, handle better goods, tell the buyers 
 the truth about all goods, and leave them free in 
 making selections. 
 
 Some cooperative stores have the further object 
 
COOPERATIVE MARKETING 419 
 
 of promoting social activities among their members 
 and aiding the development of the cooperative move- 
 ment. In furthering these latter objects such stores 
 may use all or a part of their profits for establishing 
 club rooms, playgrounds, etc., or in spreading coop- 
 erative propaganda. 
 
 History of consumers' cooperation. — Experi- 
 ments in distributive cooperation can be traced baclc 
 into the eighteenth century but the first movement to 
 attract general attention was that started by Robert 
 Owen in England in 1824. Owen's scheme, however, 
 was broad and essentially communistic. The con- 
 sumers' cooperative movement was really started in 
 Rockdale, England, by 28 weavers who met in 1844 
 and started a cooperative store. The original capital 
 was only $140 and the "Toad Lane Store," where 
 business was started, was rented for 25 cents a week. 
 This association — the Rochdale Equitable Pioneers 
 — ^was successful from the first. Within a year the 
 association numbered 74 members and in ten years 
 had 900 members and a capital of over $30,000. The 
 plan has been adopted by thousands of other organ- 
 izations in England and other countries and from 
 this humble beginning in Rochdale, the cooperative 
 movement has grown until there are in the neighor- 
 hood of 60,000 consumers' cooperative societies in 
 the world, with a total membership which represents 
 close to 20,000,000 families. 
 
 Importance of consumers' cooperation, — The im- 
 portance of the consumers' cooperation may be shown 
 by figures giving the number of societies, number of 
 
420 MARKETING 
 
 members, and the sales of such societies in some of 
 the countries of Europe, where the movement has had 
 its principal growth. 
 
 IMPORTANCE OF CONSUMERS' COOPERATIVE SOCIETIES 
 IN CERTAIN EUROPEAN COUNTRIES' 
 
 fc.S fct l"2 ^>, ^- 
 
 Country Year |;§ 1)^ :«| ^^ ^1^ 
 
 Austria 1916 636 490,717 $39,815 $62,602 $81.14 
 
 Belgium 1912 205 170,748 9,182 44,789 53.77 
 
 Denmark 1915 1,562 243,855 24,297 15,555 99.64 
 
 Finland 1916 486 181,752 31,391 64,591 172.71 
 
 France 1918 2,233 1,129,684 109,066 48,842 96.55 
 
 Germany 1918 2,277 2,900,000 181,649 79,776 62.64 
 
 Italy 1915 1,970 411,358 30,270 15,366 73.87 
 
 United Kingdom 1918 1,364 3,846,531 755,076 553,575 196.30 
 
 Consumers' cooperative societies are important 
 in many other European countries. Russia had 
 40,000 such societies in 1919. The various forms of 
 cooperative enterprises are estimated to reach 100,- 
 000,000 people in Russia. Consumers' cooperative , 
 societies are also important in Greece, Holland, 
 Spain, Switzerland and many of the new European 
 countries created as a result of the World War. The 
 War led to a great increase in the membership of co- 
 operative stores due to the attempt to escape from 
 profiteering merchants and hold down the cost of 
 living. The movement has grown until it is estimated 
 that from 33 to 40 per cent of the families in the 
 * Figures from Monthly Labor Revieio, October, 1920. 
 
COOPERATIVE MARKETING 421 
 
 United Kingdom have one or more members in such 
 societies; that 22 per cent of the families in Germany 
 are members of cooperative societies; that from 10 
 to 12 per cent of the population of France are coop- 
 erators; and that such societies supply about one-half 
 of the people in Denmark.^ 
 
 Cooperative wholesale societies. — Cooperative 
 buying ordinarily starts with retailing. Its aim is 
 to eliminate the profits of all middlemen and make 
 goods pass as directly from producers to consumers 
 as possible. The object is to secure goods for the 
 consumers at the producer's, or the wholesale, price 
 plus the necessary expenses of transportation and 
 retailing. To this end wholesale warehouses, or asso- 
 ciations, are established as soon as possible. The 
 idea is to own the marketing machinery as far 
 back toward the producers as possible. Productive 
 enterprises such as bakeries, shoe factories- preserve 
 factories, etc., are often secured when the societies 
 become large and have sufficient capital. The English 
 societies send their buyers to foreign countries and 
 import a considerable part of their own goods. The 
 affiliated retail societies may establish national whole- 
 sale societies, which may have branches in convenient 
 locations. Such national wholesale organizations 
 have been established in England, Scotland, Ireland, 
 Germany, Russia, Italy, the United States, and other 
 countries. The German wholesale society in 1918 
 had 2,140 affiliated retail societies. The combined 
 
 'Monthly Labor Re-vieio, October, 1920. 
 
422 MARKETING 
 
 sales of the English, Scottish and Irish wholesale so- 
 cieties amount to over $400,000,000 a year. 
 
 Principles of the Rochdale plan. — It has been 
 stated that most of the cooperative stores that have 
 succeeded have adhered more or less closely to the 
 Rochdale Plan, while those that have failed have 
 done so because they have not followed the sound 
 principles laid down by the Rochdale Pioneers. The 
 Rochdale Plan is based on democratic control and 
 cash sales at prevailing market prices. Under the 
 Rochdale Plan the capital is contributed by the mem- 
 bers but regardless of the number of shares owned 
 each member has one vote. The one-man one-vote 
 principle is fundamental. The rate of return on the 
 capital is limited to the legal rate. Any surplus is 
 used to establish reserves or is distributed to mem- 
 bers in proportion to their purchases. Sales are 
 made only at the prevailing market prices. This pol- 
 icy gives a surplus from which reserves, so essential to 
 the successful operation of any business, can be set 
 aside. It is clearly impossible to tell in advance 
 what dividends can be paid, hence to attempt to 
 sell at the net price is to invite disaster. Sales are 
 made only for cash. Many retail stores have 
 failed due to unwise or an over extension of credits. 
 Starting with a small capital cash sales were neces- 
 sary to the Rochdale Pioneers, as they also paid cash 
 for the goods purchased. Many cooperative stores 
 do extend a limited amount of credit and this policy 
 does not always lead to failure but it adds to expense 
 
COOPERATIVE MARKETING 423 
 
 and lessens the saving which is the object of such 
 stores. Sales for cash ena,ble the society to. pay cash 
 for its goods, reduce expenses, prevent losses from 
 bad debts, and enable the store to be operated with 
 a smaller investment. The one-man one-vote prin- 
 ciple prevents a small group of men securing control 
 of the organization and changing it from a coopera- 
 tive to a profit making enterprise as has often hap- 
 pened in the United States. 
 
 Development in the United States. — Consumers' 
 cooperation in the United States began in Boston in 
 1844 when a tailor started a buying club for the 
 New England Association of Mechanics and Work- 
 ingmen. The Workingmen's Protective Union, later 
 known as the New England Protective Union, grew 
 from this club. By 1852, 403 stores had been organ- 
 ized. The American Protective Union was formed 
 as a result of a split. By 1857 this latter organiza- 
 tion reported 350 branches with sales of $2,000,000. 
 In all 769 stores were established but all either failed 
 or became private concerns. Among the causes of 
 failure were listed: sales at cost; sales on credit; 
 paying more than the legal rate of interest on stock 
 so that some concerns came to operate for the benefit 
 of the stockholders; poor management; and lack of 
 the spirit of cooperation. 
 
 Many other organizations were instrumental In 
 establishing cooperative stores. The Grange, or the 
 Patrons of Husbandry, an organization of farmers, 
 started many stores. The Sovereigns of Industry, the 
 
424 MARKETING 
 
 Patrons of Industry, the Farmers' Alliance, the Labor 
 Exchange and the Right Relationship League, were 
 some of the other organizations active in establish- 
 ing such stores. Most of these stores failed, but a 
 few succeeded in staying in business, although some 
 of the successful stores became joint stock companies 
 operated for the profit of the stockholders. There 
 were approximately 200 cooperative stores in the 
 United States in 1903 and 400 in 1916. Organiza- 
 tions to spread propaganda and aid in establishing 
 stores succeeded in starting many stores, and in in- 
 creasing interest in the subject of cooperation. 
 Consumers' cooperation, however, remained relative- 
 ly unimportant in the United States until the World 
 War sent prices skyward. 
 
 Reasons for failure. — Mr. N. O. Nelson, who 
 organized a cooperative association of 20,000 mem- 
 bers in New Orleans, estimated that 1,000 coopera- 
 tive stores were started in the United States from 
 1910 to 1915, of which only 1 per cent had suc- 
 ceeded.^ The reasons for the large number of fail- 
 ures are not far to seek. Poor management and lack 
 of support by the members are the most important 
 reasons. 
 
 Many stores have failed because neither the mem- 
 bers nor the manager really had the cooperative 
 spirit. / The American people are constantly on the 
 move. This complicates the problem of the cooper- 
 ative store. The average income has been much 
 
 'Nelson, N. O.: Cooperative Stores, Outlook, February 16, 1916. 
 
COOPERATIVE MARKETING 425 
 
 higher in this country than in Europe and the people 
 have paid less attention to small savings. They have 
 been unwilling to undergo the inconvenience of trad- 
 ing at the cooperative store for the small savings 
 possible. The American people have been individ- 
 ualists and independent. They have not learned to 
 cooperate. The stores that have succeeded have gen- 
 erally been located among a group having a rather 
 strong class or group feeling; as among people of 
 the same race or nationality; among college students; 
 among a labor group, that has learned something of 
 cooperation in their labor unions ; or among farmers. 
 Many of the stores that failed had poor managers. 
 Oftentimes the members were unwilling to pay 
 enough to secure a competent manager. The suc- 
 cess or failure of a retail store depends to a large 
 extent upon the manager and it is hard to secure the 
 best management from hired employees. The mem- 
 bers and directors were often absolutely inexperienced 
 in business matters and so were incapable of prop- 
 erly supervising operations. It probably would not be 
 far from the truth to say that the stores that had effi- 
 cient management succeeded and that the. others 
 failed. It has been observed that all conspicuously 
 successful cooperative stores can trace their success 
 to the influence of some conspicuous leader. This 
 leader must be backed up by other members and by 
 the manager and clerks. Practically the location has 
 a good deal to do with the success of a store. Theo- 
 retically a cooperative store can take the cheapest 
 
426 MARKETING 
 
 available location as the members are supposed to 
 go out of their way if necessary to patronize their 
 store. In practice they often do not do this, and 
 to succeed the cooperative store should have a con- 
 venient location.* * Some stores have started with too 
 few members, too little capital, or with wrong ideas. 
 The failure of many stores has been attributed to the 
 departure from the Rochdale plan. Sales have been 
 made on credit, sales have been made below the pre- 
 vailing market prices, and a few stockholders have 
 often been allowed to secure control of the stores. 
 If all the stores had been operated in accordance with 
 the rules laid down by the Rochdale Pioneers the per- 
 centage of successes would undoubtedly have been 
 larger. 
 
 The recent movement. — The interest in coopera- 
 tion has been growing for some years and the move- 
 ment was given a fresh impetus by the rapid increase 
 in the cost of living during the World War. Hun- 
 dreds of new stores were opened. The conditions 
 were favorable for the growth of the movement. The 
 fact that prices rose more rapidly than wages and 
 salaries forced many people to economize. Also the 
 fact that prices were rising made it a relatively easy 
 matter to conduct a store successfully. The move- 
 ment has grown rapidly. The National Cooperative 
 Association estimated that there were 3,000 stores 
 in the United States in 1920 doing an annual business 
 
 'See U. S. Dept. of Agriculture, Bulletin No. 394, 1916, pp. 7 
 and 27. 
 
COOPERATIVE MARKETING . 427 
 
 of $200,000,000. The movement seems to have 
 grown more rapidly in sections where several stores 
 were already in existence. The stores are more or 
 less centralized on the Pacific Coast, backed especial- 
 ly by the labor unions; in Illinois, especially among 
 the miners; in the Dakotas, supported by the non- 
 partisan League ; in Kansas and Nebraska supported 
 by the Farmers' Educational and Cooperative Union; 
 and in the North Central States, supported by the 
 Cooperative Wholesale Society of America, at St. 
 Paul. There are also a number of stores operated 
 by the Finns, who have a wholesale society at Supe- 
 rior, Wisconsin, and another at FItchburg, Massachu- 
 setts. The Tri-State Cooperative Association stated 
 on October 1, 1919, that there were 50 cooperative 
 stores within 50 miles of Pittsburgh. 
 
 "The Pacific Cooperative League now has some 
 fifty branch retail societies, a combined membership 
 of some 15,000 and is doing a business of about 
 $3,500,000 annually."^ Many of the farmers' co- 
 operative marketing organizations also purchase 
 supplies for their members. In some instances large 
 quantities of goods are purchased. More will be 
 said of these purchasing activities in the next chap- 
 ter. 
 
 Wholesale societies have been organized to sup- 
 ply the retail stores. The National Cooperative 
 Association has its main office and warehouse in 
 Chicago and a branch at Hoboken, N. J. It is 
 
 " Quotation from a letter of December 15, 1920, to the author. 
 
428 MARKETING 
 
 planned to open other branches In Los Angeles, Kan- 
 sas City, Omaha, Denver, and other points. Dis- 
 trict or affiliated wholesale stores are located at 
 San Francisco, St. Paul, Superior, East St. Louis 
 and Pittsburgh.® Other wholesale houses have been 
 reported in Omaha ; Miles City, Montana ; and Bos- 
 ton. 
 
 It is too soon to form a final opinion as to the suc- 
 cess of this recent cooperative movement, although 
 many of the stores are reported to have failed. 
 It is one thing to operate a store successfully during 
 a period of rising prices and another thing to oper- 
 ate a store successfully when prices are falling. 
 The test of any store is its ability to operate suc- 
 cessfully when prices are on the decline. It is sig- 
 nificant that some of the organizers have advocated 
 the establishment of such stores not on the basis 
 of the money saving, but on the basis of developing 
 a cooperative spirit, or spreading cooperative propa- 
 ganda, of loyalty to a cause, and of the social fea- 
 tures possible with such an organization. Savings 
 were to be incidental and perhaps were to go for 
 social features or for propaganda and not to 
 the buyers. Many of the stores in the past have 
 failed due to a lack of loyalty on the part of mem- 
 bers. If the organizers succeed in "selling" the peo- 
 ple on the idea of cooperation, cooperative stores 
 will succeed, and it is doubtful if very many can 
 
 ^ Consumers' Cooperative Wholesale Societies in the United 
 States, Florence E. Parker, Monthly Labor Revieiu, April, 1920. 
 
COOPERATIVE MARKETING 429 
 
 succeed until the members are "sold" on this prin- 
 ciple. _ 
 Organization. — The average paid-up capital of 
 61 cooperative stores in Minnesota in 1913, as re- 
 ported by the Minnesota Experiment Station, was 
 $9,880/ The average paid up capital of 50 co- 
 operative stores located in 10 western States in 1915 
 as reported by the Office of Markets and Rural 
 Organization of the United States Department of 
 Agriculture, was $16,627.* The average number 
 of members of 59 of the Minnesota stores in 1913, 
 was 104. The average for 43 of the western stores 
 In 1915 was 228, the number for different stores 
 varying from 30 to 1,600. The number of mem- 
 bers of 85 stores in 1920, as reported by the United 
 States Department of Labor, varied from 35 to 
 1,700, the average being 427.' This indicates an 
 Increase In the membership of cooperative stores 
 from 1915 to 1920 due probably to the growth of 
 stores among urban labor groups. The Minnesota 
 stores were almost all rural stores, the farmers 
 owning 86 per cent of the stock. The western 
 stores covered by the report of the Department of 
 Agriculture Included some town stores, as 37 per 
 cent of the sales were made to town trade. Sev- 
 eral of the 85 stores reporting to the Department 
 of Labor in 1920 were apparently located in indus- 
 
 ' "Minnesota Experiment Station Bulletin No. 146." 
 * United States Department of Agriculture, "Bulletin No. 394," 
 November 3, 1916. 
 
 'Monthly Labor Bulletin, March, 1920. 
 
430 MARKETING 
 
 trial centers. All of the stores which reported to 
 the Minnesota Experiment Station operated on the 
 one-man one-vote principal. Of 45 western stores 
 reporting to the Department of Agriculture in 1915, 
 40 voted on the one-man one-vote principle and 
 4 voted according to the stock owned. 
 
 Sales. — Most cooperative stores sell to both mem- 
 bers and non-members. The report of the Depart- 
 ment of Agriculture,' based on reports from 42 
 stores, showed that 40 per cent of the sales were 
 made to non-members. Fifty Minnesota stores re- 
 ported that 41 per cent of their sales were made 
 to non-members. Some stores pay dividends on pur- 
 chases only to members, while others pay to mem- 
 bers and non-members alike. Perhaps the most 
 common practice is to pay a lower rate of dividend 
 til non-members than to members Of 23 stores 
 covered by the Minnesota study, 6 paid the same 
 dividend to members and to non-members; 10 paid 
 their members double the rate paid to non-members, 
 and 7 paid dividends to members only. Most of 
 the cooperative stores in the United States do a cer- 
 tain amount of credit business. The Department of 
 Labor reports that most of the stores extend credit 
 to their members equal to from 20 to 80 per cent 
 cf their share capital and to 100 per cent of their 
 loan capital. Of 50 stores reporting to the Office 
 of Markets and Rural Organization in 1915 only 
 two did a strictly cash business and one-half of 
 their total business was done on a credit basis. 
 Fifty Minnesota stores reported that 31 per cent 
 
COOPERATIVE MARKETING 431 
 
 of their sales were made for credit. Most of the 
 stores sell at the prevailing prices. Onl)'^ 3 of the 
 85 stores reporting to the Department of Labor 
 in 1920 sold at less than prevailing prices. The 
 average annual sales of 61 Minnesota stores in 1913 
 was $42,518. The average annual sales of 45 west- 
 ern stores in 1915, was $87,782, the sales of the 
 individual stores varying from $7,500 to $623,703. 
 The Department of Labor in 1920 reported sales 
 varying from $13,315 to $78,450 per month. The 
 average monthly sales were $13,315, or $159,780 
 annually. The increase is, of course, due to higher 
 prices, but it Is pointed out that a few large stores 
 raise the average and that most cooperative stores do 
 a business below the average. 
 
 Opportvmities for saving. — The primary object 
 of the cooperative store Is the elimination of the 
 middlemen's profit. There are also supposed to 
 be several economies In the operation of such stores. 
 Such stores do not need an expensive location. As 
 the members are trading with their own society, the 
 store can be located on a side street where the rent 
 is low. There Is also supposed to be a saving in 
 wages. Fewer clerks arc needed as sales are not 
 pushed, and the customers very largely select their 
 own goods. It Is also claimed that managers can 
 be secured for lower salaries than are paid by other 
 stores. This may be true In England, where the 
 managers are ardent cooperators, but In this country 
 many stores have failed because the salaries paid 
 were too low to secure good managers. The co- 
 
432 MARKETING 
 
 operative stores can also eliminate advertising ex- 
 pense and materially reduce, or eliminate, delivery 
 expense. If sales are made only for cash a saving 
 is made in interest, in bookkeeping expense, and in 
 losses from bad debts. Some claim that cooperative 
 stores should secure a more rapid stock turnover 
 than other stores due to the fact th jt they carry only 
 goods demanded by their customers and have steady 
 sales. These savings in operating expenses together 
 with the elimination of profit should mean savings 
 in the retail stores equivalent to from 5 to 10 per 
 cent of sales. When cooperative wholesale houses 
 are established further savings are possible. If co- 
 operation should grow the way some of its advo- 
 cates hope all the middlemen's profit would be elim- 
 inated and the consumers' organizations would pro- 
 duce their own goods or purchase directly from pro- 
 ducers' cooperative organizations and thus mate- 
 rially reduce the total marketing expenses. 
 
 Operating expenses. — The operating expenses of 
 35 cooperative stores in 1915, varied from 7 to 17 
 per cent of sales, the average being 11.7 per cent. 
 The average expense of 61 cooperative stores in 
 Minnesota in 1913, was 10.9 per cent of sales. 
 A comparison with the expenses of non-cooperative 
 stores handling similar goods indicates that the co- 
 I operative stores had an average saving in operating 
 I expenses equal to 2 to 3 per cent of sales. 
 
 The rate of stock turnover of 35 cooperative 
 stores in 1915 varied from 2.1 to 16.1 times per 
 
COOPERATIVE MARKETING 433 
 
 year, the average being 4.4 times.^" This does not 
 indicate that the cooperative stores have succeeded 
 in turning their stock any more rapidly than non- 
 cooperative stores. 
 
 Actual savings on purchases. — Of 57 coopera- 
 tive stores reporting to the Minnesota Experiment 
 Station in 1913, 18 paid no dividends, even on stock; 
 11 paid dividends on stock but not on purchases; 
 and 28 paid dividends on purchases. The dividends 
 paid on purchases by these 28 stores averaged 5.6 
 per cent to members and 3.5 per cent to non-mem- 
 bers. The average net profit of 35 western stores 
 in 1915, was equal to 6 per cent of sales. The 
 highest net profit reported was 10.6 per cent and the 
 greatest loss 1.1 per cent. Out of 60 western stores 
 in 1915, only 11 reported a net profit of 5 per cent 
 or over. This means that the members of 49 stores 
 were entitled to no dividend at all or to a dividend of 
 less than 5 per cent. 
 
 The Department of Labor early in 1920 reported 
 savings of from 3 to 10 per cent on purchases. The 
 average saving for grocery stores was slightly over 
 7 per cent, and for general merchandise stores 6 
 per cent. A saving of 7 per cent on groceries would 
 amount to $36 per year for a typical family having 
 an income of $1,200 to $1,500. This saving is 
 realized only if all groceries are bought from the 
 coperative stores. It must be remembered that these 
 percentages of saving were the savings reported 
 
 "United States Department of Agriculture, "Bulletin No. 394," 
 p. 24. 
 
434 MARKETING 
 
 during a period of rising prices and exceptional 
 prosperity for most dealers. Making a saving dur- 
 ing such a period is an entirely different matter from 
 making a saving during a period of falling prices 
 or business depression. It is not clear just wha 
 prices are used as a basis of comparison in com- 
 puting the percentages of saving. A comparison 
 with prices of individually owned stores operating 
 on the service plan would show different results 
 from a comparison with the prices of non-service 
 chain stores. 
 
 A cooperative store organizer has stated to the au- 
 thor that he didn't advocate opening stores where it 
 was necessary to meet chain store competition. The 
 corporation stores arc by no means always able to 
 undersell the chain grocery stores. These company 
 or corporation stores are not operated for profit; 
 are often able to buy on advantageous terms, and 
 some of them have a part of their overhead ex- 
 penses borne by the concern for, or by, whose em- 
 ployees it is operated. 
 
 Conclusions on consumers' cooperation. — ^The 
 savings shown above indicate the benefits actually 
 received by members of cooperative stores. Only 
 one-half of the stores covered by the Minnesota 
 study paid dividends on purchases and less than one- 
 fourth of the cooperative stores covered by the De- 
 partment of Agriculture's 1915 study had net profits 
 of 5 per cent or more. The average savings of 7 per 
 cent realized during 1919 and the early months of 
 1920, cannot be taken as typical of what can be ex- 
 
COOPERATIVE MARKETING 435 
 
 pected in normal years, for the profits of most 
 dealers were exceptionally large in this year. The 
 savings so far realized fall far short of what could 
 theoretically be realized under a complete system of 
 cooperative marketing. 
 
 Mr. Edward A. Filene, a prominent Boston mer- 
 chant, says "theoretically cooperative stores either 
 individually, or organized in chains . . . ought to 
 become the stores of the future."" It has been 
 pointed out that the large chains operating on the 
 non-service method probably represent the highest 
 efficiency yet attained in retail merchandising. If 
 such chains could be made cooperative so that their 
 profits would be passed on to the consumers, and 
 at the same time retain their buying power and effi- 
 ciency of operation, perhaps the ideal merchandising 
 system would be attained. As a matter of fact, 
 however, it is exceedingly difficult to attain efficiency 
 without the opportunity for personal profit. There- 
 in lies the problem of cooperation — to make people 
 industrious and efficient without the stimulus of per- 
 sonal gain. 
 
 " Writing in System, March, 1920. 
 
 CHAPTER XVI— QUESTIONS 
 
 1. What is meant by cooperation? What are the different kinds 
 
 of cooperative enterprises? 
 
 2. What are the principles of the Rochdale plan? Are these 
 
 principles necessary to the success of a cooperative store? 
 
 3. Why have so many cooperative stores failed in the United 
 
 States ? When successful, what advantages do they offer their 
 members? 
 
436 MARKETING 
 
 4. Why have cooperative stores been more successful in Europe 
 
 than in the United States? 
 
 5. A group of local labor unions propose to start a cooperative 
 
 store. What facts should be ascertained before such a store 
 is opened? What policies should be followed to ensure the 
 successful operation of such a store? 
 
 6. The faculty of an urban university of 5,000 students desires to 
 
 engage in some form of cooperative buying in order to reduce 
 the cost of living? What are the schemes that should be con- 
 sidered? Which scheme oflFers the greatest opportunity for 
 saving? Which would be most likely to be successful? Could 
 such schemes, be extended to the students? If so, how would 
 the students benefit? 
 
Chapter XVII 
 COOPERATIVE MARKETING (Continued) 
 
 2. COOPERATIVE MARKETING OF FARM PRODUCTS 
 
 Cooperative marketing organizations among 
 farmers have been the most successful of any form 
 of cooperative enterprise in the United States. Such 
 organizations have grown until there are at present 
 14,000 of them marketing some 10 to 15 per cent of 
 the total farm products sold by our farmers. 
 
 Origin. — The Grange (Patrons of Hnsbandry) 
 was one of the earliest organizations instrumental 
 in starting cooperative marketing enterprises among 
 farmers. During the period from 1869 to 1876 the 
 granges started many cooperative marketing organ- 
 izations — purchasing agencies, stores, grain eleva- 
 tors, creameries, grist mills, factories, and also 
 banks, and insurance companies. It will be remem- 
 bered that Montgomery Ward & Company was 
 started as a mail order house to supply the local 
 granges. The purchasing agencies and stores gen- 
 erally failed, but they failed partly because they 
 succeeded in bringing prices down. Other stores 
 had to reduce prices to meet the competition. Sew- 
 ing machines for example, were reduced from $120. 
 and $125. to $70. The grain elevators were in 
 most cases sold to one or two members to be op- 
 
 437 
 
438 MARKETING 
 
 erated as profit-making enterprises. The factories 
 succeeded fairly well in production but failed abso- 
 lutely in the marketing of their products. The 
 creameries, grist mills, and live stock shipping asso- 
 ciation succeeded in some cases. 
 
 Many other organizations have been instrumental 
 in starting farmers cooperative marketing enter- 
 prises, which space forbids mentioning. Those en- 
 terprises that have succeeded have generally been 
 organized to meet a real need. Poor or inadequate 
 marketing facilities have sometimes driven the grow- 
 ers to provide their own marketing machinery. Co- 
 operative associations organized by outsiders have 
 generally failed. Companies selling supplies and 
 machinery have often organized cooperative con- 
 cerns which have generally been unsuccessful. Coop- 
 erative enterprises have often failed due to a lack of 
 loyalty on the part of the members, due to inefficient 
 management, and to the volume of business being 
 too small. In spite of the many failures the move- 
 ment has grown until such organizations market a 
 very considerable part of our farm products. It is 
 significant that cooperative selling organizations 
 have been successful more frequently than coopera- 
 tive buying organizations. 
 
 Present Status. — There are about 14,000 farm- 
 ers' cooperative organizations in the United States, 
 which according to an estimate of the Secretary of 
 Agriculture marketed $1,500,000,000 worth of 
 products in 1919. Such organizations are found in 
 practically every agricultural section of the United 
 
COOPERATIVE MARKETING 439 
 
 States but are most numerous in the Northern Cen- 
 tral States. Minnesota has the largest number of 
 organizations — 2,950 in 1917 — ^Wisconsin comes 
 second and Iowa third. Large numbers also exist 
 in the Dakotas, Illinois, Kansas, Nebraska, Michi- 
 gan, Ohio, and the Pacific Coast States. The num- 
 ber of organizations in Minnesota increased from 
 2,007 in 1913 to 2,956 in 1917. The sales of these 
 Minnesota organizations amounted to $56,260,208 
 in 1913 and $118,710,606 in 1917. Among the 
 cooperative associations in Minnesota there were in 
 1917, 643 creameries, 360 elevators, 400 live stock 
 shipping associations, 52 cheese factories, 102 stores, 
 15 potato warehouses, 159 fire insurance companies, 
 and 950 telephone companies. The cooperative 
 creameries and cheese factories now produce and 
 market a considerable part of our butter and cheese. 
 The organizations of the dairy farmers supplying 
 milk to the eastern cities have attracted much atten- 
 tion in recent years in their attempts to secure higher 
 prices for their milk. Associations have been started 
 in the South for the sale of cotton. The coopera- 
 tive movement has also attained a considerable 
 growth in Western Canada. There are, for exam- 
 ple, 316 farmers elevators in Saskatchewan and other 
 associations handling live stock, butter, wool, eggs, 
 potatoes, etc. 
 
 Grain elevators. — There are about 5,000 coopera- 
 tive grain elevators in the United States with over 
 600,000 members. The elevators are said to market 
 over one-half of the grain of the country. Groups 
 
440 MARKETING 
 
 of these organizations are establishing their own 
 commission houses and terminal elevators and de- 
 manding membership in the grain exchanges. The 
 Farmers National Grain Dealers' Association in its 
 convention on Dec. 2 and 3, 1920, recommended the 
 establishment of selling agencies in desirable mar- 
 kets. The attempt is being made at this writing to 
 combine the various cooperative marketing organiza- 
 tions engaged in marketing grain into one large mar- 
 keting organization with its own terminal elevators 
 and commission houses. This organization is the 
 United States Grain Girowers' Inc. and is ito be 
 financed by the Farm Finance Corporation with a 
 capital of $100,000,000. There are 565 farmers' 
 elevators in Iowa, 553 in Illinois, 516 in North 
 Dakota, 488 in Kansas, 482 in Nebraska, 420 in 
 Minnesota, 291 in Ohio, 168 in Indiana, 132 in 
 Oklahoma, 123 in Montana, and smaller numbers in 
 other States.' 
 
 Live stock shipping associations. — There are 
 said to be over 4,000 live stock shipping associations, 
 with over 1,000,000 shippers. A very large num- 
 ber of these associations were organized during 
 1919-1920.=' 
 
 Rice. — The Pacific Rice Growers' Association 
 controls the greater part of the rice grown in Cali- 
 fornia. The Southern Rice Growers' Association 
 started marketing rice under a cooperative plan in 
 
 1 American Cooperati<ve Journal, November, 1920. 
 ^Earl J. Trosper, writing ifi the American Cooperative Journal 
 of December, 1920. 
 
COOPERATIVE MARKETING 441 
 
 November 1920. The latter association claimed to 
 have as members 70 per cent of the growers in 
 Texas, Louisiana, and Arkansas. It expected to 
 handle between 5,000,000 and 7,000,000 barrels of 
 rice during the year.' At this writing its plans are 
 reported to have not been altogether successful. 
 
 Potatoes. — There are many cooperative associa- 
 tions engaged in marketing potatoes. Several are 
 located in the eastern potato belts. The Michigan 
 Potato Growers' Exchange is a well-known organiza- 
 tion. The Nebraska Potatoes Producers' Sales As- 
 sociation has been organized as a federation of the 
 local associations in Nebraska. 
 
 California. — In value of products marketed by 
 growers' cooperative associations California is one 
 of the leading states. The California Fruit Grow- 
 ers Exchange handles nearly 75 per cent of the cit- 
 rus fruits sold by California growers. In the fiscal 
 year of 1920 this concern marketed over 34,000 
 cars of fruit worth over $81,000,000 to the Cali- 
 fornia growers and about $166,000,000 to the con- 
 sumers. The California Associated Raisin Co., sold 
 during 1919 over $42,500,000 worth of raisins. The 
 California Peach Growers Inc. handled $10,000,000. 
 worth of peaches in 1919. There are some 30 or 
 3S other cooperative marketing organizations in the 
 State, among which might be mentioned the Califor- 
 nia Lima Bean Growers' Associations, the California 
 Prune and Apricot Growers, Inc., the California 
 Walnut Growers' Association, the Pacific Rice Grow- 
 
 " Journal of Commerce, November 11, 1920. 
 
442 MARKETING 
 
 ers' Association, and the California Almond Grow- 
 ers' Exchange. 
 
 Fruit growers. — There are many cooperative or- 
 ganizations engaged in marketing fruit. The fruit 
 growers in Washington and Oregon have strong 
 associations. The Northwestern Fruit Exchange, 
 the Yakima Fruit Growers' Association, and the 
 Oregon Cooperative Growers' Association (prunes) 
 are well-known associations. The North American 
 Fruit Exchange has 120 local associations identified 
 with it and during 1920 sold over 35,000 carloads of 
 fruits and vegetables. There are several such asso- 
 ciations in the east which market apples or other 
 fruits. The Florida Citrus Exchange in the year 
 ending September 1, 1920, handled 3,770,511 boxes 
 of citrus fruit worth $13,757,000. 
 
 Object. — The objects of the farmers' cooperative 
 marketing organizations are to increase the efficiency 
 of the marketing machinery and secure higher prices 
 for the products sold. To do this these organiza- 
 tions often try to build up outlets, eliminate losses, 
 lessen marketing expenses, standardize the products 
 handled, and collect and distribute market informa- 
 tion. These organizations attempt to secure a di- 
 vision of labor. They recognize that the farmer 
 knows more about production than about marketing; 
 that he often does not know when, where, or how 
 to sell; and if left to dispose of his own products 
 he may be the victim of a system which he does not 
 understand and is powerless to change. The coop- 
 erative organization relieves the farmers of the mar- 
 
COOPERATIVE MARKETING 443 
 
 keting function and by its larger volume of business, 
 and its ability to employ experts and concentrate on 
 marketing problems, is often able to market the 
 farmers' products to much better advantage than 
 the farmers can while acting individually. 
 
 The objects of the farmers' cooperative marketing 
 organizations have in nearly all cases been practical 
 rather than theoretical, idealistic or Utopian. They 
 recognize the necessity of retaining the motive of 
 self-interest. Many of these organizations are will- 
 ing to sell directly to consumers' cooperative organi- 
 zations, but if the consumers don't organize that is 
 their own fault and no concern of the farmers. In 
 the meantime they work with the established mar- 
 keting machinery. The California Fruit Growers' 
 Exchange works with 2,500 jobbers and 300,000 
 retailers in order to increase the consumption of Cal- 
 ifornia fruits. In this way they try to have oranges 
 and lemons constantly on sale in the small towns 
 and villages that could be reached in no other way. 
 They want the cooperation of the retailers in dis- 
 playing and pushing the sale of their products. 
 
 Cooperative enterprise the result of necessity. — 
 The growth of many cooperative organizations has 
 been the direct result of the failure or inefficiency 
 of the old marketing system. The marketing sys- 
 tem has in many instances failed to keep up with the 
 growth of population and the increase of the area 
 over which goods are transported and sold. Prior 
 to the organization of cooperative marketing enter- 
 prises the California orange growers either sold 
 
444 MARKETING 
 
 their crop to local buyers or consigned them to east- 
 ern commission merchants. The sale in either way 
 involved considerable risk. Neither the individual 
 grower or shipper had accurate information as to the 
 supply of oranges in the various eastern markets. 
 The result was that oranges were often shipped to a 
 glutted market with resultant loss. There were also 
 the risks from transportation and decay which were 
 larger than now as the methods of handling, pack- 
 ing, and transportation were poorer than at present. 
 The growers also came to believe that the buyers 
 fixed maximum prices and divided territory. The 
 growers who consigned their oranges took all the 
 risks themselves and were subject to exploitation by 
 commission men sometimes 2,000 to 3,000 miles 
 away. If the oranges arrived in good condition on 
 a day when prices were high large profits might be 
 realized. If, on the other hand, many oranges were 
 decayed or the market was glutted when the fruit 
 arrived heavy losses were to be expected. Some 
 growers got from 100 to 200 per cent more than 
 others for the same grade of fruit. Many growers 
 failed to receive enough for their fruit to cover the 
 cost of production. It was such conditions as these 
 and no theories about a more equitable distribution 
 of wealth that caused the growers to organize.* 
 
 The development of cooperative grain elevators 
 grew out of the fact that the wheat farmers felt 
 that they were not receiving a fair share of the 
 wholesale price of wheat and were being exploited 
 
 * Cumberland, Wm. W.: "Cooperative Marketing," ch. 3, 
 
COOPERATIVE MARKETING 445 
 
 by the elevator companies. Wheat is standardized 
 and dealt in on organized exchanges so that the 
 farmers could always ascertain the price of a par- 
 ticular grade on a particular day. It has been said 
 that the farmer receives a higher percentage of the 
 wholesale price for small grains than for any other 
 farm products. Yet they believed the margin to 
 be unjustifiably high and hence the cooperative ele- 
 vators ! The conditions in the sale of live stock, 
 butter, and cheese were somewhat similar although 
 these products are not as thoroughly standardized 
 as are the small grains. 
 
 Methods. — The methods used vary with the prod- 
 ucts marketed. Most of the cooperative organiza- 
 tions, however, only attempt to place their products 
 on the wholesale markets. California oranges are 
 sold to the wholesale dealers in the consuming mar- 
 kets either through the Association's salesmen or 
 the fruit auctions. The Associated Raisin Co. has 
 eliminated brokers and beginning in 1921 will sell 
 the wholesale dealers direct. Potatoes are sold to 
 the wholesalers through the Association's salesmen or 
 brokers. The local buyers, country shippers, brok- 
 ers, and commission merchants are eliminated and 
 the trade channel correspondingly shortened. The 
 cooperative grain elevators are demanding the right 
 of membership on the grain exchanges but do not 
 propose to go further than to sell to the large buyers 
 — millers, exporters, etc. in the large terminal mar- 
 kets. 
 
 Packing and manufacturing. — Most products are 
 
446 MARKETING 
 
 sold in the form in which they are received from 
 the farmers, although some products have to be 
 manufactured. This is true of cheese and butter. 
 The citrus fruit and raisin-packing houses also re- 
 semble manufacturing plants in many ways. The 
 manufacturing process in each of these cases is rela- 
 tively simple and is done for the reason that it is 
 impractical for each farmer to provide and operate 
 his own manufacturing or packing plant. The 
 cooperative associations very commonly grade and 
 pack the product of their members. 
 
 Pooling. — Most cooperative organizations sell 
 the products for the farmers although grain may be 
 bought outright by the association for the reason 
 that the purchase can be immediately covered, or 
 hedged, by a sale on a grain exchange. The prod- 
 ucts may be pooled or each shipment may be hand- 
 led and accounted for separately. Under the pool- 
 ing method the receipts for a certain period are 
 averaged and each member is paid on the basis of 
 the quantity of each grade or product delivered. In 
 this way no member gets an unusual advantage from 
 an especially favorable sale or bears a heavy loss 
 as the result of a poor sale. This is the fairer 
 method and has come into general use. The dis- 
 advantage of handling each shipment separately is 
 shown by the following incident. "A potato asso- 
 ciation shipped out two cars of potatoes on the same 
 day. One car found a ready market, while the other 
 was sold at a considerably lower price, with the 
 result that the growers having potatoes in the sec- 
 
COOPERATIVE MARKETING 447 
 
 ond car received less than the others through no 
 fault of their own.'" 
 
 Standardization and advertising. — Many coop- 
 erative associations have standardized their prod- 
 ucts and insisted on the product packed by their 
 members measuring up strictly to these standards. 
 This has been notably true of the far western fruit, 
 vegetable, and nut growers. These growers were 
 handicapped by the distance from market and high 
 freight rates. To overcome this disadvantage they 
 placed a highly standardized and neat-appearing 
 product on the market. They have been so success- 
 ful in this practice that their products have in some 
 instances taken the lead from the cheaper and bet- 
 ter flavored but less standardized eastern products. 
 Buyers prefer to handle standardized products be- 
 cause there is less need for inspection and the danger 
 of "topped off" goods is absent. Consumers prefer 
 the standardized goods because of their better ap- 
 pearance. Many of these associations are very careful 
 as to the color, size, cleanliness, and labels of their 
 products. Growers are held strictly responsible and 
 goods of inferior quality are not sold under associa- 
 tion labels. Many of these associations advertise 
 their products extensively. Some brands of the 
 western associations have become well-known 
 through such advertising. Among these might be 
 mentioned "Sunkist", "Sunmaid", "Skookum", "Big 
 Y", "Diamond Brand", and "Sunsweet." This ad- 
 
 5 United States Department of Agriculture, "Farmer's Bulletin 
 No. 1144," p. 14. 
 
448 MARKETING 
 
 vertising is done to increase the demand for the 
 product as a whole as well as to effect sales over 
 the product of non-member growers. The California 
 Fruit Growers' Exchange, for example, advertises 
 in magazines, newspapers, posters, street cars, trade 
 publications and moving pictures. During 1920 na- 
 tional magazines alone carried its advertisements in 
 119,000,000 copies.* In this connection some of 
 these associations employ specialty salesmen, who go 
 to the jobbers and retailers to stimulate the sale of 
 their products. 
 
 Purchasing supplies. — Cooperative selling has 
 been much more successful than cooperative buying 
 but many of these cooperative associations purchase 
 large amounts of supplies for their members. The 
 supplies purchased are generally for use in the pro- 
 duction of the crops marketed, such as machinery, 
 implements, boxes, crates, barrels, wrapping-paper, 
 fertilizer, twine, chemicals for spraying, and in- 
 secticides — or are articles of considerable impor- 
 tance in the farmer's budgets such as feed, lumber, 
 brick, oil, tires, etc. The farmers elevators in Illi- 
 nois, Iowa, and Nebraska operate 292 lumber yards. 
 The Farmers Service Company was organized in 
 Ohio in the summer of 1920 to purchase supplies for 
 the various cooperative associations in the State. 
 In the first 40 days this concern handled 286 cars 
 of coal, 20 cars of salt, 12 cars of feed and meal, 
 10 cars of fence posts, 12 cars of sugar, 10 cars of 
 
 ° "Annual Report." 
 
COOPERATIVE MARKETING 449 
 
 oyster shells, and 5 cars of fencing materials. Dur- 
 ing the first six months it reported buying 1,000 cars 
 of supplies. The Farmers' Union State Exchange 
 of Nebraska started business in 1914 as a broker- 
 age company to purchase binder twine. Its activi- 
 ties expanded and in 1918 it reported a business of 
 $3,000,000. In 1919 its capital was increased to 
 $400,000 and it reported handling implements, 
 clothing, shoes, dry goods, groceries, automobile 
 tires, produce, etc. The tire business alone amounted 
 to $250,000 in 1919. It has operated a wholesale 
 department, a mail order department, and has 
 started chains of retail stores. The Farmers' Na- 
 tional Grain Dealers' Association has indorsed the 
 organization of State and National purchasing asso- 
 ciations and apparently plans arc beiii \ made to ex- 
 tend the purchasing activities.' 
 
 Organization. — Most of the farmers' cooperative 
 marketing associations are democratically controlled 
 although all of them do not operate on the one-man 
 one-vote principle. Some associations are formed 
 with capital stock and others are formed without 
 capital stock. As long as the stock is widely held it 
 makes little difference whether voting is according to 
 men or shares of stock. The danger of allowing one 
 man more than one vote is that it allows a few men 
 to get control of the associations and manage It for 
 their own profit. This has been the fate of many 
 cooperative enterprises. To prevent this it is com- 
 
 '' American Cooperative Journal, September and December, 1920. 
 
450 MARKETING 
 
 mon for organizations having capital stock to allow 
 only one vote to each member regardless of the 
 number of shares of stock owned, or to limit the 
 number of shares that one person can hold. It is, 
 however, difficult to prevent shares of stock being 
 transferred. For this reason many associations 
 have been organized without capital stock, the mem- 
 bers being required to pay a membership fee instead. 
 Elevators and creameries are generally organized 
 with capital stock, while fruit, vegetable, milk pro- 
 ducers, and live stock shipping associations are gen- 
 erally organized without capital stock. The Cali- 
 fornia Fruit Growers' Exchange, the Florida Citrus 
 Exchange, the New England Milk Producers' Asso- 
 ciation, and the Michigan Potato Growers' Exchange 
 are some of the larger associations organized with- 
 out capital stock.' Some of the organizations ordi- 
 narily considered as cooperative associations should 
 perhaps technically not be so classed. Such capital 
 stock corporations are, however, ordinarily consid- 
 ered as being cooperative organizations when the 
 stocks are widely held by the farmers and they are so 
 considered here. 
 
 Some farmers cooperative organizations are inde- 
 pendent while others are members of federations. 
 The orange and lemon growers of California are 
 organized into 117 local associations, which are 
 affiliated into 17 district exchanges, and one central 
 exchange. The Nebraska Potato Producers' Sales 
 
 ' United States Department of Agriculture, "Farmers' Bulletin 
 No. 1144," p. 16. 
 
COOPERATIVE MARKETING 451 
 
 Association is a federation of the local associations 
 in the State. There seems to be a tendency toward 
 federation for the reason that a larger organization 
 is in a much better position to market a product than 
 several small organizations. 
 
 Accomplishments. — There have been many fail- 
 ures among farmers' cooperative selling organiza- 
 tions due to inefficient management, lack of loyalty 
 on the part of the members, or small volume of busi- 
 ness. In spite of these failures the movement has 
 grown rapidly and new associations are constantly 
 being formed. Many of these associations are 
 young. It is too soon to know whether they will be 
 able to withstand a long period of depression and 
 become permanently successful or not. Of the large 
 California associations only the California Fruit 
 Growers' Exchange and the California Associated 
 Raisin Co. antedate the period of rising prices dur- 
 ing the war. 
 
 For the most part these cooperative associations 
 seem to have returned substantial benefits to their 
 members. The successful associations have gener- 
 ally centered their activities on one product or a few 
 closely related products. Where several different 
 products are handled it seems best to organize sep- 
 arate departments to handle each product. 
 
 Benefits have come from the elimination of the 
 middlemen's profits and from increased business ef- 
 ficiency. The growers have benefited from standard- 
 ization and careful grading of products, from im- 
 proved methods of growing and packing and ship. 
 
452 MARKETING 
 
 ping. In most cases the number of middlemen be- 
 tween the farmers and the central markets, where the 
 prices are fixed, has been lessened, and the farmers 
 have gotten some benefits from this change. In some 
 cases the savings have been relatively small; one, 
 two, or three cents per bushel or pound, but the 
 farmers have felt that they were worthwhile. It 
 has been estimated that the cooperative elevators in 
 Illinois in marketing 150,000,000 bushels of grain 
 saved their members $3,000,000.' This is an av- 
 erage saving of two cents a bushel. The benefits 
 derived of course vary with the product handled and 
 the size and efficiency of the organization. It is 
 to be expected that larger savings could be made with 
 a specialty such as oranges than with a standard 
 product like wheat or butter. The large organiza- 
 tion able to distribute its products to the different 
 markets as occasion demands and to sell or store its 
 products as seems expedient should accomplish more 
 for its members than the small association which is 
 too small to exert a noticeable influence on supply, 
 and which is not in a position to store its product. 
 Non-members often benefit almost as much from the 
 cooperative associations as do the members for the 
 reason that private buyers must pay prices substan- 
 tially equal to those realized for their members by 
 the associations, in order to get business. This is 
 an advantage that should not be overlooked. 
 
 Low selling expenses. — By concentrating their 
 
 'J. W. Coverdale, Secretary of the American Farm Bureau 
 Federation, quoted in the Journal of Commerce of July 13, 1920. 
 
COOPERATIVE MARKETING 453 
 
 sales lower brokerage rates are obtainable. The 
 brokerage rates on California dried fruits were re- 
 duced in the Spring of 1920 from 2j4 to 1^ per 
 cent. Many of these associations have very low 
 expenses. The Florida Citrus Exchange reported 
 an average cost of 1.3 cents per box during the fiscal 
 year of 1920. The California Fruit Growers' Ex- 
 change markets the products of its members at a cost 
 of less than 2 per cent. This organization is consid- 
 ered by many as the most successful of the farmers' 
 cooperative marketing organizations. The accom- 
 plishments of this organization may be enumerated 
 as follows: reducing selling expenses from 7 to 10 
 per cent (commission) to less than 3 per cent; re- 
 ducing losses from bad debts to 1/1300 of one per 
 cent, the brokers formerly charging 5 per cent for 
 guaranteeing payment of accounts; reducing pack- 
 ing costs from 50 cents to 30 cents per box (pre- 
 war) by eliminating profits, working plant steadily, 
 and by cooperative purchase of supplies; improving 
 the product and methods of packing; securing lower 
 railroad rates and better payment of damage claims; 
 and increasing the demand for California fruit by 
 seeking out smaller markets, extending the season 
 the year around, and securing cooperation from 
 wholesalers and retailers. From 1894-95 to 1913- 
 14, the production of California oranges increased 
 580 per cent while the population of the country 
 increased only 56 to 57 per cent. In spite of this 
 fact the growers sold their fruit at a profit in 1913- 
 14, while many of them were losing money in the 
 
454 MARKETING 
 
 early 90s. This probably represents the greatest 
 accomplishments of the organization. The actual 
 money saving from 1894 to 1916 is given by Cumber- 
 land at $34,200,000 on 228,000,000 boxes of fruit. 
 The growers who are not members of the organiza- 
 tion are benefited by it as private buyers must meet 
 the Exchanges' prices in order to secure fruit." Al- 
 though many associations cannot hope to do this 
 much for their members this shows what can be 
 done by a large, efficient, cooperative organization 
 marketing an agricultural specialty. 
 
 Danger of monopoly. — Farmers cooperative or- 
 ganizations, together with labor unions, are exempted 
 from the price-fixing provisions of our anti-trust 
 laws on the theory that the. individual farmer, or 
 laborer, is at a disadvantage in the sale of his prod- 
 uct or labor. This may be an equitable provision as 
 long as the farmers' organizations do not themselves 
 become monopolies. When these organizations 
 gain control of a very large part of a given product 
 it is, however, hard to see why they should not either 
 be subjected to government regulations or dissolved. 
 There appears to be no reason why such an organi- 
 zation cannot secure a monopoly of a commodity all 
 of which is produced in one locality. In fact some 
 of the California associations have obtained monop- 
 olies of certain products, notably raisins. The Cal- 
 ifornia Fruit Growers' Exchange has a virtual mon- 
 opoly of the California oranges and lemons but is 
 prevented from controlling the market by competi- 
 
 1" Cumberland, Wm. W.: "Cooperative Marketing," ch. 9. 
 
COOPERATIVE MARKETING ASS 
 
 tion with Florida and imported fruit. This sug- 
 gests the possibility of the California and Florida 
 associations combining. A combination of the Cali- 
 fornia and Oregon associations would give virtual 
 control of the domestic supply of prunes. English 
 walnuts, lima beans, and almonds are other products 
 that might be monopolized. The buyers have 
 voiced their disapproval of the monopolistic tenden- 
 cies and have talked of increased imports from 
 abroad. The associations have responded with a 
 demand for increased tariffs on imports. The mere 
 fact that these associations are composed of farmers 
 would not seem to justify monopolistic activities car- 
 ried on by them under legal protection. When such 
 associations become monopolies they should be dis- 
 solved under the anti-trust laws or their activities 
 should be subjected to Government supervision. The 
 latter appears to many to be the preferable proce- 
 dure." 
 
 The raisin trust. — The California Associated 
 Raisin Co. has during the past few years controlled 
 approximately 88 per cent of the raisin crop of the 
 United States. This company is not strictly a farm- 
 ers' cooperative association, but by making relatively 
 simple changes in its organization it could be made 
 to qualify as such. Conditions among the growers 
 
 " The American Co-operative Journal, commenting on the activi- 
 ties of the California associations said: "The California coopera- 
 tors do not 'fix prices.' They simply are efficient agencies to get 
 the best prices that the consuming market affords." — December, 
 1920, p. 34. This is all any monopoly selling a widely used product 
 can do. 
 
456 MARKETING 
 
 were admittedly bad prior to the organization of 
 the Raisin Co. in 1913. "The raisin growers were 
 virtually at the mercy of those engaged in packing 
 and selling raisins . . . (who) secured to themselves 
 the large profit, while the growers frequently failed 
 to realize the cost of production." The Associated 
 Raisin Co. is admitted to have benefited the grow- 
 ers materially but it has been accused of being a 
 monopoly, of charging unreasonable prices, and of 
 pursuing unfair practices. The Federal Trade 
 Commission made an investigation of the operations 
 of this company for-the Federal Department of Jus- 
 tice and reported: "our conclusion is that the price 
 fixed by the Raisin Company for the 1919 crop was 
 in excess of a fair and reasonable price." The price 
 fixed for 1920 was considerably in excess of the 1919 
 price. The company has also made a contract with 
 another corporation "contemplating the fixing of 
 prices, an exclusive dealing clause and involved price 
 discriminations against other independent packers. 
 The contract also involved a guarantee . . . against 
 decline in price. These provisions "practically com- 
 pleted the elimination of the (California) Packing 
 Corporation as a competitor." The Company has 
 also advocated a curtailment of production in order 
 to stimulate price.'^ This reference to the Raisin 
 Company is made to show that there is no reason to 
 suppose that a monopoly of farmers would be any 
 more beneficent than a monopoly composed of man- 
 
 12 Report of the Federal Trade Commission to the Department of 
 Justice, June 8, 1920. 
 
COOPERATIVE MARKETING 457 
 
 ufacturers, dealers, railroad operators, or any other 
 class of men. The advocates of cooperation may 
 reply that the Raisin Company was not strictly speak- 
 ing a cooperative association during the period cov- 
 ered by this report.'' The actions of the Raisin 
 Co. were, however, almost unanimously endorsed 
 by the growers and there is no reason to suppose the 
 modification of its structure by abolishing capital 
 stock and restricting membership to growers will 
 lead to changed policies. Early in 1920 all old 
 contracts were cancelled and the Raisin Co. asked 
 the growers for new contracts running for 15 years. 
 The Company reports that it has secured contracts 
 covering 92 per cent of the acreage, or 12,131 out of 
 13,165 growers. 
 
 3. COOPERATIVE ENTERPRISES AMONG DEALERS 
 
 There are many types of cooperative enterprises 
 among dealers. The cooperative jobbing grocery 
 houses have already been mentioned. If a coopera- 
 tive wholesale grocery house is successful it would 
 appear that a cooperative wholesale hardware house, 
 a cooperative dry goods house, or a cooperative 
 drug house should also be successful. If the retail 
 grocers can cooperatively operate their own whole- 
 sale plant, why can't the retail hardware dealers, 
 the retail druggists, or any other class of retailers 
 who commonly buy their goods through wholesal- 
 
 "On September 24, 1919, 853 non-growers held 2,S53i shares of 
 stock, while 2,454 growers held 77654 shares of stock. There are 
 almost 9,000 growers in all. 
 
458 MARKETING 
 
 ers ? Some of the restaurants in New York are now 
 buying their food stuffs cooperatively. The retail 
 grocers did not do this, however, until faced by ex- 
 tinction by chain store competition and it is doubtful 
 whether other classes of retailers will organize many 
 such cooperative jobbing houses until forced to do 
 so for self-preservation. The experiment is, how- 
 ever being tried out in other lines than groceries. 
 
 Many of the department stores maintain joint 
 buying agencies. The idea has also been tried out 
 among wholesalers. Cooperative delivery systems 
 have also been tried in many towns. There is no 
 doubt that small stores can realize large savings 
 from cooperative delivery systems. Some such co- 
 operative systems have been successful but many of 
 them have failed due to the jealousies and rivalries 
 of the individual merchants." There are many other 
 forms of cooperation that might profitably be de- 
 veloped among different classes of dealers. The 
 danger of such cooperative organizations, as will 
 be shown in a later chapter on the trade associations, 
 
 ^* The savings possible by a cooperative delivery system may be 
 shown by the results of a limited delivery system introduced in 
 Utah during the war. The number of deliveries made to the same 
 buyer was limited and heavy extra charges were made for special 
 deliveries. W. F.^ Jensen, State Commissioner of Commercial Econ- 
 omy, estimated the savings in Salt Lake City, a city of 110,000 
 people, at $1,000,000, the savings to the retailers at from 3 to 6 
 per cent of sales, of wholesalers at from 1 to 2i per cent of 
 sales, and the savings in total delivery expenses of from 35 
 to 75 per cent. Quoted in Federal Trade Commission report 
 or; "Wholesale Marketing of Food," p. 162. Still further sav- 
 ings should be possible by eliminating the duplication of facili- 
 ties by cooperative delivery systems. 
 
COOPERATIVE MARKETING 459 
 
 is that they will neglect the legitimate objects and 
 proceed to illegal price-fixing activities. 
 
 Cooperative organizations among dealers are not 
 always considered as coming in the scope of dis- 
 tributive cooperation for which reason they will not 
 be further discussed in this chapter. 
 
 BIBLIOGRAPHY 
 
 Monthly Labor Re-vieiu. Articles on cooperation are published in 
 almost every number. See especially, "The Cooperative 
 Movement in the United States," by Florence E. Parker, March, 
 1920; "Consumers' Cooperative Wholesale Societies in United 
 States," by Florence E. Parker, June, 1920; and "Comparative 
 Study of the Cooperative Movement in Various Countries," by 
 Florence E. Parker, October, 1920. 
 
 The Bureau of Markets of the United States Department of Agri- 
 culture has published many bulletins. Articles are also pub- 
 lished in the "Yearbook" of the Department bearing on the co- 
 operative movement, especially on farmer's cooperative mar- 
 keting enterprises. 
 
 Many of the State Experiment Stations have published bulletins on 
 cooperative marketing enterprises. Among others might be 
 mentioned: Minn. Experiment Station "Bulletin No. 146"; 
 "Cooperative Stores in Minnesota," by L. H. D. Weld ; Wis- 
 consin Agr. Exp. Station "Bulletin No. 238, Agricultural 
 Cooperation," by H. B. Hibbard; State of Washington, Office 
 of Farm Markets, "Bulletin No. 2"; etc. 
 
 Several papers are published by organizations interested in fur- 
 thering the movement. Among such papers might be men- 
 tioned: The American Cooperative Journal, published by the 
 American Cooperative Publishing Company, Chicago; Co- 
 operation, published by the Cooperative League of America, 
 New York; The National Cooperative Neius, published by the 
 National Cooperative Association, Chicago; and The Pacific 
 Cooperator, published by the Pacific Cooperative League, 
 San Francisco. 
 
 A very large number of magazine articles are published on Co- 
 operative. Marketing. The student should consult the "Reader's 
 Guide to Periodical Literature." Among such articles might 
 
460 MARKETING 
 
 be mentioned Nelson, N. O. : "Cooperative Stores," Outlook, 
 February 16, 1916; Warbasse, J. P.: "Cooperative Movement 
 During the War," Public, February 1, 1919; Sisson, F. H.: 
 "World Wide Trend Toward Cooperative," Annals Ameri- 
 can Academy, March, 1919 ; etc. 
 For bibliography upon recent movement abroad, see Monthly Labor 
 
 Re-vieiu, October, 1920, pp. 166-67 (790-91). 
 Adams and Summer: "Labor Problems," ch. 10. 
 Aves, Ernest: "Cooperative Industry." 
 Butterfield, Kenyon L. : "The Farmer and the New Day." 
 Cooperation and Cost of Living in Certain Foreign Countries" 
 
 (1912), 62d Cong. 2d session. House Doc. No. 617. 
 Cumberland, Wm. W. : Cooperative Marketing." 
 Coulter, John Lee: "Cooperation among Farmers." 
 Fay, Chas. Ryle: "Cooperation at Home and Abroad." 
 Harris, Emerson P.: Cooperation: The Hope of the Consumer." 
 Powell, G. Harold: "Cooperation in Agriculture." 
 Radford, Geo.: "Agricultural Cooperation." 
 Sonnichsen, Albert: "Consumers' Cooperation." 
 Woolf, Leonard S. : "Cooperation and the Future of Industry." 
 
 CHAPTER XVII— QUESTIONS 
 
 1. Why have the farmers' cooperative selling organizations been 
 
 more generally successful than the cooperative stores? 
 
 2. When farmers' cooperative marketing organizations threaten 
 
 to become monopolies should they be dissolved, regulated by 
 the Federal Government, or allowed a free hand in marketing 
 their product? Why? 
 
 3. What advantages may the farmers expect from a successful 
 
 cooperative marketing organization? 
 
 4. The potato growers in a Tennessee county desire information 
 
 about the desirability of forming a cooperative organization 
 for the sale of their potatoes. The county now has several 
 cars for export each year and could easily increase its output 
 1,000 per cent if the potatoes could be successfully marketed. 
 What could the farmers expect of such an organization? 
 Would you advise its organization? If organized how should 
 it be managed? How should the manager go about marketing 
 the potatoes? (See U. S. Department of Agriculture, "Farmers' 
 Bulletin No. 1144.") 
 
COOPERATIVE MARKETING 461 
 
 5. Would it be practical for the retail hardware dealers of a city 
 
 of 200,000 people to operate their own wholesale house? Dis- 
 cuss. 
 
 6. What savings could the dealers in a town of 50,000 people real- 
 
 ize from a cooperative delivery system? Why have so many 
 such systems failed? 
 
 7. The department stores in a large western city have all their 
 
 small packages delivered by parcels post They report a sub- 
 stantial saving in delivery expenses. What are the advantages 
 and disadvantages of such parcel post deliveries? 
 
Chapter XVIH 
 
 TRADE ASSOCIATIONS 
 
 Another form of cooperative organization that 
 has become very important in recent years is the 
 trade association. The trade association is an or- 
 ganization of men or concerns engaged in the same 
 trade, or line of business, formed for the purpose 
 of furthering the interests of its members, or of the 
 trade as a whole. Not all organizations of business 
 men are trade associations. Local organizations, 
 such as chambers of commerce and boards of trade, 
 are composed of men in different trades or indus- 
 tries. The aim of such local organizations gener- 
 ally is to promote the interest of some community 
 rather than that of a trade. The local chambers 
 of commerce have a national organization — The 
 Chamber of Commerce of the United States of Am- 
 erica — whose object is to promote the interests of 
 business as a whole, especially in the cultivation of 
 public opinion and the passage of laws relating to 
 business. Organizations of farmers, laborers, and 
 professional men arc not ordinarily considered as 
 trade associations. 
 
 Importance of trade associations. — Persons who 
 have had no contact with trade associations per- 
 haps do not know of their number and variety. Man- 
 
 462 
 
TRADE ASSOCIATIONS 463 
 
 ufacturers of everything from pickles to bridges, 
 from tacks to fertilizer, from steel to canned peas, 
 from flour to optical instruments, from metal lath 
 to salt, from asbestos textiles to leather belting, and 
 from boots and shoes to farm implements have their 
 organizations. There are associations of manufac- 
 turers, mine operators, wholesalers, brokers, retail- 
 ers, railroads, undertakers, and warehousemen.^ The 
 point has been made that some men attend so many 
 meetings that their business suffers. Some large 
 concerns have officials who spend a large part of 
 their time attending various meetings and making 
 speeches. 
 
 An estimate made a few years ago placed the num- 
 ber of business associations in the United States at 
 3,500 of which 1,000 were important. A report of 
 the Bureau of Foreign and Domestic Commerce on 
 Commercial and Industrial Organizations in the 
 United States for November 1, 1919, lists approxi- 
 mately 650 interstate, national and intfrnational or- 
 ganizations; 600 State associations; and over 4,000 
 local associations. This list is admittedly incom- 
 plete, but on the other hand it includes many organi- 
 zations of professional men and farmers which are 
 not ordinarily considered as trade associations. 
 Most of the local associations are chambers of com- 
 merce, boards of trade, and commercial clubs, which 
 
 *For the names of typical Associations see Department of Com- 
 merce, Bureau of Foreign and Domestic Commerce, Miscl. Series 
 No. 99, "Commercial and Industrial Organizations of the United 
 States." 
 
464 MARKETING 
 
 do not come within our definition of trade associa- 
 tions. 
 
 The membership varies from five in the case of the 
 Association of Creosoting companies of the Pacific 
 Coast, to 40,000 in the case of the National Asso- 
 ciation of Retail Grocers of the United States. 
 
 Types of organizations. — Trade associations 
 may be local, state, sectional, or national. In some 
 industries the local or state associations may be fed- 
 erated into national associations. This is true for 
 example of the state millers' associations which co- 
 operate through the Millers' National Federation 
 and the state and sectional vehicle associations which 
 are federated into the National Federation of Im- 
 plement and Vehicle Dealers' Associations. In 
 some Industries the state and local associations are 
 not affiliated with the national association, the local 
 associations devoting their attention to local matters, 
 and the national associations to matters relating to 
 interstate or foreign commerce or to the industry 
 as a whole. In such cases there is likely to be a good 
 deal of duplication of work. Some trade associa- 
 tions cover only highly specialized fields. This Is 
 true for example of The American Faced Brick As- 
 sociation, the Asbestos Brake Lining Association, or 
 the Minced Razor Clam Packers' Association. 
 Other Associations cover a much broader field. In 
 such cases the association may be divided into sec- 
 tions to permit more detailed attention to the In- 
 terests of the various members. The National 
 Canners' Association, for example, has the follow- 
 
TRADE ASSOCIATIONS 465 
 
 ing sections: Corn, Pea, Tomato, Fruit, Wax and 
 Refugee Bean, Kraut, Shrimp, Molasses and Sirup, 
 Sardines, and Home Economics. 
 
 Activities. — There is a good deal of difference in 
 the attivities of different associations. The work 
 of the retail grocers association of a small city nat- 
 urally differs considerably from the work of a na- 
 tional association of large manufacturers. There 
 is, however, a good deal of similarity in the activities 
 of many of these associations. Some of the more 
 common activities of the trade associations are the 
 following : improvement of methods of production, 
 education of members as to plant efficiency, account- 
 ing methods, etc. ; standardization of products ; ob- 
 taining legislation favorable to the industry; adop- 
 tion of a uniform sales contract; agreeing 
 upon uniform terms of sale, such as prices, 
 discounts, guarantee, delivery, credit, etc; se- 
 curing favorable freight classification and rates for 
 their products; adoption of uniform accounting 
 methods ; cooperation in checking up the credit stand- 
 ing of buyers ; increasing the demand for their prod- 
 ucts by advertising; gathering and distributing of 
 information of interest to the trade, such for example 
 as figures showing the production and sale of the 
 product; securing newspaper publicity favorable to 
 the industry; consideration of working conditions and 
 wages ; cooperation in the foreign sale of their prod- 
 uct; cooperation in the purchase of supplies; and 
 social activities such as banquets, theater parties, 
 etc. 
 
466 MARKETING 
 
 Some trade associations do little except hold peri- 
 odical conventions at which speeches are made upon 
 topics of interest to the members. Other associa- 
 tions are very active, with highly paid secretaries and 
 attorneys, and in addition to conventions may operate 
 experimental laboratories, carry on advertising cam- 
 paigns, gather and tabulate statistics, and carry on 
 price-fixing activities. 
 
 Activities having to do with production, such as 
 the discussion of factory processes, wages of fac- 
 tory workers, introduction of new machinery, etc., 
 do not concern us here. A very large part of the 
 activities of most trade associations, however, has 
 to do with some phase of marketing. Standardiza- 
 tion of products, adoption of uniform sales contracts, 
 cooperation of credit departments, advertising of 
 products, gathering of market information, and fix- 
 ing of prices are primarily marketing problems. 
 Some of the activities relating to marketing are 
 described In the following paragraphs. 
 
 Standardization of product. — The adoption of 
 fair and uniform standards to be observed by an in- 
 dustry is highly desirable. Many trade associations 
 have been active in this work. The National Can- 
 ners' Association, for example, to promote the con- 
 sumption of canned foods, has adopted a system of 
 inspection of its own, in spite of the fact that the 
 goods must conform to the federal pure food law, 
 and that many of the states have factory inspectors 
 to see that the goods are canned under sanitary con- 
 ditions. This inspection system is conducted in con- 
 
TRADE ASSOCIATIONS 467 
 
 nection with an elaborate advertising campaign. The 
 acceptance of the association's inspection system by 
 the individual canners is voluntary. One weakness 
 of standards adopted by trade associations is that 
 they must depend very largely upon persuasion or 
 public opinion for their enforcement. The associa- 
 tion may expel an offending member but cannot force 
 a non-member to produce a standard product. If 
 non-members refuse to observe the standards about 
 all that the association can legally do is to ask for 
 legislation making the standards compulsory. 
 
 The manufacturers of farm implements have done 
 much to standardize the sizes, styles and equipment 
 of various implements. There has always been a 
 great variation in the types of implements made by 
 manufacturers. In 1910 an official of a large plow 
 company estimated that his- concern was making 
 2,000 different styles of plow bottoms.^ Such vari- 
 ation In sizes and types is especially expensive to the 
 manufacturers as they must carry repair parts or 
 patterns from which parts can be made for all im- 
 plements. Orders for repair parts may be received 
 30 years after the manufacture of a particular im- 
 plement has ceased, for the older the implement the 
 more likely it Is to break. The carrying of such 
 repairs ties up capital and requires space. If no 
 parts are in stock and a few castings are made from 
 the patterns the expense is likely much above the 
 price of the part. A good deal of variation Is nec- 
 
 ' Bureau of Corporations: "Report on Farm Machinery Trade 
 Associations," p. 14. 
 
468 MARKETING 
 
 essary, due to differences in soil, topography, and 
 crops in different sections. Yet there is no need for 
 the large variety of styles and sizes that have been 
 produced. The farmers want the size or style of im- 
 plement that they have been accustomed to, when in 
 many cases standard implements would serve their 
 purposes equally as well. Yet as long as the farmers 
 think they need an odd size it is hard for any one 
 manufacturer to stop producing odd sizes. Coop- 
 eration is necessary to secure standardization, which 
 should result as much to the benefit of the farmers as 
 to the manufacturers. 
 
 As early as 1904 the National Wagon Manufac- 
 turers' Association took up the subject of standardi- 
 zation of wagons, such as height of wheels, type of 
 hounds, tires, etc. The various associations of im- 
 plement manufacturers have been active in trying 
 to adopt standard implements. The movement re- 
 ceived a great impetus during the war when the Com- 
 mercial Economy Board of the Council of National 
 Defense, and its successor the Conservation Division 
 of the War Industries Board, urged that all unnec- 
 essary sizes and types of implements be eliminated. 
 In November, 1918, the executive committee of the 
 National Implement and Vehicle Association, of 
 which nearly all manufacturers of farm implements 
 are members, adopted a resolution to make all war- 
 time eliminations permanent.^ 
 
 Objects of standardization. — The objects of 
 
 'Federal Trade Commission: "Causes of High Prices of Farm 
 Implements," p. 308. 
 
TRADE ASSOCIATIONS 469 
 
 standardization may be to reduce manufacturing 
 costs, to increase sales, or to form the basis of price 
 agreements. It is impossible to adopt uniform 
 prices without some uniformity in the articles for 
 the simple reason that prices would mean nothing 
 unless they referred to similar goods. In conduct- 
 ing cost studies, to be described later, it is necessary 
 that standard articles be considered, for otherwise 
 the costs would not be comparable. The reduction of 
 costs is highly desirable ; the increase of sales is per- 
 fectly legitimate; but the fixing of prices is, under 
 the present law, illegal. 
 
 Cooperation on credit. — Cooperation of business 
 concerns in gathering information as to the credit 
 rating of buyers, of preventing dishonest persons 
 from securing goods under false pretenses, of pros- 
 ecuting swindlers, and protecting themselves in other 
 ways from losses from uncoUectable accounts, is fre- 
 quently carried out through trade associations. This 
 is often one of the chief activities of local associa- 
 tions of retail dealers. Associations of wholesale 
 dealers and manufacturers often devote some atten- 
 tion to such matters. The secretary of the associa- 
 tion upon the request of a member may ask other 
 members for their experience with a certain cus- 
 tomer. Very often, however, separate credit asso- 
 ciations are organized which do not observe trade 
 lines but have members from different trades and 
 industries. 
 
 Advertising and publicity. — Some trade associa- 
 tions carry on advertising campaigns to Increase the 
 
470 MARKETING 
 
 sale of the products of their members. This coop- 
 erative advertising is cheaper than separate adver- 
 tising by each member. Such advertising may 
 increase the sale of a product such as canned foods, 
 white pine, or bicycles, but it does not promote the 
 sale of any individual's product over that of his 
 competitors. For this reason cooperative advertis- 
 ing is not used extensively by concerns that desire 
 to push their own brands or trademarks. It would 
 seem that such advertising would be used much more 
 widely than at present by concerns selling unbranded 
 goods or products with brands of little importance. 
 Many associations give information to the newspa- 
 pers which favor their industries. Such informa- 
 tion may attempt to justify increased prices, to point 
 out new uses of the product, or to deny stories which 
 are injurious to the product. 
 
 Prices, — Of all activities of trade associations 
 those relating to prices have attracted the most at- 
 tention. Price is of absorbing interest and of great 
 importance to all business men. Often no other sub- 
 ject will induce men to lay aside their jealousies and 
 cooperate with their competitors. Under the pres- 
 ent laws practically any kind of price agreements 
 among competitors is illegal. The Federal laws 
 relate to all persons engaged in interstate commerce 
 — and there are very few except the smallest business 
 concerns that are not so engaged. Even the small- 
 est retailers often buy a part of their goods in other 
 states. Many states also have laws against price- 
 fixing. In spite of the laws, the members of many 
 
TRJDE ASSOCIATIONS 471 
 
 trade associations engage in price-fixing activities. 
 These activities are either secret or are done in 
 some roundabout or indirect way in the attempt to 
 avoid prosecution. 
 
 Old methods of price-fixing. — Prior to the pas- 
 sage of the Sherman Anti-trust Law in 1890 business 
 men often met and agreed upon the prices of their 
 products directly and often without much attempt 
 at secrecy. These simple agreements were common- 
 ly called "gentlemen's agreements" as they depended 
 solely upon the promises or "honor" of the partici- 
 pating parties for their fulfillment. It often turned 
 out, however, that some of the parties to such agree- 
 ments were not "gentlemen" and did not adhere to 
 the agreed prices. Thus if there were six parties 
 to such an agreement, five might adhere to the 
 agreed prices conscientiously while the sixth, by 
 quietly cutting the price, might get a large part of 
 the business before the others realized what was go- 
 ing on. In order to prevent such practices various 
 schemes were provided to force all contracting par- 
 ties to maintain the agreed prices. The pool was 
 often used, especially by the railroads through their 
 traffic associations. One form of pool provided that 
 all members should turn over to the treasurer, or 
 pool manager, a given percentage of their receipts. 
 This money was distributed at stated periods in ac- 
 cordance with agreed percentages to all members 
 who had observed the rules. Another method was a 
 division of the territory among the members of the 
 organization. Under such a plan each member 
 
472 MARKETING 
 
 would sell his goods only in an agreed territory and 
 higher prices were to be quoted to any inquirers from 
 outside his territory. In the case of railroads the 
 traffic might be divided according to agreed percent- 
 ages. 
 
 With the enforcement of the Sherman Law such 
 practices had to be abandoned or carried on secretly. 
 Some have argued that the prohibition of price 
 agreements was one of the causes to the large number 
 of consolidations formed in the years around 1900. 
 It was illegal for six competitors to agree on selling 
 prices, but if the six consolidated their businesses into 
 one company there was no agreement of competitors 
 as the new company named prices for its six plants. 
 After the courts started dissolving such consolida- 
 tions or "Trusts," the interest in price-fixing agree- 
 ments seems to have been stimulated. 
 
 Increased activity in fixing prices as a result 
 of the war. — During the war, especially during 
 1916 and 1917, prices were rising very rapidly. 
 Manufacturers who sold goods for future delivery 
 were at a loss to know what the goods would finally 
 cost when ready for delivery. Raw materials were 
 advancing rapidly and wages might have to be raised 
 overnight. As a result, many manufacturers were at 
 sea when it came to naming future prices. They set 
 to estimating or guessing at what their costs would 
 be. They consulted each other and called meetings 
 to discuss future costs, sales, and prices. If they 
 made their prices too low serious losses might follow. 
 If they made them too high the buyers might balk. 
 
TRADE ASSOCIATIONS 473 
 
 They had no time to feel out the demand. As a 
 result there was a great increase in the price-fixing 
 activities of old trade associations. 
 
 During the latter part of 1917 and most of 1918, 
 the national Government was active in fixing prices. 
 Producers were called together and prices were 
 agreed upon or fixed upon the basis of reports of 
 accountants as to the costs of production. Hearings 
 were held on the cost data obtained by the account- 
 ants and the industry affected had the right to be 
 heard and present its idea of what prices should be 
 fixed. The Government could not deal with individ- 
 ual producers. Organizations were necessary and 
 industries that had not been organized were prac- 
 tically forced to form trade associations to represent 
 their interests at Washington. The members of 
 many of these associations entered into price agree- 
 ments, at least tacitly. The defence was that the 
 "Government" expected them to fix prices and that 
 those were unusual times when ordinary rules did 
 not apply. In presenting their cases to the various 
 government boards uniform demands were advisable 
 so that agreements were almost necessary. Also the 
 Department of Justice showed no disposition to 
 prosecute persons for price-fixing activities. 
 
 It should also be borne in mind in considering the 
 price-fixing activities of trade associations during the 
 war period that it is much easier to make and keep 
 such agreements when prices are rising than when 
 prices are falling. 
 
 Recent methods of price fixing. — Three recent 
 
474 MARKETING 
 
 methods tending toward uniformity of prices, if not 
 actually to price-fixing, are: gentlemen's agree- 
 ments, open price associations, and a discussion of 
 the costs of production. 
 
 Gentlemen's agreements. — Gentlemen's agree- 
 ments are by no means a thing of the past as a 
 method of fixing prices. The members of trade 
 associations do not pass definite resolutions fixing 
 prices. They do, however, often discuss prices. 
 Such discussion is ordinarily held before the meeting 
 is formally called to order or after the motion to 
 adjoul-n is passed, so that no record of the discussion 
 will appear in the secretary's minutes. Yet, occa- 
 sionally a mention of such discussion will be found 
 in the minutes of some secretary who forgets that 
 his books may be inspected at any time by a govern- 
 ment agent. For example, the report of the secre- 
 tary of a mid-western canners' association said of a 
 certain meeting in 1917 : "Based on our estimate of 
 such costs, we felt that 90 cents for standard corn 
 
 was as cheap as we could pack it Most 
 
 canners offered goods at that price. There was no 
 collusion or agreement of any kind between packers, 
 but simply a general consensus of opinion that we 
 could not afford to sell it cheaper."* 
 
 Very often the members simply talk over the 
 subject of prices around the hotel lobbies, around 
 the convention hall, or during meals. No formal 
 agreement is entered into, but very often an 
 
 * Federal Trade Commission : "Report on Canned Foods, Vegeta- 
 bles and Fruits," p. 86. 
 
TRADE ASSOCIATIONS . 475 
 
 understanding is reached and the members go 
 home knowing what prices their competitors are 
 going to name. The members who have ideas 
 of liberal prices do all they can to induce the 
 members who have ideas of lower prices to raise 
 their prices to a level with those they desire to estab- 
 lish. If the conservatives refuse, the others may 
 have to reduce their proposed prices to meet the 
 latter's prices, or else a compromise is effected. No 
 formal agreement has been made in this case, but 
 the intent to fix prices clearly exists. 
 
 Agreements are also made as to the dates when 
 prices will be changed, and as to the percentage by 
 which prices shall be increased or decreased. Terms 
 of sale such as length of credit, amount of cash 
 discount, etc., may also be agreed upon. Agree- 
 ments as to terms of sale are made openly by some 
 associations as they do not believe them to be illegal. 
 
 Open price associations and comparison of 
 prices. — The object of open price associations and 
 of comparisons of prices by competitors is to en- 
 able all members to have full knowledge of the pre- 
 vailing prices, or of the prices of their competitors, 
 so that they can make their prices "intelligently." 
 In open price associations the members usually re- 
 port the prices received for goods sold, or the prices 
 submitted on bids, to the secretary who tabulates 
 the reported prices and distributes the information, 
 to all members or to the members entitled to receive 
 it under the rules. At tim.cs the information is given 
 to the press. This was true of the information 
 
476 . MARKETING 
 
 gathered during 1916 and 1917 by the National 
 Canners' Association.' Under the plan used by the 
 Bridge Builders' Structural Society copies of all bids 
 were sent to the secretary who at once transmitted 
 the information to other members submitting bids 
 when the copies were unsealed. If copies of bids 
 were sealed the prices were not distributed by the 
 secretary until the contract was let.* 
 
 Price comparisons consist in the exchange of price 
 information by competitors. The members of an 
 association may exchange information as to their 
 prices, or as to their proposed prices. This may 
 be done at a meeting, or different concerns may ex- 
 change their prices directly. 
 
 Open price associations have been declared by 
 several lawyers to come within the pale of the law 
 although their legality has not been finally passed 
 upon by the Supreme Court. The object of ex- 
 changing prices is to promote price stability, pricfe 
 uniformity, and to increase profits by raising prices. 
 
 Following an exchange of price-lists by members 
 of the Wisconsin Pea Packers' Association in 1917, 
 it was found that over 95 per cent of the prices 
 quoted by different members for future delivery 
 were within 5 cents (a dozen) of the secretary's 
 own prices which had been sent to all members.^ 
 
 "Federal Trade Commission: "Report on Canned Foods, Vegeta- 
 bles, and Fruits," p. 81. 
 
 "Tosdal: "Open Price Associations," The American Economic 
 RevieiB, June, 1917, p. 342. 
 
 ' Federal Trade Commission : "Report on Canned Foods, Vegeta- 
 bles, and Fruits," p. 87 
 
TRADE ASSOCIATIONS 477 
 
 Sellers naturally want to receive as much as possi- 
 ble for their products. When they know what others 
 are receiving they naturally dislike to sell for less, 
 especially when their prices are to be reported to 
 their competitors. The agreement to report prices 
 is an incentive for a seller to resist a demand from 
 a buyer for a concession in price. A man doesn't 
 want to be scorned or called "weak-kneed" by his 
 friends. There is no legal obligation on a seller 
 to make his price in line with those of his competi- 
 tors, but the force of their opinion may be very 
 effective. A member is not bound to submit his 
 prices. The only punishment is the withholding 
 of information as to other's prices or expulsion from 
 the association. The temptation is always present 
 for a concern to shade the prevailing price to secure 
 a desirable order and then either fail to report the 
 sale or to report it at a price higher than actually 
 received as, for example, failing to mention a special 
 discount. If such practices become known, other 
 members are likely to take similar action to pro- 
 tect themselves. If such practices become general, 
 the whole scheme is likely to be abandoned. This 
 is why such schemes may operate successfully and 
 help to push prices up when the demand is strong 
 and prices are rising, and then fail altogether in a 
 falling market. Open price associations were very 
 common from 1912 to 1920, but very little was 
 heard of them during the period of falling prices 
 during 1920 and 1921. 
 
 Open price associations often go further than to 
 
478 MARKETING 
 
 exchange prices and engage in price-fixing either be- 
 cause of ignorance of the law or in a deliberate at- 
 tempt to evade the law.^ 
 
 Cost discussions. — There has been a great in- 
 crease in the interest in cost accounting in Tecent 
 years and many trade associations have seized upon 
 cost accounting as a cloak under which they secure 
 price uniformity or form price agreements. Educa- 
 tion in cost accounting is a good thing. All business 
 concerns should know their costs. Uniform account- 
 ing methods would apparently be desirable in many 
 industries. Discussion of cost accounting, however, 
 is one thing and a discussion of costs is another 
 thing. Many trade associations, under the guise 
 of discussing cost accounting, have discussed costs in 
 order to agree upon or determine average or typical 
 costs of production. It is clear that in many cases 
 the cost figures agreed upon in these cost meetings 
 were to be used as selling prices or as the basis of 
 selling prices, members adding reasonable profits 
 to the agreed cost to determine their selling prices. 
 It has been admitted by association officers and 
 proven by letters published by the Federal Trade 
 Commission that the object of many of these cost 
 discussions was to determine selling prices and that 
 the average or typical costs were simply a means to 
 an end. 
 
 The cost figures arrived at are often purely ar- 
 bitrary or estimated figures. They are infrequently 
 
 ' Tosdal : "Open Price Associations," American Economic Revieiu, 
 July, 1917, p. 351. 
 
TRADE ASSOCIATIONS 479 
 
 based on the actual costs of the members. Often 
 the materials are taken at uniform prices submitted 
 by the secretary, which may be the quoted market 
 price, but not the price actually paid by any of the 
 members. Again cost estimates may be based on a 
 certain output, as so many cases of peas per acre. 
 Since the cost figures are really intended as a basis 
 of future prices the costs must be estimated, as no 
 actual costs can be determined in advance. This 
 is particularly true during a period when prices, and 
 hence costs, are rising. Average costs, at best are 
 purely arbitrary if not entirely meaningless. The 
 members of the association often know nothing of 
 the theory of marginal or "bulkline" costs, but their 
 estimates of average costs are often so liberal that 
 they let most of the producers out with a profit and 
 hence approximate the actual "bulk-line" cost. 
 
 The average or typical cost figures arrived at in 
 these association meetings are often distributed to 
 all members whether present or not, and at times 
 have been sent to all producers whether members of 
 the association or not. One trade association secre- 
 tary had these cost estimates printed on the back of 
 his letterheads. 
 
 The discussion of, or agreement upon, "costs" 
 has been very common in trade associations in recent 
 years. Cost discussions may be accompanied by 
 gentlemen's agreements or "understandings" as to 
 price or may be conducted with price exchanges. 
 They have undoubtedly tended to greater uniformity 
 of prices and have probably also helped to increase 
 
480 MARKETING 
 
 prices. They are used more in periods of rising 
 than of falling prices. When prices are falling, 
 producers are not especially anxious to get together 
 and estimate how much their costs will decrease 
 during the next few months. This is, however, just 
 as logical and practical as to estimate how much costs 
 will increase during periods of rising prices. If the 
 advocates of cost discussions really believe in what 
 they advocate, they should hold such discussions 
 regularly regardless of the trend of prices. Many 
 trade associations have entered upon cost discus- 
 sions with the idea that they were legal. No legal 
 objection can be made to a discussion of accounting 
 forms. Such discussions may go as far as to discuss 
 the percentage of depreciation that should be 
 charged against different types of property and ma- 
 chinery, or to the proper methods of determining 
 and distributing overhead and general expenses. 
 However, when an association goes from a discus- 
 sion of cost accounting into a discussion of costs of 
 production it is on questionable ground. Average 
 or typical cost figures arrived at In such discussions 
 are meaningless except as a basis of prices. Many, 
 if not all, members understand that the agreed, costs 
 are to be made the basis of prices. 
 
 Trade association secretaries generally realize 
 that discussions of prices are dangerous and so warn 
 their members to speak of "costs," but not to rnen- 
 tlon "prices." In spite of such continued warnings 
 members frequently use the word "prices" In such! 
 
TRADE ASSOCIATIONS 481 
 
 a way as to show that price is really what they are 
 thinking about. 
 
 There is no doubt in the writer's mind that many 
 associations have used cost discussions to camou- 
 flage price-fixing agreements, that the intent has 
 often been to fix prices, and that if evidence of their 
 activities were presented to the courts, convictions 
 would follow. Referring to cost discussions the 
 Federal Trade Commission has said: "While it is 
 clearly desirable that each producer shoald accurately 
 know his own costs, it is very doubtful if any public 
 interest is served by the producers having meetings 
 to discuss each other's costs.!||. 
 
 Are price agreements effective. — It may be 
 argued that it is needless to prosecute competitors 
 for agreeing upon prices for the reason that such 
 agreements arc ineffective when the prices agreed 
 upon are unreasonably high. This is said to be 
 true for the reason that if prices are fixed high 
 enough to produce large profits that such large profits 
 will draw other producers into the industry and re- 
 store competition. The truth of this depends upon 
 how easily others may enter the industry. In the 
 case of retailing, new men can enter easily and 
 quickly, but with manufacturing it often requires 
 considerable skill, capital, or the control of raw 
 materials, so that considerable time is necessary for 
 new concerns to become established in the industry. 
 
 ' Federal Trade Commission Report on Canned Foods : "Vegeta- 
 bles and Fruits," p. 8. 
 
482 MARKETING 
 
 Then, too, there is the possibility of inducing the 
 new producers to become parties to the agreement. 
 
 It is also argued that price agreements will be 
 ineffective when the prices are fixed- too high for the 
 reason that the desire to make profitable sales will 
 lead members to violate the agreement and cut 
 prices.^" Business men sometimes refuse to become 
 parties to such agreements, because they are not 
 adhered to by all members. Thus when such agree- 
 ments arc in force certain members will secretly cut 
 prices and obtain the bulk of the business, while 
 their more scrupulous brothers, who adhere strictly 
 to the agreement, have their goods left on their 
 hands until the price cutters are sold out. There is 
 no doubt that such practices have at times led to 
 the abandonment of price agreements. 
 
 The effectiveness of price agreements depends 
 upon the strength of competition, the number and 
 attitude of the producers, the trend of prices, and 
 the seriousness of price cutting. It is much easier 
 to get a few men together and hold them in line 
 than to get a large number into such an agreement. 
 
 '°A. B. Farquhar, in "My 64 Years in Business," brings out this 
 idea in the following way: "By some tomfoolery or other, be it 
 open price association, trade association, or what-not, they solemnly 
 restrict production and hold out for price. They make the price — 
 but nobody buys. They keep right on making the price until one 
 fine morning some intelligent man awakes to the fact that business 
 does not grow out of making prices but out of selling goods and the 
 whole house of cards goes crashing. I have seen that happen so 
 many times that I now regard it as one of those events in nature 
 that seem inevitably to happen." — System, March, 1921, p. 385. 
 
TRADE ASSOCIATIONS 483 
 
 Also when price competition has been very keen 
 and many men have been losing money they are 
 more likely to lay aside their jealousies and form 
 agreements than when prices have been high enough 
 to yield fair profits. Again such agreements are 
 more likely to be observed when prices are rising 
 and a "seller's market" exists than when prices are 
 falling and the buyers control the situation. 
 
 There is no doubt that prices have at times been 
 boosted as a result of price agreements. During 
 periods of rising prices such agreements have pushed 
 prices up more rapidly than^ould have been true 
 under free competition. V^l^n prices are falling, 
 price agreements may also retard the decline. It is, 
 however, extremely difficult to make a general state- 
 ment as to the effectiveness of price agreements in 
 raising and maintaining prices. 
 
 Are price agreements desirable. — It is argued 
 by some that price agreements tend toward staple 
 and uniform prices, which are fair to both buyers 
 and sellers. It is contended that associations of pro- 
 ducers, or merchants, are in a better position than 
 any one else to make prices intelligently. Stable 
 prices are desirable, and it is said that price agree- 
 ments would prevent both unreasonably low and un- 
 reasonably high prices and so prove fair to both the 
 buyers and the sellers. It is argued that the German 
 cartels, which in many respects resemble our trade 
 associations, were permitted to fix prices and that 
 these prices were fair to the buyers. 
 
 It must be admitted that competition has been 
 
484 MARKETING 
 
 modified by price agreements, either direct or tacit, 
 entered into in spite of the law. Further restriction 
 of competition has resulted from the growth of large 
 business organizations which dominate various in- 
 dustries. Large organizations, such as the Stan- 
 dard Oil Co., U. S. Steel Corporation, International 
 Harvester Co., the American Can Co., and the 
 American Woolen Co. are potent factors in making 
 prices. The "independents" commonly follow the 
 prices set by their large rivals. Often their posi- 
 tion is "we can't get more and we'd be foolish to 
 sell for less." When the market is strong they may 
 go above the prices set by the big concerns and when 
 the market is weak they may cut the prices slightly, 
 but as a general rule they ordinarily stick pretty 
 close to the prices set by the big companies. It is 
 argued that the government should recognize con- 
 ditions as they are and allow the trade associations 
 to fix prices. The United States, however, is not 
 ready to give the associations a free hand. The peo- 
 ple do not believe in price agreements. The pro- 
 ducers do not as yet fully realize the responsibility 
 of fixing prices and are not sufficiently imbued with 
 the idea of public service. It appears that the Ger- 
 man cartels often "squeezed" the domestic buyers in 
 order to sell cheaply abroad and so build up their 
 foreign trade. Hence the proposal to allow price 
 agreements to be made under government super- 
 vision, the government to exercise a veto on all 
 prices in order to see that the interests of the con- 
 sumers were protected. Such an arrangement might 
 
TRADE ASSOCIATIONS 485 
 
 lead to a government price-fixing, which as yet ap- 
 pears to be of questionable desirability. 
 
 The Webb Pomerenc law allows competitors to 
 form cooperative associations and fix prices for the 
 export trade under the supervision of the Federal 
 Trade Commission. Up to the close of 1920, 43 
 such associations with 732 members had registered 
 with the supervisory body. 
 
 Desirability of government supervised price 
 agreements. — ^The desirability of government super- 
 vised agreements is questionable. In industries 
 where competition is very keen such agreements 
 would likely benefit the producers. In industries 
 where great concentration has taken place such 
 agreements would likely benefit the consumers. The 
 Government would likely use the marginal or the 
 bulk line theory in determining the fairness of prices. 
 When competition is very keen prices may be lower 
 than the bulk line cost with resultant loss to high 
 cost producers. This causes these high-cost pro- 
 ducers to lower their costs or to drop out of the 
 industry. Under price-fixing there is less incentive 
 to efficiency as prices would be set high enough to 
 allow most producers to realize a profit. When 
 competition is limited the prices may be higher than 
 the bulk line cost. In such cases government super- 
 vision would result in lower prices. It then seems 
 that price-fixing under government supervision is de- 
 sirable when competition has been largely eliminated 
 either by consolidations or unsupervised agreements 
 as to prices. 
 
486 MARKETING 
 
 Conclusions. — Trade associations can do much 
 that is beneficial. Improvements in methods or low- 
 ering the costs of production; introduction of bet- 
 ter accounting methods; improving the quality of 
 output ; improving methods of packing and shipping 
 goods ; and standardizing products are all very com- 
 mendable activities. Much good can come from the 
 right kind of cooperation through trade associations. 
 The trouble is that many associations pay too little 
 attention to activities that are legitimate and desir- 
 able and engage in price-fixing activities that are 
 illegal and of doubtful desirability. The suggestion 
 has been made that trade associations be allowed 
 to fix prices under government supervision. Such 
 agreements would apparently be in the interest of 
 the public only when competition is already stifled by 
 price agreements or by consolidations in the industry. 
 
 BIBLIOGRAPHY 
 
 Federal Trade Commission Report on Canned Foods: "Canned 
 
 Vegetables and Fruits," Chapter S. 
 
 "Causes of the High Prices of Farm Implements,'' pp. 31 and 
 
 32 and chs. 7 and 8. 
 
 "Commercial Wheat Flour Milling," 1920, pp. 39-41 and 110 
 
 to lis. 
 Bureau of Corporations: "Farm Machinery Trade Associations." 
 Tosdal, H. H.: "Open Price Associations," American Economic Re- 
 view, June, 1917 (vol. 7, p. 331). 
 Eddy, Arthur Jerome: "The New Competition." 
 Montague Gilbert H.: "Business Competition and the Law." 
 Haney, Lewis H. : "Price-Fixing in the United States During the 
 
 War," Political Science Quarterly, vol. 34, pp. 104-126; 262- 
 
 289; 434-453, March-September, 1919. 
 Department of Commerce, Bureau of Fbreign and Domestic Com- 
 
TRADE ASSOCIATIONS 487 
 
 merce, Miscl. series No. 99, "Commercial and Industrial Or- 
 ganizations of the U. S." 
 
 Naylor, Emmett Hay: "Trade Associations, Their Organization and 
 Management." 
 
 Stevens, W. H. S.: "Unfair Competition," ch. VI. 
 
 Bruce, William George: "Commercial Organizations, Their Func- 
 tion, Operation, and Service" (covers work of chambers of 
 commerce). 
 
 CHAPTER XVIII— QUESTIONS 
 
 1. What is a trade association? Do you believe trade associations 
 
 return benefits to their members commensurate with the time 
 and money spent on them? Why or why not? Enumerate ad- 
 vantages that may come from a well-managed and active 
 association. 
 
 2. If you were secretary of a large local association of retail mer- 
 
 chants, what activities would you recommend that the associa- 
 tion carry on ? 
 
 3. Under the present law how far may trade associations go in dis- 
 
 cussing costs and prices? 
 
 4. Do you believe that trade associations should be allowed a free 
 
 hand in fixing prices? Why or why not? 
 
 5. The American Blank Manufacturers Association has twelve 
 
 members while the Interstate Blank Dealers' Association has 
 four thousand members. Which association is most likely to 
 engage in price-fixing? Why? 
 
 6. What results would likely follow the legalizing of price-fixing 
 
 b}- trade associations under government supervision? Enum- 
 erate probable advantages and disadvantages of such permis- 
 sion. Would such a policy lead to government fixing of prices ? 
 
Chapter XIX 
 
 MARKET ANALYSIS 
 
 Necessity of calciilating sales possibilities. — 
 Before starting any kind of a manufacturing or mer- 
 cantile enterprise the available volume of business 
 should be carefully estimated. A failure to do this 
 may lead factories to be started to produce articles 
 for which the demand is too small to justify the ex- 
 penditures, or stores to be located where there is a 
 lack of customers. Some investors erected a $150,- 
 000 plant in New England to make an ingenious 
 office appliance. When the plant was completed it 
 was found that it could turn out enough machines 
 in six months to supply the entire market for ten 
 years.^ This may be an extreme case, but it shows 
 the necessity of carefully analyzing the market be- 
 fore launching a business venture. Many concerns 
 have failed through a failure to analyze the selling 
 possibilities of the product, of making a product 
 unsulted to the market, of adopting the wrong sell- 
 ing policy to develop the potential demand, or of 
 choosing a poor location for reaching the market. 
 Many concerns have achieved success when they 
 realized the limitations on the sale of the old prod- 
 
 ' Frederick, J. George: "Modern Salesmanagement," p. 16. 
 
 ^8S 
 
MARKET ANALYSIS 489 
 
 uct and started to manufacture a new product or 
 to change their old product so that it would appeal 
 to a larger number of buyers. 
 
 In the following pages a few examples will be 
 given which it is hoped will suggest methods by 
 which the sales possibilities of any article may be 
 calculated. 
 
 New products to meet demands — farm tractors. 
 — The Minneapolis Steel and Machinery Company 
 had been making steam engines. The market was 
 highly competitive, selling expenses high, and the 
 company located at a distance from most purchasers. 
 It was finally decided that a radical change would 
 have to be made in the product or in the selling 
 policy. In looking over the field it was found that 
 a demand for farm tractors was developing and that 
 their plant, located near the great Northwestern 
 wheat belt, was advantageously situated for the 
 production and sale of tractors. It was therefore 
 decided to make tractors. Great care was taken to 
 adapt the tractor to the needs of the farmers. As a 
 result the sales of the company increased eightfold.^ 
 
 Automobile paint. — ^A manufacturer of paint no- 
 ticed that one salesman was turning in exceptionally 
 large orders for one particular kind of paint. Upon 
 making inquiry it was found that the salesman was 
 selling this paint for automobiles. The company 
 had overlooked the fact that many people painted 
 
 ' Gillette, Geo. M. : "How Changing a Policy Multiplied Our 
 Sales by 8," System, March, 1921. 
 
490 MARKETING 
 
 their own cars and hence that a consumer demand 
 already existed for a convenient paint at a reason- 
 able price. By changing this paint slightly to better 
 adapt it to the purpose, by labelling it automobile 
 paint and pushing its sale, it became one of the 
 concern's leaders and greatly increased the com- 
 pany's sales. 
 
 Other products. — A New Jersey canning factory 
 after several years of success suffered a period of 
 declining business. An employee got the idea of 
 canned condensed soups selling for 10 cents a can. 
 Campbell's soups were the result. A man in Ver- 
 mont had been making magic lanterns, but the movies 
 were destroying his business. He conceived the idea 
 of the "kiddie car," of which nearly a million were 
 made In 1920. A glass works at Corning, New 
 York, had been making lantern globes, semaphore 
 lenses, and similar products. The wife of a man 
 in the business noticed a beaker in the plant, which 
 she took home and tried as a pudding-dish. This 
 called the attention of the firm to the demand for 
 cooking dishes. "Pyrex" was the result.' 
 
 Use of questionnaires in determining demand. — 
 It is not an easy matter to determine just what the 
 consumers want. Theoretically the retailers should 
 Inform the manufacturers through the latters' sales- 
 men or through the jobbers as to the consumer de- 
 mand. In practice, however, the information ob- 
 
 ' Dickinson, Roy: "Where Are My 1921 Customers Coming 
 From?" Printers Ink, Jan. 6, 1921 
 
MARKET ANALYSIS 491 
 
 tained in this way is often very meagre. The 
 manufacturer may, of course, judge demand from 
 his sales records. The trouble with information 
 obtained in this way is that it is often received too 
 late to act as a guide in the production of goods. 
 At times manufacturers go direct to the consumers 
 with questionnaires to obtain this information. 
 
 Men's underwear. — ^A manufacturer of men's un- 
 derwear recently secured information in this way 
 from 2,000 men, principally commuters in New 
 York City, concerning their preferences as to under- 
 wear. A tabulation of the information showed 
 that 23 per cent preferred medium weight two- 
 piece wool suits; 22 per cent preferred medium 
 weight wool union suits ; 1 5 per cent preferred nain- 
 sook cotton union suits ; 9 per cent preferred heavy 
 wool union suits; 8 per cent preferred balbriggan 
 cotton union suits; 7 per cent, heavy two-piece wool 
 suits; 5 per cent preferred nainsook two-piece cot- 
 ton suits. The preferences of the other 1 1 per cent 
 were scattered. As to color, 62 per cent preferred 
 white; 22 per cent light tan or ecru, and 16 per 
 cent gray. As to fit, 36 per cent preferred snugly 
 fitting garments; 33 per cent medium fitting gar- 
 ments, and 31 per cent loose fitting garments. In 
 buying underwear, 60 per cent of the men stated 
 that they looked first for fit, while 21 per cent looked 
 first for the weight desired.* 
 
 * Bulletin of Robert Reis & Co., quoted in the New York Times of 
 October 24, 1920. 
 
492 MARKETING 
 
 This information should be very helpful to both 
 manufacturers of and dealers in men's underwear. 
 The limitation on these figures is that other classes 
 of men and men in other parts of the country may 
 have preferences very different from those of the 
 New York commuters. This shows the limitation 
 in the use of questionnaires — the expense of getting 
 enough filled out to correctly reveal the actual de- 
 mand from all classes of buyers in all parts of the 
 country. 
 
 Location of stores. — Many stores have failed be- 
 cause they have been located where there were too 
 few customers or where business could only be ob- 
 tained by taking it away from other similar stores. 
 It was pointed out in a previous chapter that many 
 chain stores never open a new store without counting 
 the number of passers-by and noting their character- 
 istics. Often a merchant fails to take this pre- 
 caution and locates his store where there are not 
 enough customers to justify the venture. Suppose 
 it is proposed to open a fancy grocery and delicates- 
 sen store in a small town. There are several gro- 
 cery stores in the town, but none of them carry a 
 large stock of fancy groceries and prepared foods. 
 Are there enough people in the town who would 
 patronize such a store to make it a profitable under- 
 taking? This depends not merely on the population 
 of the town but on the character of the people. 
 Such a store would be more likely to succeed in a 
 town where many wealthy people live than In a 
 town made up almost entirely of factory workers. 
 
MARKET ANALYSIS 493 
 
 It would be more likely to succeed in a town where 
 many people live in apartments than in a town 
 where most of the people live in houses and where 
 domestic servants are relatively plentiful. An 
 analysis of the situation showing the population of 
 the town, the approximate number of families in 
 the various income groups, and the methods of liv- 
 ing and buying habits of the groups that such a 
 store can hope to reach will be helpful. Such an 
 analysis will not ensure the success of the store, but 
 it will show whether or not the store has a field 
 for success and what business it can hope to develop. 
 Meastiring the buying power of a commimity. — 
 A department store in a small city had one depart- 
 ment that had been losing money for many years. 
 One manager after another was employed and finally 
 one was obtained who made the department break 
 even. At first the owners of the store were happy, 
 but the thought came to them that if the department 
 could break even that it could be made to produce 
 a profit. They started out to ascertain the buying 
 power of the community. They first consulted the 
 census to get the population of the city and of the 
 tributory townships. Realizing that buying power 
 does not depend entirely on numbers they also at- 
 tempted to ascertain the number of people receiving 
 different incomes. Permission was secured to in- 
 spect the payrolls of the various factories in the 
 town. An idea of the income of the farmers could 
 be obtained from the size of their farms, fertility 
 of their land, the crops raised, and their living 
 
494 MARKETING 
 
 methods. From this information the store owners 
 were able to approximate the amount of the 
 kind of merchandise in question consumed in 
 the community. This survey showed that business 
 was available. Considering the number of competi- 
 tors, however, it was apparent that this store was 
 not receiving its share of the business, at least 
 measured by the proportion of the community's 
 business which it received in other lines. This study 
 showed that the trouble was within the depart- 
 ment. Attention was centered on the department 
 and it was found that the firm had been too con- 
 servative in the purchase of goods. It had not kept 
 up with the changes in demand so that the people 
 went to other stores to get up-to-date goods. A 
 change in buying policies together with a better dis- 
 play of the goods and more advertising made this 
 a profitable department. 
 
 The Curtis Publishing Company a few years ago 
 made an estimate of the trading population and 
 the volume of department store business in each city 
 of over 5,000 population. Somie sales organiza- 
 tions use such information to check the uniformity of 
 their sales.^ If a certain concern finds that in many 
 communities its sales amount to $10 per million of 
 general business, but in others that its sales are ma- 
 terially below this figure, it should look for the 
 trouble. Due allowance must be made for the cli- 
 
 "Parlin, C. C. "Merchandising of Textiles," published by the 
 National Dry Goods Association, p. 16. 
 
MARKET ANALYSIS 495 
 
 mate, race, etc., of the community. If such factors 
 do not explain the small sales, search should be 
 made in the concern's selling activities. Perhaps 
 the salesman works the town hurriedly, perhaps the 
 concern has a poor local representative, perhaps 
 little advertising has been done in the community. 
 Whatever the reason, when it is once found intelli- 
 gent attempts can be made to remedy conditions and 
 improve sales. 
 
 Some local peculiarities in demand have been ob- 
 served. For example, Boston and Poughkeepsic are 
 said to be good towns for the sale of lisle hosiery. 
 Hartford, Conn., on the other hand is said to be a 
 good town for the sale of silk hosiery. 
 
 Importance of market analysis to merchants. — 
 Every merchant who overbuys or underbuys has 
 failed to accurately measure demand. The mer- 
 chant who fails to stock new products, thereby 
 forcing his customers to patronize his competitors 
 has failed to anticipate demand. The importance 
 and difficulty of anticipating demands have been dis- 
 cussed in a previous chapter and cannot be discussed 
 again at this point. An analysis of the buying power 
 of their communities would, however, help many 
 merchants to determine whether they were selling 
 the quantity of the various goods which they could 
 reasonably hope to sell. Such analysis will also warn 
 them against spending money in advertising and dis- 
 play of goods out of proportion to the sales which 
 can reasonably be expected. At the time of this 
 writing the dealers in electric goods in Cleveland, 
 
496 MARKETING 
 
 Ohio, are reported to be carrying on a campaign 
 to bring the per capita use of electric merchandise 
 up to that attained in several other cities. 
 
 Factors affecting demand. — Several factors must 
 be considered in ascertaining the demand for differ- 
 ent articles. The demand for some articles, such as 
 foodstuffs, depends very largely upon the popula- 
 tion. The entire population, with the exception of 
 the babies, is a potential consumer of such articles 
 as eggs, milk, baked beans, rice, and dried fruits. 
 But even with foodstuffs, other factors than mere 
 numbers must be considered. The wealthy buy more 
 food because they waste more. The laboring class 
 may need more nourishment, but they generally buy 
 cheaper foods than the wealthier classes. Race, 
 climate, custom, and occupation must also be con- 
 sidered. Much less food can be sold to farmers in 
 a mixed farming district than to farmers in a spe- 
 cialized farming district and much less to farmers 
 in a specialized farming district than to city dwell- 
 ers. The demand for many other products is much 
 more limited. The demand for tabulating machines 
 is limited to offices that have a large amount of sta- 
 tistical work to do. The buyers of raw cotton are 
 limited to a thousand or so manufacturers, while 
 the demand for cotton cloth and hosiery extends to 
 100,000,000 people in the United States. The 
 demand for raw materials is ordinarily limited to 
 the manufacturers using this product. The number 
 of manufacturers of different products varies widely. 
 There are, for example, about 7,000 merchant wheat 
 
MARKET ANALYSIS 497 
 
 flour mills in the United States, compared with some 
 half-dozen manufacturers of binder twine. 
 
 Income. — Mere population figures are useless in 
 determining the demand for many articles, for exam- 
 ple automobiles. Few buyers could be found for an 
 expensive car in a slum district, while a fashion- 
 able residential district might furnish a very large 
 number of buyers. The same is true to a very large 
 extent with clothing. Well to do people buy more 
 clothes than poor people. They also buy a different 
 type of clothes. This is also true of furniture, 
 rugs, musical instruments, and many other articles. 
 The information desired for the sale of such goods 
 is not the total population of any territory, but the 
 number of persons in the various income groups. 
 
 Statistics of income. — Figures published by the 
 Bureau of Internal Revenue show that the follow- 
 ing number of persons received different incomes 
 during the calendar year 1918. (See table page 498.) 
 
 Married men with incomes of over $2,000 and 
 single men with incomes of over $1,000 were re- 
 quired to file returns. One return was filed for ap- 
 proximately every five families and for every 61/2 
 adult males. Figures based on tax returns cannot 
 be taken as entirely accurate as a certain number of 
 people fail to file returns or understate their incomes. 
 The incomes during 1918 were considerably larger 
 than during the years preceding the war, but were 
 likely considerably smaller than during 1919. In 
 spite of these limitations, the figures are very valu- 
 able. 
 
498 MARKETING 
 
 NUMBER OF PERSONS RECEIVING THIS INCOME 
 
 Income Class Number Per cent of Total 
 
 $ 1,000— $2,000 1,516,938 34.28 
 
 2,000— 3,000 1,496,878 33.83 
 
 3,000— 5,000 932,336 21.06 
 
 5,000— 10,000 319,356 7.22 
 
 10,000— 25,000 116,569 2.63 
 
 25,000— 50,000 28,542 0.65 
 
 50,000— 100,000 9,996 0.23 
 
 100,000— 150,000 2,358 0.05 
 
 150,000— 300,000 1,514 0.035 
 
 300,000— 500,000 382 0.009 
 
 500,000— 1,000,000 178 0.004 
 
 1,000,000 and over 67 0.002 
 
 4,425,114 100.00 
 
 The salesmanager should not lose sight of the 
 fact that only two out of every thirteen men had 
 sufficient earnings to necessitate filing income tax re- 
 turns; that only 10.8 per cent of those filing income 
 tax returns reported incomes of $5,000 or over; that 
 only 3.6 per cent reported incomes of $10,000 or 
 
 'The figures for 1917 and 1916 are as follows: 
 
 1917 1916 
 
 $ 1,000—$ 2,000 1,640,758 
 
 2,000— 3,000 838,707 
 
 3,000— 5,000 560,763 157,149 
 
 5,000— 10,000 270,666 150,553 
 
 10,000— 25,000 112,502 80,880 
 
 25,000^ 50,000 30,391 23,734 
 
 50,000— 100,000 12,439 10,452 
 
 100,000— 150,000 3,302 2,900 
 
 150,000— 300,000 2,347 2,437 
 
 300,000— 500,000 559 714 
 
 500,000—1,000,000 315 376 
 
 $1,000,000 or more 141 206 
 
MARKET ANALYSIS 
 
 499 
 
 over; and that only 0.98 per cent reported incomes of 
 $25,000 or over. A product that is only within the 
 reach of the wealthier classes necessarily has lim- 
 ited sales possibilities. 
 
 I 
 
 1 
 
 ^1000 ^2000 ^;?ooo fjooo over. 
 
 TO TO TO , TO , 
 
 f2000 4^000 1^000 4ioooo fioooo 
 
 Chart 9 
 
 Number of Persons Reporting Different Incomes in 1918 
 (Bureau of Internal Revenue) 
 
 Occupation. — The demand for many articles de- 
 pends upon occupation. Only the farmers need farm 
 implements. The demand for overalls is very largely 
 limited to farmers, artisans and laborers. Only the 
 
'500 MARKETING 
 
 railroads and industrial concerns that do their own 
 switching are buyers of locomotives. Carpenters' 
 tools, however, may be sold to three classes of buyers. 
 First, carpenters who want good tools and who buy 
 very largely on their past experience and the reputa- 
 tion of old brands. Second, farmers who need sub- 
 stantial tools but who are less particular about quality 
 than the carpenters. Third, the city dwellers who 
 need a few tools for doing odd jobs. They do not 
 need a high quality of tools and seldom need to re- 
 place wornout goods. They are most likely to buy 
 the tools they see advertised or those offered by the 
 local dealers. 
 
 Other factors. — ^Age, race, sex, habits, customs, 
 and climate also exert an influence on demand. Toys 
 can be sold only where there are children. A 
 "wealthy community with few children may, however, 
 spend more for toys than a poor community with 
 many children. Children's clothing, story books, 
 etc., are sold in proportion to the child rather than 
 to the total population. The effect of sex, habits, 
 and customs on demand have previously been com- 
 mented upon. Climate also exerts a strong influence 
 on demand. The people in Minnesota need fewer 
 light weight clothes than those in Florida. The 
 people in California may wear clothes of uniform 
 weight the year around while those In Chicago may 
 demand entirely different kinds of clothes for sum- 
 mer and winter wear. More porch furniture may be 
 sold in the South, where the summers are long, than 
 in the North, where the summers are short. The 
 
MARKET ANALYSIS 501 
 
 climate may also affect the types of goods sold for 
 building, heating and furnishing houses. 
 
 MEASURING DEMAND 
 
 Cotton pickers. — Suppose a successful cotton-pick- 
 ing machine were invented, which could be sold at 
 a moderate price. A demand for this might be 
 taken for granted as the amount of cotton that can 
 be grown is limited by the amount that can be 
 picked. The picking requires a very large amount 
 of human labor. Before starting production the 
 approximate demand should be ascertained so that 
 the proper production program could be planned. 
 There arc in the nine cotton States (Alabama, Ar- 
 kansas, Georgia, Louisiana, Mississippi, Oklahoma, 
 North Carolina, South Carolina and Texas), 
 2,297,055 farms according to the 1920 census. Al- 
 though some cotton is grown in Tennessee, Florida, 
 and Virginia, this would be offset by farms in North 
 Carolina, Louisiana, Texas, Oklahoma and other 
 cotton States that do not raise cotton.' Then the 
 farms in Arizona, New Mexico and California rais- 
 ing long fibre cotton must be considered. Some 
 use has already been made in these States of the 
 pneumatic picking machine. The number of farms 
 in the cotton growing states could not, however, be 
 used as a guide to the number of machines that could 
 
 'A better method would be to consider the number of farms by 
 counties, the total number of farms in all cotton growing countries 
 being ascertained. For illustrative purposes the author has not 
 felt it necessary to do this. 
 
502 MARKETING 
 
 be sold, due to the tenancy system and the census' 
 definition of a "farm." A very large part of the 
 cotton is grown by colored tenants who generally 
 do not furnish the implements used. It is not to be 
 expected that such tenants would purchase cotton 
 pickers. The white owners of the land would fur- 
 nish the purchasers so that one machine might be 
 used to pick the cotton on several census "farms." 
 The 1910 census gathered figures from 39,073 plan- 
 tations, i.e., continuous trao^ of land under single 
 supervision and having at leafet five tenant farmers. 
 On these 39,073 plantations were 398,905 tenant 
 farms. Some of the white planters might buy more 
 than one machine, but it certainly could not be hoped 
 to sell one for each tenant farm, if as assumed one 
 machine would pick a large acreage. The demand 
 from these 39,073 plantations would likely be nearer 
 50,000 than 400,000. There are some three to 
 four times as many landowners having two, three and 
 four tenants as have five or more tenants. Consider- 
 ing these facts the number of potential buyers in the 
 South would be reduced frorn 2,297,055 to some- 
 thing like 1,500,000. To this must be added the 
 potential buyers in the Southwest to get the number 
 of potential buyers in the United States. This does 
 not consider the possibility of sales to Egypt, India, 
 or other cotton producing countries. 
 
 The rapidity with which the machines could be 
 introduced would depend upon their accomplish- 
 ments in actual operation, the saving involved in 
 their use, and their selling price. When the market 
 
MARKET ANALYSIS 503 
 
 was once supplied, business could only come from 
 replacement orders. The amount of business then 
 obtainable would depend upon the average length 
 of life of the machine. Suppose it is concluded that 
 1,600,000 of these machines can be sold, that it will 
 take five years to secure complete introduction, and 
 that the machines will last an average of ten years. 
 During the first five years, average sales of 320,000 
 might be expected. During the next five years sales 
 will be expected to be light; orders being re- 
 ceived principally for repair parts, and for machines 
 to replace those that wore out in less than ten years. 
 Foreign markets might be developed during this 
 period. At the end of ten years sales of 160,000 
 machines per year may be expected. Sales, however, 
 will not be uniform for all years. They will be much 
 larger in years when the cotton farmers are pros- 
 perous than in years when "times are hard." 
 
 Another factor that must be considered is the 
 possibility that the picking machine will so cheapen 
 production and increase the acreage of cotton grown 
 that many more than 1,600,000 machines will be 
 needed. 
 
 Competition^ — If the production of these ma- 
 chines is competitive, no one concern can expect 
 to secure all the business and plans should be made 
 accordingly. If the original producer has a patent 
 monopoly he can make his plans with greater assur- 
 ance. The probability, however, is that other ma- 
 chines will soon appear on the market either by in- 
 fringing his patents or by developing different 
 
504 MARKETING 
 
 designs which will do the same work without in- 
 fringing his patents. 
 
 Farm tractors. — Slightly different information is 
 needed to determine the potential market for farm 
 tractors. According to the 1920 census there are 
 nearly six and a half million farms in the United 
 States. How many of these farms can be expected 
 to furnish buyers for tractors? This depends to 
 a large extent on the size of the farms. Less than 
 20 per cent of the farms contain more than 174 
 acres. If the tractor is made so heavy that it can 
 be used profitably only on large farms the market is 
 thus limited to something over a million customers.' 
 Some of the larger farms may buy several tractors, 
 but the demand could hardly exceed 1,500,000. If, 
 however, a tractor is built that can be profitably used 
 on smaller farms, the market will be greatly in- 
 creased. Almost one-fourth of the farms range in 
 size from 100 to 174 acres. Hence a tractor suited 
 to this size farm will have over a million and a 
 half possible customers. Approximately 45 per cent 
 of our farms range in size from 20 to 99 acres. 
 A tractor suited to such farms will have nearly two 
 million possible users. It cannot, perhaps, be hoped to 
 place a tractor on every farm, for the reason that 
 some farms in hilly and mountainous regions can 
 not successfully use them. The wisdom of develop- 
 ing light tractors adapted to the use of the small 
 farmers is, however, apparent. Here, also, is the 
 
 * Here again the census' definition for a "farm" should be remem- 
 bered. 
 
MARKET ANALYSIS 505 
 
 reason for the pulley. Many small farmers will not 
 buy tractors merely for traction power, but when 
 the tractors also furnish belt power for running the 
 feed mill, separator, woodsaw, etc., the reasons for 
 buying are doubled. 
 
 Railroads. — When new railroads were being 
 built many elaborate estimates of the traffic that 
 could be developed were prepared by the promoters. 
 A road built through an unsettled section of the mid- 
 dle western prairies could be expected to develop the 
 land for about six miles on either side. Thus each 
 mile of road c'ould be expected to form the outlet 
 for 7,680 acres of land. AH of the farmers not only 
 have goods to sell, but must purchase supplies. Be- 
 yond six miles cattle raising may be carried on until 
 the territory is reached by branch lines or other 
 roads. With motor trucks the distance which farm 
 products may be hauled to market is much greater 
 than six miles. When the roads crossed the one 
 hundredth meridian into the semi-arid region much 
 less traffic could be expected from farm crops. The 
 traffic available from any mines or quarries that the 
 road will open can also be estimated. A road built 
 through a timbered region can estimate the num- 
 ber of feet of marketable lumber per acre. If it is 
 expected that the cleared land will be brought under 
 cultivation the future traffic of the road may be 
 secure. Roads built to move lumber sometimes find 
 themselves without traffic when all the lumber is 
 marketed. A road can also expect that certain towns 
 and cities will grow up along its lines, all of which 
 
506 MARKETING 
 
 will have goods to ship and supplies to buy. Manu- 
 facturing towns bring together larger numbers of 
 people than commercial towns. Hence the desir- 
 ability of the territory for manufacturing enter- 
 prises should be considered. 
 
 If a road connects large cities, or forms a con- 
 necting link in a through line, it may expect to share 
 in the through traffic. The amount of through 
 traffic which a road receives depends on Its agree- 
 ments for the interchange of traffic with other roads 
 and the efficiency of Its traffic soliciting organization. 
 The amount of traffic received from competitive 
 points depends upon the convenience of its terminal 
 facilities, its ability to supply cars and move Its 
 trains expeditiously, the success of its solicitors, and 
 its reputation for good service and square dealing. 
 We have had many examples of railroads, as well 
 as factories, that have been failures due to a lack 
 of business. In some instances roads seem to have 
 been built without carefully analyzing the situation, 
 again the territory has failed to develop as expected, 
 in other cases the road was built as part of a through 
 route which was never completed, and in still other 
 cases the road failed to wrest traffic from its com- 
 petitors. 
 
 Automobile accessories. — The maker of an ac- 
 cessory or attachment has a very definite market. 
 The man who makes an attachment for a Ford 
 automobile has a well-defined market. A young 
 man recently sought the author's advice about an 
 automobile accessory which in the past has only been 
 
MARKET ANALYSIS 507 
 
 used to a limited extent on the more, expensive cars. 
 It was evident that his market would be rather 
 narrow unless he succeeded in selling to the owners 
 of moderate priced cars. 
 
 Electrical goods. — Electrical appliances for do- 
 mestic use can only be sold for use in homes that 
 have electricity. At present it is estimated that 
 6,291,160 houses, about one-third of those in the 
 United States, are wired for electricity. Here is 
 the limitation on the sale of electric goods — ^but the 
 market is constantly increasing as more and more 
 houses are being wired. The sales of electrical 
 merchandise during 1920 has been estimated at 
 $2,000,000,000.' 
 
 Difficulties due to changing demand. — The esti- 
 mation of the possible sale of many products is much 
 more difficult than those mentioned in the preceding 
 paragraphs for the reason that styles and habits 
 change so from year to year, and that the demand 
 for different articles depends to a large extent on the 
 intensity and success of various selling campaigns. 
 
 Automobiles. — Take automobiles as an example. 
 In 1900, who would have believed that we would 
 have over nine million automobiles in use twenty 
 years later? Who would have believed in 1899 
 when 3,700 cars were built, that in 1920 we would 
 have an automobile for every twelve people? The 
 average wholesale value of passenger automobiles 
 was about $850 for 1919, while the average whole- 
 
 8 "Sales management," v. 3, No. 1, Abstracted in Business Digest 
 Service, Advertising and Sales Promotion Section, March 9, 1921. 
 
508 MARKETING 
 
 sale value of business vehicles in this year was about 
 $1,750, and of chassis $950." It has been estimated 
 that the American people have seven billion dollars 
 invested in passenger cars and considerably over a 
 billion more in commercial cars. The investment of 
 over seven billion dollars in cars used largely for 
 pleasure is an illuminating commentary on the pros- 
 perity of the American people. The tremendous 
 growth of the automobile industry would not have 
 been possible except for the very prosperous condition 
 of the country. The number of cars in use would 
 undoubtedly have been smaller except for the policy 
 of the Ford Motor Co. in standardizing production 
 and turning out a popular low-priced car that was 
 within the reach of the man of moderate means. It 
 Is said that every family wants a car and that the only 
 deterrent is the lack of money. 
 
 A few years ago it was estimated that the demand 
 for cars would be fully met when 8,000,000 cars 
 were in use. Later this figure was increased to 10,- 
 000,000. Recently some optimists have estimated 
 that it will be possible to sell 12,000,000 cars. As 
 soon as all possible users have cars the business of 
 the manufacturers will be limited to replacing worn- 
 out cars. If 10,000,000 cars arc In use with an aver- 
 age life of five years, then the manufacturers can 
 hope to sell an average of 2,000,000 cars per year. 
 Published figures of production and registration, 
 however, indicate that the average life of a car is 
 
 "Census figures. See also Reeves, Alfred, in Journal of Com- 
 merce, Jan. 5, 1920. 
 
MARKET ANALYSIS 509 
 
 in excess of five years. This may be due to the 
 large use of rebuilt cars. 
 
 It has been estimated that each car uses an aver- 
 age of five tires a year. Hence if 10,000,000 cars 
 are in use there will be an annual demand for 50,- 
 000,000 tires. If $25 be taken as the average price 
 this would mean an annual business of $1,250,000,- 
 000. The number of tires used tends to decrease 
 not only with improvements in the tires, but with 
 the improvement of the streets and roads of the 
 country. 
 
 Determining demand by experiment. — ^The de- 
 mand for many articles has really been created. In 
 such cases it is impossible to anticipate the public 
 favor with which an article will meet. When alum- 
 inum cooking vessels were first produced who could 
 tell how they would be received by the public? 
 The makers probably felt that they should be used 
 in every kitchen, but the buyers would, perhaps, 
 think otherwise. Long years of intensive selling 
 activities have failed to attain this result. When 
 the Eastman Kodak Co. first placed kodaks on the 
 market it was problematical what sales could be 
 expected. When a new product is proposed for 
 which the demand is questionable a small quantity 
 may be produced and tried out experimentally in 
 a certain territory. If the buyers in this territory 
 like the article its production may be increased. If 
 they do not like it the product may be changed to 
 better suit the consumers or its production discon- 
 tinued. Hundreds of articles have been produced 
 
510 MARKETING 
 
 which never proved popular. Losses would have 
 been reduced in many Instances if the articles had 
 been tried out experimentally. Yet the stores are 
 full of articles that found no demand until the con- 
 sumers were educated up to their use. 
 
 Secvuring the estimated volume of sales. — Cal- 
 culating the potential demand is one thing and 
 securing sales equal to the estimated volume of 
 sales Is another thing. Take the cotton picking 
 machine which we assumed to have been Invented. 
 The makers determine that there are 1,600,000 
 cotton growers who should have the machine. 
 Unless there Is such a saving in its use as to 
 practically drive the non-users out of business, 
 it will probably take many years to sell this num- 
 ber of machines. Some farmers have hilly land, 
 some grow only a very few acres of cotton, others 
 may hire a neighbor's machine, others may be unable 
 to afford the machine, and others will refuse from 
 pure stubbornness and desire not to do what their 
 neighbors do. The makers may do well if they 
 place 1,200,000 machines In use In five years. 
 
 The makers of electric washing machines, no 
 doubt, feel that there should be a machine in every 
 home that has electricity. This distribution may 
 never be realized. Families that employ laun- 
 dresses may be indifferent and poor families may 
 be unable to afford such a machine. Manufacturers 
 of talking machines, no doubt, believe that every 
 family should have an instrument. Extensive ad- 
 vertising and selling campaigns have so far failed 
 
MARKET ANALYSIS 511 
 
 to attain any such distribution. Shoe manufacturers 
 perhaps feel that all adults should wear shoes and 
 yet there are many countries where shoes are just 
 beginning to be used and other countries where a 
 large part of the population goes barefoot a part of 
 the year. 
 
 Success in sales campaigns. — The success of any 
 industry in stimulating sales depends upon its suc- 
 cess in educating the people up to the use of its 
 products through advertising and salesmanship and 
 in placing its products within the reach of all possi- 
 ble buyers. The success of any individual concern 
 in increasing its sales and getting ahead of its com- 
 petitors depends upon the plan of distribution em- 
 ployed, the price policies used, and the advertising 
 and selling methods followed. Some of these poli- 
 cies will be discussed briefly in the following 
 chapters. 
 
 BIBLIOGRAPHY 
 
 Copeland, Melvin T.: "Marketing Problems," ch. 1. 
 
 Curtis Publishing Co.: "The Farm Market." 
 
 Duncan, C. S.: "Marketing," ch. 3. 
 
 Ivy, Paul W. : "Principles of Marketing," chs. 9 and 10. 
 
 Frederick, J. George: "Modern Salesmanagement," chs. 2, 3, 6 
 and 7. 
 
 J. Walter Thompson Co.: "Population and Its Distribution." 
 
 There are several sources from which specific information about 
 different industries, and communities may be obtained. Many 
 government reports contain very valuable information. The 
 various publications of the Census Office give information on 
 the population and on the agricultural, manufacturing and rain- 
 ing industries. The Internal Revenue Bureau publishes statis- 
 tics on income based on the income tax returns. The Depart- 
 ment of Agriculture publishes many publications bearing on 
 
512 MARKETING 
 
 agricultural conditions, live stock, crop values, etc. The Bur- 
 eau of Foreign and Domestic Commerce, of the Department of 
 Commerce, publishes much information bearing on our foreign 
 trade and on opportunities for the sale of American goods 
 abroad. The Interstate Commerce Commission, Tariff Com- 
 mission, Federal Trade Commission, and many other Govern- 
 ment departments and bureaus publish information that may be 
 very valuable in determining the markets for various products. 
 Many States also publish figures showing the population, re- 
 sources, and industries of their various counties and cities. For 
 example the 16th Biennial Report of the Commission of Agri- 
 culture and Labor of North Dakota shows by counties the num- 
 ber of farms, acreage and yield of various crops, live stock, 
 and live stock products, population, farm labor, manufacturing 
 industries, etc. 
 
 Trade papers and trade associations often gather and publish sta- 
 tistical information and directories of the trades represented. 
 The man in search of information about any particular trade 
 or industry would do well to secure the names of the papers 
 and associations representing the trade and ascertain what in- 
 formation they are able to furnish. 
 
 Directories: City, telephone, and trade often furnish helpful infor- 
 mation. 
 
 Local chambers of commerce and boards of trade often are glad 
 to furnish information about their communities. Real estate 
 dealers and banks may also have such information for dis- 
 tribution. Railroads often can furnish information, at least of 
 a general character, concerning the territories served. 
 
 CHAPTER XIX— QUESTIONS 
 
 1. Name some of the important factors that are helpful in de- 
 
 termining the demand for different articles. 
 
 2. Name some of the sources from which information useful in 
 
 making market analysis may be obtained. 
 
 3. Suppose a company is organized to produce an improved electric 
 
 heater which will operate on a fuel cost only slightly above 
 that of artificial gas. What sales may the company hope to de- 
 velop? If the heater is still further improved to compete in 
 operating cost with natural gas how much will the potential 
 market be increased? i 
 
MARKET ANALYSIS 513 
 
 4. Suppose the heater in the above example has a factory cost of 
 
 $7.00, what price would you recommend be charged the con- 
 sumer? Why? What sales could be expected at $25? How 
 much would a reduction to $15 increase sales? A reduction 
 to $12? 
 
 5. It is proposed to open a store handling the better grade of fur- 
 
 niture, rugs and draperies in a manufacturing town of 25,000 
 population. The town is located in a rich farming district and 
 has a large trade with the farmers. At the present time the 
 stores handle only medium and low-priced furniture, the people 
 desiring a better grade of goods are forced to go to the larger 
 cities for them. What facts should be ascertained before decid- 
 ing to start such a store? 
 
 6. In recent years the sale of several calculating machines has been 
 
 actively pushed by advertising and personal salesmanship. An 
 inventor has what appears to be a better machine than any of 
 those on the market. It is electrically operated. It is simpler 
 than the present electrical machine and faster than the present 
 hand machines. He has interested a group of capitalists in the 
 proposition but before putting up the factory they want a care- 
 ful analysis of the selling possibilities of the machine. How 
 would you proceed to get the desired information? 
 
 7. A wagon factory located in a southern state had established a 
 
 good reputation for its wagons. Its wagons were well liked by 
 both farmers and lumbermen. Competition in this section was 
 very keen. Due to the weight of a wagon, the high freight 
 charges made it very hard for this concern to sell its wagons 
 more than ISO or 200 miles from its plant. Its market was 
 therefore limited. There appeared to be an opportunity for 
 the profitable manufacture of buggies. A subsidiary company 
 was organized to make buggies, the reputation of the wagon 
 being counted upon to help introduce the buggies. The buggy 
 factory was started about 1906. At this time automobiles were 
 just coming into general use but as yet very few had been sold 
 in this section. Within a very few years automobiles came 
 into use in this section and in less than ten years they were so 
 generally used that the demand for buggies had been seriously 
 curtailed. Would a careful analysis of the market have pre- 
 vented the organization of the buggy company? 
 
Chapter XX 
 
 CHOOSING A METHOD OF DISTRIBUTION 
 
 Importance of choosing proper method. — After 
 determining that a market exists for his product one 
 of the first problems of the manufacturer is to choose 
 the best method of reaching that market. This prob- 
 lem is so important that no manufacturing scheme 
 should be launched without having the marketing 
 method definitely planned. The problem is also im- 
 portant to established concerns. It has been previous- 
 ly pointed out that they often change their method 
 of distribution due to the growth of their output and 
 organization,, due to an unsatisfactory volume of 
 sales, or due to a change in trade conditions. The 
 volume of sales may depend to a considerable extent 
 on the method of distribution. 
 
 Factors affecting choice of method. — The method 
 chosen depends upon the product, the market to be 
 reached, style, the number of articles to be marketed, 
 and the size of the seller's organization. The manu- 
 facturer of farm implements or automobiles, due to 
 the large size of the machines, will likely secure branch 
 houses or assembling plants and sell the retail dealers 
 direct while the manufacturer of a grocers' specialty 
 will likely secure brokers to sell his output. The man- 
 ufacturer of steel billets or heavy machinery due to 
 
 514 
 
METHOD OF DISTRIBUTION 515 
 
 the small number of buyers will likely sell the users 
 direct. On the other hand the shoe manufacturer, 
 due to the large number of users, will in all probabil- 
 ity utilize the services of the retailers and perhaps al- 
 so the services of the wholesalers. The manufacturer 
 of high-grade ladies ready to wear clothing is almost 
 forced to sell the retailers direct due to the rapidity 
 of style changes. The manufacturer of cheap hos- 
 iery, however, can just as easily sell through jobbers. 
 The full line manufacturer will be much more likely to 
 sell the retailers direct than the specialty manufac- 
 turer. Finally, the large concern can better afford to 
 choose a more direct selling method than the small 
 concern for the reason that its sales are larger. A 
 salesman for a nationally known and widely used 
 product may be able to secure three times as many 
 orders in a day from retail dealers as a salesman for 
 a similar but unknown product. This may explain 
 why the expense of the first salesman may be reason- 
 able while that of the second may be prohibitive. 
 
 In order to determine the proper method in each 
 case we should have the various methods in mind to- 
 gether with the advantages, disadvantages, and limi- 
 tations of each. Such information should be helpful 
 in determining the most desirable method under any 
 given set of conditions.^ The operations of the var- 
 ious middlemen have already been discussed. The 
 purpose of this chapter is to examine the usefulness 
 of the various middlemen from the standpoint of the 
 
 *The reader should review Chapter III, "Trade Channels," at 
 this point, unless it is fresh in his mind. 
 
516 MARKETING 
 
 manufacturer, or other producer, who has goods to 
 sell. 
 
 Disposal of entire output to one buyer. — The 
 sale of the entire output.of the factory to one buyer 
 is perhaps the easiest selling method. The buyer 
 may be a jobber, a chain store, a mail order house, a 
 department store, or another manufacturer. This 
 method does away with the need of salesmen, sales 
 managers, and advertising. Only one sales contract 
 need be negotiated and the organization is free to 
 devote its entire energy to problems of production. 
 If the buyer is able to take the capacity output of the 
 plant and the price is adequate this may be a very 
 satisfactory selling method. It, however, has many 
 disadvantages. 
 
 Disadvantages. — The price is likely to be such 
 that the profit will be moderate unless the seller has 
 a very efficient plant. The manufacturer is unknown 
 to the ultimate consumer and hence derives no bene- 
 fit from a high quality of product. There is a ten- 
 dency for him to turn out a product that will barely 
 meet the specifications of the buyer. As the goods 
 do not bear the producer's brand he has no good will 
 with the public. He has no sales organization, no 
 salesmen and only one buyer. He is, therefore, abso- 
 lutely dependent upon his one customer. The buyer is 
 probably aware of his position and may take advan- 
 tage of it to "squeeze" the manufacturer when the con- 
 tract is renewed. He may demand a price concession 
 or other conditions which will bear heavily upon the 
 seller If the seller refuses and loses his customer he 
 
METHOD OF DISTRIBUTION 517 
 
 finds himself with an unknown product and no selling 
 organizaHiion. He very likjcly accepts the sellers 
 terms and contents himself with a very small profit. 
 The seller, however, may demand still further con- 
 cessions at the next renewal. This may go on until 
 the seller is ruined, sells out to the buyer, or until he 
 faces squarely the problem of building up his own out- 
 let. 
 
 It must not be supposed that all buyers will try to 
 take an unfair advantage of the seller. Some are 
 broad-minded enough to realize that no permanent 
 advantage is realized by ruining the sellers and de- 
 stroying their sources of supply. Again there may be 
 many buyers capable of handling the seller's entire 
 output. In this case the manufacturer may play one 
 buyer against another and secure an attractive price. 
 This might be true, for example, with a paper mill 
 which could sell its entire output to any one of a num- 
 ber of large newspapers, or the manufacturer of auto- 
 mobile parts,, who may have several prospective cus- 
 tomers. What we want to point out here is that the 
 manufacturer who has only one customer has a very 
 insecure market and very little opportunity to build 
 up any good will for his product. 
 
 Selling through a sales company. — Some concerns 
 instead of marketing their product themselves organ- 
 ize a subsidiary sales company to handle the marketing 
 end of the business. This arrangement leaves the 
 producing company free for problems of production 
 while the sales company can devote its entire atten- 
 tion to the problem of distribution. This method is 
 
518 MARKETING 
 
 used most frequently with products that demand in- 
 tensive selling efforts. The sales company, however, 
 has to meet all the problems of marketing that would 
 have been faced by the parent concern if it had mar- 
 keted the product. No problems have been solved 
 by the organization of the sales company, hence no 
 attention need be given to it in this chapter. 
 
 Selling through sales agents. — Some manufactur- 
 ers, as well as farmers' cooperative organizations, 
 turn the marketing of their entire products over to a 
 sales agent on a commission basis. Others appoint 
 different agents in different territories. The manu- 
 facturer may place his brand on his goods so that he 
 is in a position to get the credit for a high quality 
 product. He is relieved from the necessity of main- 
 taining a large sales organization, it only being nec- 
 essary to exercise a general supervision over the activ- 
 ities of his agent or agents. The agent's remunera- 
 tion depends upon his success in effecting sales so that 
 he is likely to be active in his selling activities. The 
 agents' commission is, however, generally small, which 
 means that he cannot be expected to do very much real 
 intensive work in selling. If the producer so desires 
 he may stimulate his sales by advertising or by hav- 
 ing his agent employ specialty salesmen to call on the 
 retailers, the extra expense of course being borne by 
 the seller. If the sales agent secures a satisfactory 
 volume of sales the arrangement may prove very sat- 
 isfactory and also very cheap. 
 
 Sales agents are very often used by small specialty 
 manufacturers who are not large enough to afford an 
 
METHOD OF DISTRIBUTION 519 
 
 expensive sales organization. Small textile mills and 
 canners, as previously noted, often employ sales 
 agents. Sales agents often help to finance the manu- 
 facturers. Sometimes they advance them money or 
 endorse their notes and at other times they guarantee 
 the payment of accounts. The limitations on the use 
 of sales agents are that they may be unable to dispose 
 of the manufacturer's output except at cut prices ; and 
 since they ordinarily sell in bulk they cannot be ex- 
 pected at any time to get more than the prevailing 
 bulk price for the goods sold. It is of course possible, 
 for a manufacturer to create a consumer demand for 
 his product by advertising, and so receive a higher 
 price and a steady demand for his product. In this 
 case, however, he would probably feel that the sales 
 agent was unnecessary. He would likely either 
 handle his sales through his own organization or 
 employ brokers at a lower rate of commission than 
 paid the sales agent. 
 
 Selling through brokers. — There is in actual prac- 
 tice no clear distinction between the services per- 
 formed by sales agents, brokers, and manufacturer's 
 representatives. As a rule the broker has less author- 
 ity, less interest in the producer, and receives a lower 
 rate of commission than the sales agent. Brokers are 
 thus employed by concerns that are in a better posi- 
 tion to exercise general supervision over the market- 
 ing of their products than the concerns that employ 
 sales agents. Or it may be that a concern merely does 
 not care to give an agent so much power and yet is 
 not in a position to maintain its own force of sales- 
 
520 MARKETING 
 
 men. As pointed out in Chapter IV brokers are very 
 common in certain trades, notably groceries, textiles, 
 and bulky raw materials. 
 
 Suppose a mill is organized by local capital to pro- 
 duce standard grades of cotton cloth. None of the 
 promoters are familiar with the textile markets. The 
 superintendent employed is probably not an expert 
 on marketing and besides has little time to devote to 
 it. Such a mill is almost forced to employ a sales 
 agent or dispose of Its product through brokers. 
 
 A company organized to manufacture a grocery 
 specialty will in all likelihood sell through brokers. 
 This is the established method and besides the main- 
 tenance of a large selling organization would be ex- 
 pensive. At first such a concern probably also employs 
 specialty salesmen to do missionary work among the 
 retail grocers. Advertising may also be necessary. 
 This makes the selling expenses very high at first, 
 — brokers' commission, specialty salesmen's expenses, 
 and advertising cost — but this is regarded as a nec- 
 essary expense of breaking into the market.. When 
 the product is once established the brokers may be ex- 
 pected to keep the wholesalers stocked up while the 
 number of specialty salesmen may be greatly reduced. 
 
 Concerns that maintain their own selling organiza- 
 tions may be glad to accept orders received through 
 brokers and to allow them the customary commission. 
 This is especially true when the market is dull and the 
 sales light. At such times the manufacturer may util- 
 ize the broker to dispose of surplus stocks at low 
 prices. The surplus maybe soldunbranded at very low 
 
METHOD OF DISTRIBUTION 521 
 
 prices while the price is maintained on the branded 
 product to the regular trade. The regular customers 
 may regard this as unethical but the manufacturer 
 defends his action on the ground of necessity. Con- 
 cerns that have their own salesmen calling on the 
 wholesalers may employ brokers to give advice and to 
 solicit "fill-in" orders between the salesmen's calls. 
 Brokers may also be employed by manufacturers of 
 special equipment where there are only a few possible 
 buyers in a town. The manufacturer would find it 
 difficult to always have a salesman on hand when a 
 buyer was ready to place an order. 
 
 The advantages of the brokers are that they are in 
 close touch with market conditions, that they perform 
 their services for low rates of commission, and that 
 they are in a position to give valuable advice on mar- 
 ket conditions. There are, however, many disad- 
 vantages to the use of brokers. They cannot be ex- 
 pected to do intensive selling or to push the product 
 pf any one buyer unless they are granted exclusive 
 rights, since they often represent several sellers. They 
 generally deal in goods in bulk and cannot be expected 
 to secure more than the prevailing price for such 
 goods. In fact In order to dispose of his entire out- 
 put the seller may have to authorize his broker to cut 
 the price in order to effect sales. 
 
 SELLING TO WHOLESALERS VS. SELLING TO RETAILERS 
 
 Manufacturers of products that are handled by 
 the retail stores may sell the retailers direct or may 
 reach them through the wholesalers. The ability of 
 
522 MARKETING 
 
 the producer to perform the jobbing function satis- 
 factorily and economically will determine whether 
 or not the retailer should be sold direct. The jobbing 
 function consists of soliciting orders from the retail- 
 ers, warehousing the goods in locations convenient 
 to the retailers, supplying the retailers with small lots 
 of goods as needed, and oftentimes selling the goods 
 on credit. In deciding whether to sell the retailers 
 direct or to sell to the wholesalers, the manufacturer 
 should consider his ability to perform these services 
 economically. Some manufacturers, in order to In- 
 crease their sales rapidly, or who wish to carry their 
 policies direct to the retailers, go direct even though 
 the net price received after paying selling expenses is 
 less than could be obtained from the wholesalers. 
 
 Soliciting orders. — The ability of the manufacturer 
 to solicit orders directly from the retailers depends 
 upon the size of his sales organization and the na- 
 ture of his product. If his product is one that is gen- 
 erally used it will require a large number of salesmen 
 to call on any large proportion of the retailers with 
 any degree of regularity. Take a manufacturer of 
 a staple food for example. There are approximately 
 400,000 retail dealers in the United States handling 
 foodstuffs. If this manufacturer expects to cover 
 only one-third of the country, he has over 125,000 
 prospective customers. In a city a salesman may 
 ''call" on two dozen retail grocers In a day although 
 it is Impossible to deliver anywhere near this many 
 real sales talks. In sparsely settled rural districts a 
 salesman can scarcely average more than four or five 
 
METHOD OF DISTRIBUTION 523 
 
 calls a day. If 240 calls a month be taken as the 
 average it will require 520 salesmen to make the 
 rounds each month and 173 salesmen to make the 
 rounds once every three months. The employment, 
 training, and supervising of this number of salesmen 
 is quite a problem. District sales offices may be nec- 
 essary. In other lines such as shoes, hats, or clothing 
 there are fewer retailers but a salesman can call on 
 fewer dealers in a day. The salesman who must show 
 samples can make fewer calls. From this it is plain 
 that the concern that would sell any substantial part 
 of the retail trade direct needs a large organization. 
 Hitting the high spots. — It is much easier to "hit 
 the high spots." A concern may decide to work the 
 retailers direct in the cities and larger towns and 
 leave the scattered dealers in the suburbs, villages and 
 rural districts to the jobbers. This may be very de- 
 sirable from the manufacturer's viewpoint but the 
 jobbers may object to such an arrangement and refuse 
 to purchase his products. A very large number of 
 concerns, however, do use both methods, or "strad- 
 dle." If the manufacturer sells the retailers direct 
 in certain territories while in other territories he sells 
 only to the jobbers, the latter may feel that they are 
 protected. If, however, the manufacturer uses both 
 methods in the same territory the jobbers may well 
 complain that the manufacturer takes the cream and 
 leaves them only the skim milk. The manufacturer 
 following this policy cannot expect much cooperation 
 from the jobbers. A very large number of concerns 
 
524 MARKETING 
 
 only work the better trade and pass by the out of the 
 way dealers. 
 
 The concern with a product such as high grade 
 shoes, clothing, jewelry, hats, or furniture, which is 
 only handled by the better dealers in the towns and 
 cities finds it easier to reach the retailers direct. There 
 were, according to the 1920 census, only 2,788 places 
 in the United States having populations of over 2,500 
 and 287 cities having populations of over 25,000; 
 while there were in 1910 6,690 towns with popula- 
 tions between 500 and 2,500 and 6,673 incor- 
 porated villages of less than 500 population. In such 
 lines as clothing, hats, and shoes the principal business 
 of the wholesalers is with the small rural dealers and 
 supplying "fill-in" orders to the larger dealers. 
 
 Warehousing and distribution. — The manufac- 
 turer of a bulky product, who tries to sell the re- 
 tailers over a large part of the country, has a big 
 warehousing problem. Small goods such as jew- 
 elry, cutlery, drugs, gloves, light hardware, etc., may 
 be delivered quickly and cheaply by express or parcel 
 post. But in order to supply the retailers promptly 
 with more bulky goods stocks should be carried at 
 convenient shipping points throughout the country. 
 In order to reduce the transportation costs it is de- 
 sirable to ship carloads to points near the retailers 
 so that the less than carload freight rates will have to 
 be paid only on short hauls. Jobbing centers have 
 grown up largely as the result of favorable long-dis- 
 tance carload rates. 
 
 Branch houses. — The manufacturer who sells the 
 
METHOD OF DISTRIBUTION 
 
 525 
 
 
 to- 
 
 
 
 Urban and Rural Population in 1920 
 
 retailers direct may secure his own branch houses, 
 may rent space in public or private warehouses, or may 
 employ others to act as his transfer agents and re- 
 ceive and ship goods on his orders. The meat pack- 
 ers have established their own branch houses. In 
 1918 the number of branch houses operated by the 
 five largest packers were as follows. Armour & Com- 
 pany, 366; Swift & Company, 343; Morris & Com- 
 pany, 154; Wilson & Company, 117; and the Cud- 
 
526 MARKETING 
 
 ahy Packing Company, 113. The National Biscuit 
 Company has 320 local branches.^ The use of 
 branch houses is common with the farm implement 
 manufacturers. Twenty-seven of the larger manu- 
 facturers had in the United States in 1918, 282 
 branch houses, 444 transfer stocks or agents and in ad- 
 dition sold to 140 jobbers. Sales organizations are 
 generally maintained at the branch houses; while 
 transfer stocks are simply stored at convenient points 
 for delivery in less than car lots to the surrounding 
 dealers. For example, a certain dealer may be ap- 
 pointed transfer agent. He receives the goods in car 
 lots and on order of the manufacturer has them ship- 
 ped to nearby retailers. 
 
 The manufacturer who d'oesn't want to tie up his 
 capital in branches and incur the expense of main- 
 taining branch organizations may arrange with ware- 
 house companies or dealers to receive and store his 
 goods and ship to the retailers on his order. 
 
 Pooled cars. — Pooled cars may be used to keep 
 from carrying stocks scattered over the country and 
 at the same time take advantage of carload freight 
 rates. Arrangements are made with certain persons, 
 perhaps transfer companies, at distributing points to 
 act as agents. A number of small shipments are 
 packed and addressed as if to be shipped direct to the 
 purchasers but instead are loaded into a car and con- 
 signed to the agent at the distributing point. The 
 agent breaks up the car and has the goods delivered 
 
 'Frederick, J. George: "Modern Salesmanagement," p. 87. 
 
METHOD OF DISTRIBUTION 527 
 
 or the bills of lading issued to the various purchasers. 
 This method saves on freight charges. It may, how- 
 ever, cause delay in many shipments due to the dis- 
 tance between retailers and factory or to orders being 
 held until enough are accumulated to fill a car to a 
 particular destination. It may also be impossible to 
 ship certain orders in pooled cars so that the saving 
 is not realized on all shipments. Goods from sev- 
 eral manufacturers to one dealer are often shipped 
 in one car. 
 
 Expense of warehousing services. — ^The manu- 
 facturer covering a large part of the country and sell- 
 ing the retailers direct may be able to supply the 
 warehousing and quick delivery service but he can do 
 so only by incurring additional expense. This expense 
 may be greater or less than the similar expense in- 
 curred by an independent wholesaler. A great many 
 manufacturers cover only a small part of the country, 
 generally that part nearest their plants. In such 
 cases the concern may be able to supply its customers 
 satisfactorily from its factory. Very few concerns 
 attempt national distribution when first started. If 
 they grow they cover more and more territory until 
 some come to have really national distribution. 
 
 Extension of credit. — Perhaps it is easier to ex- 
 tend credit to the retailers than to solicit orders from 
 them and supply them with the goods as needed. This 
 follows from the fact that the manufacturers selling 
 the wholesalers often have to extend them a certain 
 amount of credit. Nevertheless the extension of 
 credit to a large number of small retailers involves 
 
528 MARKETING 
 
 a great deal of work in gathering information, pass- 
 ing on applications, and collecting small accounts. It 
 also means that credit must be extended or denied to 
 many retailers on the meager information obtained 
 by salesmen on their regular calls or contained in re- 
 ports of the mercantile agencies. Many of the small 
 retailers are not even listed in the directories. The 
 maintenance of the larger credit departments and the 
 larger risks assumed adds to the expense of selling 
 the retailers direct. The small or the rapidly grow- 
 ing concern may need all the capital it can raise for 
 other purposes and might have its resources very much 
 strained by supplying credit to retailers. In most 
 lines cash sales are not yet practicable although the 
 use of trade acceptance provides the seller with securi- 
 ties that may be discounted at the banks. 
 
 Limitations on the use of wholesalers. — One of 
 the chief objections of sales to the wholesaler is that 
 many of them are not in a position to actively push 
 the sale of any one product. A wholesaler may 
 handle anywhere from 1 to 80,000 items. Those 
 handling several thousand items cannot push the sale 
 of each article. Many jobbers are not anxious to 
 handle goods for which a consumer demand does not 
 exist. The manufacturer who has sold his goods to 
 a large number of jobbers may find it still necessary 
 to do missionary work among the retailers or to carry 
 on extensive advertising to create a demand among 
 the consumers. The use of specialty salesmen to so- 
 licit orders from the retailers to be filled through the 
 jobbers has been previously explained, (see chapter 
 
METHOD OF DISTRIBUTION 529 
 
 VI). Other concerns maintain traveling forces whose 
 functions arc to call upon the retailers to secure their 
 good will, supply them with advertising matter, help 
 them with window displays and give them advice as 
 to the handling of goods rather than to solicit orders. 
 
 Some concerns make a bid for the jobbers active 
 support by allowing them a large margin of profit, 
 perhaps 40 or SO per cent of the cost of goods. The 
 jobber may be sold at half the retail price to the con- 
 sumer. This will allow the jobber to make 40 per 
 cent and the retailer 43 per cent on their respective 
 costs. Some concerns give the jobbers' salesmen spec- 
 ial inducements to push the sale of their goods. This 
 practice is coming to be recognized as an unfair prac- 
 tice and certainly should not be done without the 
 knowledge and consent of the jobbers. 
 
 It may be asked why the jobbers are used if it Is 
 still necessary for the manufacturer to go over their 
 head to stimulate sales. In the first place it is much 
 cheaper for the manufacturer to have his representa- 
 tives call on the retailers infrequently than to have 
 his salesmen call on them regularly. In the second 
 place the jobbers still perform the function of ware- 
 housing the goods and supplying them to the retail- 
 ers as needed. In the third place the jobbers still ex- 
 tend credit to the retailers. 
 
 Disadvantages of selling to wholesalers. — Some 
 disadvantages of selling to the jobbers are the fol- 
 lowing : 
 
 The manufacturer loses contact with the retail 
 dealers unless he employs specialty salesmen. 
 
530 MARKETING 
 
 The jobber may at any time discontinue any manu- 
 facturer's line to take over a competitive line or to put 
 out his own branded goods. 
 
 The jobber may refuse to carry out the manufac- 
 turer's policies or to resell at the suggested resale 
 prices. 
 
 Types of manufacturers who should sell to re- 
 tailers. — It is very hard to generalize as to just what 
 types of manufacturers should sell to the jobbers and 
 what types should sell to retailers. As a general rule, 
 however, it appears that the following types may sat- 
 isfactorily sell to the retailers : manufacturers of a 
 full line or a large family of products ; manufacturers 
 of products that have to be actively pushed in order 
 to attain a satisfactory distribution; manufacturers of 
 style goods that need to reach the retailers as quickly 
 as possible; and manufacturers of large or valuable 
 articles that are bought in large enough units to jus- 
 tify the salesmen's expenses. Bulky goods such as 
 coal, hay, lumber, brick, corn, etc. should be shipped 
 as directly as possible to the retailers to save trans- 
 portation and handling costs. 
 
 Proctor and Gamble's change to the retailers. — 
 The change in selling policy adopted by Proctor and 
 Gamble in the summer of 1920 by which the jobbers 
 were almost entirely eliminated in the sale of their 
 product attracted considerable attention due to the 
 widespread use of the firm's products. This firm's 
 most widely distributed product is "Ivory" soap which 
 is handled by between 250,000 and 300,000 retailers; 
 "Crisco," a cooking fat, is also very widely used al- 
 
METHOD OF DISTRIBUTION 531 
 
 though not nearly so well known as "Ivory" soap; 
 and some less known products. The firm had been 
 selling direct to the retailers in New York for some- 
 time and on July 1, 1920, extended this policy to the 
 whole country, although it is understood that several 
 jobbers in the more sparsely settled sections still han- 
 dle their goods. The jobbers were very much per- 
 turbed over the change but started to push other 
 brands as soon as their Proctor and Gamble goods 
 were disposed of. 
 
 Success of the P. & G. plan. — The success of the 
 new plan was awaited with keen interest. Soap is not 
 generally supposed to be an article adopted to direct 
 selling and Proctor and Gamble's line is not a long 
 one. After the plan had been In operation for six 
 months information was gathered from the jobbers 
 that indicated that they had been able to keep up their 
 soap sales by pushing other brands. A short time 
 later an official of Proctor & Gamble stated that the 
 sale of "Ivory" soap has been well maintained al- 
 though the sale of "Crisco" and the less important 
 brands had fallen off somewhat. This falling off he 
 attributed to the general business depression and not 
 to the change in selfing policy. He further stated that 
 his concern was thoroughly satisfied with the changed 
 selling method. There Is such a strong consumer 
 demand for "Ivory" soap that the retailers are prac- 
 tically forced to carry it regardless of where it must 
 be purchased. In commenting on this point Haney 
 remarks: "In my judgment something like 75 per 
 cent of the retail grocery dealers would prefer to deal 
 
532 MARKETING 
 
 with grocery jobbers, and this will always make a 
 tendency to buy soap from jobbers rather than from 
 any direct selling manufacturer."^ The experience of 
 Proctor & Gamble seems to demonstrate that a large 
 company with a well-introduced product can success- 
 fully market it to the retailers even though the line is 
 short and the average orders small. It does not ap- 
 pear what, if any, benefits the consumers will derive 
 from such a change.* 
 
 Exclusive agencies. — Manufacturers selling the 
 retailers direct should give careful consideration to 
 the wisdom of distributing their goods through deal- 
 ers who are granted the exclusive rights of handling 
 their products in their respective territories. Manu- 
 facturers selling through wholesalers may also at 
 times find it desirable to grant exclusive agencies. Ex- 
 clusive agencies are more often used with shopping 
 lines — clothing, shoes, household furnishings, farm 
 implements, automobiles, machinery, boxed candy, 
 etc., although they may occasionally be used in the sale 
 of convenience lines. Such agencies secure greater co- 
 operation from the dealers. The dealer who has an 
 exclusive agency is likely to push the sale of the goods, 
 to display them better and advertise them more than 
 he would if he did not have the exclusive agency. The 
 willingness to grant exclusive agencies may enable the 
 manufacturer to induce the best dealers to handle his 
 
 ' Haney, Lewis H., Director New York University Bureau of 
 Research, writing in the Journal of Commerce of March 12. 1921. 
 
 ' See discussion in Journal of Commerce, February 19, March S, 
 and March 12, 1921. 
 
METHOD OF DISTRIBUTION 533 
 
 goods and to carry complete lines. The reason for 
 granting exclusive agencies is the belief that more busi- 
 ness can be secured from one good dealer in a town 
 who pushes the sale of the goods than from several 
 dealers none of whom have any special interest in the 
 goods. The manufacturer selling to exclusive agen- 
 cies needs fewer salesmen, spends less for bookkeep- 
 ing, and assumes less credit risk than the manufac- 
 turer who tries to sell to all the retailers. 
 
 On the other hand exclusive agencies limit the num- 
 ber of dealers handling a product and so may limit 
 sales. This is especially likely to be true if the agen- 
 cies are poorly placed or if the dealers are given too 
 much territory. Too much territory can easily be 
 granted in large cities. In such cities it may be hard 
 to find a single dealer, even if he has several stores, 
 who satisfactorily covers the entire city. In such 
 cases the manufacturer should consider the wisdom of 
 giving the agency to different dealers located in differ- 
 ent parts of the city. It is doubtful if it is good policy 
 for a manufacturer of convenience goods to grant 
 exclusive agencies (except perhaps to chain stores) 
 unless it is impossible to otherwise induce dealers to 
 handle the goods. 
 
 The dealer with an exclusive agency can take full 
 advantage of the manufacturer's advertising. He can 
 connect his own name with that of the manufacturer 
 and get the advantage of both. The exclusive agency 
 is valuable to the dealer if the goods are of high 
 quality and have a good reputation. A hardship is 
 often suffered by a dealer who has an agency taken 
 
534 MARKETING 
 
 from him after he has spent time and energy building 
 up a market for the goods. When the International 
 Harvester Co. agreed with the Department of Jus- 
 tice to sell to only one dealer in a town it was faced 
 with the necessity of withdrawing agencies from deal- 
 ers in towns where it had formerly allowed different 
 dealers to handle different brands. Many dealers 
 felt that this was a great hardship. 
 
 It is legal for a seller to agree to sell to only one 
 dealer in a given territory but it appears to be illegal 
 under the Clayton Act for a dealer to agree with a 
 seller to handle no other competing products. The 
 object of this provision was to keep the market open 
 for all sellers. Section 3 of this Act contains the fol- 
 lowing: — "It shall be unlawful for any person en- 
 gaged in commerce ... to lease or make a sale 
 . . . of goods / . . . or fix a price . . . 
 or discount from, or rebate upon such price on condi- 
 tion . . . that the lessee or purchaser thereof 
 shall not use or deal in the goods ... of a 
 competitor . . . where the effect of such lease, 
 (or) sale . . . may be to substantially lessen 
 competition. ..." 
 
 SELLING DIRECT TO CONSUMERS 
 
 New products. — Most manufacturers of widely 
 used merchandise prefer to dispose of their products 
 through middlemen. Many of those that have gone 
 direct to the consumers have done so because they 
 failed to secure a satisfactory volume of sales through 
 the middlemen. Manufacturers with new products 
 
METHOD OF DISTRIBUTION 535 
 
 that require demonstration and intensive selling ef- 
 forts are likely to go direct to the consumers for the 
 reason that the dealers are unable to sell their prod- 
 ucts. Besides if the manufacturer has to sell the 
 consumer what is the reason for allowing the dealer 
 a profit on the article ? Many such articles are sold 
 through the dealers after they have been brought into 
 general use . In this class might be mentioned sewing 
 machines, electric and gasoline irons, typewriters, kit- 
 chen cabinets, aluminum cooking utensils, and dozens 
 of other articles that are now regarded as standard 
 merchandise. A similar class of products that is 
 often sold direct consists of novelties or luxuries that 
 people can do without and which many will buy only 
 when urged to do so. In this class might be mention- 
 ed books, magazines, musical instruments, and en- 
 larged portraits. The manufacturer of such prod- 
 ucts may find the public so indifferent to the value of 
 his products that he is forced to keep sticking them 
 under their noses either through printed advertise- 
 ments, or so-called "agents." This follows from the 
 fact that the demands upon the average man's purse 
 are so great that he buys only those extras that are 
 most strongly or frequently offered to him. 
 
 Goods unsuited to dealers, — Another class of 
 products sold direct consists of goods that can- 
 not be carried on the dealers' shelves. In this class 
 come such widely different products as fruit trees, life 
 insurance, and heavy machinery. The only way that 
 a dealer can handle such products is to act as an agent 
 in soliciting orders. 
 
536 MARKETING 
 
 Unknown brands. — Many manufacturers whose 
 products are adapted to dealer distribution sell direct 
 to the consumers because the dealers cannot or will 
 not secure a general distribution of their products. 
 This may simply mean that other brands are now in 
 general favor. The manufacturer of the less known 
 brand instead of calling in a receiver may attempt to 
 distribute his product himself. Direct mail order 
 selling may be tried in the belief that prices can be 
 lowered with a resultant increase in demand. In this 
 class may come producers of everything from soap to 
 woven wire fence, from shoes to buggies, and from 
 pictures to cream separators. 
 
 Direct selling is more general in the rural districts 
 than in the cities for the reason that stocks carried 
 by the rural stores are much more limited than those 
 carried by the various city stores. 
 
 Methods of selling consumers direct. — The three 
 common methods of selling the consumer direct are 
 by mail advertising; by the use of specialty salesmen 
 or canvassers; and by the establishment of retail 
 stores. The two latter methods involve the use of 
 salesmen so that the human effort required in distri- 
 buting the product may not be lessened. Perhaps 
 the manufacturer's retail stores should not be re- 
 garded as direct selling as they duplicate the facilities 
 of the independent or unit retail stores. The manu- 
 faturer in effect says to the retailers, "you do not carry 
 out my policies," or "you do not push the sale of my 
 product, therefore, I will establish my own stores." 
 Some manufacturers establish one or two stores in 
 
METHOD OF DISTRIBUTION 537 
 
 order to come into contact with the consumers, feel 
 out the demand; and work out methods for the use 
 of the dealers handhng their goods. This, however, 
 can scarcely be regarded as direct consumer selling. 
 
 Selling by mail has already been somewhat fully 
 discussed in the chapter on Mail Order Houses 
 (Chapter XII), and need not be discussed again at 
 this point. 
 
 Selling through specialty salesmen. — ^The con- 
 cern that sells the consumer through specialty sales- 
 men, canvassers or "agents" has many problems in 
 the hiring, training, and supervising of these salesmen 
 as well as in the delivery of goods, and the making of 
 collections. We are speaking now of products of re- 
 latively small value which are sold direct because of a 
 lack of demand, and not of such products as heavy 
 machinery or life insurance which are unsuited to sale 
 through the dealers. It is difficult to secure the best 
 type of salesmen. Those obtained are often inex- 
 perienced or are "just working" until something bet- 
 ter turns up. Not that such salesmen cannot earn 
 large commissions but those that do are very often 
 picked up by other organizations that can offer them 
 better pay, or easier work. The work is often hard 
 and unpleasant because they are selling goods which 
 most of the prospects do not want when the sales- 
 man calls. The reason for the "agent" coming into 
 such disrepute is that so many unscrupulous salesmen 
 have tried to browbeat the prospects into buying. 
 
 Securing a treiined salesforce. — To keep a large 
 force of salesmen recruited and trained in even the 
 
538 MARKETING 
 
 rudiments of salesmanship; and to keep them con- 
 tented and enthusiastic, which is so necessary for suc- 
 cessful selling, necessitates a considerable organiza- 
 tion to write letters and visit the men in the 
 field. Some concerns advertise for salesmen and ap- 
 point all applicants as "agents." The concern that 
 does this has little regard for its reputation for many 
 such salesmen will misrepresent the firm's goods either 
 through ignorance or deliberate falsehood. Some 
 concerns make a habit of recruiting salesmen from col- 
 lege students who agree to work during the summer 
 vacations. This may secure a high type of men but 
 means that the concern has salesmen in the field only 
 three months out of the year. 
 
 It is of course possible to secure a fairly perma- 
 nent and fairly well-trained force of salesmen but it is 
 no easy matter. The employing and training of these 
 men, the supervising of them in the field, assigning 
 them satisfactory territories, of adjusting their small 
 complaints, and of writing them "pep" letters In- 
 volves considerable expense. These men must some- 
 times be sold on credit. The goods generally have 
 to be packed and shipped out in small lots, but no 
 smaller than is necessary when the retailers are sold 
 direct. In addition to all of this overhead expense 
 the salesmen must be allowed fairly large commissions 
 commonly from 25 to 75 per cent of the selling price. 
 Perhaps the most common commissions are between 
 40 and 60 per cent of selling price (or 66 2-3 to ISO 
 per cent of price to salesmen) although higher rates 
 are by no means unknown. From these facts it is 
 
METHOD OF DISTRIBUTION 539 
 
 apparent that selling the consumers through specialty 
 salesmen is not a cheap selling method. It may be 
 more expensive than selling through the jobbers and 
 retailers. The use of specialty salesmen to go to 
 consumers to Introduce new products which are reg- 
 ularly handled by retail dealers involves many of the 
 same problems but the expense is one for develop- 
 ment or advertising and is not expected to be perma- 
 nent. 
 
 CHAPTER XX— QUESTIONS 
 
 1. The Dominion Canning Co., packs a fancy grade of vegetables 
 and fruits which have for years been sold under its own 
 brands. Its goods are handled by a large number of the better 
 class grocery stores through the eastern part of the United 
 States. The goods sell to the consumers at fancy prices, which 
 tends to curtail the demand for them. The company employs 
 specialty salesmen who call upon the retailers once a year to 
 solicit orders which are filled through the wholesale grocers. 
 The concern also has brokers in all the larger cities who are 
 paid commissions on all sales made in their territories. The 
 wholesalers distribute and collect for the goods sold by the 
 canners' salesmen and also forward additional orders from 
 time to time. Information, however, indicates that the whole- 
 salers make little attempt to sell these goods and really only 
 forward the orders voluntarily given by the retailers. The 
 brokers are used to dispose of any surplus product especially 
 standard grade goods which are not pushed by the companies' 
 salesmen. 
 
 The company has a high cost of production due to its care in 
 turning out a high grade and varied product. This high cost 
 of production coupled with a high marketing expense has 
 reduced the company's profits to a very unsatisfactory level. 
 The company could pack lower grade products and sell through 
 the brokers to the jobbers very largely under the latters' 
 brands. Lower prices would be received but both production 
 
540 MARKETING 
 
 and marketing expenses would be materially lowered. The 
 company, however, has spent years in introducing its brands 
 and building up a reputation for its product and feels that its 
 brands are too valuable to be given up. What should be done? 
 
 2. How should the improved electric heater mentioned in the third 
 
 and fourth questions to Chapter XIX be marketed? 
 
 3. A small company is organized to produce side windsnields for 
 
 automobiles. It is believed by the organizers that this is some- 
 what superior to the windshields now on the market. What 
 method of distribution should be adopted? 
 
 4. A young man has been importing jewelry and bric-a brae from 
 
 Japan and selling to the smaller retailers. Many of the larger 
 retailers have their own buyers in Japan. He has been very 
 successful and has become familiar with the sources of the 
 goods in Japan and the details of handling the shipments. His 
 business has been prosperous and has grown until he finds him- 
 self unable to properly look after both the importing and sell- 
 ing of the goods. He can sell to wholesalers at a greatly re- 
 duced rate of profit or he can employ salesmen to sell to the 
 retailers devoting most of his own time to importing the goods 
 and only exercising a general supervision over the salesmen. 
 What course should he pursue ? 
 
 5. The Star Knitting Company produces a medium priced line of 
 
 cotton hosiery. A limited amount of advertising has been 
 done and the product sold to the wholesalers. The company 
 now finds it necessary to make a change of policy if its sales 
 are to be increased. It considers going direct to the retailers. 
 Another suggestion is to continue to sell the wholesalers, but 
 to occasionally send special representatives to the retailers to 
 stimulate their interest in the company's product. What policy 
 do you recommend ? 
 
 6. A talking machine manufacturer finds the market crowded and 
 
 competition keen. He considers selling direct to the consumers, 
 abolishing all retail agencies, and soliciting orders by mail or 
 by appointing a large number of specialty salesmen to call on 
 the consumers. What factors should be considered before de- 
 ciding to take this step? Which method of direct selling would 
 produce the best results? If he solicits mail orders what classes 
 of periodicals should he use for advertising? If he employs 
 specialty salesmen what territory should he cover? 
 
METHOD OF DISTRIBUTION 541 
 
 When an eastern city went dry a local brewery took up the 
 manufacture of ice cream. Due to the excellent quality of 
 the cream, the sales were reported to be almost double the 
 former sales of beer. The beer had been sold to wholesalers 
 in car lots. The owner was an old man, and, according to 
 reports, he was unable to adjust himself to the new marketing 
 methods and sold the plant. Outline the methods necessary in 
 the sale of ice cream. How do these differ from the methods 
 used by this concern in selling beer? 
 
Chapter XXI 
 
 PRICE DETERMINING FACTORS 
 
 Importance of prices. — Prices are one of the most 
 important things in business. Accuracy in forecast- 
 ing price changes may mean success while mistakes 
 may mean failure. Some concerns have attained 
 success as a result of low prices and a large volume 
 of business and others as a result of high prices and 
 a sales appeal based on quality. A price too low may 
 mean loss. A price too high may mean idle factories, 
 crowded warehouses and — loss. Price and quality 
 cannot be considered separately. A low price means 
 nothing until quality is considered. The concern that 
 says it doesn't care about price, that it doesn't sell its 
 goods on price, that high prices get the buyers* minds 
 on quality on which basis all sales should be made, 
 may be able to get 10, 15, or even 25 per cent more 
 than others for its product but let it try to get 100 or 
 200 per cent more and see how its sales will slump. 
 
 Changes in price levels. — It is well known that we 
 have periods of rising prices and periods of falling 
 prices. These are quite different things from the daily 
 and weekly fluctuations in prices. These changes in 
 price levels together with the accompanying changes 
 in industrial activity have been called business cycles. 
 During a period of rising prices everyone wants to 
 
 542 
 
PRICE DETERMINING FACTORS 543 
 
 buy as the goods will be worth more when they are 
 sold or consumed in the future than at the time pur- 
 chased. Merchants and manufacturers are making 
 money on their inventories and hence buy in advance 
 of immediate needs. The consumer does the same to 
 a lesser extent. The customer says "shoes are too 
 high. I will make my old ones finish the winter", to 
 which the retail salesperson replies, "they'll be high- 
 er, Sir, in the fall." Whereupon the customer buys 
 one pair and perhaps two pairs. This freedom In 
 buying means a strong demand and Is one of the fac- 
 tors contributing to the advance of prices. 
 
 On the other hand nobody wants to buy when prices 
 are falling. The merchants and manufacturers do 
 not want to lose money on inventories and so buy from 
 hand to mouth. The consumer makes his old shoes 
 .finish the winter. Demand is weak which tends to 
 reduce prices. All holders of goods want to unload 
 before prices go any lower. This large supply helps 
 the downward movement. Both rising and falling 
 prices are cumulative. Once started a price move- 
 ment may go a long distance on its own momentum. 
 
 It is very important to all business concerns to an- 
 ticipate changes in price movements. If prices are 
 going up large purchases may be made to advantage. 
 If prices are going to fall it Is wise to buy lightly and 
 push sales so that stocks will be light when the break 
 comes. The correct forecasting of such changes is, 
 however, very difficult. Wrong forecasts often 
 result in losses. For this reason many successful busi- 
 ness men have made it a rule to always buy conserva- 
 
544 MARKETING 
 
 tively except at times when all underlying conditions 
 point to price advances. Conservative buying pre- 
 vents large losses when prices break. 
 
 Factors determining changes in price levels. — 
 The two underlying factors that are credited with 
 causing changes In price levels are first the supply of 
 and demand for goods, and second the quantity of 
 money In circulation. Neither of these factors can be 
 discussed at length here. The law of supply and de- 
 mand is explained In most books on the Principles of 
 Economics and is a matter of daily discussion among 
 business men and In business periodicals. It may, 
 however, be well to say a few words about the quan- 
 tity theory of money. 
 
 The quantity theory of money. — The quantity 
 theory of money is much less understood and Is still 
 in the controversial state. The essence of the quantity 
 theory, briefly stated, is that prices are the result of 
 dividing the total of commercial transactions by the 
 total amount of money available to perform these 
 transactions. In the amount of money In circulation 
 must be counted not only metallic and paper money 
 but bank deposits as. In the United States, most bills 
 are paid by checks. We must also consider the rapidity 
 with which money circulates. Small coins in a busy 
 retail section may change hands several times a day 
 while money tucked away in tin cans and bedtlcks 
 may change hands only a few times a year. The same 
 is true of bank deposits. One man may issue checks 
 every few days equal to his average deposits while 
 another may take two or three months to withdraw 
 
PRICE DETERMINING FACTORS 545 
 
546 MARKETING ' 
 
 his average balance. The theory may be expressed 
 by the following formula. P represents price, or price 
 
 level. N represents the number or amount of com- 
 mercial transactions; or the volume of trade. M 
 represents the amount of money available including 
 checking deposits; and R represents the rapidity of 
 circulation. 
 
 The advocates of the quantity theory claim that 
 they can forecast changes in the price level by changes 
 in the amount of "money" in circulation. The anti- 
 quantity theorists deny this, saying that the amount 
 of money is the result and not the cause of changes 
 in price levels. If prices double other things being 
 equal, then we need twice as much money to carry on 
 business. Few economic theories have been discussed 
 with any more interest during recent years. There is 
 a great difference of opinion among both the econo- 
 mists and business men. The quantity theorists seem 
 to be in the majority among the economists, at least 
 judging by the noise they make. Judged by the same 
 criterion, the anti-quantity theorists seem to be in the 
 majority among the bankers and business men. 
 
 If true, the quantity theory is of fundamental im- 
 portance to business men for the reason that by study- 
 ing the changes in the amount of money they could 
 forecast or predict changes in the price level, or trend 
 several weeks in advance. This information would be 
 
PRICE DETERMINING FACTORS 547 
 
 of tremendous value to all persons engaged In buy- 
 ing and selling goods. If, on the other hand, the 
 quantity of money in circulation is the result and 
 not the cause of price changes it is of little practical 
 value to buyers and sellers of goods. 
 
 Factors to be considered in fixing prices. — The 
 official charged with the responsibility of fixing a 
 concern's prices must consider not only the trend of 
 prices but many other factors such as the cost of the 
 goods, competitors' prices, the quality and reputation 
 of the product, the customary price, and what "the 
 traffic will bear," or what the consumers will pay 
 without a serious falling off In demand. 
 
 Cost of goods. — Some people seem to think that 
 all the sales manager has to do In naming prices Is to 
 ascertain the factory cost of the goods from the 
 firm's accountant, add to this his selling expense 
 and what is considered a fair profit, print his price 
 lists and send his salesmen out to get the business. 
 If It were as simple as this, business would be a snap, 
 all would succeed and there would be no failures. 
 Over a short perio d co st ha^_^erx_little,tjO__do,:with 
 prices. The merchant who paid $10 for silk shirts 
 and can get only $5 for them must sell them for $5. 
 The farmer who has wheat that cost him $1 to 
 raise will not sell it for $1.10 if the market price 
 is $1.60. The relation of cost tcrprice^sjhis— ^at 
 over a long period_tEose_£roducersjwhose costs of 
 production arc above the market price will be forced 
 out of business. On the other hand if the price is 
 considerably above the cost of production the large 
 
548 MARKETUSTG 
 
 profits will tend to increase output by drawing in 
 new producers or by stimulating the output of those 
 already in business. This increased output will 
 increase competition until prices fall to the cost of 
 production by the marginal producers. (The non- 
 profit producers who are just managing to stay in 
 business). Thus under a competitive system over 
 a long period of time prices tend to equal the cost 
 of production by the marginal producers. During 
 the period of government price fixing in 1917 and 
 1918 prices were fixed on what was known as the 
 bulk line principle. That is, prices were fixed high 
 enough to allow the bulk of the output, say 70, 80, 
 or 90 per cent, to be produced at a profit. 
 
 One of the most widespread fallacies is that 
 prices are based on the average cost of production. 
 As previously pointed out in Chapter XVIII, under 
 a cornpedjiKe- system m^ar gin al__and not average 
 co'sts are__the._det£niuning~-factor. 
 
 The price fixing official of a concern should, how- 
 ever, consider his costs in naming prices. If com- 
 petition forces him to name a .price below the cost 
 of production his concern should examine its pro- 
 duction methods to see If its cost can be reduced. 
 If prices are below cost as a result of price wars 
 he should consider the advisability of limiting the 
 sales and concentrating on other products. At 
 times it may be well to stop producing goods that 
 can only be sold at a loss. At other times it may 
 be well to take his losses and wait for better condi- 
 
PRICE DETERMINING FACTORS 549 
 
 tions. It may be a case of the survival of the 
 fittest. 
 
 Competitors' prices. — The sales manager must 
 consider the prices charged by his competitors. Un- 
 less his goods are of a better quality or have a better 
 reputation he can get little more than his competi- 
 tors. Business men generally try to make their 
 prices "in line" with prices of competing concerns. 
 Some men have made a practice of naming their 
 prices in this way. "If my competitor can sell at 
 that price I can do the same." Since prices must 
 be in line with the prices of others a cost accounting 
 system is regarded as a useless luxury. This is a 
 wrong attitude for the accounting system would at 
 least warn of losses so that prices could be raised 
 or production stopped. 
 
 What should be done when a fair profit can be 
 made at prices below those of your competitors? 
 Such a condition may arise from the fact that your 
 concern has a lower cost of production than your 
 competitors. Some argue that under such a condition 
 the wise policy is to reduce prices and thereby In- 
 crease the volume of sales and stock turnover and 
 hence total profits. Others argue that this is un- 
 wise as your competitors will follow your example 
 with the result that no one will gain any business 
 and the profits of all will be reduced. Before de- 
 ciding on the proper policy, the conditions in the in- 
 dustry and the probable increase in demand resulting 
 from a lower price should be considered. It may be 
 that a cut in price will so stimulate demand that all 
 
550 MARKETING 
 
 concerns will have more business and more profits 
 than before, or that some competitors will be elimi- 
 nated. Some such concerns make it a policy to keep 
 the price as low as is consistent with fair profits 
 in order to stimulate demand. On the other hand 
 if the demand is relatively inelastic a different price 
 policy may be advisable. 
 
 Quality and reputation. — The market is full of 
 similar articles that sell for different prices because 
 they are of different qualities. The old established 
 brands often sell for more while new or unknown 
 brands may sell for less than the prevailing or com- 
 mon price. One of the reasons for branded prod- 
 ucts is to free the producers from the keen price 
 competition existing on bulk products. The public 
 will pay more for a package branded product than 
 for the same product in bulk. Whether this is a 
 mistake on the part of the public does not concern 
 us here. What we are interested in at this point is 
 the value of this to the manufacturer. 
 
 Many concerns say frankly that they want to sell 
 on a basis of quality, that they do not care to com- 
 pete on a price basis, and that they purposely place 
 their prices slightly higher than others in order to 
 get the buyers' minds on quality at once. To many 
 buyers higher prices carry the idea of superior qual- 
 ity. Some people will choose the higher priced arti- 
 cle for the simple reason that they think the higher 
 price signifies a higher quality. 
 
 "Some years ago an investigation of the costs and 
 selling prices on a piece of well known broadcloth 
 
PRICE DETERMINING FACTORS 551 
 
 was made and disclosed these facts. The mill re- 
 ceived $1.65 a yard for the goods delivered New 
 York. A Fourteenth Street department store sold 
 the goods for $1.85 a yard. A store then on 
 Twenty-third Street sold the same cloth at $2; a 
 ' Fifth Avenue store, then owned by the parties oper- 
 ating the Twenty-third Street store, sold the cloth 
 at $2.50; while another Fifth Avenue store sold the 
 cloth as "imported" for $3.50 a yard. Curiously 
 enough at the time of the investigation, the store 
 selling at the highest price was buying more of the 
 goods than the other stores."^ The old grocers who 
 sold fifty cent and one dollar tea out of the same 
 package were simply taking advantage of this ten- 
 dency. Perhaps those buying the "dollar" tea got 
 more satisfaction out of drinking it than if they 
 had paid fifty cents for it. Who can tell? But a 
 lot more people paid fifty cents than paid one dollar 
 for their tea. All buyers will not pay an extra price 
 to get a slightly better quality. Although price 
 and quality cannot be separated, most people think 
 a great deal about price. This means that all sellers 
 cannot get the business of those who are willing to 
 pay extra for extra quality. If too many try for it, 
 competition may be exceptionally keen. 
 
 Quality may be based on quality of raw materials, 
 skilled workmanship, experience in production, su- 
 periority of design, cleanliness in preparation, or of 
 superiority of process. The superiority may be 
 based on a patented or secret process. Reputation 
 
 ' Journal of Commerce, January 28, 1921. 
 
552 MARKETING 
 
 means that the people think a certain brand has a 
 certain quality. As far as the seller is concerned 
 these two are sometimes pretty near the same thing. 
 The importance of a superior quality to the seller 
 is that he can get more for his product than his 
 competitors do for theirs or he can sell at the same 
 price and make a larger number of sales. Take 
 a manufacturer of farm implements, for example. 
 He makes several implements. Some of them he 
 sells at the same prices as his competitors. On a 
 particular one, perhaps a swamp or road plow, he 
 has, due to its design, a better implement than any 
 of his competitors. He can make a much better 
 profit on this than on his other implements. Per- 
 haps he makes a profit of 10 per cent on most of his 
 implements, but on this particular plow he is able 
 to make a profit of 25 or 35 per cent. 
 
 Customary price. — The price that customers have 
 become accustomed to must be taken into considera- 
 tion in fixing the prices for many articles. This was 
 more important before the war than now for the 
 reason that war costs changed prices that had re- 
 mained stationary for years. The five cent cigar, 
 the five cent loaf of bread, and the five cent street 
 car fare died hard. For a long time walking plows 
 retailed at $1 per inch for the width of cut.. 
 Thus a plow turning a 12-inch furrow retailed for 
 $12, while one cutting a 14-inch furrow sold for $14. 
 The farmers objected to paying more and for a long 
 time prices remained at this point, the manufactur- 
 ers preferring to reduce their profits or the weight 
 
PRICE DETERMINING FACTORS 553 
 
 of the plow in order to sell it so that it might reach 
 the farmer at the customary price. The manufac- 
 turers of many other products often changed the 
 size of the package in preference to changing the 
 price. The following case was called to the author's 
 attention a few months ago. The price of oranges 
 was high, but the price of the small sizes was out 
 of proportion to the price of the large sizes. The 
 explanation given was that the retail stands could 
 with diiEculty get more than five cents for an orange. 
 Consequently when the price of any particular size 
 got so high that it could not be sold for five cents 
 the retailers refused to buy. This caused a falling 
 off in demand for the larger sizes and an increased 
 demand for the smaller sizes. The result was that 
 small oranges were retailing for five cents when 
 very much larger oranges could be sold for six or 
 seven cents. Still most buyers purchased those sold 
 for five cents. 
 
 When a customary price exists the manufacturer 
 should consider it in fixing his prices. It also is 
 better to sell small convenience goods that are widely 
 used on a basis permitting their resale to the cus- 
 tomers at an even figure — 5, 10, or 25 cents for 
 example. The single coin makes it easy to buy. 
 Odd prices, such as 19, 33 or 98 cents, gives the 
 idea of cut prices, or bargains, and do attract a cer- 
 tain type of trade, but there are many places where 
 an even price is preferable. 
 
 Ethical or fair prices. — There has come down 
 through the ages a more or less vague conception 
 
554 MARKETING 
 
 of a fair, honest, or just price. There are many 
 who claim that prices are fixed by what competition 
 will allow or what the traffic will bear and that 
 ethical considerations have no influence with the 
 sellers. Perhaps this is generally true, but there are 
 many exceptions. There are many persons who fix 
 their prices to yield a reasonable profit and refuse 
 to take more even if market conditions would allow 
 them to d'o so. Perhaps the best example of this 
 is seen in the present rent situation. The author 
 knows of similar houses similarly situated, the rent 
 of which varies 50 to 75 per cent simply because 
 certain owners have seen fit to ask more than the 
 others. Those that have made moderate increases 
 say that they are making fair returns on their in- 
 vestments and that they do not want to be "profi- 
 teers." The others are simply charging what the 
 traffic will bear. The whole idea of "profiteering" 
 was an unfair price — a price that yielded more than 
 a reasonable return on the investment. The whole 
 purpose back of decrying the "profiteers" was to 
 force sellers to be content with reasonable profits. 
 
 Ethics, perhaps, plays a less important part than 
 it should in the present fixing of prices and yet it 
 must be admitted that ethical considerations do play 
 some part in the determination of prices. 
 
 Charging what the traffic will bear. — ^AU sellers 
 must be careful not to place their prices so high 
 that a serious falling off in sales results. It must be 
 remembered that demand is just as important in 
 determining prices as supply. The so called "buy- 
 
PRICE DETERMINING FACTORS 555 
 
 ers' strike" during the winter of 1920-21 meant only 
 that prices were higher than most consumers would 
 pay. This meant that prices had to be reduced to 
 levels at which the consumers would buy before sales 
 could be made. The danger of prices fixed by 
 monopolies or by agreements among competitors, is 
 that such prices will be fixed so high that demand will 
 hp curtailed. After all is said, the greatest factor 
 in curtailing demand for most goods is high prices 
 and the greatest factor in stimulating demand for 
 such goods is low prices. The cheaper a product 
 is, barring certain exceptions (e.g., goods bought for 
 their exclusiveness) the more people will buy and 
 the higher it is the less they will buy. This applies 
 to everything from potatoes^ to automobiles. 
 
 Monopoly price. — ^Ajiionop.Qly.in fixing ks prices 
 has to consider all of the factors considered by 
 other sellers except competition. If the monopoly 
 controls the supply of a given commodity and is able 
 to turn out enough of it to fill all possible demand, 
 then it has to consider primarily the demand over 
 which it has no control. Its cost of production fixes 
 the lower limit of the possible price. The monopoly 
 attempts to fix its prices at the highest point that the 
 traffic will bear, that is at the point that will yield 
 
 ' In the spring of 1920 white potatoes were very scarce and very 
 high. In spite of the high prices a large jobber told the author that 
 he was losing $1 on every barrel sold for the simple reason that the 
 falling off in demand had forced the prices below what he had paid 
 for his stock. If the demand for such a staple as potatoes is so 
 affected by a change in price it is easy to understand the effect of 
 price on the demand for luxuries. 
 
556 MARKETING 
 
 the largest net profit. If the demand for the product 
 varies widely with price the monopoly may fix a Ioav 
 price to secure a large volume of sales. If, on the 
 other hand, the demand is fairly inelastic and little 
 affected by changes in price, the probability is that the 
 price will be relatively high. 
 
 This principle may be illustrated statistically. Let 
 us suppose that a monopoly has a certain overhead 
 expense for interest, depreciation, taxes, and main- 
 tenance of property; for the salaries of superin- 
 tendents and managers; and for general office ex- 
 penses. Then there is a certain direct charge for 
 raw materials and factory, or direct, labor that 
 varies in proportion to the number of units pro- 
 duced. If the demand for the product at different 
 prices be known the net profits realized at each price 
 can be computed. Suppose that the fixed overhead 
 expense is $1,000,000 a year, that the direct charge 
 for raw materials and labor is 30 cents for each unit 
 of output, and that the demand varies as shown 
 in the following table : 
 
 'S Demand 
 
 Set 
 
 Total 
 Variable 
 
 Fixed 
 
 Total 
 
 Net 
 
 plrTnit » P»«« 
 
 Sales 
 
 Expense 
 
 Expense 
 
 Cost 
 
 Profit 
 
 $1.00 
 
 1,000,000 $1,000,000 
 
 $300,000 $1,000,000 $1,300,000 
 
 *$300,000 
 
 .SO 
 
 2,000,000 
 
 1,600,000 
 
 600,000 
 
 1,000,000 
 
 1,600,000 
 
 
 .75 
 
 3.000,000 
 
 2,250,000 
 
 900.000 
 
 1,000,000 
 
 1,900,000 
 
 '356,000 
 
 .00 
 
 4.000,000 
 
 2,400,000 
 
 1,200.000 
 
 1,000,000 
 
 2,200,000 
 
 200,000 
 
 .50 
 
 5,000,000 
 
 2,500,000 
 
 1,500,000 
 
 1,000,000 
 
 2,500,000 
 
 
 .40 
 
 6,000,000 
 
 2,400,000 1,800,000 
 
 1,000,000 
 
 2,800,000 
 
 * 400, 666 
 
 • Loss. 
 
 The first column shows the selling price, the second 
 column the number of units that can be sold at this 
 
PRICE DETERMINING FACTORS 557 
 
 price, the third column the net sales in dollars, the 
 fourth column the total variable charge at 30 cents 
 per unit, the fifth column the fixed overhead expense, 
 the sixth column the total cost and the seventh column 
 the total net profit. 
 
 It is evident that the price will be fixed at 75 cents 
 as the largest net profit is realized at this price. 
 In actual practice few cases could be found so simple. 
 The overhead charges are not absolutely fixed re- 
 gardless of output. We have, however, chosen a 
 simple example to illustrate the idea we are trying 
 to make, viz., that demand really fixes the monopoly 
 price. The reader can add other factors and make the 
 problem as complicated as he desires. The demand 
 can, of course, be ascertained only by actual trial. 
 It is so influenced by other things than price — 
 changes in general prosperity, etc. — that no monopoly 
 can ever be absolutely certain that It has its prices 
 fixed at the most profitable point. A monopoly price 
 may be a low price — at times lower than the price 
 would be under competition — but as a rule it Is safe 
 to say that monopoly prices are generally somewhat 
 higher than they would be If competition were 
 keen. 
 
 Monopoly price may be based on average cost. 
 — A monopoly, if it so desires, can base its prices on 
 its average costs letting the profits In some plants 
 offset the losses In others. The monopoly Is look- 
 ing at total net profits. This can not be done under 
 competition for the reason that the low cost pro- 
 ducer is not willing to turn his profits over to his high 
 
558 MARKETING 
 
 cost competitor. The tendency, however, is for the 
 monopoly to close the high cost plants and con- 
 centrate production in the more efficient plants. This 
 tends to lower the average cost of production. It 
 must not be assumed from this that a monopoly 
 can always produce goods more cheaply than can be 
 done by several competitors. This may or may 
 not be true. A monopoly making nice profits may 
 be satisfied to let things go along as they are. One 
 of the greatest incentives to introduce economies, 
 to devise new methods, or to install new processes 
 is the threat of loss or ruin. 
 
 What constitutes monopoly — Just what percen- 
 tage of production is necessary to constitute monop- 
 oly has never been satisfactorily determined. If 
 court decisions be followed wc may conclude that 
 a concern must control somewhere between 60 and 
 90 per cent of the total production to be so classed. 
 Outside of patented and secret process articles, and 
 a few raw materials such as nickel and aluminum, 
 there are, according to this definition, few monopo- 
 lies in the country. Yet it must be admitted that 
 the extreme competitive conditions upon which much 
 of our economic theory is based now exists in rela- 
 tively few manufacturing industries. It has been 
 modified by the growth of large Industrial corpora- 
 tions, by trade associations, by open price associa- 
 tions, by gentlemen's agreements, by the fear of 
 starting price wars, by Interlocking directorates, by 
 communities of interest, and by mutual understand- 
 ings. The Importance of large companies in fixing 
 
PRICE DETERMINING FACTORS 559 
 
 prices has been previously commented upon. In the 
 canned salmon industry, for example, two companies 
 which together pack less than 30 per cent of the 
 total output, name the prices at which about 90 
 per cent of the pack is sold.^ 
 
 'See Federal Trade Commission: "Report on Canned Foods, 
 Canned Salmon," pp. 49 and 74. 
 
 BIBLIOGRAPHY 
 
 Fisher, Irving: "Why the Dollar is Shrinking"; "The Purchasing 
 
 Power of Money"; "Stabilizing the Dollar." 
 Mitchell, Wesley C. : "Business Cycles"; "Gold, Prices and Wages 
 
 Under the Greenback Standard." 
 "Annals of the American Academy of Political and Social Science," 
 
 Volume 89. 
 Laughran, J. Laurence: "Money and Prices." 
 Kemraerer, Edwin Walter: "Money and Credit Instruments in 
 
 Their Relation to General Prices." 
 Carman, Edwin: "Money: Its Connection with Rising and Falling 
 
 Prices." 
 Burton, Theo. E.: "A Century of Prices." 
 Layton, W. T.: "An Introduction to the Study of Prices." 
 Wallace, Henry A.: "Agricultural Prices." 
 
 Ely, Richard T.: "Outlines of Economics," Chapters 10, 11 and 12. 
 Seager, Henry Rogers: "Principles of Economics," Chapters 7, 17, 
 
 18, and 19. 
 Taussig, F. W. : "Price Fixing as seen by a Price Fixer," Ouar. 
 
 Journal of Economics, February, 1919. 
 Simpson, Kemper: "Price Fixing and the Theory of Profit," 
 
 Quarterly Journal of Economics, November, 1919. 
 U. S. Bureau of Labor Statistics has many publications on prices, 
 
 index numbers, and the cost of living. 
 U. S. Department of Commerce : "Series on History of Prices Dur- 
 ing the War." 
 Sauerbeck, Augustus: "The Course of Average Prices of General 
 
 Commodities in England." 
 Many trade papers publish current price quotations. Among the 
 
 periodicals that might be of more general use in this connection 
 
560 MARKETING 
 
 might be mentioned: The New York Times Annalist, The 
 Statist, the London Economist, the Journal of Commerce, Brad- 
 street's and Dun's Review. 
 
 CHAPTER XXI— QUESTIONS 
 
 1. What is the quantity theory of money ? 
 
 2. What factors must a sales manager consider in naming his sell- 
 
 ing prices? 
 
 3. How do monopolies fix their prices? What is the difference be- 
 
 tween the methods followed by monopolies and competitive 
 concerns? 
 
 4. If a monopoly had a fixed expense of $500,000 and a variable 
 
 expense of $1 per unit of output, what would be its selling 
 price if the demand be assumed to be as follows: price $4- 
 demand for 400,000 units, price $3, demand for 600,000 units ; 
 price $2.50, demand for 900,000 units; price $2, demand for 
 1,200,000 units; and price $1.50, demand for 1,800,000 units? 
 
 5. The Jno. Doe Co., manufactures tooth paste which it believes 
 
 to be superior to most pastes on the market. The company is 
 undecided whether to have the paste sold at 25 cents and ad- 
 vertise better quality for same price or to have it priced at 
 30 or 35 cents and sold on a quality basis. Which policy should 
 be followed? Would your answer be the same if this concern 
 made flour? Automobile tires? 
 
 6. The Mason Company manufactures a high grade of men's cloth- 
 
 ing, which is sold through retail stores which as a rule handle 
 no other brand of high grade clothing. Most of these stores, 
 however, handle medium priced and cheap clothes made by 
 others. The Mason Company, although small, has a very 
 profitable trade. The Company is considering putting out a 
 cheaper product under its brand. It is believed that most 
 of the retailers would handle the cheaper goods and that they 
 could be easily sold on the reputation of the high grade cloth- 
 ing. The company anticipates no serious difficulties in expand-, 
 ing its plant and turning out the cheaper product but fears that 
 the cheaper product will injure the reputation and sale of its 
 high grade goods? What policy should be followed? 
 
 7. The Sweet Confectionery Company manufactures chocolate bars 
 
 and similar candies ordinarily sold at cigar counters, fruit 
 stands, and drug stores. Before the war the bars and similar 
 products were uniformly retailed at 5 and 10 cents and the boy 
 
PRICE DETERMINING FACTORS 561 
 
 candies at 25 and SO cents. During the war it was necessary 
 to increase prices several times. The buyers objected to these 
 increases and a falling off in sales could be noticed after each 
 advance. The sales, however, picked up as soon as the con- 
 sumers became accustomed to the new prices. In the autumn 
 of 1920 the sales decreased as the result of the so-called 
 "buyers' strike." Prices were reduced but due to the wave of 
 economy sales continued below normal. Early in 1921 it was 
 found that costs had decreased to such an extent that by selling 
 on a very close margin of profit prewar prices of S, 10, 25, 
 and 50 cents could be restored. Would it be advisable to do 
 this in the hope of stimulating sales? 
 
Chapter XXII 
 
 PRICE POLICIES 
 
 The success attained in the sale of any product 
 depends to a very large extent upon the price poli- 
 cies followed. It is the purpose of this chapter 
 to discuss briefly some of the more important poli- 
 cies. 
 
 UNIFORM PRICES 
 
 Prices uniform as to territory. — Goods are some- 
 times sold f. o. b. factory, in which case the deliv- 
 ered cost varies to buyers in different parts of the 
 country. Certain sellers on the other hand absorb 
 the freight charges and deliver to all buyers, regard- 
 less of location, at the same price. A middle course 
 is to divide the country into zones and deliver the 
 goods for different prices in the different zones. 
 Under this system the prices are uniform in each 
 zone. The country may be divided into few or many 
 zones. A division of the country into four zones 
 might be as follows : First zone, the East and Up- 
 per South; second zone, the Lower South and the 
 West from the Mississippi River to the Rocky 
 Mountains; third zone, the Pacific Coast Section; 
 fourth zone, the Rocky Mountain and Great Basin 
 district. 
 
 Uniform prices in different parts of the country 
 
 562 
 
PRICE POLICIES 563 
 
 appear to be illogical as they force the consumers 
 living near the center of production to help pay the 
 freight on the goods consumed by those located at 
 a distance. On the other hand it may be argued 
 that to charge the people living in the more remote 
 districts more for their goods is to penalize them 
 for their location. Much the same argument can 
 be made for uniform territorial prices as for uni- 
 form postal rates or flat rates on our city street cars. 
 Uniform prices the result of competition. — This 
 practice of selling the dealer in Kansas for the same 
 price as the dealer in New York appears to be the 
 result of competition. Suppose that competing fac- 
 tories making the same product were located in 
 Philadelphia and St. Louis. The Philadelphia man- 
 ufacturer has lower freight rates to dealers located 
 in the East and probably gets the most of their 
 business. He, however, desires to expand and sends 
 his salesmen to the Middle West. The dealers 
 there reply that it is cheaper for them to buy from 
 the St. Louis manufacturer. In order to get busi- 
 ness it is necessary for the Philadelphia concern to 
 deliver its goods as cheaply as they can be obtained 
 from St. Louis. This being done the eastern con- 
 cern is in a position to compete for business with its 
 western competitor. The St. Louis Company, how- 
 ever, doesn't sit idly by and see its trade lost. It 
 probably reciprocates by invading the eastern terri- 
 tory. As a result these two concerns may soon come 
 to pay the freight on their goods to all parts of the 
 United States. 
 
564 MARKETING 
 
 Advantages of imiform territorial prices. — ^The 
 seller who sells at the same price over a wide terri- 
 tory places all buyers on the same basis. No buyer 
 can complain of discrimination. This practice 
 makes it easier to sell in the districts at a distance 
 from the factory. It makes It easier for the buyers 
 to compare prices of different sellers. It makes 
 easy the quotation of prices. It makes it easier for 
 the dealers to maintain uniform prices to the con- 
 sumers. 
 
 Difficulty of maintaining tmiform prices in all 
 territories. — It is very difficult for most concerns 
 to maintain uniform prices in all territories, because 
 of the varying strength of competition. Some man- 
 ufacturers vary their prices somewhat In different 
 territories due to competition being keener In some 
 sections than in others. Take farm wagons as an 
 example. They are made largely of wood and their 
 manufacture is very largely the work of carpenters. 
 No expensive machinery is necessary for their pro- 
 duction. There has, however, been a tendency for 
 the local blacksmiths and wagon makers to be re- 
 placed by the large wagon factories. Nevertheless, 
 many small wagon factories are still in existence. 
 This is especially true in the Upper South where the 
 factories can draw on local supplies of hardwood 
 lumber and where wages are relatively low. Due 
 to the bulk, freight is quite an Item In the cost of 
 wagons to the local dealers. This gives the local 
 factories an advantage over those located at a dis- 
 tance. The manufacturer located In northern Indi* 
 
PRICE POLICIES 5 65 
 
 ana or Illinois may find that he must either stay out 
 of many parts of the South or else sell at lower 
 prices than he receives in the West. He may feci 
 that his wagon is superior to those made by the local 
 factories but the farmers living near these factories 
 like the local products and believe the local wagons 
 to be equal to those built anywhere. It is therefore 
 necessary for the northern manufacturer to stay out 
 of this territory or to sell at prices practically as 
 low as those charged by the local concerns. 
 
 Similar conditions are faced by producers in many 
 industries. Relatively few companies have selling 
 organizations that cover all parts of the country 
 thoroughly. This often means that competition is 
 much keener near the producing centers than in other 
 sections. Buyers often prefer to buy from local 
 concerns due to the ability to get quicker deliveries 
 which enables them to carry smaller stocks than 
 would be possible if goods were obtained at a dis- 
 tance. Local competition therefore often makes it 
 very hard for sellers to maintain uniform prices in 
 all parts of the country. 
 
 Prices uniform as to buyers. — Some concerns 
 have but one price which applies to all buyers. Other 
 concerns have no uniform prices, the price for each 
 sale being subject to negotiation. The latter was 
 formerly a common practice with retailers and is fre- 
 quently used at present. The one price policy is, 
 however, now in very general use among retailers. 
 This policy places all buyers on the same basis, in- 
 spires confidence as the buyers arc not afraid that 
 
566 MARKETING 
 
 someone else will get a lower price, and saves the 
 time wasted in higgling. 
 
 In the sale of goods to dealers the problem is not 
 so simple. The wholesaler wants to buy cheaper 
 than the retailer. The large dealer thinks he should 
 be given a better price than the small dealer. The 
 small dealer on the other hand thinks it unfair to 
 sell to his large competitor at a lower price than he 
 is compelled to pay. No plan will satisfy all buyers. 
 
 Price based on position in trade. — Some concerns 
 have adopted the plan of letting the status of the 
 buyer — wholesaler, or retailer — determine the price. 
 Under this plan one price applies to all wholesalers 
 (or to all retailers) regardless of the quantity pur- 
 chased. Thus a concern may adopt the policy of 
 selling only to the wholesalers (or to the retailers) 
 and of selling to all of them at the same price. The 
 advantage of this policy is that it allows all dealers 
 to compete on an equal basis. The manufacturer, 
 however, must decide whether he is going to sell to 
 semi-jobbers, cooperative jobbing houses, and chain 
 stores. Such concerns commonly claim a wholesale 
 status and are accorded this status by many sellers. 
 Then the department stores and many factories in- 
 sist on buying direct. If the seller refuses to sell 
 to these buyers he may seriously curtail his business. 
 On the other hand if he sells them at the wholesale 
 price the wholesalers will likely complain of unfair 
 treatment. As a solution some manufacturers have 
 adopted a semi-jobbing price which is between the 
 price to the wholesaler and the latter's price to re- 
 
PRICE POLICIES 567 
 
 tailers. A great many manufacturers sell to both 
 wholesalers and retailers. In this case a manufac- 
 turer may have three distinct prices — one to the job- 
 bers, one to the semi-jobbers, and one to the 
 retailers Some manufacturers adhere rigidly to 
 these prices in spite of the fact that the large re- 
 tailers often buy in larger lots than the small jobbers. 
 There is, however, the insistence of the large retail- 
 ers that they be given a jobbing, or at least a semi- 
 jobbing status, and of the manufacturers, chain 
 stores, and semi-jobbers that they be given a full 
 jobbing status. The semi-jobbing price is an irregu- 
 lar price. It gives the recipient an advantage over 
 his retail competitors in selling to the consumers and 
 places him at a disadvantage as compared with other 
 wholesalers in selling to the retailers. Concerns 
 selling to the retailers may receive objections to the 
 semi-jobbing price unless the semi-jobbers do a sub- 
 stantial wholesale business and observe the custom- 
 ary retail prices in their retail departments. 
 
 DISCOUNTS 
 
 Prices based on quantity purchased. — In order to 
 avoid all of these difficulties some manufacturers let 
 quantity alone determine the price, regardless of the 
 buyer's position in the trade. The quantity dis- 
 count may be based on the size of separate orders 
 or on the total purchases during a stated period, 
 for example, one year. The first method is the sim- 
 pler. Under this method the following discounts 
 might be announced: 
 
568 MARKETING 
 
 Orders for less than 10 cases. net prices 
 
 Orders for 10 to 24 cases 2% discount 
 
 Orders for 25 to 49 cases 5% discount 
 
 Orders for 50 to 99 cases 7.5% discount 
 
 Orders for 100 cases or over 10% discount 
 
 Lower prices on large purchases are justified due 
 to the lower expense of soliciting orders, packing 
 and shipping goods, sending out bills, making col- 
 lections, etc. This system of making prices also 
 saves the seller from the necessity of classifying 
 buyers. Buyers complain that they are wrongly 
 classed and hence unfairly treated. This policy, 
 however, tends to eliminate the small dealers and to 
 concentrate business in the hands of large retailers. 
 The manufacturers may of course sell to the retail- 
 ers and wholesalers at different prices and yet give 
 the large buyers of each class quantity discounts. 
 Thus the large retailer would get a better price than 
 the small retailer but a higher price than the small 
 wholesaler. 
 
 Other forms of discounts. — Some manufacturers 
 give special discounts to dealers stocking their 
 entire line, or to dealers giving their goods 
 special display or advertising. Some producers 
 in order to keep up sales allow special discounts 
 for orders placed during slack periods. To 
 secure large orders some concerns pay the freight 
 on car load orders while buyers of less than car lots 
 must pay the freight. Some concerns date the bills 
 forward by the approximate time required for the 
 buyers to receive the goods. This is done so that 
 
PRICE POLICIES 569 
 
 buyers in all part of the country will have an equal 
 time to pay for their goods, and so receive the same 
 credit terms. 
 
 Cash discounts. — It is a very common practice 
 to allow a special or cash discount for the prompt 
 payment of bills. The common rate varies in dif- 
 ferent trades. In the grocery trade it is often 2 per 
 cent for payment within 10 days, while in the farm 
 implement trade the discount is now generally 5 per 
 cent for payment prior to certain dates in the spring 
 and fall, or within 90 days of date of sale. In this 
 latter trade cash discounts of 10 per cent were not 
 uncommon a few years ago. 
 
 Objections to cash discounts. — A great deal of 
 discussion has taken place in the last few years con- 
 cerning the justification of cash discounts. The dis- 
 counts are much in excess of ordinary interest rates. 
 For example, 2 per cent for 20 days (2% for 
 payment in 10 days, net 30 days) is equal to 36 
 per cent per year. Many persons have taken the 
 attitude that no such discounts are justifiable and that 
 cash discounts should either be discounted or re- 
 duced in amount. Many buyers also take advantage 
 of the cash discount terms. If the terms are 2 per 
 cent for ten days the buyers often take the discount 
 long after it is past due. For example, a buyer may 
 remit at the end of 20 or 30 days and deduct the 
 discount as if the bill were paid within ten days. 
 The seller for fear of losing the business of the 
 buyer often accepts the check with the discount de- 
 ducted and says nothing. Other buyers allow cer- 
 
570 MARKETING 
 
 tain invoices to go past the discount date but pay 
 later invoices promptly deducting the discount. They 
 thus use the sellers money (due on the old bills) to 
 take the discounts on the later bills. 
 
 Arguments in favor of cash discounts. — There 
 is no doubt that the cash discount system has 
 been abused. Some sellers justify the granting of 
 cash discount not on the basis that it is a fair pay- 
 ment for the use of money but on the basis that it 
 imposes a penalty on the slow payers. The cash 
 discount, they say, is in effect added to the net price 
 and so is not paid by those who pay their bills 
 promptly but acts as a penalty for those who are 
 slow in their payments and the collection of whose 
 accounts perhaps involves extra expense. The buy- 
 ers generally object to the discontinuance of the cash 
 discount system. Some of them claim that the larger 
 part of their profits is derived from cash discounts. 
 The exclusive farm implement dealers, for example, 
 had average net trading profits, excluding cash dis- 
 counts, of 2.5 per cent, in 1915, while their 'other 
 income' made up very largely of cash discounts on 
 purchases averaged 3.8 per cent in the same year.^ 
 The buyers fear that an abolition of cash discounts 
 would not be accompanied by a corresponding re- 
 duction in prices. 
 
 The system of cash discounts is so firmly estab- 
 lished that its abolition would be extremely difficult. 
 That the system has been abused cannot be denied. 
 
 ^Federal Trade Commission: "Causes of High Prices of Farm 
 Implements," pp. 266 and 268. 
 
PRICE POLICIES 571 
 
 The trade acceptances which are used by some sell- 
 ers allow cash discounts to be granted but prevent 
 the buyer taking the discount after the discount 
 date has been passed. Sellers in the formulation of 
 their price policies should give careful consideration 
 to the cash discount policy to be followed. 
 
 Legality of price discrimination. — The feeling 
 that all buyers of the same class should receive the 
 same prices has been developing for several years. 
 As a result of the demand for equal treatrrient the 
 Clayton Anti-Trust Act, passed in 1914, contained 
 the following provision : "That it shall be unlawful 
 for any person engaged in commerce, in the course 
 of such commerce, either directly or indirectly, to 
 discriminate in price between different purchasers of 
 commodities, . . . where the effect of such dis- 
 crimination may be to substantially lessen competition 
 or tend to create a monopoly in any line of commerce. 
 Provided that nothing herein contained shall pre- 
 vent discrimination in price between purchasers of 
 commodities on account of differences in the grade, 
 quality, or quantity, of commodities sold, or that 
 makes only due allowances for difference in the cost 
 of selling or transportation, or discrimination in 
 price in the same or different communities made in 
 good faith to meet competition: and provided fur- 
 ther that nothing herein contained shall prevent per- 
 sons from selecting their own customers in bona fide 
 transactions and not in restraint of trade." 
 
 This law specifically allows quantity discounts. It 
 also allows a seller to vary his prices in different ter- 
 
572 MARKETING 
 
 ritories to meet competition. To convict a seller 
 for price discriminations it must be shown that the 
 effect of such discriminations may be to substantially 
 lessen competition. 
 
 List prices. — Many concerns publish so called list 
 prices from which trade discounts are allowed the 
 buyers. The use of list prices has several advan- 
 tages. Some concerns print the list prices in their 
 catalogs, the net price being obtained from supple- 
 mentary discount sheets. When it is desired to 
 change prices it is only necessary to issue new dis- 
 count sheets. Since the same discount may apply on 
 a large number of articles this may be a very simple 
 matter. Another advantage of this method is that 
 when the dealer shows the customer the catalog for 
 the selection of an article not in stock, the customer 
 does not see the net price. If the discount is high 
 enough to enable the dealer to sell below the list 
 price the buyer may feel that the dealer is giving 
 him favored treatment. 
 
 Different discounts can be allowed different classes 
 of buyers without issuing separate prices by simply 
 giving them different discount rates. Some manu- 
 facturers use list prices to suggest resale prices to 
 the dealers. This may be an easy way to suggest 
 prices to the dealers that will yield them fair profits. 
 
 A disadvantage of list prices is that arithmetical 
 calculations are necessary to obtain the net prices. 
 The actual cost is not always apparent to the buyers 
 who find it more or less difficult to compare the prices 
 of different sellers. 
 
PRICE POLICIES S12> 
 
 TERMS OF SALE 
 
 Freight. — Many goods are sold f. o. b. factory. 
 In case the seller wants to pay the freight he may 
 quote a delivered price. Many sellers, however, 
 quote a price f. o. b. factory less a freight allowance 
 of per 100 pounds. There are two advan- 
 tages from the seller's standpoint, to such quota- 
 tions. First, it relieves the seller of responsibility 
 in case the goods are lost or damaged in transit. 
 Second, the seller is protected in case of an advance 
 in freight rates. A quotation f. o. b. destination 
 places the liability of loss or damage in transit on 
 the seller. He must then make the claims against 
 the transportation company.^ 
 
 S. A. P. — Sales made subject to approval of price 
 when named by the seller, are really options under 
 which the buyers may later purchase stated quanti- 
 ties of goods if the price is satisfactory. Such 
 s. a. p. "sales" are more or less common in the sale 
 of canned foods. The future sales being made in 
 the spring and the opening prices being named later 
 in the season when the canners can more accurately 
 approximate their costs of production. The canners 
 say that it is necessary to make future contracts for 
 the reason that the banks are unwilling to advance 
 money for the season's operations unless they can 
 show that they have contracts for the sale of a large 
 
 ' For a list of quotations used in foreign trade see pamphlet 
 published by the National Foreign Trade Council giving defini- 
 tions adopted by a conference of nine commercial association^ held 
 on December 16, 1919. 
 
574 MARKETING 
 
 part of their packs. The buyers sometimes ob- 
 ject to this method of naming prices claiming that it 
 allows the sellers to name high prices which the buy- 
 ers practically have to accept since few canners will 
 sell below the opening prices. 
 
 F. O. P. — Sales made firm at the opening prices 
 have been used by some of the California coopera- 
 tive associations. Under this form of contract the 
 buyer agrees to take the goods at the opening price 
 to be named later by the seller. Due to war con- 
 ditions the sellers were able to effect sales on this 
 basis. Contracts containing such terms are clearly 
 one sided and their legality has been questioned. 
 These contracts have come into disrepute and will 
 likely be little used in the future. 
 
 GUARANTEE AGAINST PRICE DECLINES 
 
 In order to stimulate sales in dull seasons, or in 
 periods of falling prices, some sellers have adopted 
 the policy of guaranteeing the buyers against declines 
 in prices. Buyers are often afraid to buy when prices 
 are falling for fear of losing money on the goods 
 before they are resold. The seller by assuming this 
 risk himself may be able to greatly stimulate his 
 sales. The guarantee may be against a decline in 
 the seller's own prices or against a decline in the 
 quoted market prices. In the former case the seller 
 is under no obligation to give a rebate to the buyer 
 unless he reduces his own price, no matter how much 
 the general market price drops. The guarantee 
 
PRICE POLICIES SIS 
 
 may be made for a definite period as 90 days or it 
 may be until a definite date, as May 1, for early 
 spring sales. The guarantee may apply to the total 
 amount of goods purchased or only to the amount 
 still on hand when the price is reduced. The for- 
 mer policy may be used in sales to consumers and 
 the latter in sales to dealers. The vegetable can- 
 ners have very commonly guaranteed buyers on fu- 
 ture contracts against decline in their own prices. 
 This has been done to prevent buyers of "futures" 
 being placed at a disadvantage as compared with buy- 
 ers of "spots." The tinned milk producers have used 
 this method for years to stimulate business during dull 
 seasons. The guarantee against decline was fre- 
 quently used by sellers during the winter of 1920-21 
 to stimulate sales. 
 
 Arguments for and against guaranteeing prices 
 against decline. — Objections have been raised to 
 guaranteeing prices against decline. It is argued 
 that such guarantees tend to prevent or retard de- 
 clines in prices and hence are opposed to the interest 
 of the consumers. This is said to be true for the 
 reason that sellers having guaranteed their prices 
 against decline do all in their power to prevent de- 
 clines in order to avoid giving rebates. It is also 
 argued that it is the function and duty of the mid- 
 dlemen to assume the risk of price declines and that 
 it is unfair to force the manufacturers to assume 
 this risk. If it is the duty of the manufacturers to 
 assume the risk of price fluctuations they should as- 
 sume the risk of advances as well as declines. That 
 
576 MARKETING 
 
 is, they should consign their goods and not sell them 
 outright. 
 
 The principal argument in favor of guaranteeing 
 prices against decline is that such guarantees are a 
 practical method of stimulating business when the 
 buyers are holding off in fear of reductions in prices. 
 Such guarantees may enable the manufacturer to 
 maintain his volume of sales and keep his plant run- 
 ning. They tend to equalize business throughout 
 the year and prevent dull periods. In industries 
 where future sales are desirable such guarantees 
 may enable the buyer to contract for the future de- 
 livery of goods without assuming too great a risk. 
 Without such guarantees buyers might very often be 
 unwilling to purchase goods for future delivery. 
 
 RESALE PRICE MAINTENANCE 
 
 By resale price maintenance is meant that the seller 
 fixes the price at which the buyer shall resell his goods. 
 Resale price maintenance generally means that the 
 manufacturer fixes the price at which the retailer sells 
 his goods to the consumers (and also the price at 
 which the wholesalers sell to the retailers in case the 
 goods are handled by the wholesalers). 
 
 The question at once arises as to why the manu- 
 facturer wants to fix the resale price of his goods. 
 What interest has he in the goods after they leave 
 his hands? What does he care if the dealer gives 
 them away or burns them up so long as he has his 
 money? The manufacturer does not want the deal- 
 ers to place too high a price upon his goods as this 
 
PRICE POLICIES 577 
 
 would tend to limit the demand for them. Some 
 manufacturers label their goods with the retail prices 
 partly to protect the consumers from overcharges 
 by the dealers. Peculiarly enough, however, the man- 
 ufacturers in nearly all cases complain of the dealers 
 cutting the prices on their goods or selling them too 
 cheaply and not of the public being overcharged. 
 This fact leads many people to believe that retail 
 prices set by the manufacturers arc inimical to the 
 interests of the consumers. 
 
 Development of demand for maintained prices. — 
 The need for resale price maintenance, according to 
 its advocates, has developed from the following 
 facts. Until the closing years of the last century 
 most goods were sold unbranded and in bulk. With 
 the rapid development of manufacturing in the years 
 following the civil war competition between pro- 
 ducers became very keen. As goods were un- 
 branded and sold largely on a price basis competi- 
 tion in prices resulted. In the attempt to get busi- 
 ness, manufacturers were forced to lower the quality 
 of their goods. Under such a system there was no 
 incentive to maintain quality as the producer was 
 unknown to the ultimate consumers. In fact the 
 manufacturer who did maintain quality was likely 
 to be ruined. This deterioration in the quality of 
 manufactured goods became very noticeable and the 
 expression "things aren't as good as they used to 
 be" was very common. To escape from this situa- 
 tion many manufacturers started branding their 
 goods and then telling the public through advertise- 
 
578 MARKETING 
 
 ments that the brands stood for certain qualities. 
 When the consumers found that goods bearing a 
 certain brand always had the same quality, they de- 
 creased their purchases of bulk goods, which were 
 of uncertain quality, and started to buying the 
 branded goods, which were of uniform quality and 
 dependable. The manufacturers of well known 
 brands were thus freed from the keen price competi- 
 tion- and enabled to maintain the quality of the goods 
 and at the same time realize fair profits. 
 
 Then came the cut price stores. A cut price on 
 an unbranded article meant little to the consumers 
 as they had no assurance of its quality. The cut 
 price stores therefore advertised very low prices on 
 well known branded goods. Such goods were often 
 sold below cost in order to draw people to their 
 stores. The public seeing a certain article sold by 
 one store for a certain price felt that this price was 
 all that the article was worth and believed that the 
 dealers with higher prices were overcharging them. 
 They refused to buy this article from such dealers. 
 These dealers in turn refused to buy the article from 
 the manufacturer. The manufacturer found his 
 sales limited to the cut price stores and even these 
 stores could discontinue his line if it lost its drawing 
 power. The manufacturer found his sales limited 
 and his advertising campaign wasted. The manu- 
 facturers therefore attempted to prevent any dealers 
 from selling their goods for any less than the prices 
 fixed by themselves. 
 
 Rebuttal by opponents. — The opponents of re- 
 
PRICE POLICIES 579 
 
 sale price maintenance do not admit all of the fore- 
 going statements. They deny that a cut price hurts 
 the reputation of an article. They say that when 
 a person buys a branded article at a cut price he 
 feels he has secured a bargain and not that the local 
 dealers are overcharging him. Such low prices 
 stimulate sales and get the product into the hands 
 of new users. If the product really has merit they 
 are likely to become regular users. Cut prices are 
 thus in the interest of the manufacturer and should 
 be encouraged by him. A great many manufac- 
 turers seem to take this position and offer no objec- 
 tion to cut price stores handling their products. 
 Other manufacturers do all in their power to pre- 
 vent their products being sold at cut prices. 
 
 Has the producer an interest in his product after 
 it leaves his hands? — The advocates of maintained 
 resale prices argue that the manufacturer through 
 his advertising really sells the goods to the consum- 
 ers; that the dealers arc only distributors, that they 
 have little or no part in the creation of demand; 
 that the goodwill in the product belongs to the pro- 
 ducer and that anything that hurts the goodwill of 
 the product hurts the manufacturer. The oppo- 
 nents on the other hand, argue that the manufac- 
 turer has no interest in the goods after he has sold 
 them and has received his pay; that the dealers 
 really make the sales; that the manufacturer has no 
 financial interest in their stores and hence has no 
 right to dictate their gross profits; that operating 
 conditions are different in different parts of the 
 
580 MARKETING 
 
 country and in different stores, hence the dealers are 
 the only ones in a position to know what prices are 
 necessary to cover operating expenses and leave a 
 fair profit; and that as long as the dealers do not 
 alter or misrepresent the goods the manufacturer's 
 goodwill is in no way injured. 
 
 Legality of resale price maintenance. — ^The right 
 of the producer to fix the resale price of his goods 
 has been much disputed. Many cases have reached 
 the courts and the decisions rendered are most con- 
 fusing to the layman. Cases are still pending be- 
 fore the United States Supreme Court so that the 
 legality of the practice under existing laws cannot 
 be said to have been finally determined. According 
 to the decisions so far rendered it appears that the 
 producer, who has no monopoly, can suggest resale 
 prices to the dealers, and refuse to sell those who 
 do not observe the suggested prices. The producer 
 cannot, however, force the dealers to observe these 
 prices and any contracts binding the dealers to sell 
 only at specified prices are invalid. The only weapon 
 of the producer is the refusal to sell to cut-price 
 stores based on the right of a seller to choose his 
 own customers. 
 
 The producer can legally maintain his prices by 
 retaining title to the goods until they reach the con- 
 sumers' hands. This can be done by selling the 
 consumers direct, or by consigning the goods to the 
 dealers to be sold on a commission basis. This 
 method is, however, unsuited to the use of most 
 manufacturers. 
 
PRICE POLICIES 581 
 
 Proposal to legalize resale price maintenance. — 
 For several years past proposals granting producers 
 the right to fix the resale prices of their goods have 
 been advocated. Several bills granting this privi- 
 lege have been introduced into Congress but so far 
 all have failed of passage. The agitation for the 
 passage of these bills has shown a great difference 
 of opinion among business men as to the desirability 
 of allowing producers to dictate the resale price of 
 their goods. Most of the manufacturers of branded 
 and widely advertised goods and most of the small 
 retailers appear to favor the passage of such a law. 
 On the other hand most of the cut-price stores, 
 chain stores, department stores, and dry goods stores 
 appear to oppose the passage of such a law. Many 
 manufacturers and dealers are indifferent. In order 
 to protect the public most of the proposals contain 
 the provision that before a resale price may be fixed 
 it must be approved by some government agency 
 (e.g. The Federal Trade Commission) which would 
 pass on the reasonableness of the price. Some of 
 those who favor the principle oppose the passage of 
 such a law on the ground that it would be an open- 
 ing wedge for government regulation of prices. 
 Some manufacturers prefer to take their chances of 
 maintaining their prices by a refusal to sell rather 
 than to submit to government supervision. 
 
 Is resale price maintenance in the interest of the 
 consumers? — The right of the producers to fix the 
 resale price of their goods should be predicated upon 
 the interests of the consumers. Producers and 
 
582 MARKETING 
 
 dealers both exist for the sole purpose of satisfying 
 the wants of the consumers. There is, however, a 
 difference of opinion as to whether price mainte- 
 nance is in the interest of the consumers. 
 
 The advocates of resale price maintenance claim 
 that it is in the interest of the consumers. They 
 argue that it insures the public receiving a good qual- 
 ity of goods. Without resale price maintenance the 
 quality deteriorates. The practice insures a fair price 
 to the public since the manufacturer allows the deal- 
 ers only a reasonable profit. The manufacturer is in- 
 terested in increasing his sales and so fixes a low 
 resale price. Some dealers object that the margin 
 allowed them is too small. The dealers can, how- 
 ever, handle advertised, branded goods more 
 cheaply than other goods. The customers ask for 
 such goods by name. No time is lost in assuring 
 the buyers as to the quality or in waiting for them 
 to make up their minds. With such articles as 
 groceries or drugs about all the retailers have to 
 do is to wrap up the goods and make change. Goods 
 with fixed resale prices are often package goods, in 
 which case there is no loss to the dealers and no 
 time is needed for weighing or measuring the goods. 
 It is further argued that cut prices involve no sav- 
 ing to the buyers. Cut price stores, it is claimed, 
 simply use well known goods as loss leaders to at- 
 tract people to their stores and more than make up 
 for such loss on other goods. 
 
 Resale price maintenance said to be opposed to 
 interest of consumers, — The opponents of resale 
 
PRICE POLICIES 583 
 
 price maintenance argue that maintained prices are 
 opposed tb the interests of the consumers. The 
 only protection of the buyers is to shop around and 
 buy goods where they can get them the cheapest. 
 Maintained prices prevent the efficient merchants 
 from passing the benefits of their efficiency on to 
 the consumers. It is well known that some efficient 
 stores with quick turnovers can afford to sell goods 
 cheaper than less efficient stores with slow turnovers. 
 It is argued that the right to maintain prices, simply 
 means that the producers can spend millions for ad- 
 vertising and then tack the cost of advertising on to 
 the cost of the goods and force the consumers to 
 pay the bills. It is denied that maintained prices lead 
 to a higher quality of product. It is claimed that 
 mail order houses, chain stores, etc., can buy the same 
 quality of goods without the makers' brands much 
 cheaper than the makers will sell their branded prod- 
 uct to the ordinary dealers. 
 
 Economy stores. — It is further argued that main- 
 tained prices make no allowance for economy stores. 
 This is not inherent in the proposal for maintained 
 prices. The producer of a well known brand of 
 baking powder, who has fixed resale prices for sev- 
 eral years, has frankly recognized that different 
 stores perform different services and has allowed 
 for a corresponding variation in price. For ex- 
 ample, a can of baking powder with a retail price of 
 IS cents may be sold for 14 cents by a store fur- 
 nishing credit or delivery service (but not both) , and 
 for 13 cents by a cash-carry store. Many manu- 
 
584 MARKETING 
 
 f acturers have not recognized the difference between 
 economy and other cut-price stores. The cash- 
 carry plan affords people who desire to economize 
 an opportunity to do so, any plan of maintained price 
 that does not allow for cash-carry, self-serve, and 
 other types of economy stores is plainly not in the 
 interest of a large class of consumers. 
 
 Additional arguments in favor of resale price 
 maintenance. — Some other arguments that have 
 been advanced in favor of resale price maintenance 
 are as follows : 
 
 Prevents the consumers from being overcharged 
 by profiteering dealers. 
 
 Keeps the small dealers, especially the neighbor- 
 hood stores, in business. It is argued that these 
 stores fill a real need and that unlimited price cutting 
 by the large stores would force them out of business. 
 
 Keeps competition alive and prevents monopoly 
 It is argued that unrestrained competition and price 
 cutting leads to widespread business failures out of 
 which the strongest concerns emerge as monopolies. 
 
 Prevents unfair practices and puts business on a 
 higher plane. Resale price maintenance does for 
 business what the rule against hitting below the belt 
 does for boxing. 
 
 It enables the manufacturer to get the advantage 
 of his advertising. It is denied that advertising adds 
 to the price to the consumers, the argument being 
 that advertising cuts down the other expenses of 
 marketing and so enables goods to be distributed 
 as cheaply as if they were not advertised. 
 
PRICE POLICIES 585 
 
 Additional arguments against resale price main- 
 tenance. — Other arguments against resale price 
 maintenance are as follows : 
 
 It keeps the inefficient dealers in business. The 
 consumers should not be taxed to support dealers 
 who cannot hold their own under free competition, 
 as is done when all dealers are allowed the same 
 margin of gross profit. 
 
 It is unfair to the dealers as it prevents sales to 
 stimulate business during dull seasons. 
 
 It prevents dealers from disposing of soiled or 
 shelf worn goods ; and likewise prevents them from 
 cutting prices on goods on which they are over- 
 stocked. These objections, however, are not in- 
 herent as some proposals provide that if the 
 manufacturer refuses to take back such goods the 
 dealers may sell them at reduced prices. 
 
 It makes the dealer mere slot machines. This is 
 not necessarily an evil if this is a more efficient 
 method of distributing goods. 
 
 It is unfair to the small manufacturers who can- 
 not afford to advertise extensively. Such manufac- 
 turers would be eliminated leaving the business in the 
 hands of the large manufacturers who would gradu- 
 ally monopolize the market. 
 
 Cut prices from the dealers' viewpoint. — In the 
 foregoing paragraphs we have discussed resale 
 price maintenance. Assuming that the dealers have 
 full power to cut prices what are the advantages of 
 this policy from their standpoint? This depends 
 upon how much prices have to be cut and how much 
 
586 MARKETING 
 
 such cut prices increase sales. Suppose a dealer has 
 sales of $100,000, cost, of sales of $75,000, and 
 expenses of $20,000. This gives him gross profits 
 of $25,000 and net profits of $5,000. Suppose that 
 he cuts the prices on 10 per cent of his stock to the 
 cost of the goods to him and that, this reduction 
 doubles his sales of the cut-price articles and in- 
 creases the sales of the balance of his stock, by 20 
 per cent. His sales would then be $123,000 (20% 
 increase on $90,000 and $20,000 cut-price goods 
 sold at 25% discount) ; his cost of sales $96,000, 
 and his gross profit $27,000. If his expenses re- 
 mained stationary his net profits would be increased 
 $2,000. It is very likely, however, that his ex- 
 penses would be increased somewhat by the increased 
 volume of business and by the necessary advertising 
 so that his net profits would be little if any larger. 
 Now suppose that he reduced the prices on 10 
 per cent of his goods by only 20 per cent and that 
 the sale of his other goods was increased by 50 per 
 cent. His total sales would now amount to $151,- 
 000 ($90,000 increased by 50% plus $20,000 cut 
 price goods sold at 20% discount), his cost of sales 
 to $116,250, and his gross profit $34,750. He 
 could now pay considerably larger expenses and still 
 have larger net profits than before starting his cut 
 price policy. In both of these examples it has been 
 assumed that no prices were increased to compensate 
 for the cut prices. 
 
 From the two above examples it is clear that to 
 be successful a cut price policy must result in a con- 
 
PRICE POLICIES S.87 
 
 siderable increase in sales. If the increase is small 
 the policy will very likely result in lowered profits. 
 On the other hand if sales are increased 50 to 100 
 per cent the policy is likely to be very profitable. 
 The location of a store, its advertising methods, and 
 Its reputation may determine whether it can operate 
 on a cut price basis successfully. A neighborhood 
 store draws trade from a very limited area for which 
 reason it may be unable to increase its sales materi- 
 ally by the use of cut prices. A store located in a 
 shopping center, however, may be able to increase 
 its sales considerably by relatively small reductions in 
 prices, if these reductions are properly advertised. 
 
 Odd prices. — In the foregoing discussion we have 
 not specifically mentioned the importance of odd 
 prices in attracting retail buyers. As a rule people 
 like to purchase articles requiring few coins, 5c., lOc, 
 25c., 50c., and $1. This objection to prices requir- 
 ing several coins is, however, very largely overcome 
 if the buyers feel that they are getting reduced prices. 
 Hence such odd prices as 29c., 48c., 98c., etc. 
 Slight reductions of 1, 2, or 3 cents may stimulate 
 sales considerably. The idea of price reductions 
 may at times be given by raising instead of lowering 
 prices. The statement has been made that more 
 articles can be sold for 11 cents than for 9 cents 
 because 1 1 cents suggests a reduction from 1 5 cents 
 while 9 cents only suggests a reduction from 10 
 cents. 
 
588 MARKETING 
 
 CONCLUSIONS 
 
 All manufacturers and dealers should give careful 
 attention to formulating their price policies. Some 
 manufacturers may find it to their advantage to sell to 
 all buyers on the same basis while others may find 
 it desirable to give different buyers different prices de- 
 pending upon their position in the trade or upon the 
 quantity purchased. Some producers may find it de- 
 sirable to make price concessions to secure large 
 orders, while others with well-known products may 
 find that such price concessions sooner or later react 
 to their disadvantage. Some dealers may find it the 
 part of wisdom to use the same percentage of mark- 
 up on all goods and to hold to the same prices the 
 year around. Other dealers, especially those han- 
 dling style goods, may find it good policy to mark the 
 goods for very high profits early in the season and 
 then to make successive price reductions on the unsold 
 portions until a part of the goods may be "closed out" 
 below cost. Some dealers may find that off season 
 sales are very profitable while others may find that 
 such sales only secure business which they would get 
 without such sales at the regular prices. 
 
 The demands and the psychology of the buyers, 
 the policy of competitors, the quality of the product, 
 the cost of production, the method of distribution, 
 and general business conditions should all be consid- 
 ered in the attempt to determine the most desirable 
 price policies. 
 
PRICE POLICIES 589 
 
 BIBLIOGRAPHY 
 
 Frederick, J. George: "Modern Salesraanagement," chs. 5, 8, 9, 10, 
 
 20, 21 and 23. 
 Nystrora, Paul H.: "The Economics of Retailing," 1919, ch. 14. 
 Butler, Ralph Starr: "Marketing Methods," chs. 19, 20, and 21. 
 Duncan, C. S: "Marketing," ch. 17 and 21. 
 Murchison, Claudius Temple: "Resale Price Maintenance," Col. 
 
 University Studies in History Economics, and Public Law, vol. 
 
 82, 1919. 
 Alexander Hamilton Institute: "Marketing and Merchandising," 
 
 1919, pt. I, ch. 12. 
 Fernley: "Price Maintenance." 
 
 Cherington, Paul T.: "Elements of Marketing," ch. 17. 
 Ivy, Paul W. : "Principles of Marketing," ch IS. 
 The various trade and business papers contain many interesting 
 
 and instructive discussions of various aspects of the various 
 
 problems. 
 
 CHAPTER XXII— QUESTIONS 
 
 1. The Adams Company manufactures grocer's specialties and sells 
 
 the retail dealers direct. It has adopted the policy of selling 
 to all dealers at uniform prices. A large chain store demands 
 a price concession. If it is refused the chain store will likely 
 secure similar products to be marketed under its own brands. 
 Due to bulk shipments, small selling expense, and cash pay- 
 ments the price offered by the chain store will yield a fair 
 profit. The price will, however, enable the chain store to 
 undersell the other retail grocers who will probably complain 
 bitterly. With this feeling they cannot be depended upon to 
 push the Adams line. Many of them may substitute other lines 
 not handled by the chain stores. Should the Adams Company 
 sell to the chain store at the low price ? 
 
 2. The Hickory Plow Company manufactures tillage implements 
 
 which are sold to the retail dealers throughout the Middle 
 West, East, and South. The implements enjoy a high reputa- 
 tion among the farmers. The company would like to sell all 
 retailers at the same price except for freight and a slight 
 allowance for the quantities purchased. There are, however, 
 many small factories in the East and South that have been in 
 business for years. The implements made by these local plants 
 are well known in the counties surrounding their factories. 
 
590 MARKETING 
 
 Due to low overhead expenses and low delivery costs to the 
 dealers these local companies can undersell the Hickory Com- 
 pany in the territories adjoining their plants. The Hickory 
 Company can get little more for its implements than is asked 
 by the local concerns due to the reputation which each of the 
 latter has in its own territory. To meet these prices would 
 mean that sales would have to be made at cost or at a very 
 small profit. To pass these territories would mean the loss 
 of a large volume of business. What policy should the 
 Hickory Company adopt? 
 
 3. The X Company makes a high grade line of cooking utensils, 
 
 which are sold to the consumers by specialty salesmen and to 
 the retail hardware, and department stores. When the Com- 
 pany was started the retail stores failed to place the line on 
 the market so that the company employed specialty salesmen. 
 These salesmen are still given the exclusive right to sell 
 certain "specialties." The standard line is, however, sold in 
 many territories by both retail stores and specialty salesmen. 
 The goods are now so well known that the larger stores fre- 
 quently feature the goods as leaders at cut prices. These cut 
 price sales mean increased sales for the X Company and also 
 help to get the utensils into new homes. They, however, arouse 
 the ire of the small hardware stores and the specialty salesmen. 
 The latter often complain very bitterly of these cut price sales 
 saying that they make it almost impossible for them to make 
 sales even of the specialties. Should the X Company refuse 
 to sell to stores that cut the prices of its goods? 
 
 One student of the problem suggests that the company allow 
 the retail stores to run special sales for short periods on a few 
 specified utensils which are not important to the specialty 
 salesmen. Stores that go beyond this in cutting prices are to 
 be cut off the list of customers. Discuss this proposal. 
 
 4. The Bristol Company manufactures watches, which are nation- 
 
 ally advertised. Enumerate the advantages and disadvantages 
 of maintained resale prices to the Bristol Company and to a 
 retail jeweler who handles this watch in a town of 10,000 
 people. 
 
 Would the situation be the same if the company produced 
 hosiery? kitchen cabinets? shoes? baking powder? type- 
 writers ? candies ? 
 
 5. The Springfield Company manufactures overalls and work shirts 
 
 which are sold to the retailers on a delivered (freight pre- 
 
PRICE POLICIES 591 
 
 paid basis). The price of cotton and of most textiles is declin- 
 ing. There is a large amount of unemployment which curtails 
 the demand for the product. The dealers are afraid of price 
 declines and so are buying only from hand to mouth. The 
 Springfield Company's salesmen are getting few orders except 
 for fill in sizes. The plant is working only part time and may 
 have to shut down entirely in the near future. The company 
 in order to stimulate sales considers guaranteeing the dealers 
 against a decline in prices for ninety days after purchase. 
 The proposal is that if the Company reduces its prices within 
 90 days after a dealer has purchased a shipment of goods that 
 he will be given a rebate equal to the price reduction on the 
 amount of goods in stock on the date the price reduction is 
 announced. What risks will the Springfield Company assume 
 under the proposed scheme ? Is it advisable under the cir- 
 cumstances? 
 
 6. The Baldwin Company manufactures rugs and carpets. Prices 
 
 are falling and the consumers are delaying their purchases 
 in the hope of lower prices. Guaranteeing the dealers against 
 price declines would do little good as most of the dealers have 
 full stocks. The Company therefore proposes to allow each 
 dealer to guarantee the consumers against a decline in prices 
 for a period of six months. Under this policy the local dealer 
 would mail a check to each buyer in case the Baldwin Com- 
 pany reduced its price within a period of six months after a 
 rug or carpet was purchased. Would this be a successful 
 method of stimulating sales? What problems would it in- 
 volve? Would it be advisable under the circumstances? 
 
 7. The Williams Wholesale Grocery Company, each year handles 
 
 several hundred thousand dollars worth of canned goods. It is 
 customary to contract in the spring for a very large part of 
 the next season's needs, deliveries to be made in the fall after 
 the goods are packed. Binding contracts may be made at 
 specified prices; the price may be named but the seller may 
 guarantee the buyer against declines in his own prices; con- 
 tracts may be made on the s. a. p. basis; or on the f. o. p. 
 basis. Outline the advantages and disadvantages of each of 
 the contracts from the Williams Company's point of view? 
 From the canner's point of view? 
 
Chapter XXIII 
 
 THE COORDINATION OF MARKETING 
 POLICIES AND ACTIVITIES 
 
 There are many marketing policies that cannot be 
 discussed in this book. Such topics as Salesman- 
 ship, Sales Management, Credits and Collections, 
 and Advertising are often considered as separate 
 subjects and may be studied as such. It is very im- 
 portant that all the selling policies and all activities 
 concerning the marketing of a firm's product be 
 properly coordinated. The work of all departments 
 should be carefully adjusted so that friction will be 
 avoided and duplication of work eliminated. All 
 departments should work for a common aim — the 
 success of the concern's policies and ideals. The 
 purpose of this chapter is to outline some factors 
 that will aid in the formulation of the various sell- 
 ing policies and to point out ways in which these 
 policies and the activities of the various departments 
 should be coordinated. 
 
 Relation of selling and production. — Throughout 
 most of the history of the world production has been 
 a more important problem than marketing. Dur- 
 ing the last century, however, the mechanical inven- 
 tions have so stimulated production that it has be- 
 
 592 
 
COORDINATION OF MARKETING 593 
 
 come very difficult In many instances for the manu- 
 facturers to sell the output of their factories at a 
 profit. The quantity of goods produced has been 
 limited by the quantity that It was possible to sell. 
 It must not be inferred from this that here Is an 
 overproduction of goods. There are hundreds of 
 millions of people in various parts of the world who 
 consume very few manufactured goods and there 
 are millions in the United States who would con- 
 sume more manufactured goods if they could afford 
 to do so. The American manufacturer has an im- 
 mediate Interest In the raising of the standard of 
 living of the masses not only in the United States 
 but throughout the world. 
 
 The Individual manufacturer has often been In a 
 position to produce more goods than he was able 
 to sell at a profit. For this reason, many persons 
 have said that there is no longer a problem of pro- 
 duction, that the only problem now is one of market 
 distribution ; — or that anything that can be sold can 
 be produced. Neither of these statements Is liter- 
 ally true. There arc still many problems of pro- 
 duction especially In the field of human relations. 
 Also, there are many things that could be easily sold 
 that have so far not been produced, for example, 
 a satisfactory talking moving picture, or a device 
 for economically cooling our homes in summer."^ 
 Nevertheless, the difficulty of profitably^dlsposing 
 of the normal output of their plants has caused 
 
 'Read Home, Frank A.: "You Will be Amazed at the Wonders 
 of Cold Storage," American Magazine, August, 1921. 
 
594 MARKETING 
 
 many manufacturers to place greater emphasis on 
 selling than on production and to consider a good 
 salesforce as the most valuable asset. 
 
 Relation of the sales and production depart- 
 ments. — Many salesmen and sales managers have 
 taken the attitude that they should be allowed to 
 specify the kind of goods to be produced. This 
 often leads to friction with the production depart- 
 ment. The latter feels that it can best decide what 
 goods should be produced and that it is the sales 
 department's job to sell whatever goods are turned 
 out by the factory. No general rule can be laid 
 down as to whether the sales department should dic- 
 tate to the production department what goods 
 are to be produced or whether the production 
 department should dictate to the sales depart- 
 ment what goods are to be sold. With sta- 
 ple articles like nails or lumber It Is perhaps the 
 duty of the sales department to take the plants' out- 
 put and dispose of it to the best possible advantage. 
 In the case of style goods on the other hand, It is 
 the duty of the production department to produce 
 the goods specified by the sales department. The 
 Important thing is that production and selling be 
 properly coordinated. The, two policies cannot be 
 entirely separated. Goods should be produced that 
 are desired by theiconsumers and that can be sold in 
 competition with other products. The concern that 
 can give the most for Its money, that can produce 
 an article that will give more service for the price 
 than any other competing article is the concern that 
 
COORDINATION OF MARKETING 595 
 
 is most likely to sell its entire ouput at a profit. A 
 concern with an active sales department may be able 
 to secure more business than another concern with 
 a better product but with a weak sales organization. 
 Nevertheless, a high quality of product and a low 
 price are the greatest assets in selling. 
 
 The sales department feels that it is in a better 
 position to know what the consumers want and hence 
 that its ideas of production should be followed. The 
 danger of following the suggestions of the sales 
 department too closely is that they may lead to a 
 great diversification of styles, sizes, colors, and 
 packages. America's industrial growth has been 
 based very largely on standardization of product and 
 large scale production. A great diversification of 
 output, greatly increases the cost of production. 
 Henry Ford has been one of the leading exponents 
 of standardization and quantity production. It is 
 said that during the period of the rapid growth of 
 his plants that his salesmen would come to him and 
 say that if this change or that change was made in 
 the car that so many thousand more could be sold. 
 His reply was said to have been that the production 
 of such special types of cars would prevent the pro- 
 duction of a much larger number of standard cars. 
 As long as the entire output of standard cars could 
 be sold his policy was undoubtedly right. If, how- 
 ever, the plant was partly idle it might have been 
 wise to have followed a different policy. 
 
 Formulation of production policies. — The object 
 is to turn out the product, or products, best adapted 
 
596 MARKETING 
 
 to the demands of the consumers. Most concerns 
 must produce those things for which there is a de- 
 mand. Even a saw mill must cut its lumber in the 
 sizes demanded by builders and manufacturers. 
 Some methods of analyzing the market to determine 
 the demand have been outlined in a previous chapter. 
 Perhaps in most cases the sales department is in a 
 better position to know the demand than the pro- 
 duction department. They should realize quickly 
 what attachments, designs, colors, or styles will meet 
 with public approval. In case of disagreement 
 between the two departments concerning the advis- 
 ability of placing a new design or product on the 
 market the wise policy may be to produce a limited 
 quantity of the proposed article and try it out in 
 a limited territory. If it meets with general ap- 
 proval there its production may be increased. There 
 are of course new products for which the demand 
 must be created. If an article is invented which 
 would satisfy a definite want, even though the public 
 knows nothing about it, it is the work of the sales 
 department to educate the public and sell the product. 
 The management should see that the production 
 and selling policies are properly coordinated. Or- 
 dinarily, the sales manager should know what should 
 be produced. He may, however, be so lost in de- 
 tails that he fails to see the important principles 
 that should determine the concern's selling policies. 
 He may propose such a diversity of products that 
 the cost of production is greatly increased. A 
 family of products may be a very desirable thing 
 
COORDINATION OF MARKETING 597 
 
 from the standpoint of the salesmen. Much in- 
 formation, however, indicates that the production of 
 a varied line limits standardization and quantity 
 production and increases costs. The specialty manu- 
 facturer may be handicapped in marketing his pro- 
 duct but he may have such an advantage in produc- 
 tion that his business yields larger profits on the 
 investment than that of his full line competitor. 
 The determination of such fundamental policies is 
 a matter for determination by the executive officers 
 or owners of the concern. 
 
 Formulation of advertising policies. — Some man- 
 ufacturers do little or no advertising depending on 
 their salesmen, sales agents, or brokers to dispose of 
 their output. This policy is very likely to be fol- 
 lowed by small manufacturers or producers of staple 
 raw materials used by other manufacturers. On the 
 other hand, manufacturers of new products or large 
 producers of branded merchandise may advertise 
 very extensively. Some concerns dispense entirely 
 with salesmen and sell their product entirely by mail. 
 Most concerns, however, make extensive use of sales- 
 men regardless of how much advertising they do. 
 The reason for this is plain. There are four steps in 
 making a sale; first, attracting attention; second, 
 arousing interest; third, creating desire; and fourth, 
 securing action. Advertising may attract attention, 
 arouse interest, and create desire but it is weak on 
 securing action or actually making the sale. How 
 many of us have had a desire for goods which we 
 never bought ? We may even stop in a store to make 
 
598 MARKETING 
 
 the purchase but perhaps we don't get waited on 
 promptly and decide to wait until the next day. By 
 the next day our desire has cooled and very often the 
 sale Is never made. Many of us even cut advertise- 
 ments out of papers thinking that we'll "stop in" the 
 next time we pass the proper store, or that we'll write 
 the letter tomorrow and yet we never "stop In" nor 
 write the letter and the purchase Is never made. A 
 great many concerns use advertising as an aid to per- 
 sonal salesmanship either In preparing the ground 
 for the salesman or In creating consumer demand. 
 The salesman who can tell the dealer that he Is selling 
 an advertised and well known product for which the 
 consumers will ask by name has one of the strongest 
 selling arguments. Again a circular or advertise- 
 ment cannot answer questions and most buyers like to 
 ask questions before making important purchases. 
 
 Cost of advertising. — The amount of money spent 
 for advertising varies widely. The California Fruit 
 Growers Exchange carries on a national advertising 
 campaign for 66/100 of 1 per cent while the adver- 
 tising of small concerns that carry on extensive cam- 
 paigns may amount to 5' or 10 per cent of sales. The 
 amount to be spent for advertising will depend very 
 largely on the article to be sold and the method 
 adopted for selling It. The concern selling the con- 
 sumers by mail will need to spend much more for 
 advertising than the concern selling the consumer 
 through specialty salesmen. The concern producing 
 an article In general use will likely spend much more 
 for advertising than the concern that has a large 
 
COORDINATION OF MARKETING 599 
 
 machine for which there are few possible buyers. 
 The new concern will need to spend more than an 
 old established concern. 
 
 Choice of medivims. — Having decided to advertise 
 the concern must give careful consideration to the 
 selection of mediums — ^newspapers, magazines, 
 trade papers, farm papers, programs, bill boards, 
 electric signs, posters, pamphlets, catalogs, circulars, 
 street car cards, slides for moving picture theaters, 
 souvenirs, calendars, cards for the retailers windows, 
 etc. The concern that desires to cover a city may 
 select the local newspapers while the merchant who 
 desires to cover only a part of a city may choose 
 posters, bill boards, circulars, souvenirs, or pro- 
 grams. The concern that is working for national 
 distribution of a product used by the public may 
 select magazines having a national circulation. The 
 statement has been made that the rates are lower 
 (in proportion to circulation) in the daily papers 
 than in the weekly or monthly magazines. On the 
 other hand, the newspapers are read more hastily 
 and thrown away sooner than the magazines. The 
 product bought only by a given class is likely to be 
 advertised very largely in trade papers. A product 
 used exclusively on the farms may be advertised to 
 good advantage in the farm papers, while electrical 
 machinery should be advertised in papers read by 
 electrical engineers. Careful attention should be 
 given to the selection of the mediums that produce 
 the greatest results for the smallest expenditure. 
 Many concerns use a large number of different 
 
600 MARKETING 
 
 mediums. The difficulty with many forms of adver- 
 tising is that there is no way to measure the results 
 obtained from a. given expenditure. 
 
 Advertising vs. publicity. — Some men claim that 
 more can be accomplished In building up goodwill 
 and getting people to talking about a product by pub- 
 licity than by advertising. Hence, they have given 
 all items of general interest to the press, have en- 
 couraged their employees to write articles for the 
 trade papers or magazines, and have availed them- 
 selves of opportunities to have their men speak to 
 various organizations. Others have made it a policy 
 of showing visitors through their plants. Such 
 articles or speeches perhaps do not mention their 
 products specifically but the fact that the writer or 
 speaker is with such and such an organization gives it 
 publicity. Some concerns prepare special news ser- 
 vices for distribution or have experts to make studies 
 of general Interest. Press agents may be employed. 
 Some people have credited one of our leading manu- 
 facturers with doing things that appeared unusual 
 or peculiar for the sake of getting newspaper pub- 
 licity. 
 
 Business concerns too secretive in the past. — In 
 the past most of our business men have been too 
 reticent. Many of them have taken the attitude that 
 the public had no Interest in and no right to know 
 anything about their business It is not too much to say 
 that the consumer has an interest in every product 
 that he consumes. If the consumer eats a beefsteak 
 produced by Swift & Co., he has a right to know 
 
COORDINATION OF MARKETING 601 
 
 something about Swift & Go's business. The Chicago 
 meat packers adopted the policy of telling the public 
 something about their business while under Govern- 
 ment investigation (1917-1919). This policy was 
 commendable but if it had been adopted 25 years 
 earlier, the investigation very likely would never 
 have been necessary. Business men have been in the 
 habit of regarding too many matters as confidential. 
 The author has had men take him into the back 
 room, lock the door, bind him to absolute confidence 
 and then tell him something that could just as well 
 be published in the local papers. 
 
 The author can think of but three reasons why a 
 concern should desire to keep information secret. 
 First, because it has been guilty of some illegal or 
 unfair practice; second, because its finances are in 
 such a condition that its credit standing would be in- 
 jured if the conditions became known; and third, be- 
 cause of some secret method, or process that gives it 
 an advantage over its competitors. Due to the work 
 of commercial and trade organizations the third rea- 
 son has now very largely disappeared. The business 
 concern that follows the old policy of secrecy is likely 
 to be suspected of coming in one of the two first 
 classes. Publicity should be sought and not shunned 
 by business concerns as it is a valuable asset. 
 
 Coordination of advertising and selling activities. 
 — Instances have been reported of the advertising 
 department using one line of argument while the 
 salesmen use an entirely different line and make no 
 use of the advertising. Again intensive sales efforts 
 
602 MARKETING 
 
 may be carried on in one territory while the adver- 
 tising department is concentrating on another terri- 
 tory. The sales department and the advertising 
 department should coordinate their work and carry 
 out uniform policies so that both the salesmen and the 
 advertisments will produce the best results. The 
 salesmen should be kept informed of the advertising 
 being done so that they can make full use of it in 
 their work. 
 
 Credit policies. — The credit policy of a concern 
 may have a considerable influence on its sales. The 
 advantages of cash sales to the seller have been pre- 
 viously commented upon. The extension of credit 
 is, however, necessary in many cases. Sales in the 
 rural districts have often been made on very long 
 time. During the past few years much has been 
 said about the necessity of extending long credits on 
 sales made in many foreign countries. The exten- 
 sion of credit requires more capital and involves ex- 
 penses for the maintenance of a credit and collection 
 department, for extra bookkeeping, and to cover 
 losses from uncollectable accounts. Sales on credit 
 are often necessary in meeting competition and may 
 greatly increase the volume of sales. The install- 
 ment method has undoubtedly increased the sale of 
 furniture. Long terms may induce the wavering 
 merchant to purchase large quantities of goods. The 
 extension of credit may be as important a factor in 
 making sales as the price of the goods. Many dealers 
 depend upon the credit extended to them by whole- 
 salers or manufacturers for a large part of their 
 
COORDINATION OF MARKETING 603 
 
 capital. Without such credit many dealers would be 
 forced out of business. This is especially true when 
 credit must be extended to the consumers. When 
 long credits have become established in a trade they 
 are very hard to eliminate. Fifty years ago when the 
 western states were being settled most of the farmers 
 in these states were without capital to pay for land 
 or equipment. If they were to be sold they had to be 
 sold on credit. Long credits become the rule in the 
 sale of farm implements. After the farmers got 
 their farms paid for and equipped the credit terms 
 were shortened. According to common report, how- 
 ever, it has never been possible to sell farm imple- 
 ments on as short terms as automobiles, which were 
 introduced after the farmers were able to pay more 
 promptly. One estimate, however, is that 46.7 per 
 cent of the automobiles sold in the United States are 
 sold on a time payment plan. 
 
 Choosing the proper credit policy, — Some con- 
 cerns have achieved success by selling only for cash 
 while others have been successful by extending very 
 long credits. Most concerns follow an intermediate 
 course. Some give only short credit but extend credit 
 to almost anyone. This is practically the policy of 
 many concerns selling meats or fruits to the retailers. 
 Such goods are generally resold by the retailers be- 
 fore they have to be paid for so that little capital is 
 needed by the retailers. As the credit is for short 
 periods and as the bills are paid frequently an indi- 
 vidual seldom owes a large sum. Other concerns 
 may extend credit for long periods but exercise great 
 
604 MARKETING 
 
 care in passing on risks. Some concerns sell on open 
 account, others use trade acceptances, others require 
 promissory notes, while still others may retain title 
 to or a lien on the goods until paid for. Every busi- 
 ness concern should give careful attention to the selec- 
 tion of its credit policy so that the policy best suited 
 to its needs can be adopted. 
 
 Work of the credit department. — It is the duty of 
 the credit department to see that the credit policies 
 are properly carried out. The object of the credit 
 department is to approve as many sales as possible 
 and at the same time reduce losses to a minimum. 
 In investigating the standing of a purchaser there 
 are several sources of information ; reports of sales- 
 men; reports of mercantile agencies; financial state- 
 ments submitted by the buyer ; reports obtained from 
 other sellers as to their experience with the buyer; 
 and reports from local banks, business men, or 
 others located near the buyer. Many factors must be 
 considered in passing on an application for credit. 
 Not only should reports be analyzed but the moral 
 risk should be considered. Many dealers who have 
 a very poor credit rating with the mercantile agen- 
 cies, or who are not rated at all, may be very satis- 
 factory customers. On the other hand, dishonest 
 men may find a way to avoid their obligations in spite 
 of careful examinations of the ordinary sources of 
 credit information. The business history of an ap- 
 plicant is very important to the credit man. The man 
 who has had several fires or who has gone through 
 more than one bankruptcy proceeding is likely to be 
 
COORDINATION OF MARKETING 605 
 
 looked upon with suspicion by the credit men. The 
 ability of the credit man to read human nature is a 
 very important asset. 
 
 Relation of sales and credit departments. — Fric- 
 tion between the sales and credit departments is all 
 too common. The salesman who has worked hard 
 to secure an order feels none too good when the 
 credit department turns it down, especially if he is 
 working on a commission basis. The salesman feels 
 that he is qualified to pass on the ability of the buyer 
 to pay for the goods. This should be true and very 
 often is. The salesman is in closer touch with the 
 customers than any one else in the organization and 
 is in a better position to know how they are succeed- 
 ing. The trouble with many salesmen is that they 
 are so anxious to secure orders that they hesitate to 
 make a thorough investigation of the buyers' finan- 
 cial conditions for fear of arousing antagonism. 
 Questions as to a buyer's finances must be asked very 
 diplomatically but the salesman should be qualified 
 to do this. The salesmen should realize that it is 
 not advisable to take an order which will not be 
 paid for. The salesman should know something 
 about credits and how to judge the ability and char- 
 acter of his customers. In selling goods he should 
 have a clear understanding with his customers as to 
 when and how payments are to be made. 
 
 The credit department on its part should realize 
 that no good risks should be rejected and that the 
 conduct of its affairs has a great deal to do with the 
 success of a concern's selling policies. It should at- 
 
606 MARKETING 
 
 tempt to make friends for the business, to develop 
 slow payers into desirable customers, and to build 
 up goodwill and make "resales" while collecting 
 accounts. When the sales department and credit de- 
 partment cooperate properly each will be of great 
 assistance to the other. 
 
 Financial policy. — The selling and credit policies 
 of a concern are closely related to its financial policy. 
 The sales department may believe that the extension 
 of long credits would greatly stimulate sales while 
 the financial department may see that such long 
 credits would be impossible without securing ad- 
 ditional capital. In making its plans the financial de- 
 partment should know what sales are being made, 
 what sales are expected, and how much money will 
 become due each month on accounts and notes receiv- 
 able. The sales, credit and collection, and financial 
 departments should work in cooperation. In periods 
 of business depression dealers or small maufacturers 
 may need more and longer credit than at other times. 
 The wholesaler or manufacturer who is financially 
 able to extend such credit may be able to secure new 
 customers, increase his goodwill, and strengthen his 
 position in the market. 
 
 Service policy. — Many manufacturers of mechani- 
 cal products operate service departments to keep 
 their products in successful operation. The sales of 
 any product must depend in the long run on the ser- 
 vice which the product gives in actual use. The 
 service obtained from a mechanical product whether 
 it be a typewriter, a grain binder, or a tabulating 
 
COORDINATION OF MARKETING 601 
 
 machine, depends very largely upon how well it is 
 cared for and kept in repair. It is therefore in the 
 interest of the producer to see that his product is kept 
 properly repaired. The work of the service em- 
 ployees is very important. They should be taught 
 not only how to make repairs but how to instruct the 
 users in the use of the product. What they say will 
 have an important bearing on the customer's opin- 
 ions of the product. They should be trained to carry 
 out the firm's policies. 
 
 Broader aspects of services. — In a broader way 
 service covers not only the making of repairs, the 
 prompt delivery of goods, and the extension of 
 needed credit but the quality of the goods sold and 
 their adaptability to the needs of the buyer. The 
 highest type of salesmanship consists in selling "ser- 
 vice." The salesman should know his goods so 
 thoroughly that he can help each customer to make 
 the proper selection. This is true whether the sales- 
 man is selling women's clothing to a retailer, electric 
 dynamos to a factory, or a heating system to a home 
 owner. The salesman who wins the respect and con- 
 fidence of his customers because of honest dealings 
 and sound advice given is laying the broadest founda- 
 tion for large sales for himself and his company. 
 
 Sales management. — The management of the 
 sales department is an important matter and should 
 not be left to a minor official. In many successful 
 companies the sales manager is a vice-president and 
 occasionally the president personally supervises the 
 sales department. The selection and training of 
 
608 MARKETING 
 
 salesmen, the choice of method for paying salesmen, 
 the laying out of territories, the fixing of sales 
 quotas, the supervising of sales conventions, the con- 
 duct of sales contests, the securing of dealer coopera- 
 tion, and the planning and management of special 
 campaigns are all matters of great importance. The 
 development of loyalty, enthusiasm, industry, con- 
 fidence, and satisfaction among the salesforce is es- 
 sential to an efficient sales organization. 
 
 Intensive selling. — By intensive selling is meant 
 to work the territory thoroughly and to obtain the 
 largest possible number of customers. It has pre- 
 viously been estimated that the specialty and general 
 stores sell 75 per cent of the merchandise sold in the 
 United States. Eliminating the large city specialty 
 stores it is clear that considerably more than half of 
 the retail business is done by the small city, surbur- 
 ban, and rural stores. The concern that desires to 
 attain a national distribution cannot afford to over- 
 look the small dealers. It is often impossible to 
 secure a satisfactory volume of business without 
 selling to the small dealers. So many manufactur- 
 ers desire to sell the large distributors that competi- 
 tion for their business is very keen. Some very well 
 known products may have an 85 or 90 per cent 
 distribution but the average is very low, many arti- 
 cles have scarcely a 20 per cent distribution even 
 though sold and advertised nationally.^ 
 
 Energetic, persevering, salesmanship and persis- 
 tent advertising are the methods ordinarily em- 
 
 ^ Frederick, J. George: "Modern Salesmanagement," p. 81. 
 
COORDINATION OF MARKETING 609 
 
 ployed to secure a high percentage of distribution. 
 Many salesmen skim their territories. A sales- 
 manager who had been preaching intensive selling 
 to his men took a census of the dealers in several 
 districts to ascertain the percentage of distribution 
 attained in different territories and by different 
 salesmen. One district manager thought there were 
 600 dealers in his territory, whereas by actual count 
 there were over 1,000. A salesman was called in 
 one day and asked how many dealers were on his 
 route and how many he was selling. He replied 
 that he knew all about intensive selling — he thought 
 there were 60 dealers on his route of whom he was 
 selling 50. By actual count there were 112 dealers 
 on his route and he was selling only 28. The policy 
 of this company is to have its salesmen call on all 
 dealers regularly and to keep calling until sales are 
 made. 
 
 Special contests and advertising campaigns are 
 often used. One chief aim in sales promotion is to 
 secure the cooperation of the dealers in pushing the 
 sale of the goods. When it is desired to stimulate 
 sales or to introduce new products a common method 
 is to concentrate on one territory at a time. Liberal 
 use is often made of local advertising and special 
 salesmen. Stocks of goods should be available in 
 the hands of the wholesalers or in warehouses to 
 keep the retailers supplied. When the special cam- 
 paign is completed in one city it may be launched 
 to another leaving the business in the first city to 
 the regular salesmen. 
 
610 MARKETING 
 
 The complete policy. — There should be genuine 
 cooperation between all departments of a business 
 organization so that it will operate like a carefully 
 adjusted and well oiled piece of machinery. The 
 policies of the sales, production, and financial de- 
 partments should be carefully adjusted and should 
 all dovetail together. The advertising, credit, and 
 service departments should all help to carry out the 
 broad selling policies of the organization and should 
 cooperate with the salesmanager and salesmen. The 
 salesmanager and salesmen, on their part, should 
 cooperate with the advertising, credit, and service 
 departments. No system can be devised which alone 
 will secure the ideal cooperation. Petty jealousies 
 may defeat the most perfect system. As long as an 
 organization is composed of men the human factor 
 must be considered. To accomplish the best results 
 all men in the organization should have confidence 
 in the firm, In the product, and in their superiors; 
 respect for their fellows; satisfaction with their 
 treatment; an incentive for improvement; and an 
 interest in their work. 
 
 BIBLIOGRAPHY 
 
 Aspley, J. C: "What a Salesman Should Know About Credits." 
 Brisco, Norris Author: "Fundamentals of Salesmanship." 
 Blackford, Katherine M. H. and Newcomb, Arthur: "The Job, the 
 
 Man, and the Boss." 
 Butler, Ralph Starr: "Marketing Methods," ch. 18. 
 Butler, DeBower, and Jones: "Marketing Methods and Salesman- 
 ship." 
 Calkins, and Holden: "Modern Advertising." 
 Cherington, Paul Terry: "Advertising as a Business Force." 
 
COORDINATION OF MARKETING 611 
 
 Copeland, Melvin T.: "Business Statistics" 
 
 Duncan, C. S.: "Marketing," ch. 17, 18, and 19. 
 
 Ettinger, R. P. and Golieb, D. E.: "Credits and Collections." 
 
 Frederick, J. George: "Modern Salesmanagement." 
 
 Gardner, E. H.: "New Collection Methods." 
 
 Griffith, J. B.: "Credit Organization." 
 
 Hagerty, J. E.: "Mercantile Credit." 
 
 Hollingsworth, Harry Levi: "Advertising and Selling." 
 
 Jones, John G. : "Salesmanship and Salesmanagement," Part II. 
 
 Kniffin, W. H.: "Essentials in Granting Credit." 
 
 Knox, James Samuel: "Business Efficiency." 
 
 Lewis, E. St. Elmo: "Financial Advertising." 
 
 Mahin, John Lee: "Advertising, Selling the Consumer." 
 
 Maxwell, Wm. M. : "Training of a Salesman." 
 
 Moody, Walter Dwight: "Men Who Sell Things." 
 
 Opdyche, John Baker: "Advertising and Selling Practice." 
 
 Prendergast, W. A.: "Credit and Its Uses." 
 
 Scott, Walter Dill: "Influencing Men in Business." 
 
 A. W. Shaw & Co.: "How to Finance a Business"; "Handling 
 Salesmen at Lower Costs." 
 
 Skinner, E. M., Lasalle Extension University: "Credits and Col- 
 lections." 
 
 Starch, Daniel: "Advertising, Its Principles, Practice and Tech- 
 nique." 
 
 System Co.: "How to Increase your Sales." 
 
 Tipper, Harry: "Advertising." 
 
 Tipper, Harry: "The New Business." 
 
 Whitehead, Harold: "Principles of Salesmanship." 
 
 CHAPTER XXIII— QUESTIONS 
 
 1. Should the sales department dictate to the production depart- 
 
 ment what should be produced? Why or why not? Discuss. 
 
 2. Should the advertising department be subordinate to the sales 
 
 department; should the sales department be subordinate to the 
 advertising department; or should the two departments be 
 separate and of equal rank? Why? If you think they should 
 be separate how can their work be co-ordinated? 
 
 3. What is meant by publicity? What is its value to business con- 
 
 cerns? Should all business concerns publish figures showing 
 their sales, gross profits, expenses, net profits, rates of turn- 
 over, and investments? Discuss. 
 
612 MARKETING 
 
 4. What should be the relation of the credit and sales departments? 
 
 5. To what extent should the credit departAient accept the sales- 
 
 men's reports in extending credit to retail dealers? 
 
 6. How should the men in the service department be trained in 
 
 order to promote the company's sales. 
 
 7. A company has been organized in the Southwest to produce 
 
 grocers' specialties. It expects to sell the retail grocers over a 
 radius of 250 or 300 miles. Its source of raw materials, low 
 overhead expense, and wage scale, together with efficient man- 
 agement methods insures it a low cost of production so that it 
 can meet or undercut all competitors' prices. The capital is, 
 however, limited and it seems impossible to extend much credit 
 to retailers. The prevailing terms in the district are 2 per 
 cent discount for payment within 10 days and net 30 days. 
 These terms are, however, not enforced by all sellers. Dis- 
 counts are often taken twenty or thirty days after date of 
 invoice and payments at the net price are often accepted 60 or 
 90 days after daite of sale. The company is considering 
 methods of avoiding the necessity of keeping capital tied up 
 in "accounts receivable." One suggestion is to give 5 per cent 
 off for cash payments, shipping all goods c. o. d. or "to order" 
 with draft attached to bill of lading. Another suggestion is to 
 require all buyers to sign trade acceptances, which could then 
 be discounted at the banks. What would each of these 
 methods involve ? Are they practicable ? Could new brands 
 be introduced under such terms? Which method appears to 
 offer the greatest opportunity for success? Can you suggest a 
 better method? 
 
Chapter XXIV 
 
 CAN THE COST OF MARKET DISTRIBU- 
 TION BE REDUCED? 
 
 In the first chapter it was shown that the costs 
 (costs as used here refers to the spread between cost 
 of production and price to consumer and includes both 
 the expenses and profits of the middlemen) of market- 
 ing many commodities amounted to over 60 per cent 
 of the total prices paid by the consumers. This high 
 cost of market distribution isi of great importance to 
 both the consumer and the producers. It is of direct 
 importance to the consumers as it exerts a great in- 
 fluence on the cost of living. It is of importance to 
 the producers as it decreases the demand for their 
 products or lessens the price which they receive. If 
 the cost of marketing many classes of merchandise 
 could be reduced the selling price could be lessened 
 and the consumers would be able to buy more goods. 
 This would mean increased sales for the producers 
 and as more goods would be consumed it would mean 
 a general increase in the standard of living. The in- 
 crease in the amount of goods produced would afford 
 employment for many people who might no longer be 
 needed in commerce under improved marketing pro- 
 cesses or methods. In many instances cheaper mar- 
 keting methods would probably mean higher prices 
 for the producers. 
 
 • 613 
 
614 MARKETING 
 
 In discussing the possibility of distributing goods 
 more cheaply, the distinction between the expenses and 
 profits of those engaged in marketing should be borne 
 in mind. Swift and Company's figures quoted in 
 Chapter I, show that 50 per cent of the consumer's 
 dollar goes for marketing expenses, 4 per cent for 
 manufacturer's profits, and 9 per cent for the mid- 
 dlemen's profits. These figures are not to be taken 
 as altogether accurate but they will serve as a rough 
 approximation and should be kept in mind during 
 the following discussion. 
 
 Four classes of proposals have been made to lessen 
 the expenses of market distribution. First to decrease 
 the number of middlemen, second to shorten the trade 
 channels; third to organize cooperative marketing 
 organizations; and fourth to develop cheaper or 
 more efficient methods. 
 
 1. DECREASING THE NUMBER OF MIDDLEMEN 
 
 Are there too many middlemen? — This question 
 has probably agitated the public in recent years as 
 much as' any other question relating to marketing. 
 The number of middlemen may refer to the number 
 within a given class, as the number of retail grocers ; 
 or it may refer to the number of middlemen through 
 whose hands merchandise passes between the produc- 
 er and the consumer. 
 
 In regard to the number of merchants in the var- 
 ious classes, Nystrom^ points out that the United 
 
 ' "The Economies of Retailing," ch. 19. 
 
CAN THE COST BE REDUCED? 615 
 
 States census shows that the total numbei- of mer- 
 chants has since 1850 increased faster than the popu- 
 lation but not as fast as the quantity of goods to be 
 handled. The number of merchants per 1,000 pop- 
 ulation was 7.51 in 1850; 11.40 in 1890; and 10.92 
 in 1910. The decline of the production of goods 
 within the home and the great increase in factory pro- 
 duction (e.g. bread, and women's ready to wear 
 clothing) has given the merchants more and more 
 goods to handle. ,In 1850 there was one merchant 
 to every $6,376 of manufactured goods while in 1910 
 there was one merchant to every $20,586 of manu- 
 factured goods. After making due allowance for the 
 changes in prices ; for the export and import of manu- 
 factured goods; for the manufactured goods not 
 handled by the merchants (e.g. partly manufactured 
 goods) ; and for the non-manufactured goods (farm 
 products) handled by them, it appears that each 
 dealer, on the average, handled a larger quantity of 
 merchandise in 1910 than in 1850. In other words 
 while the number of merchants has increased more 
 rapidly than the population it has increased less rap- 
 Idly than the quantity of goods handled. The local- 
 ization of industry to secure the advantages of large 
 scale production, the growth of the city population, 
 and the increase in the standard of living have in- 
 creased the services which the merchants are called 
 upon to perform. Customers not only order a greater 
 variety of goods, but they buy in smaller quantities 
 and demand more personal attention. 
 
 This comparison with 1850 is very helpful but it 
 
616 MARKETING 
 
 is not conclusive as we do not know whether there 
 were too many or too few merchants in 1850. 
 
 Fewer merchants would very likely mean larger 
 profits for those remaining in business but it is ex- 
 tremely difficult to say whether a great reduction in 
 the number of merchants, taking the country as a 
 whole, would benefit the consuming public or not. 
 There are undoubtedly some locaHties that could be 
 better served by fewer retail merchants. In the re- 
 tail grocery business, for example, stores are some- 
 times so numerous that none of them are able to either 
 operate at a profit or carry fresh and well assorted 
 stocks of goods. On the other hand to decrease the 
 number of stores would lessen competition and might 
 allow the dealers to raise their prices. 
 
 Expenses might be somewhat reduced if retailing 
 were conducted by a few large and centrally located 
 stores. The information at hand, however, indicates 
 that low operating expenses depend more on the 
 efficiency of operation than on the volume of business. 
 The large department stores, for example, seem to 
 have already reached, and in some instances perhaps 
 to have passed, the size of maximum efficiency. Fur- 
 ther growth would apparently not lead to any lower 
 operating expenses. 
 
 The public liberally patronizes the small neighbor- 
 hood stores, which indicates that these stores per- 
 form a real service in furnishing a convenient source 
 of supply. It is difficult to see how these neighorbood 
 stores could be abolished without inconvenience to the 
 public and as long as they are individually owned it 
 
CAN THE COST BE REDUCED? 617 
 
 is hard to see how their number can be regulated.^ 
 The growth of the large chains, each of which puts 
 only one store in a neighborhood, does, however, tend 
 to limit the number of such small stores. 
 
 2. SHORTENING THE TRADE CHANNELS 
 
 Number of dealers between producer and con- 
 sumer. — When the public speaks of "too many mid- 
 dlemen" it generally has in mind the number of deal- 
 ers who handle merchandise between the producer and 
 the consumer. The public generally feels that mer- 
 chandise passes through the hands of too/ many mid- 
 dlemen and that the. profits and expenses of these 
 middlemen contribute in a large measure to the high 
 prices. It believes that if the majority of these mid- 
 dlemen could be eliminated and merchandise be made 
 to pass from the producer to the consumer directly 
 or through a very few middlemen that prices would 
 be materially reduced. The consumers especially do 
 not see that so many middlemen are necessary and 
 regards them as unproductive parasites preying on 
 the long suffering and unorganized public. 
 
 A limitation of the number of middlemen handling 
 an article between the producer and the consumer 
 might be expected to result in a decrease in both ex- 
 
 'One suggestion is that the government should regulate the 
 number of dealers. If this was done by arbitrarily allowing only 
 certain persons to operate stores in certain localities there would 
 be the opportunity for serious personal discriminations. If a heavy 
 license or tax were used to reduce the number of dealers, it would 
 be shifted to the consumers so that it is doubtful if they would ob- 
 tain any benefit from lower prices. 
 
618 MARKETING 
 
 pense and profits. The distinction between the ex- 
 penses and the profits of the middlemen must be borne 
 in mind. If merchandise passes through the hands of 
 four middlemen, each of whom takes a profit, it might 
 reasonably be assumed that the total profits would be' 
 less, under competitive conditions, if the merchandise 
 passed through the hands of only middlemen. When 
 it comes to expenses, however, the situation may be 
 entirely different. The expenses of the one middle- 
 man might be less or they might be more than the 
 combined expenses of the four middlemen. It is ar- 
 gued by some that economy in marketing, just as in 
 production, may be obtained by splitting up the pro- 
 cess into a number of successive steps so that the full 
 advantage may be taken of specialization and the 
 division of labor. According to this argument we 
 should have a large number of highly specialized mid- 
 dlemen, who it is argued could distribute goods more 
 cheaply than a few general and less specialized deal- 
 ers. This might or might not be true. Sufficient 
 information is not available to enable us to draw an 
 accurate general conclusion. Those who have at- 
 tempted to answer this question have generally based 
 their conclusions on theoretical or abstract reasoning, 
 or else have generalized from a few conditions or 
 practices that have come to their attention. 
 
 Large retail organizations. — The number of mid- 
 dlemen handling goods between the producers and 
 the consumers has been decreased by the development 
 of large retail organizations. Note the recent devel- 
 opment of the chain stores. These stores not only 
 
CAN THE COST BE REDUCED? 619 
 
 eliminate the wholesalers but as they become large 
 tend to enter the manufacturing field. Although 
 they eliminate the wholesaler they do not eliminate 
 the warehousing and delivery services formerly per- 
 formed by the wholesaler. They do, however, elimi- 
 nate the expenses of the wholesaler's salesmen and 
 credit and collection department. It appears that 
 competition with other chain stores forces them to 
 pass a part of the saving along to the consumers. 
 The mail order houses eliminate from one to three 
 middlemen. The large department stores generally 
 eliminate the wholesalers. , The large mail order 
 houses and department stores also manufacture a 
 part of their goods. But as in the case of the chain 
 stores, the expenses of the various wholesaler dealers 
 are not altogether eliminated when their functions 
 are taken over by the mail order houses and depart- 
 ment stores. 
 
 Manufacturers selling direct to retailers. — The 
 trade channels are also shortened by the growth of 
 larger units in the field of production. Large manu- 
 facturers can often sell the retailers direct while small 
 manufacturers are often unable to do so without in- 
 curring very heavy selling expenses. Some small 
 manufacturers may be unable to even maintain direct 
 relations with the wholesalers and must depend upon 
 brokers or sales agents to market their product. The 
 reason for this has been explained. This tendency for 
 the manufacturers to sell the retailers direct has been 
 a matter of comment for several years and the quan- 
 tity of merchandise marketed in this way has become 
 
620 MARKETING 
 
 very large. The wholesalers are, however, far from 
 being eliminated. Their importance was shown in 
 Chapter VI. Direct relations between the manufac- 
 turers and retailers eliminate the wholesaler's profits 
 but it is not clear whether the consumer benefits 
 thereby or not. 
 
 Relative costs. — Some people assume that direct 
 selling, as a matter of course, lessens the cost of the 
 goods to the retailer. This may or may not be true. 
 It may often happen that a wholesaler handling many 
 articles can sell a given product cheaper than the 
 manufacturer maintaining a sales organization to sell 
 only one product. Sufficient information is not avail- 
 able to enable a general statement to be made as to 
 which method Is the cheaper. This is an important 
 matter and it is to be hoped that some governmental 
 agency (for no private agency is in a position to make 
 such a study) will soon gather enough of such in- 
 formation to enable general conclusions to be drawn 
 as to the conditions under which It is cheaper for the 
 manufacturer to sell the retailer direct than to sell 
 through the wholesalers. 
 
 Several of the cost studies so far published do not 
 segregate selling expenses. Some figures showing 
 the average selling expenses of manufacturers market- 
 ing their products in different ways have, however, 
 been published. The average pre-war selling ex- 
 penses of the farm Implement manufacturers was ap- 
 proximately 15 per cent.^ Most of these manufac- 
 
 ' Federal Trade Commission: "Causes of High Prices of Farm 
 Implements," pp. 119 and 124. Losses from bad debts and collection 
 expenses are not included in expenses. 
 
CAN THE COST BE REDUCED? 621 
 
 turers maintain branch jobbing houses and sell direct 
 to the retail dealers and some of them supply canvas- 
 sers to help the retail dealers sell the farmers. On 
 the other hand some of these manufacturers sell their 
 implements on a jobbing basis to other manufacturers' 
 or to wholesaler dealers. This percentage of IS per 
 cent then does not include all the wholesale or jobbing 
 expenses for if all manufacturers operated such 
 houses the average selling expenses would be slightly 
 higher than 1 5 per cent. 
 
 The flour millers had average selling expenses of 
 4.5 per cent in 1912-13, and 4.9 per cent in 1913-14.* 
 Some of the flour mills have a number of branch job- 
 bing houses but most of the flour is sold through mill 
 agents, brokers, or jobbers. 
 
 The canned food packers have typical selling ex- 
 penses of about 5 per cent. The average selling ex- 
 pense of the salmon canners in spite of their remote 
 locations is about 6 per cent, when cash discounts 
 are excluded.^ The canners market the bulk of their 
 product through brokers and sales agents, although 
 some of them do sell direct to the wholesalers and a 
 few direct to the retailers. 
 
 The items included as selling expenses may not be 
 the same for each of the above industries. The prod- 
 ucts are so difEerent that comparisons must be made 
 with caution. The number of industries is too small 
 
 * Federal Trade Commission: "Flour Milling and Jobbing," 1918, 
 p. 12. Figures cover 130 large and small mills producing 40 per 
 cent of the total domestic output of flour. 
 
 ° Federal Trade Commission : "Canned Foods, Vegetables and 
 Fruits," pp. 16-20 and 31; "Canned Salmon," pp. 47-48. 
 
622 MARKETING 
 
 to enable definite general conclusions to be drawn, 
 but by comparing the methods of selling with the aver- 
 age selling expenses for the different classes of manu- 
 facturers it is evident that the selling expenses of those 
 manufacturers selling to the retailers are much higher 
 than those selling through brokers or sales, or mill, 
 agents. 
 
 Producers selling direct to consumers. — Much 
 has been said in recent years about direct relations be- 
 tween producers and consumers. Four methods of 
 direct selling may be mentioned : Manufacturers sell- 
 ing the consumers by mail; manufacturers selling the 
 consumer through their retail stores or through spec- 
 ialty salesmen; farmers selling the consumers upon 
 city or public markets; and farmers selling the con- 
 sumers by parcel post. 
 
 Manufacturers selling by mail. — This method 
 has already been discussed in Chapter XII "Mail 
 Order Houses." It need only be pointed out here 
 that such a method greatly increases the manufactur- 
 er's selling expenses. His expenses for advertising, 
 correspondence, packing and shipping are especially 
 large. It does not appear whether or not the manu- 
 facturer's expenses are increased to an amount equal- 
 ling the expenses and profits of the displaced 
 wholesalers and retailers. If the volume of sales is 
 large such direct selling would appear to involve a 
 saving in expenses but if the volume is small the per- 
 centages of expenses might be increased. The 
 growth of this method indicates that there is some 
 saving to the consumers but not enough to lead most 
 
CAN THE COST BE fiEDUCED? 623 
 
 of them to undergo the inconveniences in patronizing 
 such manufacturers regularly. 
 
 Manufacturers selling the consumers through 
 their own stores. — Several manufacturers have estab- 
 lished their own retail stores through which they sup- 
 ply their goods to the public. A few years ago such 
 chains were regarded by some as furnishing a cheaper 
 method of distributing goods. The operation of such 
 stores, however, involves all of the problems of re- 
 tail store operation except that of purchasing. As the 
 manufacturers are specialists in production and have 
 organizations designed to operate factories and not 
 stores they have apparently not been able to reduce 
 the expenses of store operation. The savings possible 
 with such stores are: the elimination factory selling 
 expenses, a part of the retailers buying expenses, and 
 the wholesalers' expenses and profits in case the class 
 of merchandise in question ordinarily passes through 
 the hands of a wholesaler. The manufacturers could 
 also eliminate the retailers profit if he so desired. 
 There are several of these manufacturers' stores and 
 the number is increasing but such stores show no signs 
 of displacing other stores. Manufacturers as a rule 
 are now very cautious in establishing such stores. 
 
 Large retail units, chain stores, mail order houses 
 and department stores, often enter the manufactur- 
 ing field. This practice establishes direct connections 
 between producers and consumers. 
 
 Farmers' markets. — Much has been said in recent 
 years about establishing, or reviving, the farmers mar- 
 kets in order that farm produce can be sold direct to 
 
624 MARKETING 
 
 the city consumers. Some cities have spent consid- 
 erable sums to provide, or retain, such markets, and 
 farmers markets are to be found in nearly all of our 
 cities. Even New York, the largest of our cities, has 
 three such markets. The number of farmers living 
 close enough to our large cities to sell their goods on 
 such markets is too small to supply any considerable 
 part of the produce consumed In such cities although 
 the motor truck has greatly increased the number of 
 farmers who can reach such markets. In the larger 
 cities the farmers markets are generally wholesale 
 markets, the farmers selling only in relatively large 
 lots — 1 bushel or barrel. The buyers are principally 
 dealers, wholesalers, retailers, street vendors, and 
 hucksters — although some consumers buy in these 
 quantities to secure the lower prices. Taking the 
 country as a whole there are very few city markets 
 where the farmers are successfully selling to the con- 
 sumers. There are several reasons for this. The 
 farmers often cannot afford the time. At the prevail- 
 ing rate of wages the time required to sell goods in 
 this way is quite an item. Thirty farmers selling on 
 the public market In Seattle report average sales of 
 slightly over $14 for an average day of nearly nine 
 hours.* The sale of goods at wholesale requires less 
 time and the wholesale markets are often held in the 
 early morning. The time necessary for the consumer 
 to visit such markets often makes this method of 
 purchasing impractical. Perishable foodstuffs must 
 
 • "Bulletin No. 2," State of Washington, Office of Farm Markets, 
 p. 10. 
 
CAN THE COST BE REDUCED? 625 
 
 be bought in small quantities and few housewives ex- 
 cept those living nearby, can afford the time neces- 
 sary to visit such markets regularly. The electric rail- 
 ways and automobiles have spread American cities 
 over so much territory that a very small percentage 
 of the population lives near such markets. 
 
 Markets in Harrisbtirg and Knoxville. — There 
 are a few cities where farmers markets are success- 
 fully selling to the consumers. The most successful 
 of such markets that have reached the author's per- 
 sonal attention are those in Harrisburg, Pa., and 
 Knoxville, Tenn. Both of these are cities of between 
 70,000 and 100,000 population and both are located 
 close to good farming sections. In Harrisburg the 
 farmers rent space from privately owned market 
 companies. In Knoxville the farmers park their wag- 
 ons on the market square and on adjacent streets. 
 One side of the square is occupied by farmers selling 
 at retail and the other side by farmers selling at 
 wholesale. 
 
 In Harrisburg, according to the author's informa- 
 tion, the people go to market from habit, the custom 
 having been handed down from their Pennsylvania 
 Dutch ancestors. The goods are, perhaps, fresher 
 but they are said to be little, if any, cheaper than 
 similar goods sold by the local grocers. In Knoxville 
 the retail grocers are said to ordinarily sell produce 
 as cheaply as the farmers selling at retail and in addi- 
 tion, they deliver the goods and extend credit. Lower 
 prices can, however, be obtained when the farmers 
 are anxious to go home, as on Saturday afternoon, or 
 
626 MARKETING 
 
 by buying on the wholesale side of the market. The 
 quantities sold on the wholesale side of the market are 
 often within the reach of the ordinary consumer, one 
 watermelon, one basket of grapes, or one bushel of 
 apples. Very successful public markets are reported 
 in operation in several other cities but it is doubtful 
 if the consumers save much by patronizing them. 
 
 Markets in Washington and California. — Seven 
 cities in the State of Washington have had public 
 markets, four of which were in operation in 1917. 
 The Seattle market has been considered a success but 
 it seems, that the consumers get little benefit from it. 
 The office of Farm Markets of the State reported: 
 "The farmers selling on the Seattle market get the 
 full retail price. Comparison with prices on uptown 
 markets and the testimony of consumers substantiate 
 this. . . . The customers. . . .are attracted to the 
 market by the freshness of the products and the abil- 
 ity to choose from a large variety of produce. . . The 
 consumer has to consider the cost of personal market- 
 ing, transportation, time, and inconvenience. . . .On 
 all the Washington public markets. . . .practically the 
 full retail price is charged except for bulk purchases, 
 or on Saturday nights." The average cost to the 
 farmers of selling on the Seattle market is estimated 
 38 per cent of the price to the consumer.' Public mar- 
 kets have been established at several cities in Cali- 
 fornia but most of them are reported to be failures. 
 
 ^ "Bulletin of Office of Farm Niarkets, State of Washington," by 
 George S. Wehrweiss, quoted in the "Third Annual Report of the 
 State Market Director of California," pp. 79-84. 
 
CAN THE COST BE REDUCED? 627 
 
 The most successful one is located at Santa Cruz and 
 the prices are reported to be slightly lower than those 
 charged by the local dealers. A public retail market 
 was started in Binghampton, N. Y., in 1917 and was 
 quite successful at first but as soon as the housewives 
 found that they saved nothing they stopped patroniz- 
 ing the market, which soon fell into disuse.^ I 
 
 Farmers selling from house to house. — 'The farm- 
 ers often sell their produce from house to house in 
 the smaller cities and towns located in agricultural 
 sections. This often means a saving to the consumers 
 as the farmers are often willing to sell in this way for 
 slightly more than they could receive for their goods 
 at wholesale, or there may be no wholesale market 
 for their goods. Small cities and towns with a local 
 supply of produce generally secure such produce very 
 much cheaper than the large cities. Prices in the large 
 cities are often double or triple those in producing 
 sections. On the other hand small cities and towns 
 outside of the producing sections may have to pay 
 more than the larger cities as the goods must pass 
 through a central market before they reach such 
 places. 
 
 Direct sales by parcel post. — The Post Office De- 
 partment has been active in promoting the shipments 
 of foodstuffs to the cities by parcel post as a means of 
 decreasing the cost of living and increasing the postal 
 receipts. The price is supposed to be somewhat higher 
 than the farmer could receive in his local market and 
 
 'Third Annual Report of the State Market Director of Cali- 
 fornia," pp. 85-87. 
 
628 MARKETING 
 
 somewhat lower than the prevailing retail prices in 
 the city. The practice is therefore supposed to bene- 
 fit both producer and consumer. The farmer also 
 finds an outlet for his goods and is able to sell quanti- 
 ties too small to be sold in other^ ways. The con- 
 sumer also gets fresher goods. This method of 
 selling, or buying, has had some growth and a con- 
 siderable number of people are using it successfully. 
 It is, however, relatively unimportant and has so 
 many disadvantages, or limitations, that it will prob- 
 ably never come into regular use by most people. 
 
 Disadvantages of the parcel post method. — It is 
 difficult for connections to be made. The consumers 
 hesitate to place orders with strangers and the farmers 
 hesitate to ship goods to strangers except on the 
 c.o.d. basis. It is hard for the farmers to keep their 
 customers posted at all times as to exactly what they 
 have for sale. The buyer may place an order for 
 goods which have all been sold or the order may be 
 received in a busy time when the farmer cannot af- 
 ford the time to pack and ship the goods. In cither 
 case the buyer is disappointed and loses confidence in 
 the seller. This method also involves the necessity of 
 the consumer anticipating his wants and the bother of 
 writing letters, and frequently of addressing and re- 
 turning empty cartons. To the farmer it means the 
 trouble of packing and addressing packages, often at 
 inconvenient times, and of writing letters. Dis- 
 putes are likely to arise as to the quality of the goods 
 or as to the damages in transit. The goods may not 
 be graded quite as carefully as the goods ordinarily 
 
PAN THE COST BE REDUCED? 629 
 
 bought by the city consumer or may be overripe, or 
 mashed in transit. Unless both parties are absolutely 
 fair in settling such cases the relations are lilcely to be 
 severed. Then there is the question of prices : The 
 prices are supposed to be between the prices 
 at the country shipping point and the city retail prices. 
 The farmer must pay the postage and as his goods 
 are fresher^ he often feels that he should receive the 
 city retail price. This may lead the buyer to think 
 that he is not getting a square deal. On the other 
 hand if the price is left to the buyer the farmer may 
 feel that he is being taken advantage of. The deter- 
 mination of a fair price is no easy matter. The price 
 of produce changes from day to day and from hour 
 to hour. The price may be one thing when the goods 
 are shipped and an entirely different thing when they 
 arrive. Then the retail prices vary with the quality 
 of the goods and the store at which the purchase is 
 made. Take peas for an example. The price of 
 young tender peas at a high grade grocery store may 
 be $1.60 a peck, while peas, of a poorer quality may 
 on the same day be bought at a cash market for 40 
 cents a peck. What then would be a fair price for 
 a parcel post shipment of a medium grade of peas { 
 Parcel Post shipments of farm products to city 
 customers may benefit some farmers and some city 
 consumers but this method cannot materially reduce 
 the expenses of marketing the nations food.® 
 
 'On the subject of parcel post shipments read article in Amer. 
 Econ Review, September, 1916: "Marketing Farm Products by 
 Parcel Post," by B. H. Hibbard and Asher Hobson. 
 
630 MARKETING 
 
 3. COOPERATIVE MARKETING ORGANIZATION 
 
 Object. — Cooperative marketing organizations at- 
 tempt primarily to secure the middlemen's profits for 
 their members. These enterprises also generally 
 attempt to eliminate certain middlemen or reduce 
 selling expenses. The consumers' cooperative stores 
 attempt to secure the retailers' profits for their mem- 
 bers. Such stores also attempt to reduce operating 
 expenses by securing a large volume of sales, renting 
 a cheap location, and limiting the credit and delivery 
 services rendered. The large volume of sales is sup- 
 posed to be secured from the liberal patronage of all 
 members. 
 
 Success. — Many such stores have been started in 
 the United States but prior to the world war most 
 of them failed or ceased to be operated on the coop- 
 erative basis. Those that have succeeded generally 
 have had a membership with a strong group, or class 
 feeling. The consumers' cooperative buying clubs at- 
 tempt to eliminate the retailers' profits and also to 
 reduce the expenses of retail distribution by dispens- 
 ing ^Ith or performing for themselves, many services 
 ordinarily performed by the retailers. The coopera- 
 tive or company stores started by many manufacturers 
 to help their employees reduce the cost of living, 
 eliminate the retailers' profit, and a part of their ex- 
 penses. Some of the expenses have at times been 
 absorbed by the corporation. These stores not Infre- 
 quently also eliminate the wholesaler and buy direct 
 
CAN THE COST BE REDUCED? 631 
 
 from the manufacturers or their sales agents. The 
 cooperative jobbing house attempts to secure the 
 wholesaler's profits for its members. The coopera- 
 tive jobbing house also eliminates certain of the whole- 
 salers' expenses — notably a part of the selling ex- 
 penses. The cooperative manufacturing activities of 
 the retail stores, for example the United Drug 
 Company, or the American Druggists' Syndicate, 
 should also be mentioned. 
 
 Farmers cooperative marketing organizations 
 often eliminate one, two, or even three middlemen, 
 and sell to the city wholesalers either through their 
 own salesmen, brokers, or auctions. The profits of 
 these middlemen are obtained by the farmers but it 
 does not appear what part of the expenses of such 
 middlemen are eliminated. Such cooperative market- 
 ing organizations are apparently a step in the right 
 direction, but it must be remembered that their pur- 
 pose in eliminating middlemen and cutting down 
 marketing expenses is primarily to get higher prices 
 for themselves and not to reduce prices to the con- 
 sumers. 
 
 4. CHEAPER AND MORE EFFICIENT METHODS 
 
 The methods already discussed in this chapter for 
 decreasing the number of middlemen and for estab- 
 lishing cooperative marketing organizations often 
 also include improvements or economies in marketing 
 methods. 
 
632 MARKETING 
 
 Cheaper retail methods. — The cash-carry stores, 
 the cafeterias, grocerterias, and self-serve stores of 
 all kinds aim at reducing the expenses of retailing 
 but, unless cooperative, make no attempt to eliminate 
 the retailer's profit. Such methods often mean that 
 the customers perform for themselves services here- 
 tofore ordinarily performed by the dealers. The 
 housewife who patronizes a cash-carry store really 
 secures for herself the money which the retailer would 
 otherwise pay out for delivery expenses and interest. 
 The self-serve stores however, seem to do a little 
 more for they may involve a considerable saving of 
 time to the consumers. A buyer may secure her goods 
 quicker in a self-serve store than in a store where 
 she must wait to be "waited on," just as it is 
 often possible to secure a meal quicker in a cafe- 
 teria than in a restaurant furnishing "table service." 
 The use of such methods by chain stores buying 
 direct from the manufacturers and operated efficiently 
 appear to offer the greatest opportunities for reduc- 
 ing the costs of marketing the goods capable, of being 
 handled by them of any system developed up to this 
 time. 
 
 Elimination of over the counter sales. — The 
 salaries of sales people constitute the largest single 
 expense for most middlemen. The cooperative and 
 mail order jobbing houses attempt to limit the ex- 
 penses of salesmen in the operation of wholesale 
 concerns. The self-serve stores are based on the idea 
 of reducing the number of employees. It was pointed 
 out in a previous chapter (Chapter XII) that the 
 
CAN THE COST BE REDUCED? 633 
 
 elimination of salespeople was one of the greatest 
 advantages, or economies, of the mail order houses. 
 Other expenses of the mail order houses, however, 
 tend to offset or counterbalance this saving. The 
 high expense of selling dry goods, women's clothing, 
 shoes, etc., are due in no small degree to the "shop- 
 ping" habits of the buyers. If a system could be 
 evolved under which salespeople would have to show 
 goods only to those who expect to buy the expenses 
 of selling many classes of merchandise could be re- 
 duced. In the case of style goods or new articles 
 it is doubtful if this could be done without seriously 
 limiting the services furnished to the customers. 
 
 Cherington^" suggests that over the counter sales 
 might be entirely eliminated in the sale of staple 
 groceries. He suggests that such groceries be sold 
 from warehouses having, railroad connections and re- 
 ceiving orders only by telephone. This method would 
 involve many economies. The warehouse could be 
 placed in a cheap rent location. The only sales- 
 people needed would be those to take the telephone 
 orders. No show windows would be needed and no 
 stock need be displayed. On the other hand the ex- 
 penses for delivery and bookkeeping would be rela- 
 tively high. If a large volume of sales were secured 
 •cheaper prices should be possible. There are, how- 
 ever, two limitations on such a method. First it is 
 difficult to get people to change their methods of 
 buying. The advertising expenses would probably 
 
 " "Elements of Marketing," pp. 196-198. 
 
634 MARKETING 
 
 have to be high at least until trade was secured and 
 customers became accustomed to buying in this way. 
 Second, such a method limits the opportunities of 
 the retailers to introduce new products. Manufac- 
 turers desiring to market new products or to stimulate 
 the sales of old ones might be forced to spend large 
 sums on advertising or to adopt other methods of 
 retail distribution. 
 
 Should consumers buy in larger quantities? — 
 Many of the suggestions for reducing the expenses 
 of retailing involve larger individual purchases by 
 the consumers. The small quantities in which con- 
 sumers now purchase many goods undoubtedly in- 
 crease the expenses of retailing. An order for 
 25 pounds of sugar can be taken as quickly as 
 for one pound, and a case of canned goods can be 
 sold as quickly as one can. Retail stores could cer- 
 tainly be operated more cheaply if their customers 
 would buy in larger lots. Many suggestions for 
 cheaper retail methods are based on the assumption 
 that customers can be induced to buy in larger quan- 
 tities. Part of the success of buying clubs depends 
 upon the relatively large size of the individual orders. 
 When customers buy in large quantities they assume 
 the risk of spoilage otherwise borne by the middle- 
 men. People living in apartments have little 
 space to store large quantities of goods. Larger in- 
 dividual purchasers, however, would reduce the ex- 
 penses of retailing, lessen the need for neighborhood 
 stores, and make possible the cheaper distribution of 
 non-perishable goods. 
 
CAN THE COST BE REDUCED? 635 
 
 Curb markets. — It was pointed out above that 
 retail farmers' markets are unsuccessful in most of 
 our cities. There are, however, in many of our large 
 cities one or more so-called "Markets" occupied by 
 dealers in perishable foods. These markets are often 
 well patronized, but the prices are generally little if 
 any lower than those obtaining among outside dealers. 
 Public officials and other interested in reducing the 
 price of foods have frequently advocated the estab- 
 lishment of curb markets. The advocates of curb 
 markets claim that the consumers can make large 
 savings by patronizing such markets. If curb markets 
 are well patronized the large sales and rapid stock 
 turnover may enable the dealers to sell at low prices. 
 Competition must, however, be keen to keep prices 
 down. If few customers come, few dealers will come 
 and prices may rise to the level prevailing elsewhere. 
 Such prices will not attract customers and the market 
 will fall into disuse. Perishable foods must be bought 
 in small quantities which means that to be available 
 to most housewives such markets must be located in 
 the various residential sections. In place of curb 
 markets some advocate the erection of buildings by 
 the cities where a very nominal rent will be charged 
 the dealers complying with all the regulations. Al- 
 though prices may be somewhat lower in such 
 markets, those that are now operating do not appear 
 to have exerted any important influence on the aver- 
 age price of foodstuffs. 
 
 Elimination of wholesale warehousing function. 
 — Another suggestion for reducing the cost of dis- 
 
636 MARKETING 
 
 tributing goods is to eliminate the warehousing func- 
 tion of the wholesalers. This proposal does not 
 necessarily involve the abolition of the wholesalers. 
 They would give up their warehouses but continue 
 to maintain their sales organizations. It would not 
 be necessary for the manufacturers to send their sales- 
 men to the retailers but all goods would be shipped 
 direct to the retailers. This method would reduce 
 the expenses of the wholesalers but would increase 
 the expenses of transportation due to shipments in 
 small lots. It would also increase the warehousing 
 and shipping expenses of the manufacturers and 
 would mean that the retailers would have to have 
 more storage space and keep more money tied up 
 in goods. This method is used by the drop shippers 
 described in Chapter VI and its use might be extended 
 to the sale of other style goods where it is desirable 
 to get the goods as quickly as possible from manu- 
 facturer to retailer. The warehousing of goods and 
 their distribution in small quantities to the separate 
 retail stores is, however, almost a necessity with most 
 classes of gopds. The chain stores do not eliminate 
 this function. If the wholesalers cease to perform 
 it, it will not be eliminated but merely shifted to 
 the manufacturers and retailers and the total market- 
 ing expenses will probably not be lessened by such a 
 shift. The suggestion to eliminate the wholesale 
 warehousing function offers no opportunity for reduc- 
 ing the cost of distributing most classes of goods to 
 the small retailers. 
 
CAN THE COST BE REDUCED? 637 
 
 Central wholesale markets. — ^Another proposal Is 
 for the establishment of central wholesale markets 
 In the larger cities, for the sale of foodstuffs. In 
 some cities the food wholesalers are located in various 
 parts of the city, often at considerable distances from 
 railroad sidings. Such locations Involve heavy ex- 
 penses for transportation and in case of perishable 
 foods also a certain amount of damage due to expo- 
 sure to heat and cold and to handling. Large termi- 
 nals could be built providing floor space for aU dealers 
 and also adequate cold and dry storage facilities. 
 Such markets should have connections with all rail- 
 roads entering the city. Goods would be unloaded di- 
 rect from the cars onto the space allotted to the 
 dealers. The basement and upper floors could be 
 used for storage space. Auction rooms and offices 
 for the brokers could also be provided on the upper 
 floors. Such markets could be publicly or privately 
 owned but should be publicly regulated. Such regu- 
 lation would secure fair dealing on the part of all oc- 
 cupants. An arrangement should also be made under 
 which anyone could ship goods to the market manager 
 or the supervising government official who would 
 have them sold by a commission merchant, broker, or 
 auction and see that the proper return was made to 
 the shipper. 
 
 The advantages of such markets would be : elim- 
 ination of cartage costs from car to store and from 
 store to car on goods shipped to out of town buyers ; 
 reduction of losses of foodstuffs from handling or 
 exposure to heat or cold; reduction in amount of 
 
638 MARKETING 
 
 foods lost due to lack or proper storage facilities; 
 an equalization of prices due to adequate storage 
 facilities; s aving of buyer's time by having all dealers 
 Jnn f fd r i n nr tn[]; Fthpr: r r du ct ion in salestofce needed 
 by thej£aleJ:s_4;^die-«©w sell~-all.xCiL_fiaft o"fnEheir 
 goods from the cars; reduction in unfair trade prac- 
 tices; and, in some cases, reduction" in ' numljer of 
 middlemen, as under the proposed scheme the car 
 lot receivers could sell directly to the retailers. It 
 would, however, be difficult to find suitable locations 
 for such Imarkets in some cities and the expense of 
 providing adequate building]s and other facilities 
 would be very heavy. 
 
 Such terminal markets should certainly reduce the 
 marketing expenses although all of the expected ad- 
 vantages might not be realized in actual practice. 
 
 PUBLIC REGULATION 
 
 Public regulation of prices. — There has developed 
 in recent years a more or less widespread demand 
 for public regulation of prices, especially of the 
 prices of foodstuffs. This suggestion was often heard 
 during the war when prices were soaring and charges 
 of "profiteering" were of daily occurrence. The ad- 
 vocates of such regulation argue that food, for ex- 
 ample, is as much a necessity as gas, electricity or 
 transportation ; that the competitive system has failed 
 to protect the consumers ; hence that the manufactur- 
 ers and dealers in foodstuffs should be considered as 
 public utilities and regulated accordingly. Under such 
 a system of control the Government might regulate 
 
CAN THE COST BE REDUCED? 639 
 
 the number of manufacturers and dealers, outline 
 the services to be performed and the records to be 
 kept, and fix their prices, or prescribe their margins 
 of profits. Such a system of regulation does not at- 
 tempt to abolish private property* or profits. Unless 
 consolidations or monopolies were formed it is diffi- 
 cult to see how prices could be materially reduced 
 for the reason that the regulating bodies would be 
 forced to consider the expenses of the high cost or 
 marginal manufacturers and dealers in prescribing 
 margins of profit or in fixing prices. Whether monop- 
 olistic organizations subject to public regulation 
 would distribute foodstuffs more cheaply than is done 
 under the present system is a debatable question and 
 one that is too broad to be discussed in this chapter. 
 
 The government might go even further and regu- 
 late the production of goods ; regulate the territorial 
 distribution of goods; and provide better storage fa- 
 cilities. Such regulations would, however, hardly be 
 practical under our present system of government. 
 
 CONCLUSIONS 
 
 Decreased costs may be obtained by increasing 
 the efficiency of present methods or by introducing 
 new methods. Some of the proposals for reducing 
 marketing costs have been discussed although it is 
 impossible in our limited space to mention all of 
 them. Many of the proposals are good but for the 
 fact that they overlook the tenacity of buying habits 
 and the difficulty of introducing new methods. The 
 buying public is unorganized and so cannot introduce 
 
640 MARKETING 
 
 new methods by agreement. Changes must be made 
 slowly. We have discussed briefly some of the 
 changes now taking place in marketing methods. 
 The tendency to lessen the number of middlemen and 
 establish direct connections between producers and 
 retailers, or consumers, has been mentioned. Such 
 connections have been made possible by the growth 
 of large retail organizations on the one side and large 
 manufacturing, or farmers cooperative organizations, 
 on the other. We do not, however, have enough in- 
 formation to enable a general statement to be made 
 as to just how much marketing costs have been re- 
 duced by such connections. 
 
 The self-serve and other "economy" methods make 
 possible lower prices to the consumers but often mean 
 that the consumers perform certain services for 
 themselves which in the past have generally been 
 performed by the retailers. Such methods used by 
 large retail organizations able to buy directly from 
 the producers offer opportunities for considerably re- 
 ducing marketing costs. Increased operating effici- 
 ency by middlemen — such as a higher rate of stock 
 turnover or cooperative delivery systems — may also 
 help to reduce marketing expenses. 
 
 Cooperative marketing organizations are poten- 
 tially important but practically often failures. Co- 
 operative selling organizations are often successful 
 in increasing the sellers profits. Cooperative buying 
 organizations have however, up to this time done lit- 
 tle to reduce the level of prices to the consumers. 
 
CAN THE COST BE REDUCED? 641 
 
 It is impossible to make a definite statement as to 
 how much changes now taking place will reduce the 
 cost of marketing goods. It must be remembered 
 that marketing methods are constantly changing. 
 Some of these changes may involve a reduction in 
 the cost of distributing merchandise and others may 
 not. But because some do not we should not be led 
 to believe that the efiiciency of our marketing machin- 
 ery cannot be increased. More study should be de- 
 voted to marketing. All members of society — pro- 
 ducers, distributors, and consumers — should encour- 
 age those proposals or methods that promise to re- 
 duce the cost of marketing goods. 
 
 BIBLIOGRAPHY 
 
 Cherington, P. T. : "Elements of Marketing," chs. 15 and 16. 
 Federal Trade Commission: "Wholesale Marketing of Food." 
 Ivy, Paul W. : "Principles of Marketing," ch. 21. 
 Nystrom, Paul H. : "The Economics of Retailing," chs. 19 and 21. 
 Weld, L. H. D. : "The Marketing of Farm Products," pp. 16-23 
 and 179. 
 
 CHAPTER XXIV— QUESTIONS 
 
 1. What are the different classes of proposals that have been made 
 
 for reducing the cost of marketing goods ? 
 
 2. Which proposal do you think offers the greatest opportunity for 
 
 reducing marketing costs? Why? 
 
 3. Are there too many middlemen? Why or why not? 
 
 4. Does direct selling from the manufacturer to the retailer benefit 
 
 the consumer? Why or why not? 
 
 5. In what ways may the manufacturer sell direct to the consumer? 
 
 Is the consumer benefited by any of these ? If so how ? If not, 
 why? 
 
 6. Do the farmers' markets supply an efficient marketing method ? 
 
642 MARKETING 
 
 Do they benefit the farmer? The consumer? Why have so 
 many farmers' markets fallen into disuse? 
 
 7. What are the diificulties involved in the farmer selling his 
 
 produce to the city consumers by parcel post? What are the 
 advantages of this method when successful? 
 
 8. Outline what you would consider an ideal marketing system for 
 
 the United States. 
 
INDEX 
 
 Accounting, 342-49; 455; 478; 
 
 481 
 Acker, Merrall & Condit, 223 
 Advertising, by Dept. Stores, 
 248; 261 
 Untruthful, 281 
 by Mail Order Houses, 281 ; 
 
 289 
 Expense by Mail Order 
 
 Houses, 289 
 by Chain Stores, 323 
 by Farmers' Coop. Assns., 
 
 447-48 
 by Trade Associations, 465; 
 
 469-70 
 by Manufacturers, 597-601 
 Agencies, exclusive, 532-34 
 Agents, See Brokers, Buying 
 
 Agents, Sales Agents 
 All Package Stores, 328 
 American Can Co., 484 
 American Specialty Manufac- 
 turers' Association, 144 
 American Woolen Co., 484 
 Antwerp, 170 
 Armour & Co., 525 
 Assembling, 9; 10 
 Atlanta, 59 
 
 Auctions, Ch. VII; 189 
 Automobile, Effect of on rural 
 stores, 239-240 
 Social changes due to, 297 
 Accessories, 506-7 
 Demand for, 507-9 
 Baltimore, 175 
 Binghamton, N. Y., 627 
 Birmingham, 48 
 
 Bon Marche, 221 
 
 Boston, 48-49; 145; 175; 427 
 
 Branch Houses of Manufactur- 
 ers, 66-67; 137-38; 514; 
 524-26 
 
 Brands, 146-50; 536 
 
 Brokers, Ch. IV; 445; 519-21 
 
 Brooklyn, 32 
 
 Bucket Shops, 199 
 
 Buffalo, 48; 49; 145; 175 
 
 Bulk Line Principle of Price 
 Fixing, 485; 548 
 
 Business Associations, 462-63 
 
 Business Defines, 2-4 
 
 Butler, Ralph Starr, 268 
 
 Buying, See Purchasing 
 
 Buying Agents, 85-87 
 
 Calif. Associated Raisin Co., 
 445; 456; 457 
 
 Calif. Fruit Growers' Ex- 
 change, 441 ; 450 ; 453 ; 598 
 
 Calif. Lima Bean Growers' 
 Assn., 106 
 
 Canvasser, 216-17; 537-39 
 
 Car Shortages, 30-31; 39-40 
 
 Cartels, German, 483; 484 
 
 Cash Carry Method, 328; 331; 
 632 
 
 Central Wholesale Markets for 
 Foods ; See Wholesale 
 Markets for Foods 
 
 Chain Stores, Ch. XIII; 223- 
 225; 536 
 
 Chain Stores, for names men- 
 tioned; see Ch. XIII 
 
 Chambers of commerce, 397; 
 462 
 
 643 
 
644 
 
 INDEX 
 
 Charleston, S. C, 48 
 
 Chattanooga, 48 
 
 Cherington, Paul T, 82; 100; 
 
 633 
 Chicago, 23; 33; 49; 50; SI; 
 52; 53; 101; 162; 175; 
 312; 337; 427 
 Cincinnati, 28; 34; 35; 36; 
 
 175 
 Clayton Act, 534; 571 
 Cleveland, 175 
 Cold Storage, 45-50 
 Columbus, 34; 175 
 Commission Merchants, 67 ; 
 
 83-84; 122-27 
 Commission, Rates of by Brok- 
 ers, 101-07; 189 
 Rates charged by Fruit Auc- 
 tions, 177-78; 453 
 Competition, Increase in 
 Relation to Prices, 549-50 
 Trade Associations, Ch. 
 
 XVIII 
 See Monopoly 
 Consignment, See Commission 
 
 Merchant 
 Cooperation by Farmers, Ch. 
 XVII; 211; 630-31 
 by Retailers, 121-22; 247 
 Producers, Ch. XVI 
 Consumers, Ch. XVI; 630-31 
 Wholesalers, 121-22; 162; 
 
 338 
 by Trade Associations, Ch. 
 XVIII 
 Cooperative Marketing, Ch. 
 
 XVI and XVII 
 Cooperative Marketing. Or- 
 ganizations, for names 
 mentioned see Ch. XVI and 
 XVII 
 Copeland, Melvin T., 82; 105 
 
 Corners, 197-98 
 Cost of Advertising, 598 
 Cost of Doing Business, Re- 
 tailers, Ch. XIV 
 Wholesaler, 153-58 
 General Stores, 236-37 
 Specialty Stores, Ch. XIV; 
 
 246 
 Department Stores, 266-70 
 Mail Order Houses, 286-90 
 Chain Stores, 325-332 
 Self Serve Stores, 326-27 
 Definition, 344-46 
 Large and Small Stores, 355- 
 
 58 
 Cooperative Stores, 432-33 
 Farmers' Coop. Assns., 452- 
 54 
 Cost of Marketing, 5-8; 613- 
 
 14; 638; 639 
 Cost of Production used by 
 trade associations, 478-81 
 Relation to prices, 547-49 
 Cotton Futures Act, 211 
 Cotton Pickers, 501-03 
 Credit, Wholesaler extends to 
 Retailer, 134 
 Mail Order Houses, 286-87; 
 
 301 
 Relation of Trade Associa- 
 tions to, 465; 469 
 Extension by Wholesalers,. 
 
 527-28 
 Policies, 602-05 
 Cudahy Packing Co., 525 
 Cumberland, Wm. W., 454 
 Curb Markets, 635-38 
 Curtis Publishing Co., 494 
 Delivery, 262; 295; 326; 329;. 
 458; 562-64 
 See Transportation 
 
INDEX 
 
 645 
 
 Demand, 391-401 
 
 New Products to Meet, 489 
 Use of Questionnaires to de- 
 termine, 490-92 ' 
 Factors affecting, 496-501 
 Determining by Experiment, 
 
 509-10 
 See Living Conditions 
 Denver, 175-428 
 Department Stores, Ch. XI; 
 
 220-22 
 Detroit, 34; 175 
 Discount, 567-72 
 Direct Sales, to Consumers, 
 
 218; 276; 277; 534-39 
 Distribution : 
 
 Choosing a Method of, Ch. 
 
 XX 
 Definition of, 2 
 Of goods by wholesalers, 
 
 131-32 
 Methods, Ch. Ill 
 Dividing, 10 
 Drop Shipper, 143 ; 636 
 Dutton, B. F., 221 
 Eastman Kodak Co., 509 
 East St. Louis, 35; 428 
 Economy, Method, 224-25; 325- 
 
 26 
 Expenses of Doing Business, 
 See Cost of Doing Business 
 Expense of Marketing, See 
 
 Cost of Marketing 
 Failures Among Retailers, 376- 
 
 81; of Mfgs., 488 
 Fairs, 215-16 
 Farmers 
 
 Attitude toward produce ex- 
 changes, 210 
 Cooperative organizations, 
 
 Ch. XVII 
 Markets, 623-27 
 
 Selling from house to house, 
 
 627 
 Federal Trade Commission, 13 ; 
 
 46; 48; 51; 55; 82; 96; 
 
 109; 135; 161; 163; 208; 
 
 301; 342; 346; 348; 354; 
 
 360; 362; 365; 372; 376; 
 
 456; 478; 481; 485; 581 
 Filene, Edw. A., 309; 435 
 Financing, 16 ; 606 
 
 by Brokers, 89 
 Fitchburg, Ma'gs., 427 
 F. O. B., 573 
 Foodstuffs, Damage to, 34; 36- 
 
 39 
 F. O. P., 574-75 
 Ford, Henry, 595 
 Ford Motor Co., 500 
 Fungible and Non-Fungible 
 
 Goods, 47 
 Future Sales, 192-94; 199-203 
 
 Delivery Under, 197-198 
 General Sales Agency of Amer- 
 ica, 165 
 General Store, 219-20; 234-40 
 Gentlemen's Agreements, 471 ; 
 
 474-75 ' 
 
 Goods, Fungible and Non- 
 Fungible, 47 
 Goods, Inc. in Manufactured, 
 
 228-229 
 Grading, 10-14; by Produce 
 
 Exchanges, 195-97 
 Graded vs. Ungraded Fruits, 
 
 175-76 
 Grain Elevators, 45; 439-40 
 Grand Rapids, Mich., 376 
 Great Atlantic & Pacific Tea 
 
 Co., 223; See also Ch. 
 
 XIII 
 Grocerteria, 225; 632 
 
646 
 
 INDEX 
 
 Guarantee Against Price De- 
 cline, 574-76 
 
 Haney, Lewis H., 531 
 
 Harrisburg, Pa., 48; 625 
 
 Harvard University, Bureau of 
 Business Research, 155; 158 
 330; 344; 346; 348; 356; 
 357; 359; 362; 364; 365; 
 405; 411 
 
 Hedging, 201-03 
 
 Help Yourself Store, 225 
 
 Higgling, 226-27 
 
 Hoboken, 426 
 
 Hoover, Herbert, 7; 40; 187 
 
 Houghton, S. S., 221 
 
 Houston, 48 
 
 Huckster, 216 
 
 Hudson Bay Co., 314 
 
 Hutchinson, Kan., 50 
 
 Income, net, 369-75 
 
 relation to demand, 497-99 
 See also Profits, net 
 
 Indianapolis, 34 
 
 Intensive Selling, 608-09 
 
 Interest as an Expense, 345-46 
 
 International Harvester Co., 
 484; 534 
 
 Inventory, Perpetual, 385-88 ; 
 unbalanced, 389-90 
 
 Jacksonville, 48 
 
 Jewell Tea Co., Inc., 217 
 
 Jobber, See Wholesaler 
 
 Jones Bros. Tea Co., 223 
 
 Jordon, Marsh, 221 
 
 Justice, U. S. Dept. of, 162; 
 337; 473; 534 
 
 Kansas City, 35; 190; 192; 427 
 
 Knoxville, 48; 625 
 
 Kresge Stores, 366; See also 
 Ch. XIII 
 
 I.auck, W. Jett, 106 
 
 Leaders, Use of by Wholesal- 
 ers, 140 
 Leggett, F. H. & Co., 147 
 Liverpool, 70; 191 
 Living Conditions, 256-57; 282- 
 
 84; 507; 593; 613; 615 
 Location of Stores, 323-24; 425- 
 26; 492-93; 260-61; 218; 
 220; 224; 235; 237; 248. 
 London, 170 
 Long Sale, 206-07 
 Los Angeles, 58; 427 
 Louisville, 34; 35; 36 
 McCrory Stores, 366; See also 
 
 Ch. XIII 
 Macy, R. H., 221 
 Mail, Business done by, 276-77 
 Use of to defraud, 281 
 Mfgs. Selling by, 63; 536-37; 
 622; Ch. XX 
 Mail Order Houses, Ch. XII; 
 
 221-22 
 Mail Order Houses, for Names 
 
 Mentioned, See Ch. XII 
 Mail Order Jobber, 121 
 Management, of General 
 Stores, 238-39 
 of Specialty Stores, 248-50 
 of Department Stores, 271-73 
 of Chain Stores, 321-24 
 of Retail Stores, 355-58 
 of Cooperative Stores, 424; 
 429 
 Market Analysis, Ch. XVIII 
 Marketing, Definition of, 1-2 
 Object of, 2-3 
 A Part of Business, 3-4 
 Little Studied, 4-5 
 Importance of, 5-8 
 Increasing Interest in, 8 
 Opportunities in, 8-9 
 Functions, 9-18 
 
INDEX 
 
 647 
 
 Marketing Facilities, Ch. II 
 Markets, Public, 63; 215-16 
 Farmers, 623-27 
 Curb, 635-38 „ 
 
 Central, 51-60 1^3 ^ 
 Memphis, 59; 225 
 Messengers in Charge of Cars 
 
 of Perishable Foods, 38 
 Middlemen Handling Various 
 
 Products, Ch. Ill 
 Middlemen, Are There Too 
 
 Many? 614-17 
 Miles City, Mont., 427 
 Milwaukee, 175 
 Minneapolis, 35 ; 175 
 Minn. Exp. Station, 429; 433 
 Moody's Manual, 348; 366 
 Monopoly; 335-38 
 Monopoly Price, 555-558 
 Montgomery Ward & Co., 223; 
 
 437; See also Ch XII 
 Morris & Co., 525 
 Mounds, 36 
 
 National Biscuit Co., 525 
 National Canners' Association, 
 
 464; 466 
 National Canned Foods and 
 
 Dried Fruit Brokers' Asso- 
 ciation, 100 
 Nelson, N. O., 424 
 New Orleans, Ch. XVI, 14, 175 ; 
 
 424 
 New York City, 22; 32; 33; 
 
 49; 50; 52; 53; 101; 161; 
 
 175; 176 
 Non-partiSan League, 427 
 Norfolk, 34; 48; 380 
 Nystronj, Paul H., 226; 268; 
 
 376; 377; 379; 614 
 Omaha, 428 
 
 Open Price Associations, 475-78 
 Ordering vs. Purchasing, 388-89 
 
 Oshkosh, Wis., 376; 377 
 Over the Counter Sales, Elimi- 
 nation of, 632-34 
 Owen, Robt., 419 
 Parcels Post, Sale of Foods by, 
 
 627-29 
 Park & Tilford, 223 
 Patrons of Husbandry, 223 
 Peddler, 216 
 Pender, David, 380 
 Pennsylvania R. R., 29; 59 
 Pensacola, 48 
 Philadelphia, 35; 48; 53; 59; 
 
 118; 145; 175 
 Philadelphia Plan, 145-46 
 Physical Marketing Facilities, 
 
 Ch. II 
 Piggly Wiggly Stores, 225; See 
 
 also Ch. XIII 
 Pittsburgh, 27; 48; 59; 103; 
 
 175; 225; 427 
 Pools, 446-47; 471; Pooled Car, 
 
 90; 526-27 
 Poor's Manual, 348-366 
 Population, Distribution of, 
 
 524; 525 
 Population, Relation to De- 
 mand, 496 
 Portland, Me., 145 
 Post Office, U. S. Dept., 627 
 Potomac Yards, 36 
 Prices, Chs. XXI and XXII: 
 Equalization of by organized 
 Exchanges, 209-10 
 Higgling Over, 226-27 
 One Price Plan, 227 
 Falling, 221; 227-28 
 Rising, 226 
 
 Mfgs. Sell by Mail to Con- 
 trol, 285 
 Low by Mail Order Houses, 
 291-92 
 
648 
 
 INDEX 
 
 Prices {Continued) 
 
 Establishment of at Auction, 
 
 173 
 Effect of Auction Sales on, 
 
 184-85 
 Public by Exchanges, 194-95 
 Stabilization of by Exchanges, 
 
 205-09 ■ 
 Certainty of by Speculation, 
 209 
 
 Of Chain Stores, 330-33 
 Relation to Profits, 350-51 
 Of Cooperative Stores, 422 
 431-33 
 Fixing by Trade Associa- 
 tions, 466; 470-86 
 Fixing by Trade Associa- 
 tions Supervised by Gov- 
 ernment, 485 
 Authority and Influence of 
 
 Brokers on, 93-97 
 Public Regulation of, 337; 
 638-39 
 Proctor & Gamble, 530; 531 
 Produce Exchanges, Ch. VIII 
 Production, 1 ; 4 ; Relation to 
 
 Selling Policies, 594-97 
 Profits, Gross, 150-53 
 Definition, 343 
 Of Retailers, 349-5S 
 Profits, Net 
 Definition, 346 
 of Brokers, 107-112 
 of Wholesalers, 158-61 
 of Retailers, 366-75 
 of Chain Stores, 372 
 Profit and Loss Statement, 346- 
 
 47 
 Providence, 35 
 
 Publicity, 600-01; See Advertis- 
 ing 
 
 Purchasing, Ch. XV; 260 
 Chain Stores, 317-19 
 Farmers' Coop. Assns., 448-49 
 Cooperative by Merchants, 
 
 121-22; 457-58 
 Power of a Community, 493- 
 
 96 
 By Mail Order Houses, 285- 
 86 
 Quality, Relation to Price, 
 
 550-52 
 Quantity Prices, 567-68 
 Quantities Purchased by Con- 
 sumers, 634 
 Quantity Theory of Money, 
 
 544-47 
 Railroads, 24-27 
 Terminals, 27-35 
 Overloading Cars, 37 
 Rates and Classifications, 
 Work of Trade Associa- 
 tions, 465 
 Estimating Traffic, 505-06 
 Refrigeration, 45 ; 46 ; 48-50 
 Rent, 236; 266; 286; 323-25; 
 
 344; 356 
 Resale Price Maintenance, 576- 
 
 85 
 Retailing, Chain Stores, Ch. 
 XIII 
 Department Stores, Ch. XI 
 Development of, Ch. IX 
 Mail Order Houses, Ch. XII 
 General Stores, Ch. X 
 Specialty Stores, Ch. X 
 Mfrs. Stores, 623 
 Richmond, Va., 48 
 Risks, Assumption of, 40-41; 
 
 203-05; 391 
 Rochdale Plan, 419; 422; 426 
 St. Louis, 34; 35; 145; 175 
 
INDEX 
 
 649 
 
 St. Paul, 35; 175; 427 
 Sammons, Wheeler, 26S ; 289 
 Sales Agent, 81-83 ; 90-96 
 Selling Through, 518-19 
 Sales Contract, 95; 465; 466 
 Sales, Cash, Spot and Future, 
 
 192-95 
 Sales Force, of Wholesalers, 
 132-34 
 Needed by Mfg., 516; 522-23 
 Of Brokers 90-91 
 Sales Management, 607-10 
 Salesmanship of Brokers, 91-93 
 Poor in Dept. Stores, 265 
 to Secure Volume of Sales, 
 
 510-11 
 of Wholesalers, 528-29 
 of Specialty Salesmen, 537- 
 
 39 
 by Manufacturers, 598; 607; 
 609 
 Sales in Same Stage of Distri- 
 bution, Necessity For, 73- 
 74 
 Sales of Raw and Semi-finished 
 
 Goods, 74-75 
 San Antonio, 48 
 San Francisco, 34; 427 
 Santa Cruz, Cal., 627 
 S. A. P., 573 
 Savannah, 48 
 Sears, Roebuck & Co., 393; See 
 
 also Ch. XII 
 Seattle, 48; 624 
 Self Serve Stores, 224-25; 326- 
 
 29 
 Selling Expenses, Farm Imp. 
 Mfrs., 620 
 Flour Millers, 621 
 Canned Food Packers, 621; 
 See Cost of Doing Business 
 
 Selling Houses, 82-83 
 Selling, Relation to Production, 
 592-97; 610 
 Relation to Advertising, 597- 
 
 98; 610 
 Relation to Credit Policies, 
 
 605-06; 610 
 Complete Policy, 610 
 Service, 231; 258-59; 263-64; 
 294-97; 299-300; 302-03; 
 334; 358-59; 606-08; 632- 
 34; 640 
 Sherman Anti-Trust Lavr, 471 
 Short Sale, 206-08 \' 
 
 Southern Pacific Railway, 58 
 Specialty Salesmen, 143-145; 
 
 537-39 
 Specialty Stores, Ch. X; 218 
 Speculation, Ch. VIII 
 Spot or Cash Sales, 192-95 
 Stage of Distribution, Sales in 
 
 Same, 73-74; 192-95 
 Standard of Living; See Liv- 
 ing Conditions 
 Standard Oil Co., 484 
 Stockkeeping, Ch. XV. See 
 
 Management 
 Stock Turnover, Ch. XV; 249- 
 
 50; 287-88; 319-20 
 Storage, 15; 42-51 
 Importance of, 43-45 
 Facilities, 45-51 
 Public Warehouses, 46-47 
 Refrigeration Space, 45-46 
 Central Wholesale Markets, 
 
 51-60 
 By Wholesalers, 131-32 
 See Warehousing; Standard- 
 ization, 10-15; 595 
 By Produce Exchanges, 195- 
 97 
 
650 
 
 INDEX 
 
 Storage {continued) 
 
 By Farmers' Coop. Assns., 
 
 442; 447-48 
 By Trade Associations, 466- 
 
 69 
 Superior, Wis., 427 
 Style, Rapid Changes in, 230 
 Swift & Co., 6; 7; 525; 601; 
 
 614 
 System Magazine, 376 
 Thomas Grocery Register, 99; 
 
 116; 309 
 Thornhurst, H. F., 144 
 Toledo, 175 
 Tractors, Farm, 288; 489; 504- 
 
 05 
 Trade Associations, Ch. XVIII 
 Trade Channel, Ch. HI; Ch. 
 
 XX; Shortening, 617-29 
 Transportation, Ch. II; 2; 14- 
 
 15 
 Traveling Salesmen, 218-19 ; 
 
 522-23 
 Turnover, of Working Capital, 
 
 413-14 
 Manufacturers', 403-04 
 See Stock Turnover 
 U. S. Dept. of Agriculture, 301 
 Bureau of Markets, 429; 430; 
 
 438 
 XT. S. Dept: of Labor, 430; 433 
 U. S. Steel Corp., 484 
 U. S. Supreme Court, 580 
 Wanamaker, John, 227 
 Wants, 2-3; 282-83 
 Warehousing, 634 
 By Wholesalers, 131-32 
 by Manufacturers, 66 - 67 ; 
 
 138; 522; 524-27; See Stor- 
 age 
 
 Waterloo, Iowa, 376 
 
 Weather, Foretelling, Effect on 
 
 Business, 397-99 
 Wholesale Dealers, Chs, V and 
 
 VI; See Wholesaler 
 Wholesale Grocers, 116-17 
 Gross Profits, 151-52 
 Expenses, 154-5 
 Net Profits, 158-59 
 Future of, 161 
 Wholesaler, Manufacturing, 
 146-47 
 Brands, 147-50 
 Gross Profits, 150-53 
 Expenses, 153-58 
 Net Profits, 158-61 
 Future of, 161-66 
 Cooperative, 421-22; 427 
 Selling to by Mfg., 521-23; 
 
 525-32 
 Mfrs.' Price to, 566-67 
 Wholesaler and Jobber, 118 
 General and Specialty, 119- 
 
 21 
 Semi-jobber, 121 
 Mail Order, 121 
 Cooperative, 121-22 ; 247 ; 
 
 421-22; 427 
 Number of, 127-30 
 Services Performed by, 130- 
 
 39 
 Problems of, 139-41 
 Wholesale Markets for Foods, 
 
 51-60; 537-38 
 Wichita, Kan., 34; 38 
 Wilkes-Barre, Pa., 48 
 Wilmington, Del., 48 
 Wilson & Co., 525 
 Woolworth, F. W. Co., 223; 
 
 366; See also Ch. XIII 
 Women as Buyers, 255-59 
 
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