The Great A&P and the Struggle for Small Business in America Page 12

  By all public evidence, A&P was an amazing growth story. Its stores, warehouses, and factories had been planted in thousands of communities across the eastern half of the United States. Its new manufacturing might would give it an ever-bigger cost advantage over neighborhood grocers. Its brand was famous, promoted on the A&P Radio Hour, one of the earliest national radio shows, by the music of Harry Horlick and the A&P Gypsies. Its sales figures, released annually since its first bond sale in 1916, astonished the experts. “1924 Sales Were Enormous,” The New York Times declared in 1925. The annual dividend on the common stock, which was announced each May, was raised to $3 in 1923, $4 in 1924, and $5 in 1925, seeming proof that the firm was in the best of health.16

  The reality was otherwise. Although the numerous articles and books about the Great Atlantic & Pacific uniformly praise the Hartfords’ management skill, the push to grow so quickly in the early 1920s and to diversify into manufacturing, apparently driven by John’s eagerness to expand, was unwise. The Hartfords had always been parsimonious with their investment dollars, doing all they could to avoid buying fixed assets: by the company’s estimate, its average store involved an investment of only $1,120 in real estate and equipment, a fraction of the $2,740 invested in the average Kroger store and the $4,543 at American Stores. But manufacturing, as John Hartford frequently pointed out, involved a great deal of “capital tie-up.” He was forced to admit that the results of his push for vertical integration were disappointing. In 1924, A&P’s canneries and milk plants produced a 23.6 percent return on invested capital—but while two canning plants were extremely profitable, others barely made money or even ran in the red. The bakeries as a group earned only a 17 percent return, far below the company average, and several of them lost money. Manufacturing was no gold mine.17

  Worse, running a complex manufacturing operation caused management to take its eye off the main business of selling groceries. Although A&P’s total sales rose 50 percent between 1920 and 1924, sales per store fell almost 50 percent. The physical volume of groceries handled in the average store declined for four consecutive years: A&P was not even keeping up with mom and pop. Among ten grocery chains, none approaching A&P’s size, A&P ranked dead last in sales per store. Selling expenses, 14 percent of sales in 1920, climbed to 18 percent of sales in 1924, forcing A&P to hike prices and retreat from discount pricing. While A&P was content with a profit of three cents on each dollar of sales, American Stores, a Philadelphia-based chain, was rumored to be earning twice as much. Those impressive dividend increases merely reflected the amounts George and John Hartford chose to pay themselves and the family trust, and were no indication of the company’s performance. By some measures, A&P was using more cash than it was generating.18

  The Hartford brothers were in no danger of running out of money, but the trend lines were pointing in the wrong direction. By 1925, they could not ignore the fact that their company had grown too big and too unwieldy. It was time for a new strategy.

  10

  THE PROFIT MACHINE

  If the modern consumer economy can be said to have a starting date, 1925 is as good a choice as any. In that year, George and John Hartford began to steer their company onto a dramatically new course, one that sought growth and profitability by emphasizing low costs, low prices, and high volume. In restructuring the Great Atlantic & Pacific Tea Company, they transformed both the nature of retailing and the expectations of the American shopper. The Hartfords’ organizational changes created a retailing behemoth whose size was almost beyond comprehension and touched off a quarter century of political and legal warfare over the role of small business in the American economy.

  The Hartfords’ initiatives were in tune with the spirit of the times. In January 1925, the Chamber of Commerce of the United States gathered two hundred executives in Washington for the first National Distribution Conference. The featured speaker was Herbert Hoover, the secretary of commerce and the man who had mobilized the American food distribution system to feed a starving Europe in the wake of the world war. Hoover, an engineer by training, had spent years trying to standardize everything from typing paper to bricks in order to improve the efficiency of the manufacturing sector. Although far from being a socialist, he believed that capitalism naturally led to so much diversity as to create inefficiency. “The only case where unlimited diversification seems justified is padlock keys,” Hoover said. Government, he asserted, could make the capitalist system more productive by helping businesses agree on standard products and procedures that would eliminate unnecessary costs. Now he was turning his engineer’s eye to America’s wholesale and retail trades, and he did not like what he saw. Those thousands of tiny wholesalers and retailers that made up the distribution system meant waste and inefficiency, and the public was paying for it. He called on businesses to standardize their products, their record-keeping systems, and their freight handling. If products could move more efficiently from producer to consumer, Hoover insisted, farmers and manufacturers would earn more profit, consumers would save money, and the country would prosper as workers shifted from distribution to more productive activities.1

  The Hartfords’ new strategy for A&P would put such ideas to use. They would ruthlessly purge waste and inefficiency from their business, rationalizing the process of manufacturing and distributing food. In so doing, they would improve the productivity of capital as well as of labor. Their family business would evolve into a complex organization that distributed more goods at lower cost than any retailer in history. Retailing would cease to be a personal matter between a regular customer and a merchant known by name, and instead become an anonymous transaction with a distant corporation whose only important attribute was its ability to sell food cheaply.

  * * *

  A&P sold $352 million worth of merchandise in the twelve months ending in February 1925. It was by any standard an astonishing figure: far more than any retailer in any country had ever sold in a single year, 63 percent more than the sales of the second-biggest U.S. retailer, F. W. Woolworth, and 18 percent above A&P’s own sales the previous year. Yet despite its size, the company was run very much like a mom-and-pop business. Though there were layers of executives, every decision, from closing an underperforming store to buying a small condensed-milk plant, was liable to end up on the desks of the men who controlled all of the company’s stock, George and John Hartford. “We handled all operations from headquarters in Jersey City. All departments. All divisions. Everything,” John Hartford explained later. There were so many details to tend to that no one was responsible for strategic planning, or for thinking about how developments in technology, society, and politics would alter the environment in which A&P operated. There simply wasn’t time.2

  The Hartfords ran their sprawling empire with rule books and carbon paper. Headquarters issued regulations for everything: how managers should use their time, how products should be selected, how company-baked bread should be priced relative to bread from outside bakeries. To keep the central office staff up-to-date on policy changes, the Hartfords invited them to “informal” dinners—command performances that were anything but informal. “I hope that nothing will occur to prevent your presence at this ‘Home Gathering’ A&P family affair,” John Hartford wrote to one manager invited to such an evening at the elegant Hotel Astor. In addition to fostering adherence to the rules, these gatherings gave the brothers a chance to assess their men and decide who was ready for promotion. They served to build team spirit as well: mid-level corporate managers cherished the opportunity to speak directly with Mr. George and Mr. John.3

  There were rule books for A&P’s store managers, too. The company’s experts, using sales data from thousands of stores, knew the best way to organize merchandise and arrange window displays, and managers were expected to heed their advice. Store managers were to treat their clerks and bookkeepers respectfully, in line with John Hartford’s belief that “after a man has worked loyally for a concern for a reasonable time, the responsibility of
his employer to him is fully as great as his responsibility to his employer.” Unlike other grocery chains, A&P did not require store managers to post bonds to assure their honesty; instead, it submerged them beneath piles of forms. Order sheets were to be filled out in a certain way and sent to the warehouse twice a week. Reports on sales and stock losses were to be submitted weekly. Once each quarter, each manager had to detail his store’s expenses for vehicles, from truck repairs to outlays for shoeing horses. Inspectors visited each store regularly, issuing grades to the managers and designating the best-run properties as “model” stores. Compliance with company policies was treated as each manager’s personal obligation to the Hartfords. “The interest that you have shown in our behalf by conforming to all our rules and regulations is indeed very gratifying,” John Hartford cabled to a “model” store manager in 1924.4

  When members of Congress first studied grocery chains, in 1921, they concluded that chains would have a tough time maintaining a competitive edge because their management and supervision costs were very high. A&P seemed to prove the case. More stores and factories led to more central office staff, driving up operating expenses. Rule books and forms with multiple copies were indispensable management tools at a time when computers did not exist and a quick phone call from New York to Chicago cost as much as a store clerk’s daily pay, but at A&P so many of those forms piled up in Jersey City that important information got lost in the shuffle. Even George L. Hartford, whose extraordinarily detailed knowledge of the firm’s finances ensured a firm footing for its expansion, had to acknowledge that he could no longer study the financial performance of each of his thousands of stores. By 1925, the brothers knew they needed to decentralize administration and delegate authority.5

  As they contemplated greater reliance on their executives, the Hartfords must have been concerned about their ability to retain talent. “One of the disadvantages of chain stores is the difficulty they have in keeping their best men, for many of them, after they learn the business, leave to engage in business for themselves,” a leading wholesaler commented in 1930. The Hartfords paid high-level managers well and provided unusually good job security; John Hartford’s view was that if a man did not perform well in a responsible position, “we can give him another equally important post for which he is better fitted.” Given that all common shares were controlled by the Hartfords, though, executives could not expect to grow wealthy thanks to a rising share price. Executives received preferred stock paying a generous 7 percent annual dividend, but lower-level managers had no financial stake in the company at all. National Tea Company, then the third-largest grocery chain, had issued common stock in 1924, allowing it to offer stock grants to executives, and it was no secret that Wall Street bankers were trying to restructure other private food chains into publicly traded companies that would then be able to use stock grants to lure away A&P managers. Keeping their best men from jumping ship would require the Hartfords to offer a similar incentive.6

  The first hint of major changes came in January 1925, when A&P sold its headquarters, warehouse, and factories in Jersey City. The sale came as a surprise, and the public explanation was enlightening. The company’s growth, an anonymous official told The New York Times, made it necessary to establish smaller warehouses and factories in different localities. This heralded far tighter control over costly investments and represented a shift in managerial focus. First and foremost, A&P would be a retailer.7

  On March 1, 1925, the start of a new fiscal year, the Hartfords announced the reorganization of their company. A&P’s 13,398 stores were divided into business units based on geography. The New England, Eastern, Central, Southern, and Middle Western divisions were all given their own headquarters and boards of directors, with a staff of real-estate, personnel, and purchasing experts. Underneath each division—two more would later be added—were units covering smaller territories. Some functions, such as store design, were assigned to the division level, but the forty-eight unit managers were responsible for the operations of stores and warehouses. Unit managers could stock A&P-brand merchandise, but they were also free to order from outside manufacturers. The Hartfords wanted to push responsibility for sales and pricing as far down the chain as possible, not only because unit managers and store managers were familiar with local conditions, but also because increased responsibility would help lower-level managers develop new managerial skills. There was one important exception to decentralization: the Atlantic Commission Company, a subsidiary created in 1924, would supply all of the divisions with fresh produce, so they would not compete with one another to buy from farmers and farm cooperatives. The division presidents would join company executives on a council to set company-wide policy on whatever matters seemed to require uniformity, but John Hartford insisted that the main role of headquarters was to offer “suggestions”; the men in the field would make the decisions.8

  The third big change came in June, when the Hartfords revamped the corporate structure. They created a new holding company with the power to sell common shares to employees. Anyone who had worked for A&P for at least five years could invest up to 10 percent of the previous year’s wages in A&P shares, with the company paying part of the cost. The shares were not available to the public, but inevitably some employees who had acquired them wished to sell, and outsiders could occasionally pick up five or ten shares on the Curb Market, New York’s lightly regulated exchange for speculative stocks. Employee stock ownership hardly affected the Hartfords’ managerial prerogatives—they still controlled more than 99 percent of the common shares—but it did provide a means for cementing managers’ loyalty: many employees jumped at the opportunity to purchase as little as a single share.9

  Along with its new stock-ownership plan, A&P announced publicly that it aimed to sell $420 million of groceries in 1925, some 20 percent more than a year before. It was an ambitious goal. A&P would achieve it with room to spare.

  * * *

  The new council of division presidents, which included the Hartfords and a few top executives from headquarters, met for the first time on June 25, 1925. The group plowed through a massive packet of graphs and tables. The brothers believed in managing with data, and each quarterly meeting of the division presidents involved detailed dissection of figures on every topic imaginable: labor turnover among meat clerks; outlays for electricity and paper bags; sales of A&P’s brands versus outside brands of coffee. Often, the figures were calculated on a per-store basis and arranged by division or even by unit, allowing executives to spot a high rate of stock losses in the Louisville unit or to see whether Atlanta spent more on in-store displays than Albany. Drawing on the Hartfords’ example, the division presidents presented numbers upon numbers at their biweekly or monthly meetings with unit heads. In those precomputer days, collecting and assembling such massive amounts of data were complicated tasks, but there was nothing to which the brothers attached higher priority.10

  The June 1925 presidents’ meeting brought a lengthy discussion of the company’s mixed performance. A&P’s return on investment in 1924, 24 percent, was far below that of competitors such as Kroger in the Midwest and American Stores in Philadelphia. Over the previous five years, one-fifth of the company’s after-tax earnings had gone into the purchase of fixed assets such as factories and warehouses, with the biggest increases coming in 1923 and 1924. This was a major change for a company that had traditionally avoided tying up its money in buildings and equipment, and the money was not well spent: the factories, while highly profitable, earned a lower return on investment than the stores. Over the same period, inventories had ballooned. In 1919, A&P had kept a one-month supply of groceries in its stores and warehouses. By 1925, seven weeks of inventory had become the norm, a particular problem in a deflationary economy in which inventories lost value. Perhaps it was a reflection of George Hartford’s chronic shyness that although he was responsible for financial matters, John Hartford took the lead in discussing the company’s results, complaining to the a
ssembled executives that “capital tie-up” was dragging down return on investment.11

  The conclusion that A&P was making poor use of its capital had fateful implications for the company’s business strategy. The planned expansion of manufacturing was abandoned; A&P would continue to run its plants, but would not add more except for bakeries, which provided an essential product for much less than the price from outside suppliers. The company’s investment would go into stores, not factories. Those new stores would be larger than the Economy Stores, which had become distinctly outmoded by the mid-1920s. A&P had conducted an experiment in Detroit, opening larger stores with meat departments and learning that customers liked the convenience of buying meat in the same place they bought their groceries, so most new stores would have meat counters. The Hartfords were so eager to add stores that they took the exceptional step of purchasing seventy outlets in Kansas City from the troubled Grand Union Tea Company.12

  The results of the push for more stores and greater regional autonomy quickly proved disastrous, turning 1925 into A&P’s worst year since the war. The average store moved only 2.73 tons of groceries, a full 13 percent below the peak in 1919. As this occurred, A&P’s return on investment plummeted; as John Hartford acknowledged, the $10 million invested during 1925 boosted earnings by less than $500,000, a meager return of 5 percent. Some local managers were trying to revive sales by offering delivery and even trading stamps, costly frills A&P had moved away from when it developed the Economy Store concept in 1912. “Mistaken sales and development policies” were at the root of the company’s problems, John Hartford told his top executives, adding: “I think that we are steering the boat wrong … [We have] a low volume and a high expense rate driving us out of the Economy business.”13