The Library of
UNIVERSI
THE
OF
COMMUNE VINCULUM
OMNIBUS ARTIBUS
MINNESOT
Class
658.83
Book
C769m

MARKETING
METHODS AND POLICIES
BY
PAUL D. CONVERSE
Head of the Department of Commerce,
University of Pittsburgh

ANTICE-HA
PRENTICE
NEW
HALL
BUSINESS
BOOKS
SERVICES
YORK
INC
NEW YORK
PRENTICE-HALL, INC.
1922
COPYRIGHT 1921, 1922, BY
PRENTICE-HALL, INC.
Printed in the United States of America
All Rights Reserved
First Printing-October, 1921
Second Printing-January, 1922
6=0.83
JAN 5 123
C76940
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.
293546
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
V
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, January, 1922.
TABLE OF CONTENTS
CHAPTER
I-MEANING AND FUNCTIONS OF MARKET
DISTRIBUTION
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
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.
PAGE
1
20
ix
X
CONTENTS
CHAPTER
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.
III-TRADE CHANNELS
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
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.
PAGE
62
31
CONTENTS
xi
1
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
PAGE
. 116
Definitions; Grocers; Wholesaler and jobber; General
vs. specialty wholesalers; Semi-jobbers; Mail order
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.
THE WHOLESALER'S COST OF DOING BUSINESS-Varia-
tion in expenses; Wholesale grocers; Flour jobbers;
Produce dealers; Shoe wholesalers.
xii
CONTENTS
CHAPTER
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
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
•
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.
PAGE
169
187
CONTENTS
xiii
CHAPTER
IX-THE DEVELOPMENT OF RETAIL TYPES
AND METHODS.
PAGE
. 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
1. THE GENERAL STORE
Still important; Inability to carry assorted stock of
goods.
ADVANTAGES OF THE GENERAL STORE-Convenience of
its location; Personal contact; Can base credit on ex-
act knowledge; Low operating expenses.
DISADVANTAGES OF 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
234
2
xiv
CONTENTS
CHAPTER
XI-RETAIL TYPES (Continued)
•
3. THE DEPARTMENT STORE
PAGE
. 253
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
XII-RETAIL TYPES (Continued)
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
276
CONTENTS
XV
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)
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
PAGE
306
xvi
CONTENTS
CHAPTER
XIV-EXPENSES AND PROFITS OF RETAIL
MERCHANTS
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 jewelry 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.
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-
PAGE
341
383
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 different classes of dealers; Turn-
over of working capital.
XVI-COOPERATIVE MARKETING
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)
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;
Fooling; Standardization and advertising; Purchasing
supplies; Organization; Accomplishments; Low selling
expenses; Danger of monopoly; The Raisin Trust.
COOPERATION ENTERPRISES AMONG DEALERS
XVIII-TRADE ASSOCIATIONS
Importance of trade associations; Types of organiza-
tions; Activities; Standardization of product; Objects
of Standardization; Cooperation on credit; Advertis-
PAGE
417
437
462
xviii
CONTENTS
V
CHAPTER
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
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; Difficulties due to changing demand;
Automobiles; Determining demand by experiment; Se-
curing the estimated volume of sales; Success in sales
campaigns.
PAGE
488
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
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
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
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.
PAGE
542
562
XX
CONTENTS
CHAPTER
XXIII THE COORDINATION OF MARKETING
POLICIES AND ACTIVITIES
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 pol-
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?
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.
5. PUBLIC REGULATION-Public regulation of prices.
6. CONCLUSIONS.
PAGE
592
613
MARKETING
CHAPTER I
MEANING AND FUNCTIONS OF MARKET
DISTRIBUTION
The place of marketing in economics.-Eco-
nomics for the purpose of study is divided into pro-
duction, distribution, and consumption. Production
consists in the creation of form, 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.
1
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
consumers or the transportation and all the transac-
tions involved in getting the goods from the pro-
ducers 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 divi-
sion 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 avail-
able by human and non-human agencies. Minerals
are dug from the earth, the soil tilled, crops har-
vested, factories operated, goods transported, stored
and exchanged, and services performed by human be-
ings 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 are 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 retailer $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
manufacturer's 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-

WHOLESALER'S
EXPENSE
10 CENTS.
WHOLESALER'S
PROFIT 3 CENTS
MANUFACTURER'S
PROFIT 4 CENTS.
MANUFACTURER'S
SELLING EXPENSE
12 CENTS.
RETAILER'S EXPENSE
28 CENTS.
MANUFACTURER'S COST
37 CENTS.
RETAILER'S PROFIT
6 CENTS.
DISTRIBUTION OF 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 eliminate 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
¹Writing 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
for 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.
ers.
Dividing.-Goods produced or purchased in large
quantities must be distributed in small lots to the buy-
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 11
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
analysis, etc. The amount of moisture permissible 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 are 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 2½ 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.'
112
2 Federal Trade Commission: "Wholesale Marketing of Food,"
P. 84.
14
MARKETING
The same conditions prevail with many other pro-
ducts. In canning fruits and vegetables the standard
size cans are Nos. 1, 2, 22, 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, mus-
tard, or tomato sauce.
Transportation.-Transportation is one of the
most important functions in the marketing process.
Steam, steel, and electricity have made possible
transportation 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 does 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 occurrence 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. All business transactions, whether
producing or selling, must be financed. Finance is
generally regarded as a separate subject and many
books are 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 assumption 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
3
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 of 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
M
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," chs. 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 greater variety of goods, the laborer of to-day
or the banker of the 18th century? Which is the happier?
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
farmer's crops to his barns, to the local elevator,
creamery, or shipping station; the moving of raw
materials from sawmill, oven, smeltery, mine, or
farm to the factory and from one factory to another;
the moving of finished products from farm or fac-
tory to local shipping station or car, from shipping
point to city market, from car or boat to wholesale
warehouse, 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
20
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 jobber's 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 latter's 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.
Över 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.¹ New York
City draws its supply of apples from 24 states, its
1
Federal Trade Commission, "Wholesale Marketing of Food,"
p. 188.
PHYSICAL MARKETING FACILITIES
23
white potatoes from 23 states, its cabbage from 16
state, its cantaloupes from 15 states, its peaches
from 15 states, its tomatoes from 13 states, its
strawberries from 12 states, and its sweet potatoes
from 8 states. Practically the same is true of all
large 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
The Lower South:
2,463
Florida
389
Minnesota
Idaho
Washington
Colorado
Michigan
California
South Dakota
• •
1,194
Texas
379
·
550
Louisana
315
• •
•
•
384
Alabama
86
302
Mississippi
59
•
274
North Carolina
22
South Carolina
13
241
197
The Upper South:
Illinois
166
Virginia
.1,223
Oregon
North Dakota
116
Maryland
152
49
Arkansas
143
•
Iowa
# •
34
Kentucky
114
Kansas
Missouri
Oklahoma
105
30
Tennessee
24
•
52
Nebraska
23
•
The East:
Indiana
21
New Jersey
187
•
Montana
21
•
Pennsylvania
63
Ohio
9
Delaware
2
Utah
6
West Virginia
1
New Mexico
2
Maine
1
2 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 trucks, 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 are paying more for automobiles
than for railway transportation.3 The money spent.
³ 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 it 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 50 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.
4
The airplane is a demonstrated success for carry-
ing the mail, but there are 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 our railroad system.-During the
world war the railroads were unable to handle prop-
erly 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 unused margin to take care of rapid increases
in traffic caused by industrial prosperity or war.
It is generally admitted 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.5 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
0
or on transfer tracks 52 per cent of the time. These
percentages show plainly the weak spot in the opera-
tion of our railroads. After the return of the roads
to private operation on March 1, 1920, the man-
agers started to purchase new cars and locomotives
and to increase 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 num-
ber 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
noteworthy, it does not appear that the terminal sit-
uation 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
depends 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 are 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 heavy 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
2
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
ports 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
7
Forst, Haywood: in American Business & 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.
198
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
8 Federal Trade Commission: "Wholesale Marketing of Food,"
pp. 118, 119, and 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
9
⁹ 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 with 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.10
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 either 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. Louis 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.12 The delays in the
classification yards, and transfer tracks are often
quite serious. It ordinarily takes several days to
10 Ibid., pp. 114-118, and 97-101.
'Ibid., p. 98.
12
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
reconsignment. 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 (Ill.). 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
37
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.13 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.
14
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.15 Overloading of green
vegetables in poorly ventilated cars leads to over-
heating and sweating. Serious complaint is made
13 Ibid., p. 88.
¹E. S. Godsell, Manager foreign fruit brokerage department of
Fruit Auction Company of New York, writing in Journal of Com-
merce, January 24, 1921.
15 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 at 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 see 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.
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-
18 Ibid., p. 109.
They see that
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 with 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 a
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.17
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
17 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."'s
Risks increase the margin between the producers
and the consumers. Each middleman who han-
18 Writing in the Saturday Evening Post, April 10, 1929.
PHYSICAL MARKETING FACILITIES
41
dles 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 are 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 consuming 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
meet properly 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 facilities 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 are 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. In 1913 there
were in the United States, 3,485 cotton warehouses
with a capacity of nearly 14,000,000 bales, aside
from the warehouses of the cotton mills.19 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 20
Capacity
Cubic Feet
3
Warehouses
Number
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
·
1,282
496,960,165
Total
19
Duncan, C. S.: "Marketing," Ch. 8.
20
Figures furnished by Bureau of Markets, U. S. Department of
Agriculture.
46
MARKETING
21
There are 1,327 branch houses of interstate
slaughtering houses, all of which have cooler space.2
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.22
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 are 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
"¹ Federal Trade Commisison: "Report on Meat Packing In-
dustry," Pt. 4, p. 32.
22 "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.-A few 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.23
Adequacy of cold storage facilities in various
cities.-The Federal 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
3 Ibid., pp. 86-87.
23
:
PHYSICAL MARKETING FACILITIES 49
•
New
to cart their goods the necessary distance.
York and Chicago had adequate facilities prior to
the war, but were unable to handle properly 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 15 per cent in zero weather. 24 "Every
year millions of dollars' worth of fruits, vegetables,
24 Ibid., 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."25 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.26
Goods often must be carted from rail terminals
25 Ibid., p. 102.
26 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 are 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
WHOLESALE 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
27 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 the latter were included in such a system. New
York and Chicago might need two or more such mar-
kets for handling each of these three classes of prod-
ucts. 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
year.28 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 busi
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,
28 Ibid., p. 147.
2
54
MARKETING ·
PAVED STREET
FOR TRUCKS TO DELIVER GOODS TO RETAILERS.
드
​E
PORTABLE BRIDGE
•
O
E
GANGWAY FOR TRUCKING.
J
RAILROAD
SIDINGS.
E
GANGWAY FOR TRUCKING.
* PORTABLE BRIDGE
E
E
E
PAVED STREET
CHART II.
SMALL MOVEABLE OFFICES FOR
DEALERS CHECK CLERKS & CASHIERS.
- E- ELEVATORS TO BASEMENT &UPPER FLOORS.


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.
Outbound 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 the tracks
every two or three car lengths to form passageways
between different 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, cabbages, etc. In a large distributing
market the cars might have to be "pulled" in the
afternoon and a second bunch placed for loading.
Cars reconsigned to other markets should not be un-
loaded but should be left on outside tracks for in-
spection. The dealers would notify the market
management before the arrival of cars as to
whether they wished them unloaded 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
federal licenses before being permitted to do business
in these markets. Under the terms of these licenses
no dealer would be permitted to engage in any unfair
practices, to charge unreasonable prices, to make un-
C
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 efficiently and that
all dealers receive 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-1
ing of perishable foodstuffs by 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 improve-
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
Many of the books and articles bearing on market-
ing contain more or less information on the trans-
portation and storage of goods. It would be im-
possible to enumerate all such books here. The
reader is, however, referred especially to the refer-
ences given at the end of the chapter on Produce
Exchanges and the Question of Speculation (Chap-
ter VIII), many of which describe the facilities for
handling certain agricultural staples. The United
States Department of Agriculture has also pub-
lished 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 American Academy of Political
and Social Science, 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 sugg
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?
C
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.
(Broker...
Wholesaler.
Producer
Branch house..
Commission Man.
+
• • •
Retailer
› Consumer
66
MARKETING
This channel is often 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 similar economic functions and incur
the same kind of expenses as the wholesalers, we may
ignore 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-
1
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.
Producer
(Broker..
Sales Agent... Wholesaler Retailer
Buying Agent..or Jobber
Local Buyer...)
› Consumer
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 organization, 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 independent 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 through the hands of four
middlemen between the producer and the consumer.
Cherington, Paul T.: "The Wool Industry," ch. 7.
70
MARKETING
Sales Agent....Broker...
Local Buyer....Broker.
•
•
.Wholesaler
Jobber
Producer Local Buyer....Wholesaler....Jobber
Importer
Broker...
• •
Local Shipper...Auction.
•
Retailer
.Wholesaler
•
.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 asso-
ciation, 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 growers' associations or for the
wholesale dealer. In either case the fruit passes
through two hands between 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 5 per cent are sold through
stores owned and operated by the manufacturers.
3
* 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 jobber's 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
4
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
75
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:
3
76
MARKETING
PRODUCERS.

CENTRAL
MARKET.
CHART III.
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
CENTRAL MARKET.

CONSUMERS.
CHART IV
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
PRODUCERS

CENTRAL
MARKET
CONSUMERS.
CHART V.
The method of marketing manufactured products
through the middlemen may be further illustrated by
the following diagram:
TRADE CHANNELS
79
C
C
C
لى
Q
୧
R
W
노
​C
M.
CHART VI.
CONSUMERS
R RETAILERS
W WHOLESALERS
M MANUFACTURER

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."
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
1
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.
2
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
Cherington³ 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
2 Federal Trade Commission: "Report on Canned Foods, Canned
Salmon," p. 22.
3
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 for sale goods belonging to an-
other, who has control of the goods, and who must
account to the owner for the proceeds of the sale of
the goods. A commission merchant is sometimes
called a factor.
The work of a broker at times closely resembles
that of a commission merchant. Both sell goods be-
longing to others for 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 and makes
delivery to the buyer, and the buyer may not know
that the goods are not the property of the commis-
sion 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 which
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."
4
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 handle profitably 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 principles or clients, he may be
expected to perform the services; and if he sees an
opportunity to make money by purchasing goods on
"Brokers handling merchandise as contrasted with stocks and
bonds are sometimes called merchandise 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
conditions 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 at
so much per month, the amount depending upon the
services rendered. Such buying agents are often used
in the purchase of hardware, dry goods, and women's
ready-to-wear clothing. These goods are manufac-
tured 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 are unable to keep in constant touch with
them. For this reason the buyers located outside of
the producing centers find it advantageous to employ
buying agents who are in close touch with the sources
of supply 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
discounts which would be beyond the reach of the in-
dividual 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 negotiate sales successfully 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
3
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
mills' notes is one to two and a half per cent, and
the charges for guaranteeing the mills' 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.5
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,
bookkeepers, 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 conduct a brokerage
business successfully 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.
of a broker depends upon his ability to secure goods.
for sale and makes sales which are satisfactory to his
0
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 established broker-
age houses often regard such a practice as "unfair"
and opposed to trade ethics. It is, however, hard
completely to 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. Stories
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 what 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 16.8.8
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
who 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
brokers dealing in articles falling in the second group
are experts in that they are thoroughly familiar with
small highly specialized markets. These brokers
furnish an excellent example of middlemen highly
specialized as to function and carrying on their op-
erations for a very low rate of commission. Freight
forwarders may be regarded as performing a spe-
cialized function in attending to the details of mak-
ing export 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 accurate 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.
9
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 10 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 there 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
9
• Copeland, Melvin T.: "The Cotton Manufacturing Industry in
the United States, 1912," p. 216.
10
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 7½ to 20 cents per share, accord-
ing to the price. The common rate on bonds is %
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, 34 of one per cent with 3/4 c. per bushel
as minimum; corn and rye one per cent with 34c.
per bushel as the minimum; oats one per cent with
½c. per bushel as minimum. When purchases are
made from members these rates are somewhat lower,
as follows: wheat, ½ of one per cent with ½c. per
bushel as minimum; corn and rye, 34 of one per cent
with 2c. per bushel as minimum; oats, 34 of one
percent with gc. 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
c. 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
c. per bushel in lots of over 5000 bushels, and
1/4 c. 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 1½ 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 5 per cent with maximum of $1.00 and a
minimum of 75 cents per ton.12 The rate on strictly
brokerage business in Pittsburgh is from 14 to 2
of one per cent.
Change from unit to percentage 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, 1920.
2
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 ½ 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
13½ per cent have been reported, while one large
salmon canner pays only 4 per cent.'
14
15
Rates on insurance and ships.-Marine Insur-
ance brokers are paid from 2½ to 5 per cent.
During the war, ship brokers were paid three quar-
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 1½ per cent of net sales. One exclusive selling
agent receives commission of from 2½ to 10 per
cent.
10
13 The Produce Reporter for 1920 gives 2½ per cent as the cus-
tomary rate.
14
Federal Trade Commission: "Report on Canned Foods, Vege-
tables and Fruits," pp. 19 and 50; "Canned Salmon," pp. 22-26.
15
Hough: "Practical Exporting, 1919,” p. 433.
10 Federal Trade Commission: "Report on Fertilizer Industry,"
pp. 7 and 8.
BROKERS AND SALES AGENTS
105
Rates on cloth.-Cotton cloth brokers receive ½
of one per cent according to Copeland" but the Bu-
reau of Foreign and Domestic Commerce¹8 states
that the brokers generally are paid 1½ per cent
when selling cloth for export. Brokers buying cot-
ton cloth for foreign importers receive from 2 to
5 per cent, 32 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 3½ 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. 19
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 1920 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
17
Cotton Manufacturing in the United States," p. 216.
18 "Selling in Foreign Markets," pp. 514 and 516.
19
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 4 to 2c. dozen on eggs;
14c. pound on cheese; and % to 2c. pound on but-
ter depending on the quantity sold.
The California Lima Bean Growers' Association
pays its selling agents five per cent of the cost 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.2
20
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, 21 cents 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 1920.2¹
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 reasonable or not. Relatively few figures are
20 Journal of Commerce, October 11, 1919.
21 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 an 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
66
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
$62,263
48,133
64,634
General Canned Food Brokers......$37,416
Canned Salmon Brokers.
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,
are included with the profits (eliminated from ex-
110
MARKETING
penses) for the reason explained above. The per-
centages of net profit were as follows:
General Canned
Food Brokers
.22
On Investment
Broker No. 1....
((
<<
2..
"
((
((
<<
((
3.
• •
A.
5.
6.
•
7.
8.
•
•
((
((
Per Cent Net Profit
1916
1917
119
174
• •
•
.130
222
114
130
•
6
24
·
275
652
·
53.
66
•
.272
520
25
253
.101
148
•
•
Average
Canned Salmon Brokers.
Broker No. 1..
((
2.
་་
((
((
<<
པ
((
པ
ཝཱ
(C
(C
པ
<<
3.
•
4.
5.
6.
7
8
9
10.
11
• ·
► •
• •
• ►
• •
((
<<
་
"
12.
"C
((
13.
•
110
77
21
34
•
•
.534
773
31
90
38
37
29
44
38
147
.218
170
39
100
•
►
..148
93
·
•
..119
124
·
20
18
14
18
•
43
54
Average
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 were 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 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, eggs, 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
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-
116
WHOLESALE DEALERS
117
X
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.¹ 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 15
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.
2
Nourse, E. G.: "The Chicago Produce Market," p. 28.
እሱ
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" .3
In this book the terms wholesaler and jobber will
be used interchangeably 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.
A
The general wholesaler is still common in the
handling of groceries and hardware. The hardware
jobber commonly handles over 10,000 items.
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
3
Report of Federal Trade Commission: "Leather and Shoe In-
dustries," p. 168.
2
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.
A
* Cherington, Paul T.: "The Wool Industry," ch. 9.
4
WHOLESALE 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
The
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.
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 $200,000.5
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
"New 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-
In actual practice the same dealer may do a
commission business, a brokerage business, and a
merchandising business.
ter.
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.
6
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 quantities 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 "it's 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
7
"On this point read Federal Trade Commission Report on
"Wholesale Marketing of Food,” pp. 165-172.
WHOLESALE DEALERS
125
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-
8
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
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
9
signment 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.10 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.
10 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 15 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 number of wholesalers. The number of
wholesale dealers handling various lines of mer-
chandise was stated as follows in 1913:11
11 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
Groceries
Produce
Provisions
Foodstuffs:
Wearing Apparel:
3,840
Dry Goods
•
7,785
Clothing
•
•
1,221
Hosiery
•
Fruit
•
1,831
725
160
•
1,105
Butter and eggs.
1,194
Fancy Goods and Notions. 786
Grain
1,210
- Notions and Toys........1,105
Flour, Feed and Grain.. 1,572
Men's Furnishings.
315
Meats
781
Millinery
424
Bakers
620
Coffee, tea and spices
547
Hats and Caps..
201
Cheese
263
Boots and Shoes.
522
Honey
113
Neckwear
315
Fish
950
Gloves
63
21,927
5,821
Hardware and House
Drugs
668
Furnishings:
Hardware
Miscellaneous
928
•
•
Agricultural Implements... 240
Harness and Saddlery..... 314
Seed ..
Furniture
Liquors and Wines...
Stationery
5,641
391
Paper
905
597
Jewelers
815
•
•
307
Sporting Goods..
423
Carpets
83
Cigars and Tobacco.
•
1,991
Wall Paper..
284
Leaf Tobacco.
592
• •
•
China, Crockery & Glass-
Sponges
37
ware
340
Florists
•
•
1,765
Woodenware
131
Junk
189
Electrical Supplies.
424
Glass, Oil and Paint....
605
12,749
4,253
Grand Total¹ … … … … ….
.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.
Q
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 are 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' salesman 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 dealers 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.13
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 coöperating. The retailers should be glad
of any help that will increase their efficiency as mer-
1 "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 with
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-
14
14
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 east 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
push actively 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-
2
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 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 it will be necessary for
him to sell the retailer direct. Would it be possible for the
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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 wholesale
grocery house. The business is in the hands of an experienced
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.¹
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 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.2 The
1
2
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 relations 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 Philadelphia 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
3
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
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.-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 which
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 renewing 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 means 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 are 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
seems 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 are primarily inter-
ested in the two latter figures as they want to know
what they get for their services or for 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
4
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, 11 per cent in 1918 and 1919, and 8.8 per
cent in 1920. The highest gross profit 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
A
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
1917.5
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 the "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.
6
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 9½ to 12½ 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 7½ 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
6
A case where the dealer has failed to do this was recently
called to the author's attention. A semi-jobber of hardware al-
lowed his percentage cost of doing business to become so large that
his bank warned him that if it was not reduced his credit would be
cut off. 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
1916, 9.1 per cent of sales in both 1918 and 1919, 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 the 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 the 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.
8
These percentages were itemized as follows for 1918:
Lowest
Item
Per cent.
Highest
Per cent.
Common
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 frt., 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.
0.03
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.
•
Taxes (exemption blds.)
Insurance (exception blds.)
Repairs of Equipment..
Depreciation of Equipment.
Total Fixed and Upkeep..
Miscellaneous
0.02
0.4
0.06
• •
0.01
0.43
0.2
0.01
0.36
0.15
•
·
0.001
0.57
0.05
•
0.01
1.39
0.14
• •
1.13
4.27
2.45
0.02
0.5
0.2
Losses from Bad Debts.
Total Expenes
0.01
1.71
0.22
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.
9
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 expenses 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 1917.10
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
10 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 1917.11
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
if the merchants have been "profiteering."
Increase during periods of rising prices.-Dur-
ing 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 1
Per cent. Per cent. Per cent. Per cent.
Car Lot Jobbers... 37.5
Small Lot Jobbers...
•
22.1
24.3
21.1
31.5
60.7
26.2
51.9
•
¹ 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
MARKETING
selling organizations and go direct to the retail
trade.12 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.13 Yet, in spite of all this compe-
tition the number of wholesale grocers does not
12
2 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.
13
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.14
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.¹
15
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.16
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 packers, but as yet their number
11
¹¹ 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."
15 See "Federal Reserve Bulletin," v. 6, No. 11.
10
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.
9917
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 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-
17
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 dealer
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. 5 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-
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 most 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?
ers.
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 goods 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 latter's
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 territory 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
X
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 coffee, 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
¹In 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 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
amounting 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 slightly 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
auctions in the spring and early summer of 1921.
Many auctions of textiles were also held during this
period.
Characteristics of auction sales.-The most appar-
ent characteristics of auction sales are that they are
open to the public and that goods are sold to the high-
est bidders. Anyone is free to attend and to make pur-
2
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.3
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
3
³ 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 auctions 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 175
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 cities 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
4
* 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 177
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 1 1-2
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 profit-
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-
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 1½ to 2½ 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 selling, 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 some time 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 whether such a change is 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 de-
mand only moderate, prices slump. As one dealer
expressed 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
buyers 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 prove definitely 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 needed.
The argument that auctions increase price fluctua-
tions seems to be the strongest argument that has
been made against this type of sales.
BIBLIOGRAPHY
Hartman, Henry 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.
C
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 answer.
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 methods 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.
99 1
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
2
2
'Writing in Saturday Evening Post of April 10, 1920.
Senator Arthur Capper, of Kansas, quoted in the New York
Times of December 5, 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 affect 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.*
3 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, warehouses 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
commissions. 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 prod-
uce 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 are 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 produce 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 Or-
leans 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 all large cities in the United States and
many in other countries have their exchanges.
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.5 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. 145.
6
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."
6
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
0
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 comparatively 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 many 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.
118
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 difficult 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 noon 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
8 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."
9
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.
10
Speculation. 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.
10
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 have
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
A
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 to 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 countries, 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
3
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. When
the prices of commodities subject to future trading
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.
9911
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
11
¹¹ 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 equalized 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.12 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
12 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 has 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 now
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. Review, 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. 1-35.
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.
New 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 VIII
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 not?
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 to 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 million 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.
Itinerant 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.¹
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 fitted up almost complete
stores on motor trucks and supply their customers at
¹It 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.2
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 1,000.³
3
General stores.-The general store developed in
the United States from the old trading post. When
3 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 Marché 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. Dutton. 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."
4
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
4
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 they did not start 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 "storekeeping"
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
6
Nystrom, Paul 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.
If
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.
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 realize 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 manufactured 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 other
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 1895 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 materials 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, 5, 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 15.
A. W. Shaw 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 North-
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 affected 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?
3
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
235
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 1918.¹
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
1
¹ 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 general 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
ple will still go where they have the opportunity of
inspecting more goods prior to making the purchase.
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 automobile 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
increase 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-
Compare, for ex-
zation among specialty stores.
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.2 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 :³
Groceries
Hardware
Drugs
Shoes
Automobile Accessories
Garages, Repair Shops..
•
Dry Goods
.235,799
49,426
49,396
•
49,152
38,988
44,085
31,168
These figures are to be taken as only approxi-
mately correct.
ling groceries
The total number of stores hand-
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.
* "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.¹
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 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
certain disadvantages in
meeting the competition from other types of retailers.
Groceries
Butcher Shops.
Drugs
Cigars and Tobacco.
Dry Goods..
Bakers
Clothing
Shoes
Carpets
•
•
•
•
Grain
•
Hats and Caps.
172,043
Confections
62,798 Lumber
•
43,230
Milliners
•
•
40,555
Stoves
30,787
Jewelers
25,788
Hardware
35,423
29,669
•
•
26,843
22,177
22,025
20,881
22,713
Harness and Saddlery.. 20,084
20,104
19,316
Glass, Oil and Paint. 29,553
Furniture
·
·
16,131
16,783
Feed, Flour and Grain. 19,839
•
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
located 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
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
5
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 as 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
0
252
MARKETING
are inefficient? Will 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, hard-
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
い
​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.¹
Character of trade.-Most department stores are
¹Parlin, 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 is 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.2
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 much more to women than to
men."3
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,
8
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
261
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 are 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.
are
Expert supervision. — Department stores
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 •
263
STORE
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 store's 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
265
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 called 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
loyal customers. The opportunity of establishing
friendly relations with customers' is a distinct advan-
of
3
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 shops. Such shops can
better carry the kinds of goods desired, and furnish
the service and "exclusive atmosphere" demanded by
this class.4
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
have 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
4 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 New York Times of Oct. 24, 1920, described the devel-
opment of such an antique department. This department not only
has its own 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
5
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 vai-
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
5
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
apportioning 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,
breakage, 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
6
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.
7
'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
8
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."
On this point read, "Women in $6,000 to $30,000 Jobs,” Ameri-
can Magazine, July 1919.
9
'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 5 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
273
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.
10
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.11
10
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.
11
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
1. What factors contributed to the rapid growth of the department
stores a generation ago? Why has the growth been slower in
recent years?
2. 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 will 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 town 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 mail 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 is 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 office, are 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.¹ 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 $100,000.2 A few facts about some of the
large mail order concerns may be interesting and
help the reader to appreciate the importance of the
1
¹ 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 15 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
Montgomery, Ward & Co., Inc*. 49,308,587
National Cloak and Suit Co*...
$233,982,584
99,336,053
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 purposely to 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 and 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
3
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-
3 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 them." An interview with Sydney S. Samuels in New
York Times, December 5, 1920.
284
MARKETING
•
ple 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.
Manufacturers 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.
Manufacturers 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 are 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.¹
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, then 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 which 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, 7.5; 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 to many who 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 have been placed by
Sammons at about sixteen per cent of sales. The
expenses of Sears, Roebuck & Company have been
290
MARKETING
6
given as 15 per cent.5 The expenses, however, vary
widely between different houses. Nystrom reports
the following expenses for nine concerns: One,
16%; one, 182%; 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, feel 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 efficient 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, were
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
5
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
7
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 large 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 50 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 official 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."'8
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.
8
* 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 community 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 has been stated that
the automobile is already taking business from the
298
MARKETING
The
cross-roads and small village stores and concentrat-
ing it in the county seats and similar towns.
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.10 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
10 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.¹¹
11
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-
11
On this subject see Ch. VIII 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 the 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.
Grocery Stores:
No. of
Name
Sales 2
Stores 1
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
Piggly Wiggly Stores Inc. (1920)..
500
*11,444
*Six months' sales.
Novelty Stores:
F. W. Woolworth Co.....
1,081
$119,496
McCrory Stores Corporation..
154
11,487
S. S. Kresge Co..
179
42,668
S. H. Kress Co..
144
25,244
W. T. Grant Co. (1c 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)³..
312
50,000
1
¹ 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.
2000 omitted.
3 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.
A
THE CHAIN STORE
309
Edward A. Filene, 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 grocers' association estimates that
15 per cent of all grocery stores in the country are
chain stores. This means over 30,000 chain groc-
ery stores. Thomas' Grocery Register for 1919 lists
216 chains of grocery stores, some subsidiary com-
panies 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
by this Register in Washington, Oregon, Idaho, Mon-
tana, North Dakota, South Dakota or Nebraska, and
few in Minnesota and Wisconsin. One estimate is
that the chain stores sell 50 per cent of the groceries
in New York City but only 5 per cent in the entire
country.
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 1920.5 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.
0
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
erative 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.
Manufacturers' chains.- Among the manufac-
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 and 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 Appalachian 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.
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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 Thompson 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 refused 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 have fresh goods always
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 is 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 efficiency.
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 is 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 stock
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 to 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 salary expenses
in a different way. The stock was so arranged that
the salesman could reach any article by taking only
9
'Journal of Commerce, April 9, 1921.
328
MARKETING
a few steps. Another method of reducing the number
of salesmen was tried with the organizations 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-packed goods. The handling of
merchandise that must be weighed or measured not
only results in a waste or deterioration of the goods
but also consumes the time of the salesforce.
Application of the self-service 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 delivery system is
much less than the cost of operating an independent
wholesale establishment. This is true because the
selling expenses, losses from bad debts, and the ex-
penses of a credit and collection department are elim-
inated and the 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
studies10 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 a 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-
penses 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 16.5 per cent in 1915 and 14 per cent in
1918¹¹ 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.12 The 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 lower operating expenses,
enables most chain stores to undersell their competi-
tors. In fact, the growth of the chain 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-
11 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
1919. 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
Difficulties 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 50 per 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 is
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 the A. & P. Co. 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. A 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
expenses, 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.¹
1
2
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.
2 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
when 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
of
terest a year while B pays $480. For the purposes
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
Less Returns and Allowances.
Net Sales
• •
Inventory at beginning of period.
Purchases
Less Inventory at end of period.
Cost of goods sold...
Gross Profit
• •
$51,000
1,000
$50,000
•
10,000
35,000
$45,000
9,000
36,000
$14,000
EXPENSES AND PROFITS
347
Expenses:
Salaries and wages of employees....
Salaries and wages of officers and owners
Rent
Etc.
Total Expenses
Net Profit
Add other income.
10,000
$ 4,000
•
$1,500
500
• •
Deduct any other expense.
Net Other Income...
Net Income
•
1,000
$ 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.3
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
will 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
3 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 expenses. 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, to 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.*
4
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
1915
1917
Under 10
10-12
13-15
12
6
•
•
16
.28
20
36
16-18
19-21
22-24
56
52
•
57
. 60
·
38
56
25-27
28-30
Over 30
18
30
9
28
4
9
297
Total number of dealers..238
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.5
Percentage of Gross
Profit on Sales
Under 20
•
Number of Stores
20-24
25-29
•
30-34
•
35-39
•
Over 40
Total number of Stores
•
1918
1919
1
1
10
11
13
13
45
37
20
25
6
8
95
95
Bureau of Business Research of Harvard University, Bulletin
No. 20, p. 15.
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:6
Class of Dealers
Year
Percentages
1915
1916 1917 1918
Implement
Implement and Hardware.
17.2
18.0
19.1
18.1
20.4
22.0
21.2
21.4
Implement and Automobile...
Implement, Hardware & Automobile..
13.5
13.1
16.3
17.3
• •
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:"
1
No.
Class of Dealers
Stores
Year
Percentages of Gross Profits
Average or
Common Low High
Hardware
218
1917 & 1918
26.5
12.8
40.2
Hardware
155
1919
27.1
10.3
41.1
253
1914 & 1915
21.0
14.6
27.9
•
197
1918
16.9
10.5 26.0
100
1919
40.1
20.1 56.6
197
1919
33.1
19.3
45.6
187
1919
34.0 20.6
50.1
Grocery.
Grocery..
Jewelry
Shoe
Drug.
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 1918.8
The common gross profits of different types of
retail shoe stores are as follows:9
7
Harvard Bureau of Business Research, Bulletins Nos. 5, 12, 13,
20 and 21. The average used is the mode.
³ 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
Low Priced Shoe.
•
Medium Priced Shoe.
High Priced Shoe...
•
Percentage
25.7
26.6
34.8
•
28.1
28.4
Shoe Department of Department Stores.
Chain Stores
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. 10
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
10 Figures from the Industrial section of Moody's Manual.
356
MARKETING
11
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." "1
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
11 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.12
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.
1913
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
1914
12 Harvard Bureau of Business Research," Bulletin No. 21.
13 Harvard Bureau of Business Resarch," Bulletin No. 10, p. 35.
14 Bulletin No. 5.
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.15 The
expenses of the stores in small cities are reported
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.
15
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 15 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 35.6 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."
16
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
10
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
Number of Dealers
Percentages of
Total Expenses
Under 5...
5- 7
8-10.
•
11-13.
14-16.
17-19.
20-22.
23-25.
Over 25.
•
•
• •
• •
• •
1915
1917
8
9
15
24
39
61
►
43
73
•
50
66
46
42
14
12
8
5
15
5
297
Total Number of Dealers......238
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-only 58 per cent of the dealers had expenses
within 4 per cent of the average, that is from 11 to 19
per cent, inclusive. In other words, 42 per cent of
the dealers had expenses of less than 11 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.
17
The decrease in these percentages is due to the
17 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, as reported
by the Federal Trade Commission, was 15 per cent
in 1915 and 13.2 per cent in 1918. The Harvard
Bureau of Business Research reports the average
(modal) expenses for 115 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 ex-
cluded, the average would be 13.3 per cent, as com-
pared 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 expense
of retail jewelry stores, including 4.6 per cent inter-
est, 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 1918.18
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 and 13.
364
MARKETING
Average
Percentages
of Expense
Excluding
•
Type of Shoe Store
Low Priced*
Medium Priced*
Popular Priced†
Popular Priced+
Popular Priced†
High Priced*
Number of
Stores Period
Interest
1911-1917
20.5
1911-1917
20.3
4
1914
22.7
9
1915
22.3
9
1918
19.8
1911-1917
28.8
General Linet
53
1914
26.3
General Linet
61
1917
26.2
Military†
4
1915
30.0
Military+
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
Chain Stores*
9
1917
25.6
178
1909-1914
24.6
Syndicatet
4
1914
23.7
Syndicatet
5
1917
26.6
•
•
Not Stated‡
197
1919
21.1
Not Stated
..397
1920
23.0
* Harvard Bureau of Business Research, Bulletin No. 10. The
average used is the mode.
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
different grades of shoes.
expenses of stores handling
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 and 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.19 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.20
The 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
20
As given by the Harvard Bureau of Business Research.
EXPENSES AND PROFITS
367
chains of 5 and 10 cent stores during 1914 and 1915
varied from 6 to 10 per cent, and during 1918 and
1919 from 3.5 to 9 per cent.
Percentages of Sales
Type of Store
Grocery
Grocery
Hardware
·
Hardware
Jewelry
Shoes
Drug
Number
of Stores
Year
Largest
Net Profit
Greatest
Loss
Average
(Modal)
Net Profit
253
1915
11.0
3.3 2.5-5.5
197
1918
9.3
6.1
2.3
•
218 1917-1918
11.1
10.2
6.0
155
1919
17.4
4.9
5.8
100
1919
22.6
7.6
•
197
1919
•24.7
2.5
9.0
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.
Percentages of net
profits (or loss)
Number of stores
1915
1919
Net loss
5
3
•
Net profit 0- 3
8
10
"
(( 3- 5
23
15
6-8
17
19
(6
((
9-11
21
20
•
•
•
12-14
13
15
•
((
<< 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.
All
of these dealers handled farm implements, but
most of them also handled other classes of merchan-
dise.21
Percentages of net trading
profit, or loss, on sales
Number of Dealers
1915
1917
Loss:
Over 3
14
4
15
2
3 - 1
Profit:
1 - 3 ..
56
50
4 - 6
60
80
•
7 - 9
10-12
13-15
34
69
•
29
47
10
23
•
Over 15
3
17
292
all dealers
3.5
6.0
Total No. of Dealers........221
Average per cent net profits of
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 of 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 5 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 Sales2
Net Trading
22
1915....
1916.
1917.
•
1918.
Profit
3.5
4.8
6.0
7.3
Net Income
6.2
7.4
8.5
9.7
22
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..
Implement and Automobile...
Implement and Lumber…..
General Merchandise..
Implement and Miscl. Lines.
•
Average all Classes.
6.2
8.9
9.0 10.6
•
•
5.5
6.3
7.7 10.6
•
Implement, Hardware & Automobile. 4.9 6.1
6.4
6.8
9.5 10.5 12.3
12.0
7.7
8.4 10.3
9.6
5.3
6.3
7.5
8.7
•
6.2
7.4
8.5
9.7
•
EXPENSES AND PROFITS
371
Percentage of Net Income,
or loss, on total investment
Total Number of Dealers 23
Losses
Profits:
Less than 2.
3- 5
•
6- 8
9-11
12-14
15-17
18-20
21-23
24-26
Over 26
1915
1917
7
2
17
5
•
•
28
8
•
32
19
37
52
25
44
17
40
• 18
26
10
23
6
16
12
38
•
Total Number of Dealers.
Average per cent Net Income..
1
..209
273
• • • •
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 11 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 11 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
23 Federal Trade Commission: "Causes of the High Prices of
Farm Implements," p. 272.
܀
372
MARKETING
net incomes equal to 12 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:24
Year
1915 .....
1916
•
1917
1918
•
Percentages of Net In-
come on Total Invest-
ment. Interest ex-
cluded from
Expense
9.0
11.2
14.7
17.7
• •
Percentages of Net In-
come on Owned In-
vestment. Interest
included as an
Expense
9.5
12.0
16.5
20.5
Return for the personal services of the dealers.—
The Federal Trade Commissions has also reported the
average net return for the personal services of the
rural dealers. The return for the personal services.
of the dealers was arrived at by including wages of
24 Federal Trade Commission: "Causes of the High Prices of
Farm Implements," pp. 270-275. The average percentages of net
な
​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:
Class of Dealers
Averages Percentages of Net
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..
•
Average of all Classes.
9.2 12.2 16.7 18.6
9.0 11.2 14.7 17.7
Percentages on Owned Investment
Implement
Implement and Hardware.
9.7 9.2 18.1 23.3
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.'
25
Year
1915
1916
1917
1918
•
Average Return per store
after allowing 7% interest
on investment
$3,307
4,320
6,767
9,305
Average Return per store
after allowing 10% interest
on investment
$2,244
3,206
5,561
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, 51 per cent of the wholesalers
and 58.6 per cent of the retailers failed within 30
years.26
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-
20
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 em-
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."27 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
27
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 sufficient 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 are 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."28 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-
28 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 men, 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. 5.
"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. 5 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, Northwestern 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.
3. 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?
મ
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 in carrying 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.
only by the sale of goods.
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
He can make profits
Some merchants, espe-
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.¹
1
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
are out of stock and that they will be shipped as soon
1 "We
e 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 to 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 loss 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.

Item-
Minimum.
Stock No.
Vendor
(Deduct from Balance)
RECEIPTS.
(Add to Balance)
Quantity to Order
ISSUES.
Date Quantity Amount. Date Quantity Amount
BALANCE.
Date Quantity Amount.
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.
Purchasing 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.2 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.
danger is that he will over-emphasize price.
may buy from the concern with the lowest price over-
looking the better service rendered by another con-
cern.
The
He
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
2
* 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 ordinarily 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-
ers are placed for the bulk of the season's goods.
The risk involved in the handling of style goods
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 methods 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 have 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 are 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.'
113
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-
3
³ 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.4
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.5
The demand for agricultural machines varies with
the crops, which depend 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.
B
4Rosenwald, 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,-
386.6 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 any way 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
Implements," 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 are
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 huskers, etc. Like all statistics those of rainfall
do not tell the whole story and 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', while summers
recording temperatures above 100 degrees are classed
as 'hot.' The study
very definitely the relation
temperatures in summer with
seems to establish
of maximum
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 suc-
PURCHASING AND STOCK TURNOVER 399
ceeded by cool summers. The flocking together of
hot summers appears to be confined to two of them
at most. These are likely to be succeeded by a
flock of from three to four summers of more mod-
erate temperature. In other words it is fairly safe
to reckon on a very hot summer being succeeded in
the main by one of more moderate temperatures.
We have then sufficient data to form a
basis of a working theory in regard to the relations.
of business and temperature. It is not and cannot be
of absolute exactness but it has been
found dependable about 80 per cent of the time.
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."
It
The
Application of principles to purchasing.
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
7
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.³ 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 turnover.-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.
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
The
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 3.6 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
9
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 investments. 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.
10
A merchant by increasing the rate of stock turn-
over may increase his sales without a corresponding
increase in expenses. Also by using better purchas-
ing 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 capital is borrowed
from the banks, its release 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 are increased
sufficiently a larger building must be obtained and
a larger organization maintained, which will in-
crease practically all expenses.
Retail hardware dealers as an 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
10
Figures reported by the Harvard Bureau of Business Research,
See "Bulletin" Nos. 13, p. 15; 14, p. 21; and 20, p. 18.
406
MARKETING
11
University, for the years 1917 and 1918. The
common selling expenses were 6.5 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.12
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).
11 See "Bulletin No. 12."
•
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.13
13 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 àlone 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 7½ 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 profit 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 the 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
Rate by
More
Efficient
Type of Store
Year
Low High Common
Stores
Retail Grocery
1915
3.5 23.8 7.0
12.0
Retail Grocery and Meats.. 1915
7.0 26.0
9.0
14.0
Retail Grocery
1918
1.8
27.1
7.9
General Merchandise
1918
0.9
13.1
2.4
Retail Clothing
1919
2.1
Retail Drug
Retail Hardware
Retail Hardware
1919
1.1
7.4
2.3
•
· •
1917 & 1918
0.9
5.8
1.8
• ...
1919
1.1
6.8
2.1
222
2.8
2.5
2.5
Retail Jewelry
1919
0.3
1.1
•
Retail Shoe
1919
0.8
4.8
1.8
Retail Low Priced Shoes....
(1)
0.6
4.8
1.6
Retail Medium Priced Shoes
(1)
0.7
5.1
1.7
Retail High Priced Shoes....
(1)
0.9
2.3
1.5
Shoe Dept. of Dept Stores...
(1)
0.9
3.1
1.5
Retail Chain Shoe Stores...
(1)
1.1
4.6
1.7
Wholesale Grocers
1916
2.8
11.6
5.7
Wholesale Grocers
1918
2.5
19.0
5.2
Over 6
Wholesale Grocers
1919
2.2
14.6
5.2
Over 6
(1) Reports cover period from 1912 to 1917, inclusive.
NUMBER OF TURNOVERS OF WORKING CAPITAL
PER YEAR
Class of Dealer¹4
1915 1916 1917
1918
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
Implement and Miscellaneous Lines.. 2.10
1.50
1.66
1.88
2.26
2.55
2.58
Average All Classes.....
1.83
1.89
2.16
2.25
14 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
have 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 are 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?
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 50 per cent in advance, while if prices are falling,
he buys less than 50 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, windew 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 manager 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 back
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
Rochdale, 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 COUNTRIES¹
Number of
Societies
Number of
Members
Sales ooo
Omitted
Average per
Society
Average per
Member
Country
Austria
Belgium
Denmark
Finland
•
•
Year
France
•
Germany
Italy
1916
636
490,717 $39,815 $62,602 $81.14
1912
205 170,748
9,182
44,789
53.77
•
1915 1,562
243,855 24,297
15,555
99.64
1916 486
181,752
31,391
64,591 172.71
•
1918 2,233
1,129,684
109,066
48,842. 96.55
1918 2,277
2,900,000 181,649
79,776 62.64
1915 1,970
United Kingdom 1918. 1,364
411,358 30,270 15,366 73.87
3,846,531 755,076 553,575 196.30
3,846,531
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 Review, 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.²
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 Review, 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
CO-OPERATIVE MARKETING
423
and lessens the saving which is the object of such
stores. Sales for cash enable 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 from 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.³ 3
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
3 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-
valists 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
4
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 cooperativè spirit, of 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
6 Consumers' Cooperative Wholesale Societies in the United
States, Florence E. Parker, Monthly Labor Review, 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 427.9 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-
8
"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
to 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
of 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. Mest of the
stores sell at the prevailing prices. Only 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 were $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.
Opportunities 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 are 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 that 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-
operative stores had an average saving in operating
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.10 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
cooperative stores. It must be remembered that these
percentages of saving were the savings reported
10 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 what
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 are 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."'11 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.
11
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 offers 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?
1
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 Husbandry)
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, or due 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 Growers Inc., and is to 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.¹
1
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
1919-1920.2
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 Cooperative Journal, November, 1920.
2 Earl J. Trosper, writing in the American Cooperative Journal
of December, 1920.
CO-OPERATIVE 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 not to have been altogether successful.
می
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
35 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-
3 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
4 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.
In
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.
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 įs
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.
195
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.
6
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 are bein 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-
7 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.
8
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
³ 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
9
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
The
sales lower brokerage rates are obtainable.
brokerage rates on California dried fruits were re-
duced in the Spring of 1920 from 2% to 1½ 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
1
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.10 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-
10 Cumberland, Wm. W.: "Cooperative Marketing," ch. 9.
COOPERATIVE MARKETING
455
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.11
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
i
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.12 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.13 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-
13
On September 24, 1919, 853 non-growers held 2,553 shares of
stock, while 2,454 growers held 7765 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.¹ 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,
14 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 21 per cent of
sales, and the savings in total delivery expenses of from 35
to 75 per cent. Quoted in Federal Trade Commission report
on "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 Review. 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 News, 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
Review, 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 crganized 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?
t
CHAPTER XVII
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 are 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.¹ 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 international 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
1
¹ 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 activities 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
sales contract; agreeing
upon uniform terms of sale, such
of sale, such as prices,
discounts, guarantee, delivery, credit, etc;
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.
se-
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.
2
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-
2
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.
3
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 uncollectable 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
TRADE
471
TRADE ASSOCIATIONS
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 for 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
As a
They had no time to feel out the demand.
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
adjourn 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.'
194
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 times the information is given
to the press. This was true of the information
476
MARKETING
5
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, price
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.
6
Tosdal: "Open Price Associations," The American Economic
Review, June, 1917, p. 342.
"Federal Trade Commission: "Report on Canned Foods, Vegeta-
bles, and Fruits," p. 87.
* See footnote on page 486 of this chapter.
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.s
8
Cost discussions.-There has been a great in-
crease in the interest in cost accounting in recent
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
8
Tosdal: "Open Price Associations," American Economic Review,
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 men-
tion "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 should 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 are 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 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.10 Business men sometimes refuse to become
parties to such agreements, because they are not
adhered to by all members. Thus when such agree-
ments are 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.
10 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 would have been true
under free competition. When 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 Pomerene 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 manufacturing meth-
ods; lowering the costs of production; introduction of
better 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.
The Supreme Court has recently declared the plan of the
American Hardwood Manufacturers Association to be an illegal
restraint of trade. This decision will apparently limit the work of
open price associations. The Department of Justice, however, says.
that it is not unlawful for such associations to gather trade sta-
tistics but only to use them for illegal purposes, i.e., fixing prices,
limiting production, dividing territory for sales purposes, or con-
trolling competition. See Journal of Commerce of Jan. 4, 1922.
(See page 476, line 18, of this chapter.)
BIBLIOGRAPHY
Federal Trade Commission Report on Canned Foods: "Canned
Vegetables and Fruits," Chapter 5.
"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 115.
TRADE ASSOCIATIONS
487
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 Foreign and Domestic Com-
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
by trade associations under government supervision? Enu-
merate probable advantages and disadvantages of such permis-
sion. Would such a policy lead to government fixing of prices?
CHAPTER XIX
MARKET ANALYSIS
Necessity of calculating 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
unsuited 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-
1
¹ Frederick, J. George: "Modern Salesmanagement,” p. 16. .
488
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.³
3
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-
3
Dickinson, Roy: "Where Are My 1921 Customers Coming
From?" Printers Ink, Jan. 6, 1921
MARKET ANALYSIS
491
The
tained in this way is often very meagre.
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.
wear.
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-
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; 15 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 11 per cent
were scattered. As to color, 62 per cent preferred
white; 22 per cent light tan or écru, 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.*
4 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.
Measuring the buying power of a community-
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. Some 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-
5
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 Poughkeepsie 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-
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
ers.
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 6½
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
MA
NUMBER OF PERSONS RECEIVING THIS INCOME
$
LA
Income Class
Number Per cent of Total
1,000-
2,000-
3,000-
$2,000....
1,516,938
34.28
3,000..
1,496,878
33.83
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
0.03.5
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:
1916
1917
$ 1,000-$
2,000-
2,000...
1,640,758
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
300,000.
500,000
2,347
2,437
559
714
500,000 1,000,000.
$1,000,000 or more.
•
315
376
•
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.

L
$1000
$2000
$3000
$5000
OVER
то
ΤΟ
ΤΟ
то
$2000
$3000
$5000
$10000
$10000
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 are 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 tracts of land under single
supervision and having at least 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 from 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.
8
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
8 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 could be expected to form the outlet
for 7,680 acres of land. All 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-
9 "Sales management," v. 3, No. 3, 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 chasses $950.10 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 are 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
10 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
suit the consumers better 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.
Securing 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."
White, Percival: "Market Analysis."
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 min-
ing industries. The Internal Revenue Bureau publishes statis-
tics on income based on the income tax returns. The Depart-
512
MARKETING
ment of Agriculture publishes many publications bearing on
agricultural conditions, live stock, crop values, etc. The Bu-
reau 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
Agriculture and Labor of North Dakota shows by counties
the number of farms, acreage and yield of various crops, live
stock, and live stock products, population, farm labor, manu-
facturing 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 in-
formation.
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 a 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?
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 better grades 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 150 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 va-
rious middlemen have already been discussed. The
purpose of this chapter is to examine the usefulness
of the various middlemen from the standpoint of the
1
1 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
organization. He very likely accepts the seller's
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
outlet.
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 market-
ing 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
agent's 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 having 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 satis-
factory volume of sales, the arrangement may prove
very satisfactory and also very cheap.
Šales 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 may be sold unbranded 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
of 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 in order 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-
die." 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

CITIES
25000 OR MORE
35.7%
TOWNS
2500
ΤΟ
10000
9.1%
CITIES
10 000
ΤΟ
25000
6.6%
RURAL
48.6%
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.2 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 doesn'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
2 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 add 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 acceptances provides the seller with
securities 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 push actively
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 are 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 50 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 selling 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
3
* 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 5,
and March 12, 1921.
1
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
or fix a price
of goods
or discount from, or rebate upon such price on condi-
that the lessee or purchaser thereof
. of a
tion
shall not use or deal in the goods.
competitor
(or) sale
competition.
}
where the effect of such lease,
may be to substantially lessen
""
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 handling 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 trained 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 appoint
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 con-
cerns 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, assign-
ing them satisfactory territories, adjusting their small
complaints, and writing them "pep" letters involves
considerable expense. These men must sometimes
be sold on credit. The goods generally have to
be packed and shipped out in small lots, but no small-
er than is necessary when the retailers are sold di-
rect. 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 150
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 terri-
tories. 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 wholesalers 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 company's 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 latter's
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 brac 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
7. 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 always to 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 the price level is the re-
sult of dividing the total of commercial transactions
into the total amount of money available to perform
these transactions. In the amount of money in circu-
lation 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 bedticks
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
·
250-
200-
150
100
80
50-
1890
'95
1900
'05
Chart 10
'10
1
'15
MOVEMENTS OF PRICES FROM 1890 TO 1921. INDEX NUMBERS OF WHOLESALE PRICES
243
1921

546
MARKETING
his average balance. The theory may be expressed
by the following formula. P represents price, or price
P
m r
n
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 period cost has very little to 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 to price is this—that
over a long period those producers whose costs of
production are 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
MARKETING
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 competitive system marginal and not average costs
are the determining 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
991
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
1
¹ 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 recently called
to the author's attention. 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 difficulty 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 do 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.-All 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
be 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 potatoes² to automobiles.
Monopoly price.—A monopoly in fixing its 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
2 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 low
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:
Selling
Price
Per Unit
Demand
in Units
Net
Sales
Total
Variable
Expense
Fixed Total
Expense Cost
Net
Profit
$300,000
$1.00 1,000,000 $1,000,000 $300,000 $1,000,000 $1,300,000
600,000 1,000,000 1,600,000
1,000,000 1,900,000
1,000,000 2,200,000
1,000,000 2,500,000
350,000
200,000
.SO 2,000,000 1,600,000
.75 3,000,000 2,250,000 900.000
.60 4,000,000 2,400,000 1,200,000
.50 5,000,000 2,500,000 1,500,000
.40 6,000,000 2,400,000 1,800,000 1,000,000 2,800,000 *400,000
* 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 we 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."
3
3 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."
Kemmerer, 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," Quar.
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 box
PRICE DETERMINING FACTORS
561
candies at 25 and 50 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 5, 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
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.
zones.
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 uniform 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 uniform 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
565
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
He may feel
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 are 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, or 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.
•
Orders for 50 to 99 cases.
Orders for 100 cases or over.
• •
5% discount
7.5% discount
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.
1
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.
1
¹ 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 treatment the
Clayton Anti-Trust Act, passed in 1914, contained
the following provision: "That it shall be inlawful
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
573
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.2
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 are made in
the spring and the opening prices are 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 associations 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
575
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-
crs 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 periods of business de-
pression 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
y? The manufacturer does not want the deal-
ers to place too high a price upon his goods as this
PRICE POLICIES
577
Some
would tend to limit the demand for them.
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 are 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 are 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.
* See footnote on page 586 of this chapter.
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 dealers can, how-
branded goods more
The customers ask for
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.
ever, handle advertised,
cheaply than other goods.
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 to 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
15 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
facturers 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.
This is
It makes the dealer mere slot machines.
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
587
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., 10c.,
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
The Supreme Court has recently declared the system used by
the Beech Nut Packing Co. to be an unfair method of competition.
This decision apparently limits, although not entirely abolishing,
the right of the manufacturer to refuse to sell to merchants
who re-sell at cut prices. This decision, perhaps, makes it illegal
for manufacturers who sell through the wholesalers to fix the
retailers' prices to the consumer. (See page 580.)
588
MARKETING
because 11 cents suggests a reduction from 15 cents
while 9 cents only suggests a reduction from 10
cents.
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 å 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 Salesmanagement," chs. 5, 8, 9, 10,
20, 21 and 23.
Nystrom, 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 15.
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.
ļ
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
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 there 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 are 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.¹
Nevertheless, the difficulty of profitably disposing
of the normal output of their plants has caused
¹Read Horne, 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.
ment.
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-
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 plant's 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 the consumers 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
A
is most likely to sell its entire ouput at a profit.
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 his salesmen would come to him and
say that if this change or that change was made in
the car
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 but depend 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 mediums.-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 retailer's 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
1
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 & Co'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.. 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 buyer's 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
607
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 having scarcely a 20 per cent distribution even
though sold and advertised nationally.2
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
in another, leaving the business in the first city to
the regular salesmen.
610
1
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
1
4. What should be the relation of the credit and sales departments?
5. To what extent should the credit department 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 date 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 is 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 de-
crease 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 pro-
ducer and the consumer.
In regard to the number of merchants in the var-
ious classes, Nystrom' points out that the United
1
"The Economies of Retailing,” ch. 19.
CAN THE COST BE REDUCED?
615
States census shows that the total number 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 localities 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
2
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 one middleman. 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 even to 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
1
·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-
3
3
2 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 15 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 15 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.
5
The items included as selling expenses may not be
the same for each of the above industries. The prod-
ucts are so different that comparisons must be made
with caution. The number of industries is too small
4 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.
5
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 REDUCED?
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 of factory selling
expenses, a part of the retailer's buying expenses, and
the wholesaler's 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 retailer's profit if they 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'
markets so that farm produce could 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 large
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.
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
The
"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 Harrisburg 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.
•
7 "Bulletin of Office of Farm Markets, 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.s
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 either
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
CAN 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 likely 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 nation's food."
9
'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 with 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 companies. 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
wholesaler's expenses-notably a part of the selling
expenses. 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 of-
ten 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 mid-
dlemen are eliminated. Such cooperative marketing
organizations are apparently a step in the right direc-
tion, but it must be remembered that their purpose
in eliminating middlemen and cutting down market-
ing expenses is primarily to get higher prices for
themselves and not to reduce prices to the consumers.
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 market-
ing 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
appears 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.
10
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 many
classes of goods. 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 all 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 of proper storage facilities;
an equalization of prices due to adequate storage
facilities; saving of buyer's time by having all dealers
located close together; reduction in salesforce needed
by the dealers who now sell all or a part of their
goods from the cars; reduction in unfair trade prac
tices; and, in some cases, reduction in number 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 markets in some cities and the expense of
providing adequate buildings 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.
Co-
Cooperative marketing organizations are poten-
tially important but practically often failures.
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 efficiency 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.
U. S. Dept. of Commerce, Bureau of the Census: "Municipal
Markets in Cities of over 30,000."
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 difficulties 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; 465; 478;
481
Acker, Merrall & Condit, 223
Advertising, by Dept. Stores,
248; 261
Untruthful, 281
by Mail Order Houses, 281;
289
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
Expense by Mail Order Bucket Shops, 199
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
Buffalo, 48; 49; 145; 175
Bulk Line Principle of Price
Fixing, 485; 548
Business Associations, 462-63
Business Defined, 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; 51;
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,
83-84; 122-27
67;
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,
XVIII
See Monopoly
Ch.
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;
by Trade Associations, Ch.
338
XVIII
XVI and XVII
Cooperative Marketing,
Ch.
Or-
names
Cooperative Marketing.
ganizations, for
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
goods by wholesalers,
131-32
Methods, Ch. III
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
Ch. XVII
Markets, 623-27
organizations,
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, Mass., 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
Fungible, 47
and Non-
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
Memphis, 59; 225
Messengers in Charge of Cars
of Perishable Foods, 38
Middlemen Handling Various
Products, Ch. III
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
Nystrom, 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,
524; 525
Distribution
of,
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)
Of
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
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, 349-55
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,
550-52
Relation to Price,
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, 268; 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 Law, 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.
Management
XV. See
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'
442; 447-48
Coop. Assns.,
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. III; 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
U. 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,
146-47
Manufacturing,
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,
421-22; 427
121-22; 247;
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


UNIVERSITY OF MINNESOTA
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Converse, Paul Dulaney, 1889-
Marketing, methods and policies,
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