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The Great A&P, the supermarket chain that conquered USA at the beginning of the XX century

I highly recommend the book "The Great A&P and the Struggle for Small Business in America" which explains the story of A&P, the first major supermarket chain. The assets of one of its founders were valued at its peak at $55.6 million — the equivalent of half a billion dollars in 2011
The Great A&P, the supermarket chain that conquered USA at the beginning of the XX century

I highly recommend the book "The Great A&P and the Struggle for Small Business in America" which explains the story of A&P, the first major supermarket chain. The assets of one of its founders were valued at its peak at $55.6 million — the equivalent of half a billion dollars in 2011 (10 times the fortune of Bill Gates, Amancio Ortega, Jeff Bezos…).

The book explains the decisions taken since its inception to its decline in a very entertaining way, and how pressure from other lobbies influenced their growth and the taxes it had to pay.

A brief list of interesting notes:

  1. The origin of A&P has to do with tea. The initial founders realized that they could buy whole tea shipments arriving in the ports of New York and sell them at low prices to individuals. The first A&P stores sold only low-priced tea, they preferred to conquer market share that have a high margin. In a few years they conquered the United States selling tea and coffee.
  2. The first big innovation was to create its own brands (tea, baking powder, butter…). Brands offered consumers the promise of consistency and quality. They would allow market segmentation, enabling grocers to offer higher-priced products targeted at more affluent consumers alongside lower-priced versions aimed at the mass market. Cardboard boxes and tin cans appealed to a public increasingly concerned with hygiene and sanitation.
  3. At the end of the XIX century, Congress was considering whether the U.S. Post Office should deliver packages weighing more than four pounds. Small grocers were dead set against the plan, fearing that the parcel post would be a low-cost alternative to rail or wagon delivery, making it cheaper for catalog merchants such as Sears, Roebuck and Montgomery Ward to sell staples by mail. They also asked Congress to make price-fixing legal so chains A&P couldn’t compete on price. The inefficiency of independent retailing was starting to appear.
  4. Over World War I, the prices of twenty-two grocery items doubled. Wages did not begin to keep up; an hour’s work at union wages bought 17 percent less food in 1919 than it had six years earlier. Drawn by its low prices, hard-pressed shoppers flocked to the A&P. The company responded by opening hundreds more locations. In 1920, two years after the war’s end, the Great Atlantic & Pacific Tea Company sold $235 million of groceries from 4,588 stores. It had become the largest retailer in the world.
  5. At that time, most stores were designed with counters in front of the shelves to keep customers (and their children) away from the food. A grocer named Clarence Saunders had opened the country’s first self-service food store, Piggly Wiggly, in Memphis in 1916, but the concept had not spread widely by the early 1920s.
  6. In the poorest neighborhoods, credit commonly accounted for 70 or 80 percent of grocers’ sales. The average urban family spent fully one-third of its budget on food. The typical store served a few dozen families who lived within easy walking distance, and almost no one else.
  7. In 1929 more than one-fourth of food retailers had annual sales of less than $5,000. After paying for merchandise, rent, and operating expenses, the owner of such a store would have shown a profit of no more than a couple hundred dollars. He would have earned more as an employee in someone else’s food store than as an entrepreneur.
  8. The average A&P store, circa 1921, stocked only a few hundred items. Some A&P stores allowed self-service, but usually the goods were kept out of customers’ reach. On average, grocery products took more than four months to get from factory to consumer in the early 1920s, and the financing charges and storage costs had to be built into retail prices. A&P, in contrast, turned its inventory once every five weeks.
  9. Over the three-year span between February 1922 and February 1925, the gold-on-red A&P logo went up on seven new storefronts a day, a pace limited only by the company’s ability to find store managers. In 1927, a time when rapid expansion forced the company to promote large numbers of untested men to run stores, one-third of all managers were replaced in a nine-month period.
  10. The Great Atlantic & Pacific was by no means a monopoly or a trust, as its critics readily charged. It manufactured only 13 percent of the groceries it sold. Even where its retail position was strongest, in the suburbs of New York City, it was responsible for only one of every five dollars of food sales. But A&P transformed American retailing in the decade after World War I.
  11. As the Great Depression arrived, three technological developments reshaped the grocery trade: refrigeration, cellophane (transparent packaging) and automobile.
  12. The lobby from small grocers worked and in the 1930s the government approved a food code that would not allow more efficient grocers to operate with lower prices than competitors, even if they could do so profitably. This hardly served consumers’ interests, but it served the administration’s objective of keeping less efficient retailers in business to avoid adding to unemployment.
  13. Apart from price fixing, states and local towns approved special taxes for chains. The levy on A&P’s fifteen thousand stores came to $8.25 million — half the company’s total profits in 1934.
  14. Wide aisles allowed shoppers to take advantage of another innovation of the 1930s, the shopping cart, in which a large volume of purchases could be wheeled directly to the shopper’s car in the parking lot adjoining the store.
  15. The state chain-store taxes, meant to shelter small grocers and wholesalers against the depredations of giant chains, gave chains such as A&P an added incentive to shift to large stores that would provide even tougher competition for mom and pop. Three years after the start of A&P’s transformation, supermarkets accounted for half the company’s profits.
  16. The shift from combination store to supermarket was far more abrupt. A full-service combination store, of which A&P still had thousands, might occupy a space twenty-five feet wide and fifty feet deep on the ground floor of a narrow building. New supermarkets were four or five times as large. A combination store, on average, had sales of $1,400 a week at the start of 1940. New supermarkets were expected to have weekly sales of $10,000 or more.
  17. Purchasing in volume, circumventing brokers and wholesalers, and minimizing losses in transit brought lower costs: in 1940, A&P estimated that moving a box of oranges from California to a store in Jersey City would cost forty-six cents with a broker but only twelve cents through Atlantic Commission (its own subsidiary).
  18. By the end of 1941, two-thirds of the A&P stores that had been open in 1937 no longer existed. In their place were bigger stores operating far more efficiently. While food prices rose only a few percentage points over those four years, sales at the average A&P store increased 236 percent, and the physical volume of merchandise moving through the average store nearly quadrupled. Sales per employee rose by half. With prices held constant, expenses fell by one-third in four years, relative to sales. By 1941, A&P’s operating costs, per dollar of sales, were half what they had been in 1925.
  19. During World War II, the military had first claim on foodstuffs, buying up 13 percent of all U.S. food production in 1942 and annulling A&P’s ability to gain a cost advantage by buying in huge volumes. The need to move troops and military freight meant that civilian transport was restricted, making it hard for grocery chains to ship large quantities of goods. No longer could A&P learn of a canner’s surplus of peaches and agree on the spot to buy a dozen railcar loads at a deeply discounted price; neither the goods nor the railcars were to be had.
  20. Many poor decisions in the early 1960s sped A&P’s downfall, but one factor stands out: A&P paid generous dividends. From the time of its public share listing in late 1958, shareholders both inside and outside the family called for dividend increases. The John A. Hartford Foundation was A&P’s largest shareholder, and it is here that the dual role of Ralph Burger, serving as head of both A&P and the foundation, was problematic: high dividends may have been in the foundation’s interest even if they damaged the company’s long-run prospects. In the year ending February 1961, nearly half of A&P’s earnings went for dividends. In 1962 and 1963 the payout topped 70 percent.
  21. The investigations, fair-trade laws, chain-store taxes, and antitrust suits aimed at A&P all served to prolong the lives of businesses that had become obsolete.
  22. But as much as the Hartford brothers deserve full credit for A&P’s stunning rise and its prolonged ascendancy, they also bear responsibility for its rapid collapse. The values they prized in their managers — experience, loyalty, and adherence to company rules — made for an organization that was highly competent, but not highly adaptable. Such inwardness was not toxic so long as John A. Hartford was on hand to steer the ship. He remained vigorous until the day of his death at seventy-nine, constantly challenging his managers to keep up with the demands of a fast-changing country. But with John’s death in 1951, the dynamism went out of A&P. He and his brother had failed to cultivate a successor generation of executives who had the broad experience, imagination, and acute cultural antennae to go along with their financial acumen. They left behind a corporate structure under which the new chief executive reported to a board of directors that never challenged his decisions because its members all reported to him.