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OSMANIA UNIVERSITY LIBRARY

No.

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THE CHAIN STORE PROBLEM

THE
CHAIN STORE PROBLEM

A Critical Analysis

THEODORE N. BECKMAN, PH.D.

Professor of Business Organization, Ohio State University, formerly

Consulting Expert in Charge of Whole sale Distribution, Bureau

of the Census, United States Department of Commerce

AND

HERMAN C. NOLEN, PH.D.

Assistant Professor of Business Organization
Ohio State University

FIRST EDITION

McGRAW-HILL BOOK COMPANY, INC.

NEW YORK AND LONDON
1938

PRINTED IN THE UNITED STATES OF AMERICA

All rights reserved. This book, or
parts thereof, may not be reproduced
in any form without permission of
the publishers.

THE MAPLE PRESS COMPANY, YORK, PA.

PREFACE

In the past two decades, chain stores have grown to occupy a
place of utmost importance in American business in general, and
in our retailing system in particular. They have been absorbing
a larger and larger share of the consumer's dollar, spreading into
many lines of business, invading the smaller communities, and
reaching across the entire country. In some lines of bXiginess,
such as the retailing of food products, shoes, drugs, and variety
merchandise, chain stores have encroached into the sphere of the
independent merchant to a notable degree and profoundly
influenced the attitude of the state, the public, the producer, and
the local merchant toward this retailing colossus.

Bitter controversy has raged about the social and economic
position of chain stores. Are they the " blessing " that their
adherents claim, or are they the " menace " that their antagonists
widely proclaim they are? Should they be restricted by legisla-
tion? Should they be left alone? Should they be regulated or
taxed? These and other perplexing questions have been widely
debated and discussed, but little headway has been made in
providing acceptable solutions, largely because of the unscientific
way in which the problem has been approached.

"The Chain Store Problem" is a critical and comprehensive
analysis of chain stores as an integral and significant part of our
distributive structure. An attempt has been made to present in
an unbiased and strictly impartial manner the historical develop-
ment of chains, their present status, their manifold contributions
to business technique, economic progress, and consumer welfare,
as well as the deep disturbances caused by them in our business,
economic, and social systems. A mass of pertinent and original
data and information has been assembled and analytically dis-
cussed in order that the position of chain stores in our national
economy may be thoroughly understood and a sane attitude
developed on the subject.

Up-to-date facts relating to prices in chain and independent
stores, consumer attitudes toward these institutions, comparative

vi PREFACE

costs and profits, the taxation of chains, and the recent legislation
affecting them are presented in this volume. An attempt has
been made to cover all phases of the chain store situation, to
analyze all prevailing points of view in a strictly scientific light,
and to delve into the far-reaching effects of this twentieth cen-
tury phenomenon.

In gathering material for this volume, original investigations
conducted by the authors over a period of several years were the
chief source, but liberal use was also made of existing publications
on the subject. Whenever specific use was made of such material,
credit was given and reference noted in the appropriate place.
In addition, the authors desire to express grateful appreciation to
the numerous individuals, business concerns, and governmental
agencies that have contributed information and ideas utilized in
this volume.

THEODORE N. BECKMAN,

HERMAN C. NOLEN.
COLUMBUS, OHIO,
December, 1937.

CONTENTS

PAGE

PREFACE v

CHAPTER I

INTRODUCTION 1

CHAPTER II
THE ORIGIN AND GROWTH OF CHAIN STORES 14

CHAPTER III
PRESENT STATUS OF CHAIN STORES 29

CHAPTER IV
CHAIN STORE ADVANTAGES 42

CHAPTER V
CHAIN STORE DISADVANTAGES AND LIMITATIONS 62

CHAPTER VI
CHAIN STORE PRICES 75

CHAPTER VII

SELLING PRICES IN CHAIN AND INDEPENDENT GROCERY
STORES 91

CHAPTER VIII
SELLING PRICES IN CHAIN AND INDEPENDENT DRUGSTORES 115

CHAPTER IX
CHAIN STORE COSTS AND PROFITS 137

CHAPTER X
CONSUMER PATRONAGE OF CHAIN AND INDEPENDENT STORES 156

CHAPTER XI

WHY CONSUMERS BUY GROCERIES FROM CHAIN OR INDE-
PENDENT STORES 168

vii

viii CONTENTS

PAGE
CHAPTER XII

CONSUMER ATTITUDE TOWARD CHAIN STORES IN THE PUR-
CHASE OF SHOPPING GOODS 184

CHAPTER XIII
ECONOMIC AND BUSINESS EFFECTS OF CHAIN STORES . . 203

CHAPTER XIV
SOCIAL AND POLITICAL EFFECTS OF CHAIN STORES. . . . 223

CHAPTER XV
PUBLIC ATTITUDE TOWARD CHAINS 233

CHAPTER XVI
CHAIN STORE TAXATION 246

CHAPTER XVII
RECENT LEGISLATION AFFECTING CHAINS 273

CHAPTER XVIII
FACING THE CHAIN STORE PROBLEM 290

APPENDICES A TO K 303

INDEX 345

THE CHAIN STORE PROBLEM

CHAPTER I
INTRODUCTION

In print, in conversation, and in public address, everywhere,
one encounters discussions of the chain store problem. Adver-
tising mediums are constantly presenting claims and counter-
claims on this question. While some rabid anti-chain advocates
have been spouting fire over the air in their opposition to the
movement, chain store protagonists have invaded the com-
munication airways to broadcast their arguments of defense.
On school and public platforms the subject has been heatedly
debated during the past decade. Finally, the chain store prob-
lem has become a subject of wide discussion in the various legis-
lative bodies local, state, and national where it continues
to occupy a prominent position on their respective agendas.

In a word, the chain store problem is to the forefront. The
controversy is raging, lines are being drawn for a continuation
of the battle, and popular interest in the conflict is now at fever
heat, where it has been during the past several years. It is
probable that no other economic development of this cen-
tury has been so highly praised by its proponents and so thor-
oughly condemned by those who consider the chain store an
economic threat and a social menace. In view of all this, the
current and lasting importance of the problem can scarcely be
overemphasized.

Essential Definitions. At least one of the reasons for the
chain store controversy can be found in a misunderstanding of
the essence of the chain store problem. Some of this misap-
prehension, in turn, can be laid to crass ignorance of the most
rudimentary concepts inherent in the question. There is com-
plete lack of knowledge even among the intelligent laymen of
what a chain store is and of how one class of chains differs from

2 THE CHAIN STORE PROBLEM

another, let alone the significance of the economic, social, and
political problems to which chain stores have given rise.

Unfortunately, much of this misunderstanding has developed
from attempts made by writers on the subject and so-called
"researchers" to becloud the issue. Many of them very defi-
nitely seem to have had an axe to grind; others may have had a
special purpose in mind to which they have fitted their concepts.
For these reasons, it would seem fitting and proper at this
juncture to define a few essential terms and to attempt to state the
nature of the chain store problem. In this wise the scope of this
discussion will be delimited and a clear understanding will be
had of the fundamental questions involved.

What Is a Chain? A considerable part of the difficulty to
which we have alluded in the preceding paragraphs can be
attributed to the confusion among the terms "chain store/ 7
"chain," and "chain system." Some authors have apparently
attempted to define one or another of these terms without giving
the slightest indication of their effort and, perhaps, without
themselves being aware of the confusion in their own minds.
That may explain in part some of the differences in definitions of
chains to be found in the literature on the subject. Then there
is the obvious attempt to understate or overemphasize the
importance of chains in our distribution system, depending upon
the objective to be accomplished. Moreover, the whole subject
has very often been conceived so narrowly as to confine the term
chain to retail distributive operations. Thus, although we are
all familiar with certain kinds of chain stores and chain systems,
the concept of what is a chain has never been adequately defined.

Among the most important factors to be considered in defining
a chain are : the number of units in the organization, the type of
merchandise handled or the kind of business, the plane of opera-
tion, the degree of central ownership, and the extent of centralized
management. In its investigation of chain stores, the Federal
Trade Commission has defined the term "chain" or "chain store"
as "an organization owning a controlling interest in two or more
establishments which sell substantially similar merchandise at
retail." 1 In its definition the Commission uses two units as the
point of departure from independent stores, confines the term

1 Federal Trade Commission, "Chain Stores Scope of the Chain Store
Inquiry," p. 2, U.S. Government Printing Office, Washington, 1932.

INTRODUCTION 3

to the retail field, emphasizes the idea of centralized ownership,
lays down as a prerequisite the carrying of substantially similar
lines of merchandise by the various units of the chain, and dis-
regards any reference to centralized management. The other
official definition of the term is that used by the Bureau of the
Census in connection with its censuses of retail distribution.
In its publications, this Bureau states that " chains are groups
of 4 or more stores in the same general kind of business, owned
and operated jointly, with central buying, usually supplied from
one or more central warehouses." 1 On this basis, a chain is a
group of four or more stores in the same kind or field of business,
under the one ownership and management, and supplied from
one or more distributing warehouses or directly from the manu-
facturer on orders placed by the central buying organization.
Consequently, the two Federal agencies differ in their concept
of what is a chain in at least two important respects: the mini-
mum number of units necessary to classify a retail organization
as a chain, and the necessity for centralized management, espe-
cially centralized buying.

One may now inquire: what difference does it make whether
two or more units make a chain or four or more units are required
as a basis? The answer to this becomes apparent only after
some study and analysis. When the larger number of units
is used as a basis in formulating the definition, the importance
of chain stores is grossly understated. On that basis, there were
in 1929, for example, but 148,037 chain store units, doing an
annual business of $9,834 millions, or 20 per cent of all retail
store sales. But when two and three store chains are included,
the number of store units is increased by 64,583 and the volume
of business is augmented by $4,276 millions or 9.7 per cent of all
retail store sales. Similarly, the number of stores operated by
chains during 1935 would be increased by 54,294 and the volume
of chain store business by $2,612 millions, making the chain store
volume, in 1935, 30.7 per cent of all retail store business instead
of the 22.8 per cent reported by the Census. Another objection
to the exclusion of two- and three-store organizations from
among the chain store statistics is the arbitrary nature of the
adoption of any number of units other than two. The artificial-

1 Census of Business: 1935, Retail Distribution, Vol. IV, Types of Oper-
ation, p. 11, U.S. Department of Commerce, Washington, January, 1937.

4 THE CHAIN STORE PROBLEM

ity of all this is evident from the following quotations taken from
a source that is very definitely and necessarily pro-chain in
sentiment. Referring to the multi-unit independent classifica-
tion made by the Census it says:

One classification of a retailer involves us in a very narrow and subtle
distinction ... It is often very difficult to differentiate between the
so-called ''multi-unit independent" and the " chain." As a matter of
fact, the similarity between the two retailing systems probably presents
a headache to the United States Bureau of the Census every time it
conducts one of its censuses of retail distribution. 1

The Census definition has also been totally disregarded in this
respect by all states that have enacted chain store tax laws, all
of them stepping up the tax on organizations with 2 or more
stores rather than beginning with 4 or more units. Moreover,
neither the chains nor the courts have questioned the authority
of states on this point.

As far as the matter of centralized management is concerned,
there is really no way of determining the extent of such manage-
ment in any of the statistical surveys so far conducted by the
Bureau of the Census. There was absolutely nothing on the
schedules used for any of the three censuses of retail distribution
that would give a clue to this question. Consequently, the only
effect of such an imaginary distinction would be to lessen the
importance of chain stores in our economic system. The only
information collected on the schedule in 1935 along this line
pertained to the " number of retail establishments or units
owned by this organization, anywhere in Continental United
States/' In the schedules for the 1935 Census, provision was
made for the first time for checking whether the reporting store
is a unit of a branch store system, the determination being left
entirely to the discretion of the reporting concern. During the
previous censuses the schedule merely asked for the " number of
establishments in same line of business owned by this organiza-
tion, anywhere in the United States/' Furthermore, it is
questionable whether the degree of centralized merchandising
should be construed as a distinguishing characteristic of chains.
For example, no one would question the classification of the Allied

1 NICHOLS, JOHN P., "Chain Store Manual," 1936 ed., pp. 10-11, Institute
of Distribution, Inc., New York, 1936.

INTRODUCTION 5

Stores Corporation as a chain of 34 department stores, yet the
central-office functions of this organization are limited to the
control of general policies, while merchandising management is
delegated to the individual stores of the corporation. The
same objection holds to any attempt to differentiate between
branch store systems and regular chains. While in practice
there may be such a distinction on the ground that branch stores
are merchandised from a dominant parent store, the Census
schedules contained no information that would make such a
distinction possible except for the checking space provided on
the 1935 schedules. For all practical purposes, therefore, the
definition of chain stores as developed by the Federal Trade
Commission would seem by far the more useful, accurate, and
practically workable.

Both of the official definitions of chains limit the term to
retail stores. In a broad sense, however, the term " chain" must
be applied to organizations owning a controlling interest in two or
more establishments in the same line of business, regardless of
whether these establishments are engaged in agriculture, com-
merce, finance, industry, or the sale of service. Outside of the
province of trade, chains may be found in public utilities as
illustrated by the Columbia Gas and Electric Co.; in banks, as
exemplified by the Bancohio Corporation which operates a
number of banks and branches thereof over a certain portion
of the state of Ohio; in restaurants, such as Childs' and Harvey's;
in theaters, as illustrated by the chains operated under the
names of Loew and Fox; in hotels, as exemplified by the Statler
and DeWitt chains; in sales finance as illustrated by the General
Motors Acceptance Corporation; in personal finance as exempli-
fied by the Household Finance Corporation; in barber shops; in
beauty parlors; in photographic studios; and in laundries.

In the manufacturing field a number of plants producing
similar items of merchandise are to be found under a single
ownership, and even under centralized management, all of them
operating as standardized units of a larger organization. Like-
wise, chains are commonly found in the wholesaling field, as
illustrated by the McKesson & Robbins organization in the drug
business. Most manufacturers' sales branches operating at
wholesale are of the chain type, and so are the chain store
warehouses maintained by so-called " retail chains."

6 THE CHAIN STORE PROBLEM

As will be shown presently, most of our so-called retail chains
are in reality chain store "systems" which engage not only in the
retail distribution of goods but perform the wholesaling functions
as well, often through separately operated wholesale establish-
ments, and not infrequently also engage in manufacturing. For
this reason, a distinction must be made, at least theoretically,
between chain stores, chains, and chain store systems. The
term " chain store," when used in a restricted and literal sense,
applies to the retail merchandising unit of a chain and is further
restricted to establishments dealing in commodities. The
term "chain" refers to the organization operating two or more
units of a given type (i.e., retail, wholesale, manufacturing,
financial, etc.) in the same line of business. The term "chain
store system," on the other hand, is the most inclusive and
embraces all operations of the company including retailing,
wholesaling, and manufacturing activities as well as the other
operations, such as transportation, which the system may be set
up to perform. It is in this latter sense that all three terms
are normally used, interchangeably, with varying degrees of
emphasis.

Unless otherwise specified, all three terms will be used in this
discussion interchangeably but will always be applied only to
organizations engaged primarily in the retailing and only second-
arily in the wholesaling of merchandise through controlled multi-
unit establishments, of which at least two or more units operate on
the retail plane and handle substantially similar lines of merchan-
dise, regardless of whether the goods come from the farm, the
factory, the mine, the oil-well, or the forest. No chains will be
included in this discussion that are purely wholesale, financial,
industrial, public utility, amusement, or service in character.

Classes of Chains. Chains may be classified on a number of
different bases. According to the kind of merchandise handled,
we may have food chains, drug chains, tobacco chains, gasoline
filling-station chains, department store chains, etc. Even these
classifications may be subdivided as in the case of food chains,
which may be subclassified into grocery chains, grocery and meat
chains, meat chains, and confectionery chains. Shoe chains, for
example, may further be divided into those handling men's shoes,
women's shoes, or a general line of men's, women's and children's
shoes.

INTRODUCTION <

A second basis for classifying chains is according to territory
of operation. Chains are classified as local if substantially all
of their stores are located in and around some one city. Sec-
tional chains are those whose stores are located in some one
section of the country, such as the New England States, the
Pacific Coast States, the Giilf Southwest, or in any other geo-
graphic division. National chains are those whose interests are
broader than those of any one section of the country.

A third and very important basis for classifying chains is on
the plane of operation, depending upon the extent, if any, to
which they engage in retailing and/or wholesaling. On this
basis at least four distinct types of chains may be distinguished, as
follows: (1) retail chains without warehouses; (2) retail chains
with warehouses; (3) wholesale chains engaged in retailing; (4)
wholesale chains proper.

Retail Chains without Warehouses. This type of chain
organization confines its activities entirely to the performance of
retail functions. Such chains purchase their supplies either from
wholesalers just as the independent merchants do, or direct from
manufacturers. They do not maintain any warehouses, nor do
they perform many of the wholesale functions. Most of these
chains either operate on a small scale, i.e., maintain a small num-
ber of units, or are engaged in lines of business such as millinery
or jewelry, in which the performance of wholesale functions does
not necessitate the maintenance of warehouses.

Many of the local chains, even in the grocery, hardware, and
drug trades, operate without separate warehouses. Whatever
warehousing may be required is likely to be done in connection
with one of the larger stores, which often operates as the parent
organization. Most of the wholesaling functions are nor-
mally passed on by these chains to either the wholesaler or the
manufacturer.

Retail Chains with Warehouses. The primary function of
this type of chain is to retail merchandise, but such chains also
maintain warehouses for the purpose of facilitating their retailing
operations. All of the large chains in the grocery trade belong in
this classification. In fact, the establishment of a warehouse by
a chain system in such a trade is one of the first evidences of its
successful development. Direct buying on anything approaching
a large scale would be difficult without a warehouse. Similarly,

8 THE CHAIN STORE PROBLEM

centralized merchandising control is greatly facilitated by the
establishment of a warehouse which normally also houses the
central offices.

The wholesale functions performed by the chain store ware-
house are analogous, to some extent, to those of independent
wholesalers. In fact, chain store warehouses often sell certain
quantities of merchandise to outside retail organizations. Chain
store warehouses are also commonly maintained by retail chains
in the drug business, in the clothing trade, and in the tobacco
business. Most chains operating a single warehouse are local
in character. Their organization is relatively simple. The goods
are assembled, stored, and delivered from the warehouse. All
of the retail outlets are merchandised and frequently supervised
from this central vantage point.

As the chain increases in size and extends its operations over
an ever-widening area, a single warehouse becomes inadequate.
The outlying stores, especially in the food chains, are frequently
given some degree of autonomy in purchasing from local sources
of supply. This condition represents a transition stage which is
concluded upon the establishment of branch warehouses.

When the stage of branch warehouses is reached, a condition of
a chain within a chain exists. The chain stores comprise a chain
on the retail plane and warehouses constitute a wholesale chain.
With the establishment of two or more warehouses, the problem
of chain administration takes on a new complexion. In this con-
nection there are two policies that have had wide usage. First,
the same method of centralized control from a general administra-
tive office may be followed as in the case of chains with a single
warehouse. The purchasing and supervision are carried on from
one of the headquarters, but with the additional necessity of
supervising the warehouses as well as the retail stores. The
second policy consists of setting up sectional or divisional
offices, which are located in one of the warehouses, with the
purpose of overseeing the activities of the several warehouses
under their respective jurisdictions. The divisional offices, and
frequently the individual warehouses, are given a high degree of
autonomy within the chain's operating code. Some purchasing
is done from general headquarters but the individual warehouses
maintain their own buying departments which take care of many
of the items handled by the stores attached to them. This is

INTRODUCTION 9

particularly true in the case of perishable goods and other items
that are especially adapted to the stores of a given area.

From the foregoing it appears that, with some exceptions, only
the chains operating on a relatively small scale or those that
confine their activities to lines of merchandise which do not
necessitate much warehousing are strictly retailing institutions.
As soon as the chain expands its activities to include the main-
tenance of a warehouse, it becomes a hybrid wholesaling-retailing
organization. Thus, most so-called "retail chains" (having both
retail stores and chain store warehouses) are distinct merchandising
institutions, possessing most of the characteristics of retail and whole-
sale institutions in addition to others which are distinctive and
peculiar only to the chain form of organization.

Wholesale -retail Chains. In this classification are included
chains which engage primarily in wholesaling but which also oper-
ate a number of retail outlets. This type of chain may be illus-
trated by various organizations in the petroleum trade, whose
main business is to sell their products through a chain of bulk
tank stations (that sell at wholesale) but which also operate some
gasoline filling stations (that sell at retail). These chain systems
differ from the typical retail chain in that the emphasis is upon
the wholesale distribution of the refiner's products rather than
upon retailing. Although some refiners are primarily interested
in the retail filling stations (the bulk tank stations being used
largely to supply the filling stations), in many cases the fiEng
stations represent an incidental part of the business, a concession
to temporary demand conditions, the interest of the refining
companies centering instead upon the wholesale distribution of
their products to independent filling stations, to wholesale
petroleum marketers, to industrial consumers, and to the export
field. A strong tendency in this direction has developed cfl&m
result of the numerous chain store taxation laws, ad& o f the
recent years by the various states, as will be showy mo re than
chapter. Such wholesale chains may also be f^ absorbed by
trades in which a few retail stores may be mai i s defined and
for experimental purposes in order that cej t only that, but
merchandising may be tested prior to passiijjm even a larger
form of " dealer-helps " to the regular retail hi e; i n the grocery

Wholesale Chains Proper. Just as there ao nsumer > 8 dollar; in
fine their activities to retailing only, so thei per cent of the total

lain stores have over

10 THE CHAIN STORE PROBLEM

only at wholesale. A large number of chains may be found in the
wholesale field which confine their business entirely to wholesaling
operations. In this group belong the wholesaling branches main-
tained by manufacturers for the disposal of their products. A
number of such chains appear in the food industry, the plumbing
business, the iron and steel trade, and in many other lines of
business. There are also chains of agents, brokers, and commis-
sion merchants, all of which operate upon a wholesale plane either
between the producer and the wholesaler or between the producer
and retailer or industrial consumer. In the marketing of agri-
cultural products there are chains of assemblers and country
buyers including many grain elevators (line), milk and cream
stations, and cooperative marketing associations. Wholesalers
of the typical variety (service wholesalers or jobbers) likewise
operate on a chain basis, as do some of the newer types of whole-
sale organizations such as cash-and-carry wholesalers and wagon
distributors.

Voluntary Chains. In addition to the types of chains just dis-
cussed, there are a number of borderline developments or hybrid
types such as the cooperative or voluntary chains (groups of
independent wholesale and retail establishments) which have
adopted chain store methods for purposes of closer cooperation
in Ihe competitive struggle for business. There are two types
of these cooperative chains that have come into prominence
diring recent years. The older type consists of groups of retail-
ers who have joined together for the purpose of securing wholesale
prices on their combined purchases. This is a form of business
cooperation designed to give the individual stores certain advan-
tages supposed to accrue to wholesalers and to other large-scale
buyers. Such cooperative retail groups may or may not main-
.perVisi7 i are " louses * facilitate their wholesaling activities. When
econd Doli P era ^ e such warehouses, it is frequently difficult in
offices which Distinguish between them and independent wholesale
purpose of overs* 1 ^ *^ e cash-and-carry variety, since both types
under their respect the same functional basis and render similar

frequently the indivi<

autonomy within the ' of cooperative chain is of more recent origin
is done from general h 'ependent wholesalers who have taken the
maintain their own buj zin 8 a 8 rou P of their independent retail
of the items handled b * or less closel y **& merchandising organiza-

INTRODUCTION 11

tion. Wholesalers have often taken this step as a means of self-
preservation, realizing that their future is closely tied up with
that of the independent retailers. By joint cooperation, fre-
quently strengthened by binding contracts, it has proved possible
to engage in advertising to better advantage, to economize in
purchasing and delivery, and to perform other merchandising
activities to the mutual benefit of the wholesaler and retailer
members. The goal of all of the cooperative types of chain
organizations is to enable the retail members to secure at least
some of the advantages which the chains enjoy, at the same time
retaining more or less independent ownership of the stores.

Voluntary chains are in reality not chains at all, because the
retailers who are members thereof preserve their individual
ownership of the stores which they operate. The members are
merely bound by an agreement which can usually be terminated
on a few days' notice. Not only is individual store ownership
completely preserved, but most of the management is also left
largely or entirely to the discretion of the individual member,
although the latter is not so important a distinguishing charac-
teristic. Because of this lack of controlling interest in the coop-
erating establishments, the Federal Trade Commission used a
separate schedule for the collection of data from voluntary chains
and always applied the word "cooperative" when the term
"chain" was used in connection with these organizations.

Why Is There a Chain Store Problem? As will be shown in the
subsequent chapters, chain stores are in the United States a
relatively recent development, whose growth has been short of the
spectacular. From 1900 to 1929, a period of 28 years, chain
stores have multiplied 2,800 per cent, and the growth has been
consistent throughout the period. At the present time, chain
stores take a substantial proportion of the total volume of the
retail business of the country. Anywhere from 25 to more than
30 per cent of all retail store business is now being absorbed by
the chain systems, depending upon how a chain is defined and
on what basis the statistics were gathered. Not only that, but
in certain lines of business, chain stores claim even a larger
share of the business volume. For example, in the grocery
trade, they claim more than 40 cents of the consumer's dollar; in
the shoe business they do approximately 50 per cent of the total
retail volume; and in the variety store field chain stores have over

12 THE CHAIN STORE PROBLEM

90 per cent of the business. Thus, in certain fields chain store
competition is being felt rather keenly by the independent
merchant and the wholesaler who serves him. This condition
is accentuated by the fact that chain stores are largely concen-
trated in urban communities. In some of our larger cities, they
account for more than 70 per cent of the grocery business even
though for the country as a whole the chain stores absorb only
about 40 per cent of the grocery trade. This means that in
certain cities and in certain lines of retail trade, the competition
from chain stores is unusually severe, and the independent mer-
chant seems unable to cope with the situation. Moreover, chain
stores are now invading fields of operation which were heretofore
untouched by the movement. They are entering in larger
numbers into the smaller communities and are integrating their
retailing operations not only with wholesaling but with manu-
facturing as well.

All of these circumstances have sharpened public interest in
the chain store question. Their ubiquitous existence and their
vital effect upon the present economic order make the pub-
lic curious concerning the future and raise questions on
what attitude to take to this development. Public interest is
greatly heightened, naturally, by the activities of the various
parties that are directly affected by and concerned with chain
stores.

Nature of the Chain Store Problem. In recent years the chain
store problem has become one of public policy. Prior to that
time the problem of the independent retailer was one of meeting
successfully the competition from chain stores. It was one of
management and relative efficiency, often leading to the forma-
tion of voluntary chains. The wholesaler's problem in meeting
such competition was similar in character, and so was that of
the manufacturer who relied principally upon the business of
independent outlets. Likewise, it was the problem of the chains
to meet effectively the competition from other types of retailing
and from competing chains. An added problem for chains in
recent years has been that of overcoming generally unfavorable
public opinion. While these problems still remain, when one
speaks of the chain store problem today, he is primarily concerned
with it from a social point of view, viz., from the standpoint of
public policy.

INTRODUCTION 13

From this angle, one is confronted with at least four alterna-
tives :

1. Shall chain stores be let alone to fight the battle for the
consumer's dollar, and let the winner in the competitive struggle
be determined by the rules of the game, or what is worse, by
the absence of rules to assure sportsmanlike conflict?

2. Shall chain stores be completely eliminated and, if so, how?
Are such organizations a sufficient social menace to justify this
drastic action and can such action be taken within the constitu-
tional bounds of our state and Federal governments?

3. Shall the growth of chain stores be definitely curtailed and by
what specific measures can this be accomplished? Is regulation
for this and other purposes desirable?

4. Shall chain stores be permitted to function under legislative
restrictions? To what extent shall such restrictions be effected?
Shall the legislation be aimed at the curtailment of their growth
or at the elimination of certain alleged abuses, and the equaliza-
tion of existing inequities in tax burdens or in contributions to
community life?

These are the questions posed by the chain store situation.
They, in short, represent the composite that is the chain store
problem. Just how to solve this problem, legislatures and others
are at a loss, except as they are impelled by pressure groups to
follow certain courses of action and are further stimulated by a
desire for additional revenue to meet budget deficits. It should
be apparent even to the unsophisticated that this problem cannot
be handled satisfactorily without an objective approach and a
complete understanding of all the facts in the case. To supply
the scientific point of view and the essential knowledge for the
solution of this problem is the purpose of the chapters that
follow.

CHAPTER II
THE ORIGIN AND GROWTH OF CHAIN STORES

Early Traces of the Chain Store Idea. Although the modern
chain store is of comparatively recent origin, the chain idea of
distribution has many forerunners and prototypes. According
to available records, On Lo Cass, a Chinese business man, "owned
a chain of a great many units in the Celestial Empire as early as
200 B.C." 1 Greek and Roman records indicate the existence of
central ownership and management of retail establishments in
the heyday of their respective civilizations. A poster found in
Pompeii, destroyed in A.D. 79, advertised for lease a certain
property which consisted of 900 retail shops. 2

For more than two centuries, beginning with the fifteenth, the
Fugger family of Augsburg, Germany, owned and operated an
industrial and commercial organization which had in it many
elements of the present-day chain system. In addition to
manufacturing textile fabrics, mining, and banking, the House of
Fugger also engaged in international trade and operated both
wholesale and retail shops for the sale of its products, although in
the later years its earnings came principally from dealings in
money. As early as 1643 the Mitsui family of Japan started a
chain system of apothecary shops, and to this day it is a potent
factor in the drug business. Its interests now cover manufactur-
ing, mining, banking, insurance, engineering, as well as mer-
chandising in both foreign and domestic markets. It is generally
regarded as the wealthiest and most powerful business in Japan
today. 3

Early Chains in the Americas. The Hudson's Bay Company is
without a doubt the oldest chain organization in the Western
Hemisphere. It was chartered by the British Crown in 1670 and

1 NYSTROM, P. H., " Retail Trade," Encyclopaedia of the Social Sciences,
Vol. XIII, p. 35, The Macmillan Company, New York, 1934.

1 Ibid.

3 ORCHARD, J. E., "Mitsui," Encyclopaedia of the Social Sciences, Vol. X,
p. 560, The Macmillan Company, New York, 1933.

THE ORIGIN AND GROWTH OF CHAIN STORES 15

began to establish trading posts on the North American continent
prior to 1750. During the eighteenth and nineteenth centuries
it operated such trading posts all over the Canadian Northwest.
The company is still in existence. It now operates 10 modern
department stores in Canada, maintains over 250 trading posts,
navigates more than 50 vessels in Canadian waters, and is reputed
to be one of the largest real estate owners in the dominion. 1
It is claimed that the second oldest chain in the Americas was
founded in Brazil. More than a hundred years ago a Scotchman
named Clarke emigrated to Brazil and opened a shoe store.
As business grew he added other stores, forming the Campanhia
Calcado Clarke which is still doing business and operates about
30 units in the principal cities of Brazil. 2

Origin of Chain Stores in the United States. The origin of
chain stores in this country has been a subject of considerable
dispute in some of the chain store litigation in recent years.
Defenders of the chain system of merchandising have argued that
the " constitutional right" to operate such a business has existed
in this land "from time immemorial." This point of view has
been challenged on the ground that "time immemorial n is
vaguely mythological rather than definitely chronological.
While in this land of freedom of economic opportunity a person
or firm has an inalienable right to engage in the sale of any com-
mon commodity, the constitutional right to engage in all kinds
of business has not been established. Certain businesses may be
subject to license fees or taxes, and public utilities are limited in
number by franchise privileges. Nor has the constitutional right
been established to run a business as the concern sees fit. Years
ago the Standard Oil group was forced to break up. Later the
big meat packers were forbidden by a consent decree to engage
in the grocery business or to perform other functions which to
them meant much profit. On the contrary, the right to regulate
business when the public welfare demands it has been firmly
established. This has been particularly true when there has been
a tendency toward monopoly or where unfair trade practices have
been discovered.

In the modern sense of the term it is probable that the first
chain stores in the United States were the group of nine stores

1 NYSTROM, P. H., "Retail Trade," supra, pp. 351-352.
1 Chain Store Progress, November, 1931, p. 1.

16 THE CHAIN STORE PROBLEM

which the Worthington Manufacturing Company of Ohio was
said to hare operated as early as 1818. On a less ambitious scale,
chain stores apparently operated at the beginning of the nine-
teenth century, Andrew Jackson is said to have operated
three or more general stores in Tennessee. 1 In 1835 the legisla-
ture of the state of Ohio imposed a fine of $1,000 on establish-
ments which opened a second unit in Hamilton County, the situs
of Cincinnati. 2 This, of course, suggests the possible existence
at that time of chain stores either in or near Ohio. In the fifties
and during the next decade, Carson, Pirie, Scott and Company is
said to have operated a chain of stores in the Middle West with
headquarters in Amboy, 111., but during the seventies the com-
pany confined itself entirely to wholesaling and abandoned its
retail operations. 3

Most authorities, however, trace the beginnings of chain store
merchandising in this country to about 1858, as indicated by the
following quotations:

"In 1858 the first chain store in the United States was estab-
lished by the Great Atlantic & Pacific Tea Company . . . The
first chain store had an annual turnover in 1858 of a few thousand
dollars. 7 ' 4

" To the largest of all chains, the Great Atlantic & Pacific
Tea Company, goes the distinction being first in the field.
Establishing itself as a single store about 1858. . . ," 5

It is probable that the following quotation reflects the situation
much more accurately: "The first of existing chain stores seems
to have been the Great Atlantic & Pacific Tea Company, which
was established in 1858." 6 The comparative recency in the

1 JONES, F. M., "Middlemen in the Domestic Trade of the United States,
1800-1860," Illinois Studies in the Social Sciences, Vol. XXI, No. 3, pp. 50-51,
University of Illinois, Urbana, 1937.

2 Cincinnati Post, Dec. 17, 1835, p. 7.

3 NYSTROM, P. H., "Economics of Retailing," Vol. I, pp. 216-217, Ronald
Press Company, New York, 1932.

4 "The Chain Store Element of Revolution," p. 5, Central Union Trust
Company of New York.

5 PALMER. J. L., " What about Chain Stores? " p. 4, American Management
Association, New York, 1929.

6 NYSTROM, P. H., "Chain Stores/' p. 3, rev. ed., Chamber of Commerce of
United States of America, Washington, 1930.

THE ORIGIN AND GROWTH OF CHAIN STORES 17

development of chain stores in this country can be gleaned from
a further statement made by the same authority to the effect that
" department stores, mail order houses and chain stores began to
appear simultaneously during the seventies and eighties." The
following quotation seems to corroborate the same point of view:
"The chain store system of marketing goods is one of compara-
tively recent origin. It is not long ago that the chain store was
an almost unheard of institution." 1

A Few of the Early Chains. As already indicated, the first of
the important chains in this country came to life in 1858, when
George H. Hartford and George F. Oilman were induced to buy a
cargo of tea, which was then selling at a dollar a pound, and opened
a red front store on Vesey Street, Manhattan, under the name
"The Great American Tea Company." Hartford took charge
of the store and soon thereafter became sole owner. The store
proved a successful venture from the start and by the end of 1859
two more stores were opened, when the company really became a
chain. The early operations were conducted with much secrecy.
The present name was first introduced in connection with the
concern's mail order trade in 1869, and the business was finally
incorporated in 1900 under the name "The Great Atlantic &
Pacific Tea Company." Today it is the largest chain store sys-
tem in the United States, operating slightly over 15,000 retail
units and doing around a billion dollars' worth of business per
year. The Hartford families are still the principal owners of the
business and are active in its management. 2 Another chain
system, which operated in similar fashion and dealt in the same
line of merchandise, was the Jones Brothers Tea Company which
came into being in 1872, although Park and Tilford, which began
business in 1840 but opened the second store in 1860, was the
second of existing chains from a chronological point of view.

The fourth of the existing chain store organizations that had
its inception in early times was the F. W. Woolworth Company.

1 "Chain Stores and the Farmer," an address by John Brandt, president
of Land O'Lakes Creameries, Inc., 1929 Convention Speeches, Chain Store
Association, New York.

2 For a more complete discussion of this company, its history and oper-
ations, see, "The A & P Company as a Whole," Fortune, July, 1930;
BULLOCK, R. J., "The Early History of the Great Atlantic <fe Pacific Tea
Company," Harvard Business Review, Vol. II, pp. 289-298, 1933; and
"Biggest Family Business," Fortune, March, 1933.

18 THE CHAIN STORE PROBLEM

The originator of the system for whom the company has been
named is said to have started to work for a Watertown, N. Y.,
merchant without wages. After proving his worth he received
a wage of $3.50 per week and was later raised to $10. While in
this employ he attempted to get rid of odds and ends by placing
such merchandise on a table with a printed card which read, " Take
your choice at five cents each. 1 ' The experiment was so success-
ful that he tried it a number of times with equal success. Thus,
with the financial support of his employer, Frank W. Woolworth
opened his first five-and-ten-cent store in Lancaster, Pa. When
he died in 1919, nearly 1,000 of such limited-price variety stores
were operated by the company in this country, Canada, and
Great Britain. Now there are approximately 2,000 retail store
units in the chain, with merchandise selling at a price range from
five cents to a dollar per article. 1 The S. S. Kresge Company in
Detroit dealing in similar merchandise was organized in 1885.
The Kroger Grocery & Baking Company traces its origin to 1882.
During the same year two other important chains came into
being the James Butler Company of Brooklyn and the McCrory
grocery chain in Scottsdale, Pa. The National Tea Company
was started in 1899, being the last of the large chains formed
during the past century.

In 1901, the United Cigar Stores Company began operations,
opening one modern cigar store after another until it had at one
time over 3,000 stores and a number of agencies. Probably
one of the greatest of the earlier chains is that of the J. C. Penney
Company. With a capital of his own of but $500, J. C. Penney
and two other partners opened the first store of the chain in
Kemmerer, in the mountains of Wyoming. The business was
first capitalized at $6,000 and E. C. Sams, who is now president
of the company, was hired as a clerk in this first unit of the sys-
tem. At the present time the company operates 1,496 stores
located in practically every state of the union. The year 1915
is especially significant in chain store history as three of our most
prominent chain organizations were formed at that time. Wal-
green in the drug field; McCrory, a variety chain; and Safeway,
next to the A & P Co. the largest grocery chain organization;
all trace their origin back to that epochal year.

1 For glimpses into the early history of the Woolworth Company see The
Pathfinder, June 30, 1928, p. 22; and Tide, June, 1928, p. 6.

THE ORIGIN AND GROWTH OF CHAIN STORES 19

GROWTH OF CHAINS FROM 1900 TO 1929

From a brief examination of the chain store companies formed
prior to this century it is evident that the earlier organizations
operated almost altogether in but two lines of merchandise, viz.,
groceries and foods (including tea and coffee), and limited-price
variety goods. It was not until the advent of the present century
that chain stores spread into other lines of trade. It is equally
evident that by 1900 the chain method of retailing, though it
had become definitely established, had hardly begun to grow and
absorbed a relatively insignificant proportion of the retail trade
of this country.

Growth in the Number of Chains and Chain Stores. At the
turn of the century several large chains made their appearance
and the older systems began to develop. Unfortunately, rela-
tively limited data are available concerning the development of
chain stores in the United States during the first quarter of this
century. Probably the most authentic and reliable statistics
on the subject are those developed by the Federal Trade Com-
mission, and even some of those are in the form of estimates.
These data resulted from a chain store inquiry conducted by
the Commission over a period of several years in pursuance of a
Senate Resolution approved May 5, 1928. In this investigation
the term " chain" or " chain store" was applied to " organizations
owning a controlling interest in two or more establishments
which sell substantially similar merchandise at retail." Con-
sequently, the Commission's statistics may be at variance with
data presented by other agencies, since they include organiza-
tions of two or more establishments, while the Census Bureau,
for example, includes in chain store figures only organizations of
four or more units. As to which of these divergent points of
view seems to be the more reasonable, a discussion in some
detail was presented in the preceding chapter. Furthermore,
the Federal Trade Commission limited its inquiry to 12 major
classes of chains (based on the lines of merchandise handled)
which, when divided into sub-classes, cover a total of 26 so-called
kinds of business 1 but do not include " certain highly specialized

1 Food (grocery, grocery and meat, meat, confectionery); drug; tobacco;
variety ($1 limit, $5 limit, unlimited); apparel (men's ready-to-wear, men's
and women's ready-to-wear, men's furnishings, women's accessories, hats

THE CHAIN STORE PROBLEM

kinds of chains such as gasoline filling stations, automobile
accessories, and others. " It is on the basis of data collected for
chains operating in the 26 kinds of business that estimates were
prepared by the Commission for all companies with two or more
stores.

According to the data shown in Table 1 (see also Fig. 1) there
were in 1900 about 700 chain store systems with a total of
approximately 4,500 stores. At the end of 1928 the number of

110.000

100,000
90.000

20,000
10,000

24,000

22,000

14,000 |^

.c
10,000

4000

2000

Fig. 1. Growth of chains in number of systems and store units, 1900-1928.

chain systems stood at 20,000, and the number of retail units
operated by chains was nearly 200,000. Thus, the number of
chain systems increased during this period by 2,850 per cent or
more than 28 times, and the number of stores in these systems
multiplied approximately 2,660 per cent or nearly 27 times. A
close examination of the data shown in Tables 1 and 2 reveals
the following interesting facts, in addition to showing the tre-
mendous growth just indicated:

and caps, millinery, men's shoes, women's shoes); dry goods; dry goods and
apparel; department store; general merchandise; furniture; musical instru-
ments; and hardware.

THE ORIGIN AND GROWTH OF CHAIN STORES 21
TABLE 1. GROWTH OP CHAINS IN THE UNITED STATES, 1900-1928

Year

Chain systems

Chain stores

Number

Percentage increase
over previous year a

Number

Percentage increase
over previous year

1900

700

4,500

1901

800

14.3

5,100

13.3

1902

1,000

25.0

5,600

9.8

1903

1,200

20.0

6,200

10.7

1904

1,500

25.0

7,300

17.7

1905

1,800

20.0

8,300

13.7

1906

2,000

11.1

8,900

7.2

1907

2,200

10.0

9,700

9.0

1908

2,500

13.6

10,800

11.3

1909

2,700

8.0

12,000

11.1

1910

3,000

11.1

13,500

12.5

1911

3,400

13.3

14,500

7.4

1912

3,800

11.8

16,300

12.4

1913

4,400

15.8

18,300

12.3

1914

5,200

18.2

21,500

17.5

1915

5,900

13.5

26,600

23.7

1916

6,500

10.2

32,900

23.7

1917

7,100

9.2

38,300

16.4

1918

7,500

5.6

39,800

3.9

1919

8,500

13.3

43,900

10.3

1920

9,400

10.6

49,200

12.1

1921

10,500

11.7

53,700

9.1

1922

12,300

17.1

63,700

18.6

1923

13,600

10.6

73,600

15.5

1924

14,700

8.1

83,400

13.3

1925

16,800

14.3

96,600

15.8

1926

18,200

8.3

105,000

8.7

1927

19,700

8.2

112,900

7.5

1928

20,000

1.5

119,600

5.9

Source: Federal Trade Commission, "Chain Stores, Growth and Development of Chain
Stores," Tables 34 and 36, Vol. I, U.S. Government Printing Office, Washington, 1932.
Computed.

1. The growth of chain stores was consistent throughout the
period from 1900. Each year showed an increase in both the
number of chains and chain units.

2. At the beginning of the second decade of this century the
rate of chain store growth was accelerated but the largest
increases did not take place until the third decade.

22 THE CHAIN STORE PROBLEM

3. During the first half of the period from 1900 the number of
chains grew faster than the number of store units, indicating a
large increase in newly formed chain organizations. At least
for the first 10 years the number of chain systems multiplied
about twice as fast each year as the number of stores, and in
each of the first 14 years the rate of growth in store units was less
than that shown for chains.

4. In 1915 the process was reversed for the first time, and
chain store units multiplied faster than the number of chain
systems. In no less than 7 of the remaining 14 years covered by
the tables was this true, indicating the formation of new chains
on a large scale or the opening of new stores by existing chain
organizations, or, probably, both. Part of the latter was also
accomplished through the absorption of small chains by the
larger rivals. Between 1900 and 1914 the number of chains
increased 640 per cent, the number of store units increased only
480 per cent, so that the number of units per chain decreased
around 36 per cent. From 1915 through 1928 the number of
chain systems increased 285 per cent and the number of store
units increased by 550 per cent, so that the average number of
units per chain was augmented by 45 per cent. This latter
period was indeed an era of large chain store development on an
ever-increasing scale.

That the estimates made by the Federal Trade Commission
concerning chain store growth were, if anything, conservative is
evident from a comparison with the data collected for the year
1929 by the Census of Distribution. According to this enumera-
tion, which covered chains operating in all kinds of retail business,
including motor vehicle dealers, gasoline filling stations, jewelry,
and a few other minor classes of business excluded from the
Commission's analysis, there were in 1929 no less than 148,137
chain store units owned by organizations having four or more
units each. To make the data comparable, one must add to
this figure the so-called " twins and triplets, " viz., the stores
operated by organizations with two or three units each. This
group comprised in 1929 a total of 64,583 stores; hence, it may be
said that the total number of chain store units in operation in the
United States during that year was 212,620, of which about
50,000 were in lines of business not covered by the Commission.
During the year 1933, when the second Census of Business was

THE ORIGIN AND GROWTH OF CHAIN STORES

TABLE 2. NET YEARLY ADDITION OF CHAINS AND CHAIN STORE UNITS,

UNITED STATES, 1900-1928
Percentages computed on base year 1900

Year

Chains

Stores

Number added
(net)

Percentage
increase

Number added
(net)

Percentage
increase

1901

100

14.3

600

13.3

1902

200

28 6

500

11.1

1903

200

28.6

600

13.3

1904

300

42.9

1,100

24.4

1905

300

42.9

1,000

22.2

1906

200

28.6

600

13.3

1907

200

28.6

600

13.3

1908

300

42.9

1,100

24.4

1909

200

28.6

1,200

26.7

1910

300

42.9

1,500

33.3

1911

400

57.1

1,000

22.2

1912

400

57.1

1,800

40.0

1913

600

85.7

2,000

44.4

1914

800

114.3

3,200

71.1

1915

700

100.0

5,100

113.3

1916

600

85.7

6,300

140.0

1917

600

85.7

5,400

120.0

1918

400

57.1

1,500

33.3

1919

1,000

142.9

4,100

91.1

1920

900

128.6

5,300

117.8

1921

1,100

157.1

4,500

100.0

1922

1,800

257.1

10,000

222.2

1923

1,300

185.7

9,900

220.0

1924

1,100

157.1

9,800

217.8

1925

2,100

300.0

13,200

293.3

1926

1,400

200.0

8,400

186.7

1927

1,500

214.3

7,900

175.6

1928

300

42.9

6,700

148.9

Source;; Derived from Table 1.

taken, no separate data were presented for chains operating two
or three stores each. The data were confined entirely to the
artificially concocted definition of chains which covers only
stores belonging to an organization having four or more units.
A comparison of the latter figure shows a decline in the number of
chain stores from 148,037 in 1929 to 141,603 in 1933, a decrease
of 4.3 per cent, due largely to the consolidation of smaller stores

24 THE CHAIN STORE PROBLEM

into larger units during the depression. In 1935, according to
the results of the third enumeration taken by the Bureau of the
Census, the number of chain stores (operated by organizations
of four or more units) stood at 127,482, a decrease from 1933 of
about 10 per cent. 1

Growth in Chain Store Volume of Sales. For years prior to
1929 only the most fragmentary information is available con-
cerning the volume of business done annually by chains. For
the early years of the present century even the fragmentary data
are unreliable, since the reporting of such data had hardly been
established. Even for the latter part of the period prior to 1929,
when the first Census of Distribution was inaugurated, only
statements of the following general nature were possible:

Between 1919 and 1927 the sales volume of twenty-seven grocery
chains practically trebled. Atlantic and Pacific sales approximately
quadrupled. Kroger sales were multiplied approximately five times.
In the drug trade, Walgreen since 1920 has multiplied its volume
approximately 20 times. In the retail meat business chains were of
negligible importance five years ago. Today one hears predictions that
in a few years most of the retail meat business of the country will be in
the hands of chains. 2

Statements of this kind, while valuable in indicating the trend,
nevertheless fail to measure the position of the chain store in our
marketing structure from the standpoint of total volume of
retail business for which they account.

For all chains it is estimated that in 1919 their volume of busi-
ness was approximately 4 per cent of the total retail trade of the
country. 3 A survey made in 1927 by the Chain Store Economic
and Financial Research Bureau disclosed the fact that in 1921
the chains of this country accounted for but $1,369 millions of
business, whereas in 1926 they were said to have done no less than

1 All data based upon the Census of Distribution and the two Censuses of
Business used in this treatise are taken from Fifteenth Census of the United
States, Distribution, Vol. I, Part I, U.S. Government Printing Office,
Washington, 1933; Census of American Business for 1933, Chains and
Independents, U.S. Department of Commerce, Washington, 1935; and
Census of Business: 1935, Retail Distribution, Vol. IV, U.S. Department of
Commerce, Washington, January, 1937.

* PALMER, J. L., op. cit., p. 5.

8 NICHOLS, JOHN P., op. cit., p. 11.

THE ORIGIN AND GROWTH OF CHAIN STORES 25

$3,400 millions of business, an increase of nearly 150 per cent.
This amounted to approximately 9 per cent of the estimated
retail sales for 1926 at about 37 billions. l One writer claimed that
in 1928 the chain stores accounted for 12 per cent of the estimated
retail sales of between 42 and 43 billions. 2

In the Census of Eleven Cities taken for the year 1926 it was
found that chains represented 15.1 per cent of all retail establish-
ments and accounted for 28.7 per cent of the retail sales. 3 Since
chains are found in greater numbers in the larger communities
these latter data are hardly indicative of the place of chain stores
in our economic order. The first Census of Distribution shows
that in 1929 chains with four or more units reported sales for the
year of nearly 10 billions ($9,834,846,000) or exactly 20 per cent of
all retail store sales in the United States. If the sales reported by
the two- and three-store chains are included, it is found that the
chains accounted for more than 30 per cent of the retail store
volume. On the basis of four or more store chains, the sales for
1933, according to the Census of American Business, reported by
chains were $6,312,769,000 or 25.4 per cent of all retail store sales,
representing an increase of 26 per cent, even though the number
of units owned by chains declined during the same period by
4.3 per cent over 1929. Thus, from 1919 to 1933 chain stores
increased their share of the retail store trade in this country nearly
6^ times. For 1935 the sales made by chain stores operating
four or more retail units accounted to $7,550,186,000 or 22.8 per
cent of the total business done by retail stores and an abso-
lute increase in dollar volume over 1933 by approximately 20 per
cent.

In view of these facts, is there any wonder that students of
marketing so frequently allude to the past two decades as the
" chain store era" or the " chain store age"? Indeed it was dur-
ing this period that the most rapid development of chain stores
took place and a constantly larger share of the consumer's dollar
was being spent in those stores.

1 The Columbus Dispatch, Oct. 29, 1927.

'RuKEYSER, M. S., " Chain Stores, The Revolution in Retailing," The
Nation, Nov. 28, 1928, p. 568.

'"Retail and Wholesale Trade," Results of the Distribution Census of
Eleven Cities, published by the Domestic Distribution Department,
Chamber of Commerce of United States of America, 1928.

26 THE CHAIN STORE PROBLEM

Invasion of New Lines of Merchandise. The tremendous and
unprecedented growth of chain stores, in both numbers and
volume of sales, occurred in lines in which they first became
entrenched. In those kinds of business new stores were opened
so rapidly by existing chains and additional chains sprang into
being overnight in such large numbers that it became difficult
if not impossible to chronicle their forward movement. This
may account for the publication of a magazine by the name Chain
Store Progress, for that was the story to be told of the chain
movement : it was continuously and unremittingly one of progress
and advancement. But there were new fields to conquer and
additional lines of business to cover. Not so many years ago it
was argued in practically all books in the field of marketing that
chain stores cannot possibly succeed in the sale of style goods and
in fields which have a diversity of items in their merchandise
stocks. From the records so far established, such statements are
no longer true. While before this century chains operated in
only a few kinds of business, the Federal Trade Commission
inquiry found chains in all of the 26 kinds of business analyzed,
and the Census of Eleven Cities for 1926 reported chains in all
of the 47 kinds of business into which stores were classified.
Similarly, the Census of Distribution for 1929 showed chains
in operation in no less than 101 kinds of business and a similar
situation was disclosed by the census data for both 1933 and
1935.

To be sure, the relative importance of chains varies consider-
ably in the different lines of retailing. Furthermore, the rate
of growth by lines of trade showed wide variation. By 1900
chains were definitely established in the grocery and grocery and
meat lines. The most rapid rate of growth, however, was expe-
rienced between 1900 and 1913. After this year the rate of
growth declined, although in 1922 the greatest absolute increase
was registered. After 1925 the rate of increase was markedly
less than during the preceding year.

In the drug field the experience has been very much like that
just related for groceries. Between 1900 and 1913 the growth
was very rapid, more than doubling in numbers between 1910
and 1915, after which the rate of growth was less rapid but steady.
In the variety store field, chain store growth did not begin in
earnest until 1906, but after this date the growth was steady but

THE ORIGIN AND GROWTH OF CHAIN STORES 27

not spectacular. Beginning with 1910 the development of shoe
chains became noteworthy, but the growth in that field has been
more steady and gradual than in any other line of trade. Dry
goods and department store chains appeared in recent years,
probably since the World War, with the numerical growth being
greatest subsequent to 1921. In recent years chains have also
invaded fields of merchandise for which demand has been devel-
oped in the last two decades. Special reference is had to the
automotive business, radios, and household appliances.

In general, when chains enter a new field of retailing a rapid
increase is registered at first in the number of chain systems, but
when they become established in that line of trade the rate of
increase in the number of chain systems declines, and the number
of units per chain begins to grow. It follows, therefore, that as
chains occupy permanent berths in their respective lines of mer-
chandise the trend will be for relatively fewer chains, each oper-
ating on a much larger scale than at present.

Spread of Chains Geographically. Naturally the chains did
not develop at the same rate all over the United States. It was
the conclusion of the Federal Trade Commission that " those
States which (relative to population) rank high in chain stores
tend to coincide with those States which rank high in urban
dwellers and in persons who make Federal income-tax returns;
and a similar coincidence appears as among States which rank
low in all three categories cited/' 1

Since 1914 the number of chain stores has increased in each
geographical division, but chains concentrated their expansion
first in the more densely populated areas where they commanded
the greatest potential ready market for their goods and where
a large number of stores could be serviced conveniently from a
central warehouse. Later they stressed the establishment of
stores in less densely populated regions. About one-half of all
the stores reported for each year to the Commission were located
in the five states of New York, Pennsylvania, Ohio, Illinois, and
Massachusetts, and another one-third of the chain stores were
found in five other states. However, a larger proportion of the
total chain stores were reported for 1928 than for 1913 in as
many as 29 different states, which included but five of the impor-

1 " Chain StoresState Distribution of Chain Stores, 1913-1928," p. 19,
U.S. Government Printing Office, Washington, 1933.

28 THE CHAIN STORE PROBLEM

tant chain store states previously mentioned. 1 This means that
chain stores have penetrated the less populous regions of the
country.

Even within any one state the tendency has been in recent
years for chains to invade the smaller towns and cities rather
than to confine their operations to the larger communities as in
the past. Thus in 1928 there were more chain store units per
thousand population in the eastern states where a large pro-
portion of the population is urban. The District of Columbia led
in this regard, followed by New Jersey and Massachusetts, while
the Dakotas, South Carolina, Arkansas, New Mexico, and Mis-
sissippi showed the smallest number of chain stores per thousand
of population. 2 A somewhat different story is told by the data
showing the distribution of chain stores geographically at the
present time, as will be shown in the following chapter, indicating
a widespread expansion of chains even into sparsely populated
districts and into the small towns.

Summary. From a small beginning in 1900, chain stores have
grown tremendously in the number of systems and have multiplied
prolifically in the number of store units. Although at the turn
of the century they absorbed but a negligible fraction of the
retail business of the land, their sales have stepped up year by
year at such a terrific rate that they now absorb from 25 to 35 per
cent of retail store sales, depending upon how a chain is defined.
Moreover, the chain store principle has been applied successfully
to many lines of merchandise hitherto thought to be immune to
chain competition. To be sure, chains have not as yet developed
a strong position in every line of retailing, but from the experi-
ence thus far observed there is no reason to believe that chains
will not become important factors throughout the field of retail-
ing. Finally, chain stores have invaded sections of the United
States thought to be unprofitable for chain store operations and
are now penetrating into the smaller communities, and even rural
regions, in their competitive struggle for the consumer's dollar.

1 Ibid., p. 11.

8 Ibid., pp. 16-19.

CHAPTER III
PRESENT STATUS OF CHAIN STORES

Regardless of their possible shortcomings, the Census data on
chain stores are by far the most complete and reliable, especially
for measuring the entire chain store universe in this country.
Such data are available for three years, for which separate enum-
erations were made, namely, 1929, 1933, and 1935. There is no
other accurate method of measuring the type of retail distribu-
tion in question either as of one of those years or as to the changes
that have taken place since 1929. All other methods are of the
sample survey type, are usually confined to the larger chains
which by no means reflect what has happened to and among the
vast number of small chains, and are woefully incomplete and
misleading.

The Number of Chain Stores. According to the Bureau of
the Census, there were in 1929 no less than 216,295 stores oper-
ated by chain organizations, representing 14 per cent of all retail
stores in the United States. Of these, 148,037 stores belonged
to organizations of four or more units each, exclusive of chains
of leased departments with four or more units per organization.
As a matter of fact, the Retail Division of the Census of Distribu-
tion itself listed 7,061 chain store systems in 1929 with 159,638
retail units even on the basis of four or more stores per chain;
hence the discrepancies in the exact number of chain stores
reported by the Census itself would indicate that there is nothing
sacred about the figure normally quoted for that year of 148,037
such stores (see Table 3).

For the year 1933 no separate data were shown for chains with
two or three stores or for chains of leased departments. For
so-called " regular chains'' with four or more units each, the
number of stores reported was 141,676, or 9.3 per cent of all
retail establishments, as compared with 148,037 such stores in
1929 which then constituted 9.6 per cent of all retail establish-
ments. Thus, chain stores showed a decline in the number of
retail units of about 4 per cent and this was often quoted as evi-

THE CHAIN STORE PROBLEM

dence that chain stores have come of age and are no longer grow-
ing. In 1935 there were a total of 185,440 chain stores which
represented 11.2 per cent of all retail places of business. But of
this number only 127,482 stores belonged to so-called "regular
chains " and these represented but 7.7 per cent of all retail estab-
lishments then in existence, although in other publications the
census reports for 1935 no less than 6,079 separate chains of
four or more store units operating a total of 139,810 stores. l This
is given as further proof that chain stores have ceased growing
and are in fact declining in importance.

TABLE 3. NUMBER OF CHAIN STORES, BY CLASS OF CHAIN, UNITED
STATES, 1929, 1933 AND 1935

192

193

Class of chain

Num-
ber

%of
all
stores

Num-
ber

%of
all
stores

Num-
ber

%of
all
stores

Chains of 4 or more
stores

148, 037 a

9.6

141,676 a

9.3

127,482

7.7

Chains of 2 and 3 stores
Chains of leased depart-
ments

64,583
3,675

4 2

b
b

54,294
3 664

3.3
2

Total

216,295

185 440

11 2

Source: Bureau of the Census publications on retail distribution.

a This represents only stores operated by so-called regular chains with 4 or more retail
units. If to this figure are added for 1935 the 3,664 leased departments of the chain type,
the 2,053 state liquor stores, and the 6,591 retail units operated by chains which are not
identified by the Census to avoid disclosure of individual operations, and similar data are
used for 1929 and 1933, it would appear that the Bureau of the Census recognizes even on a
four or more retail-unit basis the existence of the following number of chains and store units:

1929

1933

1936

Number of chains

7,061

5,646

6,079

Number of retail unita

159,638

152,308

139,810

Census of Business: 1935, Retail Chains, U.S. Department of Commerce, Washington,
June, 1937.
6 No comparable data.

Census of Business: 1935, Retail Distribution, Vol. I, pp. 1-26, U.S.
Department of Commerce, Washington, 1937; Census of Business: 1935,
Retail Chains, U.S. Department of Commerce, Washington, June, 1937.

PRESENT STATUS OF CHAIN STORES 31

That the conclusions reached on the basis of the number of
chain stores during each of the three years in question are
absolutely erroneous becomes evident from an examination of
chain store sales during the same years. The shrinking in the
number of such stores has been due largely to a consolidation of
smaller stores into larger units and through a closing during the
depression of unprofitable places of business. This process,
which began even before the depression, was no doubt hastened
by the various taxation measures aimed at the chains, for such
taxes are based largely on the number of units in operation, the
tax progressing as the number of retail units increases.

Chain Store Sales. During 1929 chain stores, following the
definition of the Census Bureau in the narrowest sense, accounted
for 20 per cent of total retail store sales. The comparable per-
centage for 1933 was 25.4 per cent and for 1935 it was 22.8 per
cent (see Table 4, particularly the footnotes). Stated otherwise,
the sales of independents during 1933 decreased about 53 per
cent over those reported for 1929, whereas the sales of chains
decreased only around 35 per cent; in 1935 the sales of inde-
pendents were about 36 per cent below those reported for 1929
while the sales of chains were only 23 per cent below the 1929
figures. It is thus apparent that while the number of stores
operated by chains declined from 1929 to 1935 by approximately
15 per cent, the share of retail business absorbed by chains was
larger in 1935 by 14 per cent.

Obviously, chain store sales declined less during the depression
and hence accounted for a larger proportion of the total than
reported by independents. This has been due largely to two
factors. Chain stores deal to a large extent in necessities, over
36 per cent of all their sales in 1933 having been in the grocery
trade alone. During times of stress the dollar volume in such
necessities as groceries and other staple lines does not decline so
fast as the total retail business. To put the matter differently,
a larger proportion of the consumer's dollar in times of stress is
spent for necessities and a smaller proportion is spent for luxuries
and for durable goods. Thus, in 1933, a little over 27 cents of
the consumer's retail dollar was spent in food stores, as against
about 22 cents in 1929. Since many chains deal in foods, they
consequently suffered less during the depression than retailing
as a whole. Second, during hard times the consumer is apt to be

THE CHAIN STORE PROBLEM

more price conscious in order to make the limited dollars at his
disposal go a long way. Chain stores have built up the reputa-
tion of offering merchandise at low prices. This has no doubt
had its effect in attracting a larger share of the customers during
the depression than in times of prosperity.

TABLE 4. SALES OF CHAIN STORES, BY CLASS OF CHAIN,

UNITED STATES, 1929, 1933 AND 1935

In thousands of dollars

1929

1933

1935

Class of chain

% of
all

Amount

retail

Amount

retail

Amount

retail

store

sales

Chains of 4 or more stores .

$ 9, 834, 846"

$6,372,554-

25.4

% 7,550,186

22.8

Chains of 2 and 3 stores

4,275,585

9.7

2,611,866

7.9

Chains of leased depart-

ments

129,702

108,070

0.3

Total

14,240,133

29 9 C

10,270,122*

Source: Bureau of the Census publications on retail distribution.

4 On the basis stated in footnote of Table 3, the Census reports the following volume of
business done by chains with four or more retail units each:

RETAIL SALES OF CHAINS (FouR OR MORE UNITS)

Year

Amount

% of all re-
tail sales

1929

$10,740,385

21 9

1933

6,767,766

1935

8,460,611

25.5

* No comparable data.

c In view of the data in footnote above, these figures represent an understatement.
When properly adjusted it would seem the chains with two or more retail units each trans-
acted a total retail business as indicated below:

RETAIL SALETS OP CHAINS (Two OR MORE UNITS)

Year

1929
1935

Amount

$15,015,970
11,072,477

% of all re-
tail sales

30.6
33.4

PRESENT STATUS OF CHAIN STORES 33

The same two reasons would explain, in part, the relative
decline in the sales position of chain stores during 1935 as com-
pared with 1933 when measured in terms of the proportion of all
retail store sales taken by chains. As conditions improved, the
price consciousness of consumers may have given way to other
patronage motives. Besides, chain stores still dealing largely in
staples, almost one-third of all chain store sales in 1935 being in
groceries, the increase in such business during a period of recovery
is likely to be smaller than the general increase in all retail sales.
To these two factors must be added the competition from super-
markets which have developed in the interim. Much of the
business of this newer type of retailing has been in the grocery
trade and has been attracted principally from chain stores,
inasmuch as their appeals are similar in many respects. A fourth
reason for the relative decline in 1935 over 1933 is to be found in
the effects of chain store taxation measures enacted in a number
of states. This is especially notable in certain lines of trade as in
the retailing of gasoline and oil. In 1933, over 35 per cent of the
business reported by filling stations was accounted for by chains,
whereas in 1935 only a little over 21 per cent of the business was
thus accounted for.

The statistics of sales analyzed so far do not include chains of
two and three stores each, nor do they cover chains of leased
departments. When these latter figures are included, it would
seem that chain stores accounted for 29.9 per cent of all retail store
sales in 1929 and for 31 per cent of all such sales in 1935 (see
Table 4). Furthermore, if all chains with two or more units are
taken into consideration, including those chains which are not
identified in relation to type classification to avoid disclosure of
individual operations but admitted by the Census as chains, the
percentage of all retail business done by chains would be 30.6 per
cent for 1929 and 33.4 per cent for 1935. However, owing to the
unavailability of detailed data on this broader and more accurate
basis, the following analyses will perforce have to be based on the
narrower and rather inadequate Census definition of chains.

Chain Store Sales by Kind of Business. In any discussion of
chain stores attention is usually focused upon food chains. When
the layman thinks of chain stores, the red- or green-front grocery
store immediately flashes to his mind. Yet chains operate in
many lines of retail trade. As shown in Table 5, there is hardly a

THE CHAIN STORE PROBLEM

major field of retailing that has not been touched by the chain
movement. To date, however, chains have preferred to specialize
in certain lines of retailing and not to enter others extensively.
Chain store business is therefore highly concentrated in a few
kinds of retail distribution.

TABLE 5. CHAIN STOKE SALES, BY KIND OP BUSINESS
In thousands of dollars

Kind of business

Amount

%of
total
chain
store
sales

Ratio of sales
in given line,

1935

1933

1929

Grocery stores

$2,466,588
168,337
186,917
423,082
883,101
708,651
138,528
74,008
200,077
255,564
93,821
47,987
13,187
206,097
32,911
242,354
65,525
316,807
20,890
1,005,754

32.67
2.23
2.46
5.60
11.70
9.39
1.83
0.98
2.65
3.39
1.24
0.64
0.17
2.73
0.44
3.21
0.87
4.20
0.27
13.33

38.8
4.4
50.0
21.5
26.7
90.8
21.0
20.6
25.2
50.0
13.5
12.6
23.1
23.8
4.3
14.5
35.8
25.7
8.9

44.1
5.3

35.5
23.9
91.2
22.0
20.3
23 3
46.2
14.2
21.5
15.6

4.1
14.9
33.9
25.1
5.9

39.1

a
a

33.8
16.7
90.1
21.2
27.3
22.7
38.0
14.2

19.1

a
a

13.6
25.1
18.5
6.4

Motor-vehicle dealers . ...

Accessories-tire-battery dealers

Filling stations

Department stores

Variety stores

Men's clothing and furnishings stores. . .
Family clothing stores

Women's ready-to-wear stores

Shoe stores

Furniture stores

Household appliance-radio stores

Radio dealers

Lumber and building-material dealers . . .
Hardware stores and implement dealers .
Restaurants and eating places

Cigar stores and stands

Drug stores

Jewelry stores

All other

Total

$7,550,186

100.00

22.8

25.4

20.0

Source: Census of Business: 1935, Retail Distribution, Vol. IV, Types of Operation,
pp. 13-14, U.S. Department of Commerce, Washington, January, 1937; Census of American
Business, Retail Distribution: 1933, Chains and Independents, pp. 3-4, U.S. Department
of Commerce, Washington.

No comparable data are available.

It is true that the grocery type of chain store is to the forefront
because most legislative and other attacks against chains in recent
years have been leveled at that kind of organization. This may
also be accounted for by the frequency with which consumers

PRESENT STATUS OF CHAIN STORES 35

visit such stores. The chief explanation lies, however, in the
large number of chain grocery stores in existence and in the vol-
ume of business they do annually. Of all chain store units in
operation in 1935, over 37 per cent were operated by grocery
chains. Moreover, these grocery chains did an annual business
at that time which was 32.67 per cent of the total business reported
by all chains for the same period. From the standpoint of the
total volume of chain store business, therefore, grocery chains
come first, followed by department store chains, variety store
chains, filling station chains, and drug store chains, in the order
mentioned. These five kinds of chains, together, accounted for
about 63.5 per cent of all the chain business in 1935.

From this it must not be inferred that the competition from
chains is the most severe in the grocery trade. While it is true
that almost a third of all chain store sales were made by grocery
chains, these chains absorbed only 38.8 per cent of the grocery
store business, the remainder going to independents, supermarkets,
and so on. Similarly, while department store chains were second
in their contribution to the chain store business total, they
absorbed but 26.7 per cent of the department store volume.
Looking at chain stores from the standpoint of the ratio of the
business they absorb in the respective lines of retail trade in
which they operate, variety store chains take the lead, since they
accounted for 90.8 per cent of the business done by all limited-price
variety stores in 1935. In this field, the competition from chains
is so severe that few indeed are the independents who would dare
to enter into competition. Chains as a group enjoy a virtual
monopoly in this business. Shoe chains are next in importance
from this point of view, with 50 per cent of the total shoe store
business, followed by dealers in automobile accessories with 50 per
cent of the volume, by cigar stores with 35.8 per cent of the busi-
ness, department stores with 26.7 per cent, and drug stores with

25.7 per cent. In practically all of these fields, chain stores have
shown considerable growth since 1929 and have absorbed an
increasingly larger proportion of the business.

It should be stated here, at least parenthetically, that the usual
reference to totals when dealing with the chain store question is
highly inadequate in depicting the actual situation. Of the
consumer's dollar spent in retail establishments in 1935 only

22.8 cents were taken by chains of four or more units each. While

36 THE CHAIN STORE PROBLEM

this constitutes nearly one-fourth of the total business, that
proportion is not large enough to cause alarm on the part of those
who look at chain stores with suspicion. But when chain store
business is analyzed by lines of trade, an entirely different picture
is presented. The national average for all kinds of retailing is of
little help to the independent grocer where the chain absorbs
nearly 39 cents of the dollar, or to the independent shoe store
where chains absorb 50 cents of every dollar spent in shoe stores.
Hence, the chain store problem has become acute in a few lines of
retailing, despite the fact that chains are steadily spreading into
other fields where they tend to absorb an increasingly larger
share of the amounts spent by consumers for such merchandise.

Geographic Distribution of Chain Store Business. Chain
stores are now to be found all over the United States. They
operate in every state of the Union. In all but two states (Idaho
and Montana) they absorbed a larger share of the retail business
of the state in 1935 than they did during 1929, indicating a general
relative growth all over the country (see Table 6). In eleven of
the states and the District of Columbia the chain sales ratio was
higher in 1935 than the national average of 22.8 per cent. From
the nature of these states, it would seem that there is a direct
correlation between a high percentage of chain store volume and
a concentration of population. On the other hand, there were
12 states with a chain sales ratio considerably below the national
average, indicating again a correspondence between low chain
store sales ratios and sparse populations. It should be noted,
however, that in three states (Mississippi, Nevada, and Vermont),
where the chain sales ratios were the lowest in 1929, the largest
relative increase in such ratios was revealed by the 1935 data.

From the statistics presented in Table 6 several important
facts can be gleaned :

1. Chain stores are highly concentrated geographically in
those states which have the largest populations. Conversely,
they are relatively less important in states of small populations.

2. Chain stores are, nevertheless, to be found in every part of
the United States.

3. In all but four states chain sales ratios were lower in 1935
than in 1933.

4. In all but two states chain sales ratios were greater in 1935
than in 1929.

PRESENT STATUS OF CHAIN STORES

TABLE 6. RATIOS OP CHAIN STORE SALES TO TOTAL RETAIL SALES, BY

STATES

State

1935

1933

1929

Total United States

22 8

25 4

Alabama

16 7

17 9

14 5

Arizona

22 2

27.2

21.6

Arkansas

12 3

14 1

11 5

California

25 7

27 7

23 1

Colorado

22 3

19 6

15 9

Connecticut

24 5

27 5

21 1

Delaware . . . .

19 9

23 9

16 5

District of Columbia

29.7

28 4

26 3

Florida ....

22 2

24 9

17 5

Georgia ....

18.7

21 3

Idaho

19 9

23 1

20 7

Illinois

29 3

30 6

23 6

Indiana . ...
Iowa

24 3
17 7

27
20 8

19.0
15

Kansas . ...

17 8

21 3

15 9

Kentucky . . .

19 5

21 1

15 2

Louisiana . . . .

17 8

18 5

13 2

Maine ... ....

19 6

18 5

13 7

Maryland . . . ...

19 2

20 4

18 8

Massachusetts . . . . . .
Michigan .

28 9
25 3

30 8
30

23 8
23 5

Minnesota
Mississippi . .
Missouri

15 1
11 1
20 4

17 8
12 3
22 3

13.5
7.5
18

Montana ... .

14 8

16 9

15 1

Nebraska . .

16 5

17 9

Nevada

15 2

10 3

New Hampshire .
New Jersey

20 6
25 1

22 3
27 3

16 1
22 5

New Mexico

15 9

16 1

13 6

New York .... ....

27 8

23 9

North Carolina ... . . .
North Dakota
Ohio .

19 8
15 9
24

22
18 2
28 1

16.1
13.1
21 7

Oklahoma . . .

21 4

22 4

18 2

Oregon

17 7

19 3

16 5

Pennsylvania .
Rhode Island . .
South Carolina

24 9
26 2
16 2

29
29 5
17 6

21 2
24.2
13 1

South Dakota ....

18 1

21 4

13 9

Tennessee .... . .

17 9

19 5

14 8

Texas

19 2

16 4

Utah

22 2

24 5

17 5

Vermont

18 3

17 6

10 5

Virginia . .

19 2

20 6

16 4

Washington

18 7

21 3

18 4

West Virginia

21 3

21 9

17 4

Wisconsin

17 6

19 5

16 5

Wyoming . . . .

14 7

15 4

12 2

Source: Census of American Business: 1933, Chains and Independents, U.S. Department
of Commerce, Washington; and Census of Business: 1935, Retail Chains, p. 10, U.S.
Department of Commerce, Washington, June, 1937.

38 THE CHAIN STORE PROBLEM

5. The greatest percentage increase is to be found in states
which had a very low sales ratio in 1929, indicating a possible
saturation point in certain parts of the country, at least so long
as the chains prefer to restrict their operations to certain fields
of retailing.

Urban Character of Chains. Although there has been a tend-
ency in recent years for chains to spread into smaller communities
and to invade sparsely populated areas, the chain store is still
essentially an urban institution. Of the 127,484 retail units of
chain stores with four or more stores each in operation during
1935 in the United States, 30,296 units were located in the 13
cities having a population of more than 500,000 inhabitants each.
These stores accounted for $2,251,362,000 of business. While the
13 cities in question accounted for a little over 16 per cent of the
country's population, they contained 23.8 per cent of the chain
stores and contributed 29.8 per cent of the chain store business of
the United States. The high degree of concentration of chains in
the large cities is quite apparent from these statistics. All this
has, no doubt, tended to accentuate the grievances held against
the chains and the severity of competition faced by independents.

To gain a better understanding of the urban character of chain
stores, their sales ratios are presented in Table 7 for five kinds
of business in which chains occupy significant positions. These
are shown for each of the 13 largest cities in this country. From
these data it is seen that in the grocery trade chain stores absorbed
a little over 60 per cent of the business in Cleveland, nearly that
much in Detroit and Chicago, and over 50 per cent in Boston and
Pittsburgh, as against a national average of 38.8 per cent. For
this reason the chain store problem in Cleveland, for example, is
more to the front in the grocery trade than it is in many other
communities where the competition from that source is less
severe. Data for the drug trade show similar results. Although
the national average for chains in this field of retailing is but
25.7 per cent, practically one-half of the retail drug business in
Cleveland is absorbed by chains, and in 11 of the 12 remaining
large cities for which data are shown in Table 7 the chain sales
ratios in the drug business are far above the national average.
An identical story is told for shoe stores and filling stations. In
the variety store field, chains do 90.8 per cent of all the business of
the country transacted by stores of the limited-price variety type.

PRESENT STATUS OF CHAIN STORES

TABLE 7. CHAIN SALES RATIOS FOB CITIES OP MORE THAN 500,000
POPULATION, TOR SPECIFIED KINDS OF BUSINESS, 1935

City

Grocery
stores

Drug
stores

Shoes

Filling
stations

Variety
stores

Baltimore

36.1

38.5

47.2

59.8

85 9

Boston . ... ...

53 4

29 8

56.1

46 5

97 7

Buffalo

47.8

26.3

72.9

57.2

93 1

Chicago

56.8

47 5

69.7

32 6

98 4

Cleveland

60 2

49 9

63.4

34 9

97 2

Detroit. . .

58.7

44.2

51.7

25 1

94 3

Los Angeles

49.5

33 8

68.7

23.1

92 3

Milwaukee

23.7

38.3

46.8

40.9

97 8

New York City . .

41.2

26.8

64.6

32 7

Philadelphia

48.5

24.7

64.4

49.4

Pittsburgh . . .

50 3

44 6

63.0

52 7

97 8

St. Louis

28.4

38.5

39.2

31 2

94 3

San Francisco

35.0

37.9

57.6

51 6

90 8

National average

38 83

25 7

21 5

90 8

Source: Census of Business: 1935, Retail Distribution^Vol. IV, Types of Operation, U.S.
Department of Commerce, Washington, January, 1937.

In Chicago, however, such business is completely monopolized by
the chains where they account for 98.4 per cent of such business.
In four other cities the ratios in this type of retailing are over
97 per cent, and in only one of the 13 largest cities was the chain
sales ratio below the national average.

Chains by Territory of Operation. It is sometimes charged that
the enemies of chain stores overlook the fact that many of the
chains are local in character and that their agitation may hit
these just as hard as the sectional and national organizations
against which their vehemence is ordinarily directed. Some
factual information on this point is therefore exceedingly
important.

Of all chain units in operation during 1929, fully 52,465 stores
were classified as belonging to local chains. This means that
35.4 per cent of the chain stores were of a local character, and
these stores accounted for 33.5 per cent of the business reported
for 1929 by all of the 148,037 chain store units. Thus, it is
argued, local chains are very prominent and agitators must not
overlook that fact; they must not think only in terms of the large
sectional or national chains. Whatever tax burden is imposed on

40 THE CHAIN STORE PROBLEM

chains will fall on the locally owned organization, although the
burden will probably be somewhat heavier on the national
chains.

The potency of this type of argument cannot be questioned.
Yet when one examines the chain store data for 1935, the force
of the argument wanes. In that year, according to the Census of
Business, there were 127,482 units operated by chains with 4 or
more stores each and doing an annual business of $7,550 millions.
Units operated by local chains in 1935 numbered, however, only
17,964 or 14.1 per cent of all chain stores and they accounted for
but 13.4 per cent of the chain store business. In an interval of
but half a dozen years, local chains declined in relative importance
whether measured by the number of stores or their sales volume,
by about 60 per cent. Stated otherwise, it means that local
chains were two and one-half times as important in 1929 as they
were in 1935. The inference is that local chains are losing their
place to the sectional and national organizations and that the
chain store business is becoming concentrated in the hands of
fewer and fewer enterprises. The fact that 47 per cent of all
grocery chain stores are in the hands of but three chains is indica-
tive of what may be expected in fields in which chain stores have
as yet had less experience than in the retailing of groceries.

Summary. From the foregoing factual presentations certain
conclusions may now be drawn :

1. In the United States, the chain store has become a retailing
institution of great importance, absorbing 31 cents of the con-
sumer's dollar spent in retail stores. While the number of chain
stores seems to be decreasing, the tendency is for the proportion of
business taken to increase.

2. A correct measurement of the significance of chain stores
cannot be obtained by dealing in totals. The analysis must be
made by lines of retail trade in which chains actually operate.
It seems that chain stores prefer to concentrate in a few kinds of
retailing where operations can be fairly standardized. In those
lines of business in which they concentrate, the proportion of
business attracted by chains runs very high and results in keen
competition with independents. In some of those fields, notably
the variety store business, they have attained a virtual monopoly.

3. Chain stores gravitate to sections of the country which are
densely populated, over 50 per cent of them being located in the

PRESENT STATUS OF CHAIN STORES 41

Middle Atlantic and East North Central states, although they
are now spreading into the more sparsely populated areas. In
those lines of retailing in which chains prefer to function, they
seem to have approached a point of saturation in the more heavily
populated states, when judged by the relative changes that took
place since 1929.

4. Chains are largely urban institutions. Their affinity for the
larger cities aggravates the competitive situation and tends to
cause much alarm and antagonism toward them. In the largest
cities of the country, chains absorb the bulk of the business in
the few fields of retailing in which they specialize.

5. The trend is for chains to become larger and sectional or
national in character. The concentration of the chain business in
the hands of large organizations has been proceeding apace and
the end is not yet.

CHAPTER IV
CHAIN STORE ADVANTAGES

The phenomenal growth of chain stores during the past few
decades is not a happenstance, nor is it altogether the natural
result of the times. It is due in large part to certain advantages
which chain stores as a class have enjoyed over their independent
rivals. Many of the advantages are, of course, peculiar to the
chain method of distribution, but chains do not necessarily have a
monopoly on many of these advantages; some are equally avail-
able to single stores. The important thing is that the chains have
utilized these advantages to a fuller extent than have other types
of merchandising establishments.

The effective use of their opportunities has been the major
factor in the mushroomlike expansion of the chain stores. The
independent merchant did not willingly allow the chains to absorb
over one-fourth of the total retail sales volume of the nation. 1
In fact, he fought to the best of his ability to keep the chains from
taking his trade. It was therefore necessary for the chains to
marshal every advantage to succeed over such opposition. That
they were successful signifies just how important their advantages
have been.

Although the peculiar advantages which the chains enjoyed
made it possible for them to capture a considerable portion of the
retail trade volume, these same advantages have backfired, as it
were, in another direction. It is because of them that the courts
have quite generally held that chain stores are a distinctive type of
retail institution and therefore subject to taxes which apply only
to establishments in their class, different rates from those levied
on independents being applied. These rates, some of which are
distinctly burdensome to chains, are possible because of the
superior political importance of the independent merchant.
Thus, the same advantages which have furthered the develop-
ment of chain stores may make it possible to curb their expansion
by means of so-called " discriminatory " license taxes.

i See Chap. III.

CHAIN STORE ADVANTAGES 43

The advantages which the chains enjoy are not all of the same
type. Some may be labeled business advantages and others
economic advantages. It is not always a simple matter to deter-
mine just when an advantage should be placed in a particular
category, and there is occasionally room for difference of opin-
ion, but fundamentally the chain store advantages not only may
be classified as has been suggested, but they should be so classi-
fied in order that one may understand the chain store problem
more clearly.

BUSINESS ADVANTAGES

The business advantages of chain stores are those points of
commercial superiority which are npt commonly enjoyed by the
rank and file of their competitors. Though there are many of
them, by far the most important are the buying advantages and
the relatively low cost of doing business which the chains have
effectuated.

Buying Advantage. That the chain store has had a decided
advantage over the independent in the matter of buying is quite
freely admitted. Chains purchase in vast quantities, take
advantage of cash discounts, and place their orders at opportune
times. The net result is that they secure the very lowest prices
which the markets afford. This ability to purchase advanta-
geously extends beyond the merchandise bought for resale; it
includes supplies, store fixtures, advertising, equipment, and
other materials. Probably no single factor has been of greater
importance in the success of chain store merchandising than the
buying advantage.

Quantity Purchasing. Specifically, what has given the chain
stores their buying superiority? Undoubtedly one of the major
reasons has been not only the ability to purchase in large quanti-
ties but to concentrate those purchases with one source or with
a few suppliers. The chain store, by its specialization in certain
lines of goods and its common practice of restricting its items to
those in large demand, is able to give a manufacturer a contract
for several months' or a year's supply instead of following the
hand-to-mouth buying practice which has been so common among
independent merchants. With a contract for a large order
before him, the manufacturer is able to figure his costs more
closely and at times to bring them down to extremely low levels.

44 THE CHAIN STORE PROBLEM

To illustrate the matter of large purchases, the Woolworth
organization in one year purchased 90 million pounds of candy
and 20 million pieces of enameled ware. In another organiza-
tion annual purchases from one biscuit and cracker manufacturer
amounted to more than $10 millions and there were other pur-
chases of such amounts as 50 million pounds of coffee, 200 million
pounds of sugar, and 200 million cakes of soap. A department
store chain has made annual purchases of 4 million handkerchiefs,
6 million knitted undergarments, 2^ million men's and boys'
overalls, 4^ million men's and boys' shirts, and 200,000 dozen
pairs of women's hose. 1

In 1934 the Great Atlantic & Pacific Tea Company's purchases
from General Foods totaled about $8,000,000. 2 The same com-
pany had a contract with the California Packing Company for
a definite purchase of 2J^ million cases of Del Monte label products
at a 5 per cent quantity discount. The A. and P. actually took
during the time of the contract 3J^ million cases. Some idea
of this enormous bargaining power may be further had when it
is considered that the A. and P. Company makes total annual
purchases amounting to more than $800,000,000 and other large
chains make purchases in proportionate amounts. 3

Since the quantity purchased vitally affects the price paid,
chains have secured reductions that were not usually obtained by
their independent competitors. Just how much this buying
advantage has contributed to chain store development is diffi-
cult to ascertain but the Federal Trade Commission studies have
revealed that the proportion of the chain grocery store price
advantage represented by the buying advantage varied from
18 per cent to as high as 45 per cent in the four cities studied. 4

Skilled Buying. In addition to securing economies through
the purchase of larger lots than are normally bought by most
wholesalers, chains employ skilled buyers and enjoy the benefits

1 NYSTROM, P. H., " Chain Stores," rev. ed., Chamber of Commerce of
United States of America, 1930, p. 25. Unless so stated, it is not to be under-
stood that these purchases were confined to one manufacturer.

2 Patman Investigation, Unrevised Committee Printing, U.S. Govern-
ment Printing Office, July 9, 1935, p. 251. Statement of Mr. Parr, assist-
ant to the purchasing agent of the A. and P. Company.

8 Federal Trade Commission, "Chain Stores Final Report/' p. 24, U.S.
Government Printing Office, Washington, 1935.
* Ibid, p. 54.

CHAIN STORE ADVANTAGES 45

of their specialization. Buyers with years of training and experi-
ence in their particular field select just the type of merchandise
that will meet the desires of the store's customers. The chain
store depends on wise buyers to choose out of hundreds of items
in any line the few best sellers. The chains know that the aver-
age customer bulks her buying in towels or hosiery or lingerie at
three or four prices in each line and therefore the chains, too,
bulk their merchandise investment and offerings at those prices.
The independent retailer without the same keen appreciation
of his customers' buying habits, may offer hosiery at 13 different
prices, towels at 10 prices, lingerie at 11 prices, and yet miss com-
pletely one or two of the best price lines in each group. Cus-
tomers may prefer pink or blue, but the independent retailer,
unguided by expert headquarters opinion, offers her green which
she rejects. 1 It must not be supposed that the above indictment
is true of all independent merchants but it is entirely too com-
mon among the exponents of small-scale merchandising.

Expert chain store buyers, specializing in a very limited field,
are able to keep in constant touch with the market and to take
advantage of favorable opportunities as they arise. Not only
that, but their companies, by scientific analysis, chemical tests,
and other devices, can select merchandise on its merits and not
by intuition or hearsay.

Financial Strength. Through their superior financial resources,
chains are generally able to pay cash for their purchases whenever
a favorable opportunity presents itself. Many manufacturers
when in need of ready money turn to chain stores with offers of
special discounts, and even though chains do not always pay
cash, they enjoy special consideration because of their superior
credit standing.

Special Discounts and Allowances. Perhaps the major buying
advantage which the chains have enjoyed in the past has been
the special discounts and allowances which they have been able
to secure. That these more or less secret concessions were a
major factor in the development of the chain store has long been
suspected but it was not until the Federal Trade Commission
and the Patman Committee investigators brought out the facts
that their extent and magnitude became known.

1 BEDELL, CLYDE, "Whiskered Wholesaling," Electrical West, July 1, 1932,
p. 27.

46 THE CHAIN STORE PROBLEM

The Federal Trade Commission study of 1930 revealed that
in the grocery trade, though the chain stores did but 44 per cent
of the total retail grocery business, they secured 90 per cent of
the special discounts and allowances 1 granted, wholesalers and
cooperatives receiving the balance. 2 The special discounts and
allowances which were granted were given largely for volume
purchases or for advertising. In the grocery trade, volume
allowances constituted 43 per cent of the total allowances made
in 1930; advertising, 41 per cent; and miscellaneous, 16 per cent.
To suggest that these concessions were entirely unearned is
hardly fair. Certainly at least part of the allowances for adver-
tising was utilized by the chains for the purposes for which they
were intended, but the mere fact that they were secret leads one
strongly to suspect that they were secured largely because of
superior bargaining ability.

These secret concessions have enabled chains to secure a com-
petitive advantage over their independent rivals which the latter
have found difficult to overcome. When the total volume of
secret discounts and allowances is compared to total retail sales
volume, it may seem like an insignificant factor, but when applied
to specific items it is entirely another matter. For example,
the Patman investigation revealed that in the case of the Great
Atlantic & Pacific Tea Company the total secret allowances
amounted to approximately $8,000,000 in 1934 or about 1 per
cent of the total retail sales of the company, which, when viewed
casually, does not seem like a major competitive factor. How-
ever, specific instances present another picture. Take, for
example, the case of one prominent tea packer who allowed the
company in question an extra 10 cents per pound on all tea sold

1 The Federal Trade Commission has defined special discounts and allow-
ances as, "all forms of discounts, excluding cash discounts . . . , which
are not shown by the manufacturer on the face of the invoice, but which are
subsequently paid or allowed by them to chain stores, wholesalers, or other
dealers. . . . They do not, therefore, include the usual trade discounts and
allowances which are customarily shown on the face of the invoice as deduc-
tions from the gross total." Federal Trade Commission, Special Discounts
and Allowances to Chain and Independent Distributors, Tobacco Trade,
p. 8, U.S. Government Printing Office, Washington, 1934.

8 Federal Trade Commission, " Chain Stores Special Discounts and
Allowances to Chain and Independent Distributors, Grocery Trade," p. 4,
U.S. Government Printing Office, Washington, 1934.

CHAIN STORE ADVANTAGES 47

during a specific period, 1 or the yeast manufacturer who allowed
this same chain a flat monthly advertising allowance of $12,000,
a 10 per cent quantity discount, and the usual jobber's discount. 2
And these are not isolated cases; they appear to be examples of
common practices when selling to large-scale buyers. After
examining the list of manufacturers who granted special prices
to chains, one can understand more readily the attitude of the
independent merchant in clamoring for the enactment of the
Robinson-Patman Bill. He felt that he was helping subsidize
the chain store through the higher prices he was forced to pay to
manufacturers so that the chains might make his continuance
in business more difficult, and he sought legislation to remove
that rather unfair advantage.

That the chains are entitled to certain special discounts is not
to be denied. For one thing, they do not practice hand-to-mouth
buying to a large extent; they make long-term contracts with a
manufacturer which enable him to use the most economical
type of machinery and turn out his product on a decreasing cost
basis. They do not require the manufacturer to carry spot stocks
or employ expensive missionary salesmen. 3 One sales contact by
the manufacturer's salesman with a chain buyer will sell as much
merchandise for him as would several calls on wholesalers.

Chains enable the manufacturer readily to determine consumer
tastes and fancies. It is claimed that "all sorts of complex investi-
gations and surveys have failed to produce an index of consumer
demand that can approach in accuracy and speed the trend of
actual sales in a group of geographically diverse but individually
similar retail stores/' 4

But, it is claimed, wholesalers also do forward buying and inde-
pendent retailers also give point-of-sales promotional services
and still they receive no special discounts and allowances any-
where equal or proportionate to those received by chains.
There is also a point beyond which quantity purchases mean
little or no additional savings to the manufacturer.

1 Patman Investigation, op. cit., p. 284.

2 Ibid.

* DEUTE, A. H., "Do Jobbers Deserve the Same Prices as Chains and
Mail Order Houses?" Printers' Ink, Feb. 12, 1931, pp. 3, 4, 6, 8, 114.

4 MORRILL, A. H., "What the Chain Does for the Food Manufacturer,"
Food Industries, January, 1932, pp. 11, 12.

48 THE CHAIN STORE PROBLEM

Volume or promotional allowances are justified in so far as
they are based upon value received, and if the chains are in a
better position to give this service than the wholesaler or inde-
pendent retailer, then they are entitled to them. But it seems
that a large part of the allowances given is not based upon value
received, but is tantamount to quoting a lower price and takes
the form of a rebate. It is a rather strange situation for a manu-
facturer of well-known goods to have to pay a chain organization
to sell those goods when in reality that is the purpose for which
the chain is organized.

Under the Robinson-Patman Act which became law in June,
1936, the chains are to be deprived of some of their unearned
allowances but only a "Polly anna" would suggest that they are
to be stripped of them all. But it will probably be some time
before a chain can again secure better than 50 per cent of its net
profit from special discounts and allowances as the Great Atlantic
& Pacific Tea Company did in 1934. l

Chains Have a Low Cost of Doing Business. The second major
advantage of the chain store is its ability to operate at lower costs
than its independent competitor, and it can do this largely because
of certain savings which it is able to effect. The successful chains
have foreseen the necessity for reducing distribution costs and,
by constant vigilance as to expenses and the natural savings of
mass operation, they have been able to widen profit margins and
at the same time reduce prices to the consumer. In 1929, for
which such complete data are extant, chain systems in the
grocery trade operated on a 17.3 per cent margin as contrasted
with 24.7 per cent for the independent wholesaler-retailer method. 2

Integration of Retailing with Wholesaling. Just what savings
have enabled chains to reduce operating costs? First of all there
is the savings due to the coordination of wholesaling and retailing.
By performing the functions of both wholesaler and retailer the
chain is able to effect certain economies in operation that the

1 In 1934 this company showed a profit of more than $16,000,000 and paid
$14,000,000 in dividends after receiving something more than $8,000,000
from brokerage fees, special discounts, and allowances. Patman Investiga-
tion, op. dt. t p. 305.

2 ENGLE, N. H., "The Marketing Structure of the Grocery Industry,"
Harvard Business Review, April, 1934, pp. 337-338.

CHAIN STORE ADVANTAGES 49

ordinary wholesaler-retailer channel of distribution has so far
been unable to achieve on any large scale. Few wholesalers can
secure a sufficient portion of a given store's business to enable
them to match the chain economies in getting the physical goods
from warehouse to store. 1 Except possibly in the case of certain
voluntary chains, this has been impossible. Again, the chain
does not have to sell its merchandise to individual stores; it
merely ships goods to them as needed and in that way it escapes
the heaviest item of the jobbers' operating expenses an item
that represents about 25 per cent of its total operating costs. 2
Neither does the chain incur expense in extending credit or in
collecting accounts, for there are no dealings with outside cus-
tomers except to a very limited extent.

While no complete data for each type of business in which
chain stores operate are available, yet there can be little doubt
that the chain performs the jobber's functions at considerably less
cost than that incurred by general-line service wholesalers. For
example, in the grocery field the 1933 Census of American Busi-
ness revealed that the cost of doing business of general-line service
wholesalers amounted to 9.3 per cent of net sales, whereas the cost
of doing business of chain store warehouses was but 4.3 per cent of
net sales. 3 But the average chain store warehouse in the grocery
trade handles but approximately 70 per cent of the goods billed
through it. When allowance is made for this fact, the cost of
performing the wholesaling function on the part of chain store
warehouses becomes approximately 6 per cent rather than 4.3 per
cent. Even this larger figure represents a considerable reduction
in cost by comparison with regular wholesalers. This reduction
is brought about partly through the curtailment of functions
actually performed and partly through more effective control
and, perhaps, also through more efficient performance of the
remaining functions. In this connection, it is interesting to note

1 SCHMALZ, CARL N., "Independent Stores versus Chains in the Grocery
Field, " Harvard Business Review, July, 1931, p. 434.

2 MILLARD, J. W., "The Wholesale Grocer's Problems," U.S. Department
of Commerce, Washington, 1928. In this study it was stated that the total
wholesale grocery selling expense amounted to 25.94 per cent of all expenses.

8 "Wholesale Distribution," Vol. I, Table 2-B, U.S. Department of
Commerce, Washington, May, 1935. For a complete discussion of costs,
see Chap. IX.

THE CHAIN STORE PROBLEM

that if the independent retail grocer cares to patronize a cash-
and-carry wholesaler, he is able to secure his merchandise at
lower costs, for the operating expenses of such wholesalers are
also around 6 per cent. In addition to savings in wholesaling
costs, the chain eliminates the wholesaler's net profit, small as it
may be, thereby bringing about an additional economy through
integration.

Lower Salaries and Wages. Chain stores, through specialization
in personnel and the use of relatively cheaper help in their stores,
are able to effect further operating economies. The Federal
Trade Commission study revealed that in each of the eight kinds
of business furnishing comparable data, the independent stores
paid their employees substantially higher wages than did the
chain stores. The accompanying table clearly indicates this
tendency of the independent merchants to pay their employees
more generously.

TABLE 8. A COMPARISON OF CHAIN AND INDEPENDENT STORE WAGES OF
FULL-TIME SELLING EMPLOYEES FOR THE WEEK ENDING JAN. 10,

1931

Type of store

Average
weekly
wages, in-
dependent
employees

Average
weekly
wages,
chain store
employees

Average
net
differ-
ence

Grocery and meat

$25.90

$18.98

$6.92

Shoes

33.48

27.83

5.65

Dry goods

25.06

19.61

5.44

Drucr

30.07

25.07

5.00

Grocery

24.91

20.40

4.51

Ready-to-wear

31 11

26.77

4.34

Tobacco

25.52

23.77

1.75

Hardware

28.77

28.12

0.65

Total, simple average

28.10

23.82

4.28

Total, weighted average

28.48

21.61

6.87

Source: Federal Trade Commission, "Chain Stores Chain Stoie Wages," p. 19, U.S.
Government Printing Office, Washington, 1933.

This study embraces 1,549 independent stores and 55,627
chain stores. A similar Federal Trade Commission study under-
taken in 30 selected small towns ranging in population from 1,737
to 5,106 revealed that the weekly wages of full-time selling

CHAIN STORE ADVANTAGES 51

employees of independent merchants exceeded those of chain
store employees by almost S3. 1

Although both of these studies might be criticized because of the
small sample, yet the fact that in practically every type of store
studied, the chains paid their employees lower wages than their
independent competitors seems clearly to indicate that the chain
stores are effecting a material savings in wages. If further proof
of this point is necessary, it may be found in the 1933 Census of
American Business. According to this investigation the average
annual earnings of full-time chain store employees was $1,079.
The comparable figure for full-time independent employees
amounts to $1,194, if it is assumed that independent store pro-
prietors are to be paid a $30 weekly wage which is much lower than
the average wage paid to managers of chain store units. 2

It is not the purpose of the authors to analyze at this point
the social justice of the wages paid by chains or independents,
but rather to bring out the point (and it is amply supported by
factual evidence) that the chains are able to secure labor at lower
costs than are their independent competitors. Part of this
saving is due to their ability to use relatively cheaper help because
of the standardized procedure developed at headquarters, part is
probably due to the feeling that a large company offers more
opportunities for promotion or that the job has more permanence
than work with a small individual merchant, and part is due to
their ability to specialize their functions so that each can be
performed more economically. The cost of highly skilled and
well-paid experts can be spread over a number of units.

Smaller Inventories. Another advantage of the chain is in
inventory float, or in interest saved through a faster stock turn-
over. The chains confine themselves to standard merchandise for
which there is a high average demand; they do not stock their
shelves with slow-moving goods. A chain grocery store usually
has from 800 to 1,200 items, whereas most independent grocers
carry from 1,500 up to 2,000 items. 3

1 Federal Trade Commission, " Chain Stores Chain Store Wages," p. 21,
U.S. Government Printing Office, Washington, 1933.

2 Census of American Business: 1933, Retail Distribution, p. 26 The
$30 wage for proprietors is purely an arbitrary amount which the authors
feel may be considered conservative compensation.

3 NYSTROM, P. H., " Economics of Retailing," 3d ed., Vol. I, p. 253,
Ronald Press Company, New York, 1930.

52 THE CHAIN STORE PROBLEM

Fewer Services. The chain store achieves further economies by
limiting its services to the consumer. Chain stores have devel-
oped a reputation for doing a cash-and-carry business and, of
course, everyone knows that it is cheaper to do that kind of busi-
ness than the full-service type. They have eliminated this cost
without seriously inconveniencing their customers because of
the widespread use of automobiles and few consumers stop to
realize that they are assuming part of the middleman's function
by carrying home their groceries themselves or by paying cash at
time of purchase.

Just how prevalent the custom of eliminating services is
among chain stores can be gathered from a study of the various
lines of business in which chains operate. In eleven types of
business, including groceries and meats, drugs, and dry goods and
apparel, 95 per cent of the sales are apparently for cash. In the
lines which we generally associate with chain stores (groceries,
groceries and meat, drug) practically all of the business is done on
a cash basis. 1 Also the larger chains were found to have elimi-
nated more services than the smaller chains. For example, the
organizations operating more than 1,000 stores did all their busi-
ness on a cash basis, while the chains of 2 to 5 stores did only
43.4 per cent cash business.

The Federal Trade Commission reports that 80.8 per cent of the
chain stores of the United States gave no delivery service or if
they did it was negligible in amount, and in the larger chains it
was practically eliminated, since less than one-half per cent of the
sales of chains with more than 1,000 units were actually delivered.
However, in the smaller chains, with 6 to 10 stores each, the
practice of delivery was more prevalent, since 38 per cent of their
sales were delivered. 2

Just how much is actually saved by the elimination of these
services? In the year 1924 the Harvard Bureau of Business
Research found that 110 stores, all with charge sales amounting
to 75 per cent or more of their total sales, commonly had a total
expense (not including interest) amounting to 18.2 per cent as
compared to the corresponding figure of 14.55 per cent for 46
stores in each of which cash sales amounted to 78 per cent or more

Trade Commission, "Chain Stores, Final Report/' p. 75, U.S.
Government Printing Office, Washington, 1932.
2 Ibid., p. 76.

CHAIN STORE ADVANTAGES 53

of total sales. The assumption is that the stores selling for cash
did not offer delivery service to the same extent as stores selling
for credit. Thus there is a difference in cost of 3.65 per cent
which may be taken as fairly representative of delivery and credit
extension cost. " There are grounds for believing that possibly
one-half of the expense savings realized by grocery chains as
compared to the wholesaler-retailer channel of distribution accrue
from the elimination or substantial reduction of these services." 1

A more recent and undoubtedly conservative estimate of the
savings brought about by the elimination of services is to be
found in the data compiled by Dun & Bradstreet, Inc., in their
"1936 Retail Survey." This study reveals that the cost of
rendering credit and delivery services is 2 per cent in grocery
stores and 2.4 per cent in combination grocery and meat stores. 2
There are sound reasons for believing that these figures are more
truly representative of actual conditions today than are earlier
figures. However, Mr. Carl W. Dipman, editor of the Progres-
sive Grocer stated in July, 1935, " insofar as one can generalize,
it appears that credit service when properly rendered need not
add more than 2 per cent to the operating expense, and, likewise,
delivery service, when properly and efficiently rendered, in gen-
eral, need not add more than 2 per cent, making a total of 4 per
cent." 3 From the available data it would appear that the cost of
rendering service varies from 2 per cent to 4 per cent, with 3 per
cent representing a close approximation of actual conditions.
Although the service savings will vary with individual stores, it is
readily apparent that this saving affords the chain stores an
important competitive cost advantage which they fully utilized.

Benefits of Standardization. The ability of chain stores to
utilize standardization to its fullest extent has tended further
to reduce their operating costs. They have standardized their
store fronts, displays, merchandise, policies, the greetings of their
salespeople, and they are still seeking more factors to stand-

1 McNAiR, M. P., "Expenses and Profits in Grocery Chain Business in
1929," p. 19, Harvard Bureau of Business Research, Cambridge, Mass.

2 The difference in the cost of doing business between cash grocery stores
and grocery stores doing more than 50 per cent credit is 2 per cent accord-
ing to the Dun & Bradstreet figures. For combination food stores the diff-
erence in cost is 2.4 per cent.

3 DIPMAN, CARL W., "Operating Expenses of Selected Cash Stores,"
Progressive Grocer, July, 1935, p. 74.

54 THE CHAIN STORE PROBLEM

ardize. Chains do not leave to the whims of the individual store
managers the working out of displays or the selection of types of
merchandise. These are matters for the attention of highly
skilled experts at the home office, specialists whose sole duties
are concerned with the effective solution of each of these indi-
vidual problems. The interior of each unit of the apparel chain
is decorated in an attractive shade of pink whose reflective color-
ing has been found to be flattering to most women. Had this
been left to the store manager perhaps he would have selected a
ghastly green whose unflattering atmosphere would have killed
many a sale. As far as possible the merchandise handled is
standardized. Only those items that can be sold in volume are
stocked. They are applying the principle of mass production to
merchandising, finding out what people want and then concen-
trating their energies on those products.

Secondary Business Advantages. Buying advantages and
low cost of operation are not the only advantages which have
played a major part in the development of chain stores. That
they possess certain advertising advantages, th^t they are usually
better financed, that they have superior facilities for research and
experimentation, that they enjoy a certain valuable prestige
because of their size and reputation, that they select their loca-
tions scientifically, and that they have a superior ability for
manufacturing and distributing private brands are all matters
to which most chains lay claim to a certain extent over their typi-
cal independent competitor. Practically all of these are inher-
ently part of large-scale merchandising and therefore are denied
to most small shopkeepers.

Advertising has been classified here as a secondary advantage,
not because it is unimportant, but rather because it is less impor-
tant than the two major advantages which have been previously
discussed. That chain stores have marked advertising advan-
tages over neighborhood unit stores must be readily admitted.
What individual small store operator can purchase large space
in his city's daily newspaper, broadcast regularly over the local
radio station, or purchase space in magazines of national reputa-
tion? The waste circulation in any such venture would make the
advertising cost prohibitive for the independent, but the chain
with its numerous units finds the same sort of advertising eco-
nomical. Individual merchants combining into voluntary chains

CHAIN STORE ADVANTAGES 55

are able to achieve somewhat the same results but even in this
instance the chains occupy a favored position.

When the relative financial status of chains and independents
is considered, we must once again recognize a definite balance in
favor of the chains. With their large size, their geographical
distribution of risk, and their general policy of selling for cash,
chain stores find it a much easier task to maintain strong, liquid
financial positions than do independents. If it becomes neces-
sary to borrow money, chains find that bankers are willing to
lend at rates considerably under the rates the local merchant
pays. One instance may be cited, as illustrative, where a chain
borrowed money for 90 days at 1^% per cent annual interest when
local merchants of good financial reputation were paying 6 per
cent.

Chains operating a considerable number of units are able to
maintain a research department and to conduct experiments on
a scale and at a cost that is prohibitive to all but the largest inde-
pendent retailers. The best methods from the individual units
can be adapted to all units of the system. Various merchandis-
ing plans, store designs, displays, or advertising programs may
be experimented with in one or several units without danger of
causing any serious loss to the organization as a whole. A novel
type of store design can be tried in one location and, if it proves
successful, can be adopted universally. An independent finds
this sort of experimentation too precarious.

Owing to its very size, the chain secures a certain amount of
prestige that helps draw patronage. Consumers become familiar
with the chain name through advertising, through the financial
and news columns of their local paper, in conversation with their
friends, and from seeing various units of the chain in its many
locations. It apparently is human nature to follow the crowd
and the average individual assumes that if so many others
trade at that particular chain store, perhaps they will also benefit
by following suit.

Chain organizations are more careful in the location of their
outlets than the average independent merchant. Large chains
have separate real estate departments to select locations and to
handle leasing and rentals. The selection of store sites has been
made a scientific problem by chain real estate experts and guess-
work has been reduced to a minimum. Traffic is not only counted

56 THE CHAIN STORE PROBLEM

but it is analyzed as to sex, purpose in passing, and buying power.
Communities are studied as to character of population, type and
stability of industries, local buying habits, and strength of com-
petition. When a chain store settles upon a definite location, it
usually has a good estimate of the volume of business it may
expect. Few independents have access to the same type of
impartial information on store sites.

Some chains are able to manufacture and distribute success-
fully their own privately branded merchandise, and today, more
than ever before, this appears as a distinct advantage. With
some forty-odd states having fair-trade laws in operation and
with the Robinson-Patman Act in effect, the savings that chains
are able to achieve through manufacturing their own merchan-
dise appear particularly timely. Specifically, the reasons chains
have given for engaging in manufacturing are that it enables
them to control sources of supply, that they can secure their
goods at lower cost, that they can sell at lower prices, that they
give consumers better values, and that they can partially cir-
cumvent some of the more recent types of legislation which they
regard as discriminatory. However, the advantages of manu-
facturing their own products are not available to all. Only those
chains which do a large volume business in specific lines can
manufacture profitably. This is especially true of apparel and
of the larger food and drug chains.

ECONOMIC ADVANTAGES OF CHAIN STORE OPERATION

In addition to the purely business advantages which chain stores
possess, they have certain inherent economic advantages which
are not generally enjoyed by smaller retail institutions. These
advantages arise principally out of the peculiar economic nature
of business. Certain enterprises are able to profit to a greater
degree than some competitors merely because of our highly devel-
oped economic structure.

Risk Distribution. One of the most obvious economic advan-
tages is the one involving the distribution of risk. As the chain
generally operates units over a wide geographical area, it is not
necessarily dependent on any one community for its prosperity.
If local business conditions are bad in one locality, the profits
from stores operated in more prosperous areas will help offset
the losses in the former. The independent merchant, on the

CHAIN STORE ADVANTAGES 57

other hand, is much more seriously affected by local conditions
since he has only his own community to depend on for his success.
This same width of market enables chain stores to transfer slow-
moving stock from some of their stores to units in which the
demand for such goods is very much greater.

Chain Merchandising is One of Decreasing Costs. One of the
fundamental reasons for chain store success lies in the simple
fact that "it is more economical to run two stores than it is to
run one, that it is more economical to operate 100 stores than 10,
that it is more economical to operate 1,000 stores than 100, and
so on." 1 Economies are effected by adding units so that costs
can be spread over a larger volume of business. Of course, not
all chains can operate on a decreasing cost basis, but it does seem
that many do. We do know that as more units are added to a
productive combination, the time will come when the average
return per unit will begin to decrease, and if too many units are
added, the time will come when net profits begin to decrease.
Few chain store operators admit that their chain has reached
the point of diminishing returns, and an inspection of chain store
profits will reveal the reason. An examination of the data in
Table 9 reveals quite clearly that in the majority of cases the
percentage of net profit for the larger chains is greater than it is
for the smaller ones. The $1 limited variety chains are a good
example. The net operating profit in this line climbs from 2.81
per cent for chains of two to five stores until it averages 10.47 per
cent for chains of more than 1,000 units. Of course, not all
of the larger chains are able to net more profit than the smaller
ones, but many factors such as variations in managerial skill,
territorial differences, etc., would account for these deviations.
The significant fact is that in most instances the larger chains are
able to earn a substantially higher rate of net profit.

Some may wonder why operating expenses instead of net profits
were not used to substantiate the assertion that chain retailing
is essentially a business of decreasing costs. However, a true
picture of the situation can not be secured from an inspection of
expenses alone. The available statistics (or at least the Federal
Trade Commission reports) include all chain costs, and, as the
larger chains engage more extensively in their own wholesaling

1 BLOOMFIELD, DANIEL, "Trends in Retail Distribution," p. 256, H. W.
Wilson Co., New York, 1930.

THE CHAIN STORE PROBLEM

and manufacturing, their expenses include costs which are not
incurred by the smaller chains. If it were possible to differentiate
the various expenses, then comparable data could be secured.

TABLE 9. PERCENTAGE OF NET PROFIT TO SALES, BY SIZE OF CHAIN

Kind of chain

Number of stores per chain

2-5

6-10

11-
25

26-50

51-100

101-
500

501-
1,000

1,001,

and
over

Aver-
age

Confectionery

2.53
2.91

3.41
2.15
1.98

4 95
2.84
1.37
2 81

2 53
0.97

6 57
4 03

4 34
1.66
1.91

1.63
2.00
0.25
3 20

5.71
1 24

8.48
4.41

3.64
1.52
1.68

2.55
2.44
30
6.17

3.12
4.08

7.95
4.13

-0.14
1.66
2.22

2.86
1.51
1.34
6.58

5.56
2.42

-1.44
4.38

4.52
1.93
2.04

0.94
1.97
-0.32
4.49

4.97
6.77

11.21
4.92

8.56
2 63
1.86

4.19
2.90
3.79
8.60

4 37

7.59

6.04
4.21

5.93
2 10

2.82

3.17
2.36
2.68
9.16

4.35
3.45

Druir

2.49

7.43
1.68
2.42

Dry goods and
apparel . ...
Grocery

5.72
2.23

2.98

Grocery and meat .
Men's and women's
shoes

Millinery

Tobacco

9.75

2.60
10.47

Variety ($1 limit) .
Women's ready-to
wear . .

Women's shoes . . .

Source: Federal Trade Commission, "Cham Stores Sales, Costs, and Profits of Retail
Chains," pp. 54-55, U.S. Government Printing Office, Washington, 1933. Only those lines
of business are included in this table in which there were chains in most of the size groups.

Another point that bears out the assertion that chain retailing
is one of decreasing costs is that the courts have quite generally
given their approval to graduated license taxes. By legalizing
this tax the courts have placed their tacit stamp of approval on
the principle of increasing returns for chains with increases in
the number of units. The courts have repeatedly held that
chain stores possess advantages and opportunities not possessed
by single-store operators and that the larger chains possess them
to a greater degree than the smaller ones. 1 In the West Virginia
chain store tax decision the United States Supreme Court said,
"A chain is a distinctive business species, with its own capacities
and functions. Broadly speaking, its opportunities and powers

1 See decisions in Florida and Indiana cases before the United States
Supreme Court: Liggett v. Lee, 288 U.S. 517,532, 1933; State Board of Tax
Commissioners v. Jackson, 283 U.S. 257, 1931.

CHAIN STORE ADVANTAGES 59

become greater with the number of component units, and the
greater they become the more far reaching are the consequences,
both social and economic. 7 ' 1

Varying Prices. One very important economic advantage of
chain store operation is the ability to vary prices, not only within
the same city but between different cities and different sections
of the country. The chain is able to average its profit results
obtained from the different stores, the high profits obtained from
one section of stores offsetting the low returns from another group
of stores. It may charge what the traffic will bear or what com-
petition will allow.

Few of the chains interviewed by representatives of the Federal
Trade Commission kept strict control of competitive prices from
headquarters but gave some store managers and district officials
authority in this matter, thus giving to these people a strong com-
petitive weapon. Chain store officials indicated " . . . that it
is a quite usual practice among them to cut prices locally not
only to meet, but to go below, the prices of their competitors in
that locality, while maintaining prices in their other stores. " 2

Out of 537 reasons given for price variation by 401 intersec-
tional and intercity chains, about 36 per cent of the reasons were
to the effect that competition was the cause for such a policy.
In the case of 142 intra-city chains, 37.5 per cent of the reasons
cited competition as the cause for a varying price policy within
the same city while about 11 per cent, the second highest per-
centage, were based on the difference in class of customers or
neighborhood. 3

A representative of the Great Atlantic & Pacific Tea Company,
testifying before the Patman Investigating Committee on July 9,
1935, stated that the two factors in deciding the company's
retail prices were cost and competition. He stated that his
organization felt that they must undersell the independent to
the extent of the service in respect to credit extension and delivery
which the latter gives.

Some may say that this is all very good and true, but since the
chain has many outlets and the independent has only one, the

l Fox v. Standard Oil Co., New Jersey, 294 U.S. 87-99 (1935).
2 The Federal Trade Commission, " Chain Stores Chain Store Price
Policies," p. vi, U.S. Government Printing Office, Washington, 1934.
* Ibid., p. 74.

60 THE CHAIN STORE PROBLEM

chain encounters competition at many more places and many more
times than does the independent and therefore this ability to
average prices means little in the way of an advantage. Of
course, there is truth to this, but it lessens the advantage very
little. Price cutting is of great significance to the independent, or
small chain for that matter, because it affects his total business,
and thus means much more to the smaller than the larger com-
petitors. It is not likely that all the units of a large chain will be
engaged in a price war at the same time. This averaging process
is one advantage that the cooperative or voluntary chain cannot
attempt to attain for its members.

A certain chain organization with an average investment of
$969,000 over a period of years in the Cincinnati territory
" . . . had an annual loss of considerably more than their total
investment in that territory while they were driving the inde-
pendents out of business." From 1930 to 1933 the same organiza-
tion had an average investment of $813,250 in Los Angeles,
Calif., " . . . and an actual loss during those years of $862,918."
In the years 1926 and 1927 this organization's loss in Dallas, Tex.,
was $50,000 more than its capital investment, " . . . whereas
in other cities in this country it showed that at the same time,
where they had got control, as in the Bronx, in New York, they
made as much as 150 per cent on their capital invested; and in
other cities in this country, where they had complete control and
set the prices, they made enormous profits." 1 Thus the profits of
other stores may be used by the chain for price cutting in any one
locality.

Summary of Chain Store Advantages. In summarizing the
advantages which chain stores possess, it would seem that they
center largely around the result of scientific retailing which can
best be attempted when merchandise is distributed in volume.
That chain stores as a group operate more efficiently than their
ordinary independent competitors as a group has been proved by
practically every comparative price or cost study that has covered
these factors. This ability to undersell is the direct result of
certain advantages which are inherent in chain store merchandis-
ing. Among the business advantages are the vitally important

1 The Patman Investigation (Revised Printing, July 31, Aug. 8 and 9,
1935), p. 141, U.S. Government Printing Office, Washington. Statement
of Wright Patman, Chairman.

CHAIN STORE ADVANTAGES 61

ability to buy cheaply, the facility to operate at low costs, and
certain secondary advantages such as advertising, financial
resources, and others. Among the economic advantages which
are partially responsible are the dispersion of risks, the decreasing
cost nature of the business, and the opportunity to vary prices to
meet local conditions.

Though some of the advantages mentioned above are denied the
independent merchant, most of them are available to aggressive
small-scale merchandisers who choose to use them. By applying
the same principles of scientific retailing and by utilizing group
buying, the independent can secure the major advantages which
the chain possesses. That they have taken their cue from the
chain store and are adopting large-scale retailing principles to
their own businesses seems readily apparent. A glance through
the comparative price studies made during the past several
years reveals a very definite trend in the diminishing size of the
price differential between chain store and independent-store
prices. 1 For example, the earliest grocery investigation found a
price difference of more than 10 per cent in favor of the chains,
but the latest study of the same line of trade reveals less than a
5 per cent differential. That this is indicative of the declining
importance of chain store advantages is a reasonable assumption.

Some of the advantages which chain stores possess might be
termed unfair. Certainly chain store operators are open to
criticism for having paid their employees less than independent
operators did, and it is not to their credit that they have clubbed
manufacturers into selling them goods at unfair discounts. It is
only a question of time before the chain store will be deprived of
these unfair advantages, and even when this does happen, it will
still require a very efficient independent merchant to compete
successfully against the legitimate advantages which the chain
will always possess.

1 A more complete discussion of this point will be found in Chap. VII.

CHAPTER V
CHAIN STORE DISADVANTAGES AND LIMITATIONS

To the vast majority of the American public the chain store
has appeared as a new form of business colossus destined to replace
the independent merchant. This apparently invincible business
giant whose invasion of the retailing field seemed so successful
some few years ago has been found to have pregnable armor. No
longer does the intelligent independent look to the future with
dismay, for he knows that the further progress of chains is beset
with numerous obstacles. The chain system has developed
several serious disadvantages, and certain limiting factors have
appeared to impede its further growth. Not that chain stores
have suddenly found themselves face-to-face with insurmountable
obstacles. Such is definitely not the case. Rather the chains
have discovered that they, too, are subject to many of the natural
disadvantages of other large-scale retailing institutions and in
addition suffer from several special disadvantages. These have
all tended to curb the rapid progress of chain stores and it is not
beyond the realm of possibility that they may actually cause a
decline in the relative importance of this form of retailing. As
yet, however, these disadvantages have not proved a definite
barrier to further progress; instead they are merely slowing up
chain store growth.

In the discussion of chain store weaknesses which follows, no
attempt will be made to distinguish between disadvantages and
limitations, on the ground that fundamentally they tend to have
essentially similar effects. Both definitely tend to check chain
store progress. Again, no attempt will be made to discuss the
economic or social disadvantages of chain stores. That phase of
the discussion is reserved for Chaps. XIV and XV. Conse-
quently, the treatment of chain store disadvantages in this chap-
ter will be confined to purely business disadvantages.

Chain Merchandising Not Adaptable to All Types of Goods. A
study of the chain store situation reveals the fact that this system
of merchandising is not equally adaptable to all lines of retailing.

CHAIN STORE DISADVANTAGES AND LIMITATIONS 63

The data in Table 5 indicate that despite the progress chain stores
have made in retailing generally, there are certain fields in which
they have found it difficult to operate successfully. For example,
in the hardware and jewelry trades they do but a very small share
of the total volume, whereas in the variety store sphere they have
virtually eliminated the independent merchant.

It is not so much that certain types of business have been
overlooked by chains, but rather that certain kinds of retailing are
less susceptible to the chain method of operation. Where a great
diversity of items must be handled as in hardware, difficulties
are encountered. Minute care and supervision are necessary in
order to maintain balanced stocks and carelessness on the part
of the local manager may result in a serious lack of essential
items or in excessive inventories of unsalable or slow moving
merchandise.

Further difficulties are found in those businesses which require
considerable discretion on the part of individual store managers
and which do not readily lend themselves to extensive standard-
ization. To entrust responsibility and authority extensively to
unit managers is something that chains ordinarily shun. In
lines of trade without definite price schedules or with multiple-
price systems, chains find it particularly difficult to operate
successfully. The same is true of trades in which contract work
prevails, as each contract offers a particularized pricing problem
and complicated sales promotion and installation duties.

Lack of Personal Contact with Customers. Like other large-
scale retailers, chain stores suffer disadvantages in the lack of
personal contact between their management and the public. A
chain store patron rarely comes in contact with the owners or
major executives of the business and his relations with the store
are confined to meetings with the rank and file of subordinate
employees. Even though those workers, because of a desire for
promotion or to retain their jobs, and with a certain amount of
training and supervision, may produce some measure of efficiency,
they, nevertheless, usually function with less effectiveness than
do the owners of small businesses with their sharpened personal
interest in customers. It is the age-old principle of self-interest
stimulating individual initiative to produce effective results. An
owner naturally takes more interest in the welfare of his customers
than does a hired worker.

64 THE CHAIN STORE PROBLEM

The independent store has an individuality which is largely a
reflection of the personality of its owner. This characteristic may
be friendly, it may be cold, it may be good, or it may be bad, but,
whatever else it is, it is distinctive. The chain, on the other hand,
has a standardized, corporate personality which undoubtedly
appeals to many, but its impersonal character does not attract
consumers to the same extent that the independents 7 distinctive-
ness does.

The independent merchant usually realizes that he must serve
his individual customers as they wish to be served or his entire
business existence is imperiled. The chain store manager, on the
other hand, feels that even though the success of his particular
store may be of considerable importance to his own career, the
success or failure of the chain is not dependent on the accomplish-
ments of this one single unit. Customers are often aware of that
attitude and appreciate the individual attention the independent
merchant can give them. The extent of the pulling power exerted
by the personality of chain managers and employees on the one
hand and of the independents on the other is shown in Chaps.
XII and XIII. Quite frequently, however, the independent
merchant interprets his designation too literally and acts much too
independent toward his customers. On this score, they must be
severely criticized, although as a class they do not deserve such
criticism.

Chains are at a disadvantage when competing with inde-
pendents, inasmuch as their competition of management must be
by proxy. The independent-store manager operates directly and
in personal contact with his business, whereas chain store manage-
ment experts must act indirectly through assistants. The value
of the experts' work is almost certain to lose some of its quality and
inspiration as it flows outward through the mechanism of the
organization. 1

Relative Inflexibility of Chain Merchandising, Closely akin
to the lack of personal contact is the relative inflexibility of
chain stores. Chain merchandising is essentially based on the
principle of standardization. Store fronts, equipment, merchan-
dise, advertising, services, and even selling are all standardized.
This uniformity has its virtues and certain economies are effected

1 NYSTROM, P. H., " Chain Stores," p. 17, Chamber of Commerce of
United States of America, Washington, 1928.

CHAIN STORE DISADVANTAGES AND LIMITATIONS 65

thereby, but at the same time the chains find it difficult to adapt
themselves to local conditions as readily as the independent
merchant can. The latter makes his store, his policies, and his
merchandise fit the needs of those whom he seeks to serve. If
he is in the grocery business, he may handle almost any brand
of merchandise his particular customers may desire or offer them
the type of service that he knows will appeal to them. But can
the chain store manager do the same? Hardly! He is permitted
some leeway, of course, but he is apt to be confined to the par-
ticular brands that sell best in the other stores of the chain and,
in the matter of service, he will probably find himself limited to
that which can be rendered effectively by all of the organization's
units, although some notable exceptions to this may now be
found.

The distance between the consumer and the chain executives
who determine management policy makes it necessary to operate
on a highly standardized basis in order to effect those economies
which are necessary to chain store success. That standardiza-
tion has its virtues is obvious and in order to secure those advan-
tages, chain stores have found it necessary to sacrifice a certain
amount of flexibility. In some lines of business this lack of
adaptability has proved to be a distinct impediment to the prog-
ress of chains. This has been especially true of the shopping
and speciality goods fields. Chains have made rapid strides in
those fields only since they sacrificed some of the standardization,
placed more responsibility in and allowed more discretion to the
individual store managers. However, in certain lines of busi-
ness, as in groceries, where high-priced unit managers would
prove too costly, only limited discretion can be given to such
managers; hence the relative inflexibility becomes an inherent
part of chain management in such lines of trade.

Personnel Problems. One of the most pressing problems fac-
ing the chains is that of personnel and employee morale. As the
chain organization grows in size, the personnel problem becomes
increasingly complex. More and more the work of the organiza-
tion must be carried on by subordinate employees. The man-
agement is forced to delegate a larger share of the responsibility
and authority to minor executives, and the skill with which the
latter perform these duties may well determine the ultimate
success of the enterprise.

66 THE CHAIN STORE PROBLEM

Scientific selection, training, and supervision of chain store
employees become a virtual necessity for successful merchan-
dising. It becomes increasingly important to have each worker
carefully selected for his job and then properly trained in his
duties. This condition makes it necessary to expand consider-
ably the functions and facilities of the personnel department.
The expense of conducting training programs for store managers
and other employees rises and, in companies with high rates of
labor turnover, the costs are likely to become excessive. If a
store manager leaves to work for a competitor or to operate an
independent store, the benefits of his training are largely dis-
sipated, at least from the viewpoint of his previous employers.
From a social and economic point of view, however, as will be
shown in a later chapter, there is a decided gain from this train-
ing and to that extent the chain method of merchandising has
contributed to the growing efficiency in retail merchandising.

Furthermore, as the chain continues to grow, it becomes increas-
ingly difficult to inculcate the spirit of achievement in employees.
In an enormous organization an employee will begin to feel that
he does not have an even chance for advancement and that wage
increases are dependent largely upon things other than his own
ability and achievements. There are many store managers who
feel, however, that they are destined for and capable of achieving
greater things than their present position holds for them, although
they may be definitely limited in their abilities. It is this prob-
lem of keeping such individuals satisfied, and yet ambitious, that
the chains must continue to face in the future. 1 Partly on this
account and partly because of the relatively limited economic
opportunities, certain chains have adopted the policy of hiring
individuals with average abilities. For example, some chains
seldom hire from among college graduates the students who
proved to possess superior qualities in scholarship or campus
leadership.

Another phase of the personnel problem that the chains find
handicaps them is that it becomes increasingly difficult to fill
satisfactorily the higher executive positions in the organization.
In a small organization the functions are simple and employees
holding responsible positions find it comparatively easy to per-

1 CLARK, FRED E., "Readings in Marketing," rev. ed., p. 365, The Mac-
millan Company, New York, 1933.

CHAIN STORE DISADVANTAGES AND LIMITATIONS 67

form their duties well. As the organization grows, these same
functions become vastly more complex and, in many instances,
the job has completely outgrown the man. For example, the
store manager may be able to do a highly satisfactory job in that
capacity but when promoted to managership of a group of stores
in a given district, he may find himself unable to perform his new
functions satisfactorily and to cope with his problems as an
executive with vision and foresight should.

Problems of Handling Style Goods. It is frequently said that
style or fashion goods cannot be merchandised centrally and,
therefore, can never amount to much in a chain way. Many a
chain store antagonist has been whistling in the dark by saying
that "you can't chain fashion. You can't buy hats like hair
pins, nor evening wraps like eggs. You can't merchandise dresses
centrally. No buyer in New York can select style goods for stores
in other cities. Every store is different and every city is different.
Maybe, you can buy bedding centrally, but not apparel." But
it is being done, and being done successfully, profitably, and
increasingly. 1 A glance at Table 5 should convince even the
most skeptical that chain stores can and do handle style goods
successfully. We find that 50 per cent of the shoe store business
and 25.5 per cent of the women's ready-to-wear store volume
were done by chains in 1935. In both of these lines the chains
registered a substantial gain over 1929.

That it is more difficult for chain organizations to handle
fashion goods than convenience goods is undoubtedly true. It
is not an easy task for the central office to determine accurately
the merchandise needs of the individual retail units, which may
vary with local tastes. Nor is it a simple matter to place respon-
sibility for unsatisfactory results when the purchase of goods is
separated from the sale. Department and individually operated
specialty stores generally find it necessary to combine the func-
tions of purchase and sale in order to secure efficient merchan-
dising. The chains have met this difficulty by shifting more
responsibility to the individual store managers. In some cases
they have given such managers more freedom in the selection of
goods by allowing them to choose their merchandise from a
range of patterns and styles contracted for by the central buying

1 GUERNSEY, JOHN, "Retailing Tomorrow," p. 145, Textile Publishing
Company, New York, 1929.

68 THE CHAIN STORE PROBLEM

office. In other instances representatives from the purchasing
office call on store managers with a line of samples from which
selections for the individual stores are made. Some of the chains
operating large units have found it advisable to have each store
do its own buying. Furthermore, with the greater use of auto-
mobiles and the more frequent attendance of motion pictures,
the distinction in styles in different sections of the country and
in varying-sized communities is fast disappearing. Not only is
there a tendency for people throughout the country to be influ-
enced by the same type of merchandise, but also to adopt the
same style simultaneously. Whatever style lag still exists is
rapidly diminishing in importance. All this plays into the hands
of chains.

Another difficulty chain stores are facing in the handling of
style merchandise is in price reductions. Style obsolescence or
local competitive conditions may make it necessary to reduce
prices very promptly. Chain stores, with their concentration
of authority, frequently find it inconvenient to act speedily in
such cases and serious losses may occur as a result of the delay or
from the necessity of having the central office act without an
adequate knowledge of local conditions, unless such matters
become solely the prerogative of the unit managers.

Style goods, more than any other type of merchandise, must be
adapted to the desires of a store's patrons. Because of their
inherent nature, chain stores should be at a disadvantage when
competing with independents in fashion lines. However, as
indicated above, that has not been the case, largely because they
have attempted to locate their units in communities where the
customers and their problems are nearly identical and because
of the other factors previously indicated. They have certainly
made progress in these fields, and so it may be truthfully stated
that the difficulties of merchandising style goods by chain stores
have been considerably overrated in the past.

Association with Price Merchandising. Almost from the date
of their origin chain stores have been merchandising price. In
their advertising, in merchandise stocks, and in selling methods
they have emphasized the price appeal. They have helped foster
a price consciousness in the mind of the American consumer which
does not always react to their own advantage. Although low
price does not necessarily infer that the merchandise is of inferior

CHAIN STORE DISADVANTAGES AND LIMITATIONS 69

quality, still the public generally feels that it may have to sacrifice
quality, style, or some other feature in return for the savings
resulting from paying reduced prices. This has not proved to
be a material handicap to chains in the convenience-goods field.
But in certain lines of trade and among some classes of consumers
this does prove to be a stumbling block. In the upper price
levels of the apparel field consumers are less responsive to the
price appeal and that is one reason that the chains have not made
more progress in that sphere.

Another disadvantage resulting from a price emphasis is that
trade bound to a store because of this appeal is usually not very
securely tied to that particular store. Persons seeking bargains
are readily lured from store to store in their quest for maximum
values. They continue to patronize their favorite stores only so
long as they feel that no other store is offering better "buys."

As long as chain stores are able to maintain their price advan-
tage through their ability to buy for less or to operate at lower
cost, an emphasis on price is frequently a decided advantage in
drawing trade from competing establishments. As they lose
this ability to sell for less (and they are losing some of it through
improved efficiency among independents and as a result of various
types of legislation) then the bargain atmosphere surrounding
many chain stores becomes less appealing to consumers. It then
becomes necessary to compete with independents along lines in
which the latter are less handicapped, such as quality, service,
convenience, and personality.

Lack of Service. While the elimination of services such as
the extension of credit and delivery reduces chain store costs,
at the same time it has the effect of limiting patronage. Many
consumers feel that they would rather enjoy these services than
save a few pennies by going without them. There are many
others, on the other hand, who feel inclined to visit retail stores,
pay cash, and bring home their own purchases in order to effect
these same economies. The widespread use of automobiles has
encouraged consumers to patronize cash-and-carry stores, but
there is still a vast body of them who balk at the inconvenience
caused by lack of service, especially credit and delivery.

Not all chain stores have eliminated services. On the contrary,
in lines such as jewelry, clothing, and furniture, they feature all
the services normally rendered by independents, and many even

70 THE CHAIN STORE PROBLEM

go beyond by offering unusually liberal credit accommodations.
Nor is the extension of service limited to those businesses. Only
recently it was discovered that 50 per cent of the chain grocery
stores in highly competitive centers like New York and Boston
are extending either delivery or credit service to their customers. 1

When chain stores extend services they naturally increase their
costs and lessen their ability to undersell the independent. The
higher the costs go, the more likely they are to lose their price
advantage over independent stores. It is hardly possible that
an effective price appeal can be coupled with the expenses inci-
dent to the extension of services.

Antagonistic Public Opinion. In the past few years the chain
stores have encountered hostility on the part of the public.
Some of this has been engendered by the vicious attacks of cer-
tain individuals who have seen in it an opportunity to further
their own personal interests; some has been due to the sentiment
aroused by their independent competitors, and some is just part
of the natural prejudice which the public apparently feels toward
big business.

Various and sundry charges have been leveled against chain
stores, some of which are without foundation in fact, but which
have, nevertheless, had their effect on the public mind. Chain
stores have endured attacks from many quarters which have had
some detrimental effect on their volume of business. A poll con-
ducted by the Institute of Public Relations in 1936 revealed that
about 70 per cent of the persons interviewed felt that chain stores
should be legislated against in one form or another. To few
other types of business is attached the stigma in the public mind
from which the chains suffer.

Some of this ill will has been due undoubtedly to chain store
practices. Chains were slow to realize that they had a public
relations problem to solve. It was not until the latter part of
the twenties that they began to donate extensively to charitable
organizations and partake in movements for community better-
ment. Recently certain chains, notably The S. S. Kresge Com-
pany and Montgomery Ward, have adopted the policy of active
participation in local activities. The chains are now beginning to
realize that there is more to merchandising and distribution of

^ORBALEY, GORDON C., "Group Selling by 100,000 Retailers," p. 141,
American Institute of Food Distribution, Inc., New York, 1936.

CHAIN STORE DISADVANTAGES AND LIMITATIONS 71

goods than mere price appeal. As a matter of self-protection they
must build good will in the eyes of the public. They are now
showing a tardy appreciation of the value of favorable public
opinion and many of them are actively engaged in wooing the
public.

Growing Competition. In the early part of their expansion,
chain stores encountered little opposition from the average
independent. Apparently, merchants were demoralized by this
new retail titan. But it was not long before the independent
merchants awakened to the need for fighting back. They found
that by adopting chain store methods they could compete more
effectively. As the weaker merchants were driven out of busi-
ness the stronger ones survived, and the general level of com-
petitive ability among independent merchants was raised.
Independents were not slow in discovering that they could
profitably adopt efficient chain store practices ; stores were cleaned
up; windows decorated; and retail clerks trained. Superfluous
brands, price lines, and sizes were reduced or eliminated. Better
display methods and advertising practices were adopted. The
chain stores are now finding that the 1937 independent is not the
same independent they encountered 10 and 15 years ago.

The independents have met chain competition in still another
way, by joining cooperative buying organizations. Realizing
that one of the major chain store advantages was that of buying,
independents banded together in buying groups and in voluntary
chains in an effort to secure their merchandise at costs comparable
to those obtained by the chains. Potentially, such organizations
have the ability to place the independents on a merchandising par
with chains. In fact, it is entirely possible that with the advan-
tages of personal initiative, ambition, ownership, intimate
customer contacts, added services, and similar superior char-
acteristics, the corporate chains may be hard pressed to maintain
their position.

Not only are the chains faced with increased competition from
the more intelligent and well-organized independents, but they
are beginning to feel the intense competition of other chains. The
chains have been spreading rapidly in the face of independent
opposition, but in many lines they have reached the point where
their major competition is now coming from other multiple-store
groups. It is a much more difficult problem now that they face

72 THE CHAIN STORE PROBLEM

competititors who possess inherently all of their own advantages.
The financial difficulties of some chains and the diminishing
profits of others in the last few years give ample evidence of the
increasing competition that chains are encountering among
themselves. It has indeed become a battle of giants.

Another competitive situation facing chain stores is that of
overlapping lines carried by chains presumably operating in other
fields. The drug stores are carrying grocery items and in some
cases even wearing apparel, and in retaliation the grocery chain
stores have placed patent medicines on their shelves and fre-
quently have installed soda fountains. Certainly, the variety
stores have encroached upon the restaurant, dry goods, depart-
ment, and grocery chain fields.

Recently, chain stores have begun to encounter a newer and
more invincible type of competition. The rapid expansion of
supermarkets in the food field has presented serious difficulties for
the grocery and meat chains and has even affected drugs. Pos-
sessing a lower cost of doing business and offering a wider selection
of merchandise than one commonly finds in chain food stores, this
new competition is proving formidable. Supermarkets have a
cost advantage due largely to self-service and low rentals which
enable them to save probably one-third of the operating expenses
of the average chain food store. This new type of competition
has been probably the primary factor in inducing chains to open
larger stores of their own and also actually adopting the super-
market method of operation. A more detailed discussion of the
supermarkets and their effects upon regular chains will be pre-
sented in the last chapter of this volume.

Legislative Handicaps. Many problems in the form of legisla-
tive restrictions are also plaguing the chains today. Special
taxes have been levied against them, their buying advantages have
been curtailed by the Robinson-Patman Act, their price advan-
tage has been lessened by state fair-trade laws, and now increased
surplus taxes are restricting their ability to expand.

In twenty states chain store taxes are now in effect. These
taxes vary from a few dollars to $550 per unit per year, as is the
case in Louisiana. In practically every instance the tax imposed
is a graduated tax which increases with the number of stores; for
example, the Michigan Act taxes the first two stores $10; the next
three $25 each; the next five, $100 each; and all stores in excess of

CHAIN STORE DISADVANTAGES AND LIMITATIONS 73

25 pay $250 each. In the case of Idaho all stores over 19 pay
$500 a year each. The principle of graduated chain store license
taxes has been declared constitutional by the United States
Supreme Court and the chains are finding it increasingly difficult
successfully to fight this restriction on their business. As long
as the taxes are not excessive, they do not curtail chain store
expansion, but in many cases they are proving a serious burden
in the filling station and grocery fields. Few chain filling stations
can afford to pay the $250 license tax which the state of West
Virginia levies nor can the smaller units of grocery chains in Idaho
well afford to pay the $500 tax which that state exacts.

As long as there is a crying need for revenue, combined with the
pressure from independent retailer and wholesaler groups, chain
store taxes will probably be extended rather than curtailed. To
date they have not seriously handicapped chain stores except in
certain states and in lines of business where the profit or sales per
unit are small. The tendency, however, is for the chain store tax
to increase in severity, and, while the tax is not as yet prohibitive,
it may prove to be a formidable disadvantage as independents
increase their efficiency and meet the chains on more even ground.
It may then be possible that the taxes will be an important
limiting factor in further chain expansion.

One of the most recent bits of legislation to hamper the chain
store has been the Robinson-Patman Law which reduces some of
the buying advantages of chains. Under the provisions of this
act, as it is now being enforced, the chains are finding it difficult
to secure the same special discounts and allowances which they
have enjoyed in the past. Should they be materially deprived of
this advantage, they will find it increasingly difficult to undersell
the independent merchant. Just what new developments may
be expected as a result of this legislation are indicated in Chap.
XVII.

The speed with which the state legislatures have enacted fair-
trade laws may soon make it extremely difficult for chain stores to
undersell independents on nationally branded items. Some 42
states now have fair-trade laws in effect, and it is expected that a
total of 44 states will soon have such laws on their statute books
(see Chap. XVII). As the chain stores are deprived of their price
weapon, their ability to compete against the up-to-date inde-
pendent will proportionally diminish.

74 THE CHAIN STORE PROBLEM

In the past, chain stores have financed their expansion largely
through the reinvestment of their earnings. With the new
Federal legislation which taxes reinvested earnings at a higher
rate than earnings paid out in dividends, it will be more difficult
for chains to expand in that fashion. Stockholders will naturally
clamor for a distribution of earnings in the form of cash dividends.
This, of course, will tend to limit the desire for expansion, or at
least it will make the policy of expansion more expensive than it
has previously been.

CHAPTER VI
CHAIN STORE PRICES

Importance of Prices to Consumers. In a modern capitalistic
economy, every commodity or service competes with all other
commodities and services for the consumer's dollar. Out of
everyday contacts with his environment, needs arise which the
consumer wishes to satisfy through the consumption or use of
specific goods and services. Because of the limited purchasing
power of the average consumer, in making the choice of a given
product he must give careful consideration to the price charged,
eliminate those goods which have a negative utility or for which
too high a price must be paid, evaluate the utility ratios of the
remaining products, and finally select the most desirable item or
the one which will presumably yield the maximum utility or the
greatest satisfaction.

It must be emphasized that to most persons price is an impor-
tant determinant of choice of product, as well as source of supply,
although it is not the sole consideration as will be shown in a later
chapter. Assuming similar quality, price has a powerful appeal
to the majority of consumers, for the reason that most of them
have decidedly restricted purchasing power. For the 38 million
persons employed in gainful occupations during the year 1935
(exclusive of work relief employees), the average per capita income
for the year was only $1,201, 1 and even in 1929 the per capita
figure for the 44 millions then employed was but $1,466. This
limited purchasing power of the millions of workers is further
restricted during a period of depression in at least two ways : the
number of employed is drastically reduced so that the where-
withal of several million workers is completely removed, and the
dollar income of those remaining gainfully employed is greatly
decreased so that for the 35 millions employed in 1933 the per
capita income was but $1,097.

1 " National Income of the United States, 1929-1935," U.S. Department
of Commerce, Washington, 1936.

76 THE CHAIN STORE PROBLEM

While both sexes are influenced by a price appeal, its effect
upon women is more pronounced than on men. This fact takes on
added significance when it is remembered that the great majority
of the purchases of the type of merchandise handled by chains are
made primarily or entirely by women. It may even be said that
the typical consumer is a woman. The appeal of a " bargain " or
of getting something for nothing is so ingrained in the human
being, especially women, that it is one of the strongest motivating
forces for shopping around.

That price is an important factor is further evident from the
numerous ways in which it has been attempted to obscure the
actual amount asked or to bring it to the forefront of the con-
sumer's consciousness. Odd prices, charging customary prices but
inconspicuously reducing the quantity offered, breaking down the
price to small amounts as in installment selling and in the variety
stores these are but a few of the illustrative cases.

It is, of course, true that a consumer's demand is a combined
demand for the article itself and for the services necessary to put
it into his possession in the manner desired and under the condi-
tions deemed advisable. He may often be willing to pay a
substantial part of the price for the service rendered. Conse-
quently, charges made for services are important factors in the
determination of prices paid by consumers, so that when price
comparisons are made, similarity in both service and quality
must be assumed; otherwise the results are likely to present a
distorted picture.

Why Comparative Price Studies Are Essential. Appreciating
the important role which price plays in our economic system, it is
obvious that an intelligent attack on the chain store problem must
include a careful analysis of this phase of chain merchandising.
Comparative price studies of chain and independent store selling
prices must be made in order that the soundness of the chain
store method of operation from the economic point of view may be
measured. It is only through such a study that we may deter-
mine whether the chain store should be accepted as a socially
desirable business institution.

A second reason for comparing chain store prices with those of
independents is to ascertain to what extent chain store advan-
tages are shared with the consumer through lower prices. That
the chains possess certain inherent advantages over many

CHAIN STORE PRICES 77

competing types of retailing is not to be denied, but from a strictly
consumer's viewpoint chain stores are welcome only so long as
they pass along some of their advantages in the form of lower
prices or greater value, other factors such as quality and service
remaining the same. Has this actually happened? Have chain
stores saved consumers the hundreds of millions of dollars which
their defenders have claimed? Only carefully made compara-
tive price studies will reveal the answer.

A third reason for special attention to this aspect of the chain
store problem has been the effort to determine the ability of
chain stores to absorb special taxes levied upon them through
an increase in the price of their goods without materially lessening
their ability to undersell their independent competitors. In
other words, just how much may chain stores be taxed without
actually putting them out of business or seriously curtailing their
trade-pulling power?

Inadequacy of Material on Chain Store Prices. Up to the
present time, some seventeen separate studies of comparative
chain and independent-store prices have been conducted since the
year 1929 for one or more of the reasons enumerated in the preced-
ing paragraphs. Of these studies, 9 were made during the first
three years of this period, and only 8 have been conducted in the
past four years. Although at first glance 17 investigations
might seem sufficient for a thorough analysis of the chain and
independent-store comparative-price problem, yet a more careful
examination of these studies reveals that only a small portion
of the available material has been unearthed. All but two of the
studies were confined to groceries. The other two, namely
the one conducted by the Federal Trade Commission and that
conducted by one of the authors of this book, in addition to
groceries, covered drugs and several other lines of merchandise.
Inasmuch as groceries only constitute some 30 per cent of the
total chain store volume, it would appear that a very important
portion of the chain store price picture has been neglected.
Another factor that makes one realize how inadequate our price
information has been, is that with the same two exceptions, the
studies were confined to a single community each. In one other
instance, however, five communities were included but they
were so small as to be almost inconsequential. 1

1 The 17 studies of chain store prices so far made are:

78 THE CHAIN STORE PROBLEM

For the sake of scientific accuracy, chains must not be treated
as a class. Common sense would indicate that not all kinds of
chains are able to undersell independents by the same amount
and that the larger chains are in a better position to offer lower
prices to consumers than the smaller ones. Practical expediency
points in the same direction. So far as the authors were able to
discover, every license tax now in effect and aimed at chains is on
a graduated basis, the chains operating large numbers of stores

ALEXANDER, R. S., "Study of Retail Grocery Prices/' Journal of Com-
merce, New York, 1929.

RHOADES, E. L., "Chain Stores and the Independent Meat Retailer,"
University of Chicago Press, Chicago, 1929.

BJORKLUND, E., and PALMER, J. L., "Study of Prices of Chain and
Independent Grocers in Chicago," University of Chicago Press, Chicago,
1930.

PALMER, E. Z., "Chain and Independent Prices in Lexington, Ken-
tucky," Chain Store Progress, August, 1930.

BREWSTER, M. R., "Price Differential in Chain and Independent
Grocery Stores of Atlanta," Georgia School of Technology, Atlanta, 1930.

TAYLOR, M.D., "Prices of Chain and Independent Grocery Stores in
Durham, N.C.," Harvard Business Review, January, 1930.

PHILLIPS, C. F., "Chain Stores Effecting Substantial Economies,"
Chain Store Progress, May, 1931.

CONVERSE, P. D., "Prices and Services of Chain and Independent
Stores in Champaign-Urbana, Illinois," N.A.T.M.A. Bulletin, October,
1931.

RUSK, MYRTLE, "Consumers Save 10% in Albuquerque, N. M., Stores,"
Chain Store Progress, November, 1931.

JORDAN, C. B., "Are Prices as Low in a Voluntary Chain ?" Food Indus-
tries, January, 1932.

DOWE, DOROTHY, " Comparison of Independent and Chain Store Prices,"
Journal of Business, April, 1932.

VAILE, R. S., and CHILD, A. M., "Grocery Qualities and Prices," Univer-
sity of Minnesota Press, Minneapolis, 1933.

PHILLIPS, C. F., "Comparison of Independent and Chain Store Prices,
1930 and 1934," Journal of Business, April, 1935.

TAYLOR, M. D., "Prices of Branded Grocery Commodities during the
Depression," Harvard Business Review, July, 1934.

CASSADY, RALPH, JR., and OSTLUND, H. J., "Retail Distribution Struc-
ture of a Small City," University of Minnesota Press, Minneapolis, 1935.

Federal Trade Commission, "Chain Store Inquiry Prices and Margins
of Chain and Independent Distributors," Vol. IV (several reports), U.S.
Government Printing Office, Washington, 1933 and 1934.

BECKMAN, T. N., "Prices in Chain and Independent Stores in Florida,
1935," unpublished.

CHAIN STORE PRICES 79

paying higher taxes than those operating but a few, the assump-
tion being that the chains with more store units have greater
ability to pay taxes. Yet only one study has been made, to
date, that compares prices of chains according to the number of
stores operated in the state in question. The results of this
particular study are rather startling but not wholly unexpected
by students of chain merchandising.

To make the story complete, it is also necessary to differentiate
between regular independents and those who are affiliated with
some voluntary group, since the latter type of store is pre-
sumably using chain store methods and techniques to a greater
degree than the ordinary independent. Only 3 of the 17 studies
have drawn this distinction in their fact-finding efforts.

In view of the foregoing, it would appear that price data are
still too meager and inadequate to enable us to draw conclusions
as to the superiority of chains over independents, from the
standpoint of the price advantage to consumers. Most of the
studies were confined to a small town and to a single line of
business. Moreover, they treated chains as a group and accorded
similar treatment to independents. Finally, the number of
items used in the research was so limited and the technique so
poor in some instances as to invalidate the results of the investi-
gations. It is believed that by far the most extensive study of
this type was that conducted by one of the authors, inasmuch as it
covered 72 communities, large and small, throughout an entire
state, and embraced several distinct lines of business, and in
each instance included a large number of items.

Results of Poor Technique in Conducting Price Studies. The
only way in which accurate results can be obtained in compara-
tive-price studies, as in any other scientific research, is by the
use of the proper technique. If improper methods are used,
distorted or inadequate conclusions are bound to follow. In
the price differential studies made in the past, numerous examples
of improper technique are discernible. However, in fairness to
those persons who have conducted these investigations, it must
be admitted that a frequent cause of defective methods has been
either the lack of facilities or a shortage of funds with which to
conduct the studies properly. But whatever the causes, poor
technique leads to the following effects:

80 THE CHAIN STORE PROBLEM

1. It commonly results in an attempt to compare the incom-
parable. For example, some studies revealed that price com-
parisons were made between national and private brands.
Obviously, they are not comparable.

2. Inadequate samples. If substantial evidence is to be
gathered, the sample must be large enough to be truly indicative
of the conditions or prices studied.

3. Even though the sample as a whole may be adequate, it
may not be representative of the types of stores studied, or of the
variety and volume importance of the merchandise handled in
the stores. There is ample opportunity for error to creep in at
this point and special care must be taken to see that the stores
covered and the commodities chosen are really representative.

4. Faulty canvassing and pricing account for some of the wide
variations in prices which are observable from an examination
of the price studies.

5. Improper computations are one of the least excusable
results of poor technique. One study would show completely
reversed results if the figures used had been carried to two
instead of one decimal place.

6. The improper choice of averages used for the presentation
of the data means that a distorted picture of the situation is
revealed. Averages are dangerous unless they are handled by
skilled technicians.

7. And last, but by no means least, are the colored results
that are inaccurate and misleading. The only results that are
worth while are those that directly flow from unbiased informa-
tion, honestly secured, scientifically handled, and impartially
presented.

A Scientific Approach to the Problem of Chain Store Prices.
Since few comprehensive studies have been made in the past
without some trace of the poor technique described in the above
list, and because price competition has been undergoing rapid
changes in recent years in the retail field, more complete and
properly executed chain store price studies must be made in the
future. For this reason it may not be inappropriate to outline
what the authors regard as good procedure in conducting such
studies. The following presentation of technique is further
justified in order that the reader may re-examine the 17 com-

CHAIN STORE PRICES 81

parative price studies that have been made to this date, and
determine for himself which of them are faulty and inaccurate
and which can stand the test.

In any attempt to study chain store prices scientifically in
comparison with the prices charged by independents it becomes
essential to follow a well-defined plan of attack. Such procedure
should deal with the proper selection of the articles on which
prices are to be compared, a proper choice of stores to be can-
vassed, careful preparation of the schedules, wise selection and
training of canvassers or interviewers, testing the accuracy of
the field work, skillful editing of the data collected, choice of the
best statistical average or averages for the presentation of the
data, unbiased presentation of the results, and an objective but
thorough analysis and interpretation of the findings.

Selecting Articles for Pricing. One of the first problems that
presents itself relates to the proper selection of commodities or
products for comparative price purposes. It is suggested that
the following criteria should govern the choice of articles selected:

1. Each commodity selected for the study of price relationships
should be branded, packaged, or otherwise carefully identified through
specifications in order to insure uniform quality and absolute
comparability.

2. The articles chosen should be of types easily recognized by investi-
gators in the event that wholehearted cooperation on the part of the
respondents is not forthcoming.

3. Each item should be so chosen as to avoid confusion on the score
of size. In practically every instance the particular size to be priced
should be specified and that size should be selected which is normally
stocked by both chain stores and independents and is fairly representa-
tive of the item involved.

4. Only those items should be selected which are carried by both
chains and independents.

5. Only such articles should be selected as were likely to be found in
the majority of stores, both chains and independents, regardless of size
of stores or their locations. This is necessary to insure proper repre-
sentation not only by type of store but also by geographical area, store
size, and type of communities.

6. The commodities selected should be representative of their respec-
tive groups. For example, the items of breakfast foods selected should
be fairly representative of the entire line of breakfast foods. They must
include slow-moving articles as well as " fast-sellers."

82 THE CHAIN STORE PROBLEM

7. The aggregate of the items included in the survey for any given line
of business should be truly representative of the commodities used in the
average home.

8. The aggregate of the items selected should give a true cross section
of the stock of goods carried by the average store, independent or chain,
in each of the kinds of business included in the survey, and in the lines
of merchandise represented by the selected commodities. Only in this
way would it be possible to depict actual conditions in the stores of the
two systems of distribution involved. 1

Following these criteria, it will be found necessary to eliminate
from the items selected for study those articles which are not
generally handled by chain stores or by independents and com-
modities which do not lend themselves to price comparison
because of differences in quality or brand. Practically none
of the bulk merchandise or privately branded items are subject
to true comparison, and therefore should be omitted, even though
the latter in many instances would constitute the major portion
of a store's sales. Because of the many complicated factors,
true price comparison can only be made when products identical
in every respect are selected.

Selecting Stores for the Canvass. In very few instances will
it be found necessary to canvass all or even a large proportion
of the retail stores in the area to be surveyed, unless the entire
territory is small. If the investigator has ample funds, a larger
sample may be advisable. To studies of this nature statisticians
recognize the applicability of a fundamental principle of sampling,
namely, that as the total number of stores in the universe
increases, the proportion of stores to be sampled may decrease.
For example, one of the investigators found that almost a 100 per
cent sample was necessary when comparative prices were studied
in Durham, N. C., a city of 50,000 persons. 2 On the other hand,
another investigator concluded that a 4.6 per cent sample proved
accurate in a Chicago study. 3

The Florida study, which is to be discussed in the following
two chapters, utilized a 30.2 per cent sample to guard against any

1 BECKMAN, T. N., "Prices in Chain and Independent Stores in Florida,"
p. 8.

2 TAYLOR, MALCOLM B., "Prices in Chain and Independent Stores in
Durham, N.C.," Harvard Business Review, January, 1930.

8 PALMER, J. L., "Study of Prices of Chain and Independent Grocers in
Chicago/' University of Chicago Press, Chicago, 1930.

CHAIN STORE PRICES 83

charge of lack of scientific method. Yet it was felt that a 6 per
cent sample actually was sufficient accurately to portray the
price situation in the entire state.

Preparation of Schedules. Much care must be exercised in the
preparation of the schedules on which the price data are to be
recorded, even when the field work is done by carefully trained
investigators. Statisticians, advertising agencies, and others
who have conducted surveys and made analyses of data gathered
firsthand, all appreciate the importance of schedules properly
prepared. Not only do such schedules facilitate the work during
the canvass and when the tabulations are made, but they are
equally significant from the standpoint of accuracy in both of
the processes. Especially is it important that schedules be
carefully prepared when they call for special information as to
services rendered, type of store canvassed, its relationship to other
stores in the organization, kinds of goods handled, and the like.
To do this scientifically, special skill is required which may be
best attained after considerable experience in this kind of
work.

Collecting the Data in the Field. Numerous problems arise
in planning and conducting the field canvass. First of all, the
investigators must be carefully selected and instructed, if the
data they are to secure are to be reliable. Many of the price
studies made in the past have utilized college students of market-
ing without previous research experience. As far as the authors
know, only the Federal Trade Commission and the Florida
studies made use of trained investigators who had had experience
in collecting economic data. Even such investigators must be
carefully coached and provided with the necessary written
instructions.

Most of the price studies have omitted special sale prices on
items. Unless the study is to include a period of several weeks as
the Federal Trade Commission survey did, the results should be
more conservative if special prices are excluded.

Chain store price data are usually more accurate when the
respective chain store units are visited by an investigator instead
of securing the information from a central office. It has been
found that prices have varied considerably in units of the same
chain, in the same city, and on the same date. If the chain store
headquarters are contacted for prices this phase of the problem

84 THE CHAIN STORE PROBLEM

is completely overlooked and the results are correspondingly
colored.

One more point must not be lost sight of when collecting data
in the field and that is that all price quotations in the same locality
should be secured on the same date. Prices vary from time to
time and discrepancies would creep in which could be prevented
if the prices were all secured on the same date. Further precau-
tions might be taken to insure accurate pricing such as calling for
the information on certain days which reflect normal operations,
and for investigators so to conduct themselves as to reduce bias
to a minimum.

Testing the Conditions. Better results are obtained usually
if the quotations secured are tested. For instance, in the
Florida study, investigators conducted a separate probationary
test in five cities. Fifteen grocery and fifteen drug items were
purchased immediately after other investigators had collected
price quotations in the same stores on the identical items. This
was done after the original canvass was completed. If no
appreciable difference between the prices quoted and those paid
for the items is found, it may be assumed that the quoted prices
are valid. Actual purchase tests are costly to make, however,
usually running into hundreds of dollars. Consequently, they are
normally omitted despite their unquestioned validity.

Editing the Data. The raw data collected in the canvass must
be carefully edited before tabulation, to reduce errors to a mini-
mum. Editors must check the schedules to eliminate prices
entirely out of line, to exclude prices that pertain to other sizes,
and to omit commodities with too few quotations. To perform
the function of editing properly, discretion, judgment, careful
instructions, and experience are required. Because of the
difficulty of setting up rigid rules, the general principle of editing
must be followed, viz., that prices are assumed to be right until
proved in error. Moreover, a decision to throw out a price may
depend upon the knowledge of the cost of other items in the
schedule, other prices quoted in the same schedule, sizes of pack-
ages, location of the store, and the amount of service rendered
by the retailer. In general, when the results of a price study are
reported, the editing methods should be described.

Compiling the Statistics and Selecting the Average. Having
edited and tallied the price data, the next logical step is to choose

CHAIN STORE PRICES 85

some measure to express the average price of each commodity,
and then the average price of all items taken together under
both distributions. The representation of a series of prices by
an average, a single typical figure, is " justified because of the
tendency of large masses of figures to cluster about a central
value from which the values of all observed cases depend, with
more or less regularity of smoothness/ 71 There are several
possible measures of central tendency available. The arithmetic
mean, the median, the mode, the geometric mean, and, under
certain circumstances, the harmonic mean may be used. Each
of these has its peculiar advantages and limitations.

The Arithmetic Mean. The arithmetic mean or simple arith-
metic average is merely the summation of values of all units
divided by the total number of units. Thus the mean of the
units 2, 5, 6, 7, is equal to the sum of the values of the units, 20,
divided by the number of units, 4, or an average of 5. This
average is simple to compute and easily understood. Moreover,
it is affected by the values of each unit of the series, and is espe-
cially desirable if the range of values is narrow. The arithmetic
mean is said, however, to have an upward bias, that is, it gives
more than the proportion of weight to articles of high unit value.
It is a fictitious or computed number, and may not be the value
of any of the units in the series.

The Median. As an alternative, it is possible to find the
median price, which is the middle price in any series of prices
arranged in the order of magnitude. Thus, when commodity A
sells at 10 cents, B at 22 cents, C at 36 cents, D at 43 cents, and
E at 60 cents, the median price is the middle figure, 36 cents.
Except when the data are grouped into class intervals or when the
number of items included is even, this measure has the advantage
of being a real or actual number found in the exact center of the
array. It is relatively easy to compute, and the concept of the
median is a thoroughly simple one to grasp. It is primarily
applicable when the data are not homogeneous because it is
affected in no way by extreme prices. But therein lies its
principal disadvantage. Since it is a position average and no
recognition is given to the range or spread of prices from low to
high, its use is limited.

1 MILLS, F. C., "Statistical Methods," p. Ill, Henry Holt & Company,
New York, 1924.

86 THE CHAIN STORE PROBLEM

The Mode. In some cases it is necessary to find that price
which occurs most often. Assume that commodities A, B, and C
have prices of 10 cents each, D and E can be purchased at 8 cents,
and F at 5 cents. The modal price is 10 cents since it is quoted
most often, three times. The mode has the advantages char-
acteristic of the median. It is an actual, not a computed, figure
except in the case of frequency distributions. No particular
technical training is necessary to visualize and understand it.
Statisticians favor using the mode as a measure of central
tendency when the data are not homogeneous because it is a
position average and gives no more weight to extreme values
than to others. When the data are not unimodal, i.e., frequencies
appear to be concentrated at two or more different prices, the
mode is obviously ineffective. This is often the case in compara-
tive chain store price studies.

The Geometric Mean. The geometric average is really a
variation of the arithmetic mean and consists of the anti-log of
the summation of the logarithms of each price quotation divided
by the number of prices. It is particularly advantageous because
it is affected by all prices quoted and measures not absolute
amounts but rates of change or differences. Thus, the effects
of large absolute differences in units of high value tend to be
minimized. For the same reason the effects of differences in
commodities of low unit value tend to be maximized. But this
average involves much more mathematical computation than
the other averages mentioned. Furthermore, this mean is
limited in its popular use since it is not universally understood.
There is the added disadvantage that " downward changes are
given more weight than equivalent upward changes, on the theory
that it takes more force to cause a decrease of 50 per cent than to
cause an increase of 50 per cent. This is based on the fact that
the greatest possible decrease is only 100 per cent, whereas there
is no limit to the possible amount of increase. " L

The Harmonic Mean. The harmonic mean is the reciprocal
of the arithmetic mean of the reciprocals of the individual values.
Dr. Mills speaks of it as a "type of average capable of application
only within a restricted field. . . . The use of the harmonic
mean in handling economic data may be illustrated if ... a

1 "Technique of Marketing Research." p. 369, McGraw-Hill Book Com-
pany, Inc., New York, 1937.

CHAIN STORE PRICES 87

given commodity is quoted at 'so many per dollar." 71 Since
prices are not generally quoted in this fashion, this average is not
particularly fitted to chain store price studies.

From the above discussion, it follows that there is no perfect
average for expressing results. Since a discriminating use of
averages is essential to sound statistics, the task becomes one of
choosing the least objectionable average. For practical purposes,
one can eliminate the mode and median at the outset, because they
are position averages and take no note of the range of prices.
Having already omitted the harmonic mean from the discussion,
there remain the arithmetic and geometric means. In one
respect, the geometric average is desirable because it measures
rates of change or differences rather than absolute amounts.
But, on the other hand, it is not so simple to compute nor so well
understood. If an average of relatives, instead of absolute
amounts, were calculated by converting the prices into per-
centages, the result would be a special type of arithmetic average
which measures rates of difference but is easily calculated. At
the same time, the upward bias of the absolute-amount arith-
metic mean has been largely corrected, thus eliminating over-
emphasized high values. It appears, in general, that the
arithmetic mean in some form is most applicable for a study
of price relationships.

The Averages Actually Used in Chain Store Price Studies.
Those who conduct price studies are confronted with two distinct
problems. First, an average price for each commodity must be
obtained, and in practically every survey that has been made to
date the arithmetic average price has been used. The sum of the
actual prices was divided by the total number of quotations,
giving the average price for every commodity.

The second problem consists of selecting the measure to be used
in expressing the average prices, also items in the aggregate for
each type of store. It is possible to total the average price
(in cents) of each commodity if purchased in chain stores and the
average price (in cents) of each item, if bought from independent
stores, and find what is known as the " market-basket " concept.
That is, if one unit of each commodity were purchased in the
average chain store, the total cost for the purchases would be
equal to the sum attained. Or, conversely, if each item were

1 MILLS, op. cit.j p. 141.

THE CHAIN STORE PROBLEM

purchased in the average independent store in that line of
business, the bill would equal the aggregate price for independent
stores obtained above. Then, using one of the types of stores as a
base equal to 100 per cent, the difference in average prices may
be found expressed in percentages. 1 The Federal Trade Com-
mission followed this technique.

The above procedure may be varied slightly by dividing the
sum of the total average prices in cents for each commodity
by the number of items, thus obtaining an average price in cents
per commodity for each type of store. Setting one type of store
equal to 100 per cent, the percentage difference is found. The
Florida study employed this method along with others to be
mentioned later.

A second major method is to calculate the percentage by which
the average price of each item quoted by one type of store was
less or more than the average price of the same item quoted by the
other type of store. This resulted in the computation of the
percentage savings per item. The total of these percentages
divided by the number of items then gave an average of price
ratios or the percentage by which the prices on the items priced
in one type of store were less or more than those in the second.
The Beckman, Palmer, Phillips, and Taylor studies used this
type of average. It has the advantage of assigning an equal
weight to each item, thereby minimizing the effect of the upward
bias in an arithmetic average.

The Federal Trade Commission applied a combination of
arithmetic and geometric means. Weights suggested by chain
headquarters were applied to each item priced for both types of
stores and an arithmetic average was taken. In addition, weights
suggested by independent wholesalers were employed in the
same fashion. Thus, two averages were obtained: the price

1 Since the sum of the independent prices in cents is usually greater than
the sum of the chain store prices, the results are more conservative if inde-
pendent prices are used for the base. Thus:

Independent

Chain

Differential

Average price per item

$0.25

$0.20

$0.05

Chain stores as base

125%

100%

25%

Independents as base

100%

80%

20%

CHAIN STORE PRICES 89

relationship between independents and chain stores was expressed
in terms of chain weights and also in terms of independent weights.
Being an absolute-amount arithmetic average, there is bound
to be an upward bias. To rectify this limitation, the Commission
computed a geometric average of these two arithmetic averages
and found what is known as Fisher's "ideal" index. 1 Thus the
upward bias of the arithmetic averages is corrected by the down-
ward bias of the geometric average.

Weighting the Averages. Thus far in the discussion, the prob-
lem of what importance to place on each commodity has not been
faced. It is common knowledge that not all of the items in a
store are purchased in equal amounts or the same number of
times in a given period. It is therefore desirable to weight them
in such a way that those commodities used most often or those
which loom larger in the family budget are given greater rela-
tive influence in the average.

The problem narrows down to one of choosing the proper
weights. To secure the truest and most accurate data, results
should be weighted by the actual amounts of each commodity
consumed by the public. This information is not available,
since it requires that housewives keep accounts of everything
they purchase and the prices paid over a given period of time.

The next alternative is to use weighted data from cost-of -living
studies made by research organizations. The best information
along this line may be obtained from the Bureau of Labor sta-
tistics. But the basic data for these reports were gathered in
1918. Since then, distribution and consumption habits have
changed so as to partially invalidate the use of this material for
such purposes. More adequate data along this line are now
being collected by the U.S. Department of Labor, partial results
of which are already being published.

If the first two methods of choosing weights do not suffice, some
data may be secured from retailers. But, again, such informa-
tion is, at best, only an estimate, since many retailers do not keep
sufficiently accurate records of sales by specific commodities.

As a last resort, we may look into the records of wholesalers
and compute their sales to retailers from invoices, on a commodity
basis. However, this procedure does not account for quantities
sold directly from manufacturers to retailers and assumes that

1 Mills, op. dt. t p. 215.

90 THE CHAIN STORE PROBLEM

all volume quantities sold by wholesalers to retailers during a
given period were also consumed during the same time. So
even this method is open to question.

The question arises whether it would not be advisable to dis-
pense with weights altogether, rather than resorting to inaccurate
data. A test survey using the weights the Federal Trade Com-
mission employed in Memphis revealed that the percentage dif-
ference in prices weighted or unweighted, were so nearly equal,
that either method may be used to the exclusion of the other.
Furthermore, the use of weights tends to maximize the price
differential somewhat. As a result, unweighted averages tend
to produce more conservative results.

CHAPTER VII

SELLING PRICES IN CHAIN AND INDEPENDENT
GROCERY STORES

In an earlier chapter it has been shown that chain stores enjoy
certain advantages that are peculiar to that method of retailing.
This point has already been well established and is incontroverti-
ble. But just what effect these advantages have or have had is
a subject of perennial lively discussion and argument. Have
such benefits merely resulted in larger net profits for the chains,
or have the chains passed on all, or some, of the special gains to
their customers? Chain store proponents have repeatedly
pointed out that, by underselling other types of stores, they have
rendered the public a great social service. They have called
attention to the many millions of dollars which they have alleg-
edly saved the consumer through lower prices. The various
price studies that have been made to date, limited and meager
though most of them are, all seem to corroborate the assertion
of the chain stores and their friends that chain grocery stores
generally undersell independently operated stores in the same
field. To this, there is but one exception which is to be found
in the relatively new institution, known as supermarkets, even
when such retail stores are operated by independents.

In the light of our present knowledge it would be superfluous
to conduct surveys or to make studies of the grocery trade with
the sole aim of discovering whether or not chains offer the con-
sumer lower prices than those charged by independents. But it
is of vital importance to know to what extent or by what amount
grocery stores operated by chains undersell, and the same query
may well be directed to other lines of merchandise which will be dis-
cussed in the chapter immediately following. Is the amount by
which chain grocery stores undersell independent grocers as large
as it should be in view of the advantages which the former nor-
mally enjoy over the latter? Are the differences in prices large
enough to permit chains to pass on all or part of the chain store

92 THE CHAIN STORE PROBLEM

tax, levied by a given state, to the consumer through a raising of
prices without destroying their competitive position in the field?
In a word, can the chain store tax be passed back to consumers
and at the same time enable the chains to continue to undersell
by an appreciable amount ? Are the chain classifications into the
various tax brackets rational or arbitrary? To throw light on
this point it is necessary to know whether and to what degree
the longer chains, or those with more units, undersell the shorter
ones.

A third aim in a study of selling prices in chain and independ-
ent stores is to ascertain the trend in such price differentials. Is
there a tendency for these price differences to narrow or widen,
and how will such a trend be affected by the various tax measures
and other types of legislation? Fourth, to what extent, if any,
does the price differential vary with the different types of mer-
chandise? Is the consumer being deluded by the low prices
charged on relatively few items into thinking that all items
handled by chains are being sold at lower prices, or is the under-
selling practice of chains widespread among the various items in
their stock? A fifth point to consider in a comparative-price
analysis is the effect of the size of the community upon the under-
selling policy of chains, in order that one may better understand
the real motives behind price cutting on the part of chains.
Along the same line it is of considerable moment to ascertain
whether and to what extent prices are affected by such services
as credit and delivery.

An attempt is being made in this chapter to throw as much
light on the questions just raised as possible, particularly in rela-
tion to the retail grocery business. This is done, first, by pre-
senting the results of a careful and probably one of the most
comprehensive price surveys conducted as late as 1935 by one of
the authors; second, by summarizing the results of other worth-
while studies of the subject under consideration; and third, by
interpreting the results in a succinct manner to make them under-
standable even to the intelligent layman.

THE FLORIDA GROCERY PRICE STUDY

The Grocery Store Schedule. In selecting grocery commodi-
ties for pricing, a number of wholesalers and retailers in the
grocery business were consulted. Lists of products used in the

SELLING PRICES 93

studies made by the Federal Trade Commission and by private
agencies were examined. The criteria outlined in Chap. VI were
followed to a considerable extent in choosing the items for pric-
ing, but were more rigidly applied in the process of editing and
tabulation. Thus while prices were obtained on 145 grocery
items, only 124 standard items were included in the final tabula-
tions, 70 of which were identical in brand, quality, and size with
those included in the Federal Trade Commission studies of price
relationships. For a copy of the actual schedule used, see Appen-
dix A.

After the canvass, the information was edited and the items
divided into a number of appropriate groups. This was done to
facilitate the tabulation of the price data and to make the
analysis more intelligible and useful. The ten commodity groups
into which the 124 grocery items, which were finally tabulated,
were divided are shown below:

Bakery products.

Beverages.

Breakfast foods.

Canned fruits and vegetables.

Other canned goods.

Condiments and salad dressings.

Farinaceous foods.

Other food products.

Soaps and cleansers.

Other nonfood products.

Size and Representativeness of the Sample. According to
published reports of the Census of Business, 1 taken in 1936
for the year 1935, there were at the end of 1935 in the state
of Florida 2,647 grocery stores (without meats) and 2,750 com-
bination stores (groceries and meats), a total of 5,397 grocery
stores. Since price data were collected from 533 grocery stores,
the number of stores covered represents a sample of 9.9 per cent
of all such stores in the entire state. Obviously, the size of the
sample is grossly understated, since only certain areas in the
state were canvassed for the survey, while the census figures
cover all grocery stores, large and small, in the whole state.

Census of Business: 1935, Retail Distribution, Vol. IV, " Types of
Operation," pp. 63-64, U.S. Department of Commerce, Bureau of the
Census, Washington, January, 1937.

94 THE CHAIN STORE PROBLEM

Nevertheless, even a sample of 9.9 per cent would appear to be
more than adequate. As already pointed out in a previous con-
nection, in the Chicago study of grocery price relationships, 1
it was decided to use a sample of only 5 per cent out of a total of
6,000 grocery stores, and for independent grocers the sample was
but 4.6 per cent. The authors of that study have found, after
some checking, that the sample was representative and typical
of the group of stores of which they were a part.

Distribution of Sample as between Chain Stores and Inde-
pendents. Of the 5,397 grocery stores in the state of Florida,
4,797 were independents, 508 were chain stores and 92 were
of other types. This means that approximately 88.8 per cent
of all the grocery stores in the state were operated by inde-
pendents and 9.4 per cent by chains. To be sure, a great
many of the independent grocery stores were very small, as
evidenced by the fact that the relatively small number of chain
stores did about a third of the grocery store business in the state,
while 88.8 per cent of the stores, representing independents,
did only 65.1 per cent of the business. In the sample study of
price relationships, 265 independent grocery stores were included
and 268 chain stores, representing 5.8 per cent and 52.7 per
cent of the sample, respectively. It is, therefore, evident
that while the sample as a whole is adequate and representative,
it is heavily weighted by chain store figures. This circumstance
would, therefore, tend to understate the price differences existing
between chains and independents, particularly, as will be shown
later, since a good proportion of the chain stores from which data
were collected were in small communities, where chains generally
undersell less than in the larger cities.

Stated otherwise, while there were in the entire state 4,797
independent grocery stores, the number of such stores included
in the samples was 265 or 5.8 per cent, whereas in the case of chain
stores, the sample included 268 of the 508 stores in the state,
making a sample for grocery chains of about 53 per cent. This
means, that while the sample for independent stores was ade-
quate, for chains it was much more than adequate and, again,
that care must be taken in the interpretation of the data because

1 BJORKLUND, EINAB, and PALMER, J. L., "A Study of the Prices of Chain
and Independent Grocers in Chicago/' pp. 4-5, University of Chicago Press.
Chicago, 1930.

SELLING PRICES 95

of the unusually heavy representation of chains. For census
purposes, a chain is an organization having four or more stores
anywhere in the United States, and a chain store, therefore,
is a store which is part of such an organization. However, in
the 268 chain grocery stores covered by the survey, there are
included some stores belonging to chains which operated only
two or three units each.

Sample Measured in Terms of Commodities Included. From
the standpoint of the number of commodities or items on which
prices were collected, the sample would also appear to be more
than adequate. In only one study was the number of grocery
commodities priced larger than in the Florida survey, and that
was in the case of the Federal Trade Commission. As already
indicated in the early part of this chapter, prices were collected
on 145 grocery items. A number of these items were omitted
from final tabulations for reasons indicated elsewhere, so that
only 124 commodities were finally included. The number of
items finally covered by the tabulations compares with 193 items
used by the Commission in the Memphis grocery study of prices
and margins, with 58 items used in the Lexington, Ky., study,
with 61 items used in the Champaign-Urbana study, with 75
items used in the Chicago study, and with 50 items included in
the New York City investigation. When it is remembered that
in some of the studies referred to there were also included unstand-
ardized commodities, such as fresh fruits and vegetables, it
becomes evident that the number of items or commodities on
which price data were collected in Florida is far more than
representative of the classes of merchandise under survey. By
using 124 commodities, this study has a larger base from the
commodity standpoint than any of the other studies thus far
published, with the exception of those made by the United States
Government through the Federal Trade Commission.

Summary of Findings. Summary Tables 10, 11, 12, and 13
have been prepared from the data secured in the Florida study.
Table 10 sets forth the unweighted average price (although
weighted by the number of quotations) for the 124 commodities.
This average for independent or Class 1 grocery stores was
16.02 cents. For Class 2, or 2 to 3 unit chain grocery stores, it
was 15.51 cents; for Class 4, 7 to 10 unit chains, 15.49 cents; for
Class 5, 11 to 15 unit chains, 15.39 cents; and for chains with

THE CHAIN STORE PROBLEM

16 stores or more, Class 6, the average price was 15.29 cents.
There were no chains in the grocery business of the state with
4 to 6 retail units; consequently no data are shown for Class 3
stores.

TABLE 10. AVERAGE GROCERY STORE PRICES, EXPRESSED IN AMOUNTS

Average of Prices Quoted by Chain and Independent Grocery Stores

on Selected Standard Items, by Commodity Groups

Chain store average price,

Inde-

cents

Num-

pendent-

ber

store

Commodity group

average

2-3

7-10

11-15

stores

items

price,

stores

and

cents

(Class

over

(Class 1)

(Class

All commodities

124

16.02

15.51

15.49

15 39

15 29

Bakery products

6.41

6 24

6 39

6 37

6.42

Beverages

27.62

26.80

26.94

26 62

26 85

Breakfast foods

13 28

12 74

12 64

12 52

12 61

Canned fruits and vegetables

17.41

16.98

16.90

15.99

16 11

Other canned goods

12 86

12 39

12 29

12 09

12 02

Condiments and salad dress-

ings

21 71

21 27

21 19

20 92

21 29

Farinaceous foods . . .

19 19

18 73

18.28

18 57

19 43

Other food products

16.07

15.42

15.59

15.60

15.22

Soaps and cleansers

10 88

10 38

10 58

10 44

10 24

Other nonfood products

15.64

15 59

14 68

16.26

14.30

If one of each of the 124 articles had been purchased from each
class of stores at the average price for the items at that class of
stores, the " market-basket " cost of the 124 commodities from
each class of store would have been as follows :

Independent stores $19.8675

Chains with 2-3 stores 19 . 2365

Chains with 7-10 stores 19.2042

Chains with 11-15 stores 19.0875

Chains with 16 stores or more 18 . 9545

Table 11, following the same form as Table 10, expresses the
average price of all commodities included in the survey, by chain
grocery store classes, in the percentage that each class is of the

SELLING PRICES

independent store average prices. Similar percentages were com-
puted for each commodity group.

The unweighted average price charged for all commodities by
Class 2 grocery stores, 2 to 3 unit chains, appears, from Table
11, to be 96.82 per cent of that charged by independent grocers.
For Class 4 grocery stores, 7 to 10 unit chains, this percentage
was 96.69, while for Class 5 stores, 11 to 15 unit chains, it was
96.07 per cent, and for Class 6, or chains having 16 or more
stores, it was 95.44 per cent on the 124 items. Thus, it is seen
that on the aggregate of these items, 2 to 3 unit chain stores
charged 3.18 per cent less than independent stores; 7 to 10 unit
chains sold them for 3.31 per cent less; 11 to 15 unit chains sold
them for 3.93 per cent less; and chains with 16 stores or more
sold them for 4.56 per cent less (see Fig. 2).

TABLE 11. AVERAGE GROCERY CHAIN PRICES AS A PERCENTAGE OF INDE-
PENDENT-STORE PRICES

Average of Prices Quoted by Chain and Independent Grocery Stores,

Expressed as a Percentage of Average Prices of Independent Stores,

by Commodity Groups

Chain

stores

Inde-

pendent

store,

Commodity group

average

2-3

stores

7-10
stores

11-15
stores

stores
and

price =

100.0%

(Class

over

(Class 1)

(Class

All commodities

100

96.82

96.69

96.07

95.44

Bakery products . .

100

97.35

99.83

99.38

100.16

Beverages ... ...

100

97.03

97.54

96.38

97.21

Breakfast foods

100

95.93

95.18

94.28

94.95

Canned fruits and vegetables

100

97.53

97.07

91.84

92.53

Other canned goods

100

96.35

95.57

94.01

93.47

Condiments and salad dressings . .

100

97.97

97.60

96.36

98.06

Farinaceous foods

100

97.60

95.26

96.77

101.25

Other food products

100

95.96

97.01

97.08

94.71

Soaps and cleansers

100

95.40

97.24

95 96

94.12

Other nonfood products

100

99.68

93.86

103.96

91.43

Expressing these differences in prices, by using the " market-
basket " illustration, the savings effected on these 124 items would
be outlined as follows:

THE CHAIN STORE PROBLEM

Class of chain

Saving over inde-
pendent-store price

Saving over price
charged by preceding
class of chain

Amount
(cents)

2-3 stores

63.24
65.72
78.12
90.52

3.18
3.31
3.93
4.56

63.24

2.58
13.40
12.40

3.18
0.13
0.65
0.65

710 stores

1115 stores

16 stores and over

Final conclusions concerning price differentials between inde-
pendent and chain grocery stores cannot be drawn at this point

Independent siore price */00 %

100

L G N O

2 - Class 2 (Chains of ?-J s fores)
4 - Class 4 (Chains of 7-10 stores)
5- Class 5 (Chaim of IMS stores)
6 * Class 6 (Chains of 16 or more shres)

FIG. 2. Comparison of average selling prices of chain and independent
grocery stores; all commodities. There were no grocery chains in Class 3 in
the state.

for a number of reasons. In the first place, only certain classes
of merchandise sold by grocery stores have been included in this
study, representing probably less than one-half of the average
sales of the grocery stores. Fresh fruits and vegetables as well
as fresh meats, eggs, and other such items have been omitted.
Goods bearing private labels have also been excluded from the
survey. In short, the survey included only well-known brands
of products widely used and sold by both chain and independent
grocers in the state.

There is reason to believe that were it possible to include the
other classes of merchandise, the differences in prices charged by

SELLING PRICES 99

chains as compared to those charged by independents would have
been considerably larger. It is a well-known fact that packaged
and standard branded grocery commodities bear a smaller margin
of gross profit than is true of such items as fresh fruits and vegeta-
bles, and, because of that, the former does not offer so great
an opportunity for price variation. Below is reproduced a quota-
tion attributed to a chain store executive. 1

The greatest difficulty in connection with a survey of this kind exists
in connection with the comparison of other than heavily advertised
products. The fact has been definitely established that the greatest
advantage the chain store offers to the consuming public is in the class
of merchandise which is not extensively advertised, primarily because all
distributors hold down their mark-up on advertised merchandise to the
lowest possible basis and many individual merchants will even attempt
to undersell the chain stores on certain heavily advertised merchandise
in order to make an impression upon the consumer. This they are in a
position to do because the chain organization cannot cut its prices on
every commodity in each of its units to meet the price cuts of a few
independents who might go very low on a small number of advertised
items. If different merchants cut prices on different groups of items
they compel the chains to cut prices on their entire line of advertised
items. The fact that this is done by certain merchants makes it neces-
sary for them to get high profits on items on which price comparisons
are not easily made by consumers.

The authors of this study further say that the chain store execu-
tive to whom the above remarks were attributed stated specifically
that "the chain stores offer the consumer even greater advantages
in the purchase of fresh and canned fruits and vegetables and
certain other items not included in this investigation than in the
purchase of national brands."

It is also a common fact that most chain stores sell private-
brand merchandise of similar quality at lower prices than those
charged for nationally known products. The following excerpts
from the Federal Trade Commission Study on chain store private
brands, pp. XVIII and XIX of the letter of submittal, serve to
verify this contention:

Although the mark-up on private brands was equal to or higher than
that on competing standard brands, according to a majority of the
reporting chains, nevertheless private brands generally were priced

1 Bjorklund and Palmer, op. dt.

100 THE CHAIN STORE PROBLEM

lower than competing standard brands chiefly because of lower cost.
Seventy-nine chains, or about one-third of the 248 reporting on their
pricing policy, priced their private brands lower than competing standard
brands, but this group operated 73 per cent (32,733) of the 44,853 stores
operated by the 248 chains. The policy of 126 chains, or 51 per cent of
those reporting, was to sell both private brands and standard brands at
the same price. The remaining 43 chains, or 17 per cent of the 248
reporting, priced their private brands higher than competing standard
brands, but these chains operated only 939 stores, or about 2 per cent
of those operated by the 248 chains. The chains pricing private brands
lower than standard brands averaged 414 stores per chain, those pricing
private and standard brands the same were next with 89 stores per chain,
while chains pricing private brands higher than standard brands aver-
aged the smallest number of stores per chain, only 22.

In addition to the general statements on pricing policies, reports were
received on the actual selling prices, March 30, 1929, of private brands
and competing standard brands which had the highest mark-up. A
total of 212 usable comparative price reports on 44 different commodities
was received from grocery and grocery and meat chains. If a hypo-
thetical customer on March 30, 1929, had purchased all 424 commodities
(212 under private brands and 212 under standard brands) from the
grocery and grocery and meat chains reporting, his private brands would
have cost him $92.22 and his competing standard brands would have
cost $105.21. In other words, the private brands sold for $12.99, or
12.3 per cent, less than the standard brands. Of the total of 212 pairs
of comparative price quotations, there were 173 in which the private
brand was sold at a lower price than the competing standard brand
item, 33 in which both were sold at the same price, and 6 in which the
private brand was sold at a higher price than the standard brand.

It is, therefore, quite evident that chain store private brands
offer the consumer even greater savings than on branded items
carried by both chains and independent stores.

Comparison of Grocery Store Selling Prices, by Commodity
Groups. Tables 10, 11, and 12 summarize the essential data
relative to chain store prices in comparison with prices charged
by independent grocers, not only for all 124 items combined, but
also give similar facts for each of the ten commodity groups into
which the 124 items had been segregated. According to these
data, chains as a whole had lower average prices than those
charged by independents in seven of the ten commodity groups.

SELLING PRICES

101

The general trend in the average prices was downward as the
number of the units in the chain increased, although such trend
was not so pronounced in grocery prices as in the case of drugstore
items analyzed in the next chapter (see Fig. 3).

TABLE 12. AVERAGE OF GROCERY STORE PRICE RATIOS, BY COMMODITY

GROUPS

Chain

stores

Inde-

pendent-

Commodity group

store
price

2-5

stores

7-10
stores

11-15
stores

stores
and

ratio =
i nn 07

(Class

over

(Class 1)

(Class
6)

All commodities

100

96.46

96.53

95.90

95.16

Bakery products

100

97.65

99.54

99.67

100.14

Beverages . . .

100

96.69

97.57

96.60

96.59

Breakfast foods ... .

100

95.62

94.93

94.12

94.83

Canned fruits and vegetables . .

100

97.03

96.97

92.12

92.10

Other canned goods

100

95.95

94.73

93 68

92.71

Condiments and salad dressings . . .

100

97.93

98.08

96.95

98.23

Farinaceous foods

100

96.48

94.57

97.03

100.99

Other food products . .

100

96.16

96.66

97.09

93.65

Soaps and cleansers

100

95.75

97.20

96.05

95.40

Other nonfood products

100

97.41

95.20

98.90

94.03

Grocery chains with two to three chains in the state undersold
independents in each of the ten commodity groups. The same
situation obtained in connection with chains operating 7 to 10
stores. Grocery chains with 11 to 15 stores sold below independ-
ents in all but one commodity group. Even in this one group,
"other nonfood products/ ' this class of chains undersold inde-
pendents in 6 out of the 7 items included therein. The largest
grocery chains undersold independents in 8 of the 10 commodity
groups; in one of the other two cases their prices were the same
and in one, slightly above.

While chains with 7 to 10 grocery stores, inclusive, undersold
independents in each of the 10 groups of items, they sold below
the next smaller chains in 6 of the 10 commodity groups and some-
what above in the remaining 4, the net result being lower prices
than those charged by the smaller chains when all groups of items

102

THE CHAIN STORE PROBLEM

are considered. Chains operating from 11 to 15 grocery stores
undersold the chains in the next preceding class in 7 of the 10
commodity groups. Chains with 16 grocery stores, or more,
sold below those in the class immediately preceding in 4 of the
10 groups and below the smallest chains in 6 of the groups. It
would thus appear that, while the price trend is not uninterrupted,
it is generally in inverse relation to the number of stores in the

ALL COMMODITIES

BAKERY PRODUCTS

BEVERAGES

* 5 6

100
95
90

100

BREAKFAST FOODS AA CANNED FRUITS & VEGETABLES, AA OTHER CANNED GOODS

100

SOAPS & CLEANSERS OTHER NON-FOOC ^ PRODUCTS Independent store

100 prices = 100%

LEGEND
95^2- Class 2 Chains of 2-3 stores

v 4-Cfass4 Chains of 7-/0 stores
5 - Class 5 Chains of I I -15 stores
90 6 -Class 6 Chains of 16 or more stores

FIG. 3. Comparison of average prices of chain and independent grocery stores
by commodity groups. There were no grocery chains in Class 3.

chain. The discrepancies may almost invariably be traced to
one of several factors. At times the number of quotations on an
item may have been too limited. In other instances, it is due
to the operation of a few high-priced, more or less exclusive
chains operating largely on a quality rather than price basis.
In still other instances, the geographic factor has been responsible.
This latter point will be discussed in detail in pages that follow.
Grocery Store Price Comparison of Individual Items. The
Florida study revealed a vast amount of information as to the

SELLING PRICES 103

prices on each of the 124 commodities which the various classes
of stores charged their customers. An examination of the rela-
tive independent and chain store prices on the individual items
disclosed the following.

1. Average prices were lower on 111 of the 124 commodities
in chains of 2 and 3 stores each. On 13 items their average prices
were higher. In the case of the 111 items which were cheaper
in Class 2 chain grocery stores, 74, or 59.7 per cent, of the total
number of items included were less than 5 per cent cheaper. An
additional 33 items, or 26.6 per cent, were between 5 and 10 per
cent cheaper, while only 4 items were in excess of 10 per cent
cheaper. Of the items averaging a higher unit price in 2 to 3
store chains than in independents, 6 of them were less than 1 per
cent higher and 4 additional items were between 1 and 2 per cent
higher.

2. Passing on to Class 4 grocery stores, those having 7 to 10
units in each chain, it was found that on 109 items prices were
lower in the chains, on 13 items they were higher, and on 2 items
independents and 7 to 10 unit chain stores quoted the same aver-
age prices. In this class, 74 items, or 59.7 per cent, were less
than 5 per cent cheaper, and only on 5 items did they undersell
independents by more than 10 per cent. Of the 13 items on
which the average price charged by chains with 7 to 10 grocery
stores was higher than at independent stores, 4 items were less
than 1 per cent higher, 8 others were from 1 to 2 per cent higher,
and on but one item the average price was 3.09 per cent
higher.

3. Class 5 chains, or those having 11 to 15 stores each, aver-
aged lower prices than independents on 98 items, higher prices
on 25 items, and the same price on 1 item. Although this repre-
sents a smaller number of items having lower prices than in the
other classes of chains, the number of items on which this class of
chains undersold by larger percentages increased. There were
50 items, or 40.3 per cent, of all commodities priced averaging
less than 5 per cent cheaper in this class of chain stores than at
independent grocery stores. The number of commodities whose
average prices were more than 10 per cent below the price of
independents increased to 15, or 12.10 per cent, of all items. Of
these, however, 6 items were from 10 to 11 per cent cheaper, with
the maximum decrease being 24.59 per cent.

104 THE CHAIN STORE PROBLEM

The average prices of 25 items were higher in this class of chains
than at independent stores. Of these, however, 10 items were
less than 1 per cent higher, 5 items were from 1 to 2 per cent
higher, and 6 were from 2 to 3 per cent higher. The remaining

4 items were scattered in 4 categories from 5 to 15 per cent higher
than at independent stores. The increase in the number of
commodities selling for higher prices is largely accounted for by

5 items in the bakery-products group.

4. In the case of class 6 chains, those having 16 or more stores
each, it was found that 100 of the 124 commodities averaged
lower prices than at independent stores, 21 items were higher,
while 3 other items, 2 of which were bakery products, averaged
the same prices in both independent stores and Class 6 chain stores.

Only 43 items or 34.68 per cent averaged less than 5 per cent
cheaper. Of the 16 items on which the large grocery chains
undersold independents more than 10 per cent 8 items sold from
10 to 11 per cent below, 5 items sold from 11 to 20 per cent
cheaper, while 3 were more than 25 per cent cheaper.

On 18 items the average prices were higher than at independent
stores, but 7 of these sold for less than 1 per cent above, and 7
others were between 1 and 2 per cent higher. On no item in this
class of chain stores was a commodity found to average as much
as 5 per cent above the independent-store average price.

5. From this analysis and from the detailed data shown in
Appendix B it would seem that the following conclusions may be
drawn :

a. Chains as a group undersold independents operating in the
grocery field.

b. The underselling was not confined to a limited number of
items; on the contrary it was general and universal.

c. A trend may be discerned for prices to become lower as the
number of units in the chain increases. This does not apply
so much to the number of commodities on which the larger
chains undersold either independents or the smaller chains,
as it does to the extent of the price differences expressed in
terms of percentage variations. In most instances the
larger chains undersold independents by a greater amount
on a larger number of items than was true of the next smaller
class of chains.

SELLING PRICES 105

Selling Prices of Groceries, by Degree of Service. At the

beginning of the Florida study no attempt was made to collect
data on the extent to which grocery stores, from which price
quotations were obtained, rendered services such as credit and
delivery. It was therefore decided to secure such information
by means of a supplementary schedule.

In the second canvass of grocery stores, information on the
degree of credit and delivery services was secured from 174 inde-
pendents and 124 chain stores. Of the independent groceries,
25.8 per cent either operated strictly on a cash-and-carry basis or
rendered so little credit or delivery service that they were classi-
fied in the category of cash-and-carry establishments. Ninety
of the independent stores, constituting 51.6 per cent of all the
stores supplying information on the subject, granted services to
the extent of 11 to 50 per cent of their sales, while 32 of the stores,
or 18.4 per cent, extended credit and delivery accommodations
on from 51 to 80 per cent of their sales, and seven stores, or
4.2 per cent, furnished credit and delivery on more than 81 per
cent of their volume of business.

Contrary to general notion, a number of the chain grocery
stores granted credit to customers and a still larger number fur-
nished delivery services. Of the 124 chain grocery stores from
which information on this point was obtained, 66, or 53.2 per
cent operated on a strictly cash-and-carry basis, while 46.8 per
cent accommodated the trade with either credit or delivery.
If the 23 stores which limited their credit or delivery services to
10 per cent of their business, or less, are to be regarded as cash-
and-carry establishments, a total of 89 of the stores, representing
71.8 per cent of the 124 stores canvassed for the purpose, are in
the no-service class. On the other hand, 32 of the chain grocery
stores, representing 25.8 per cent of the total, extended credit
accommodations or made delivery on 11 to 50 per cent of their
sales, and three of the stores extended one or both of the services
on more than 50 per cent of their total business.

In computing the degree of services for purposes of this tabula-
tion, the arithmetic average of the credit and delivery service
percentages as reported was obtained by adding the per cent of
service in the form of credit sales to the per cent of service in the
form of delivery and dividing the sum by two. This method is

106 THE CHAIN STORE PROBLEM

similar to the one used by the Federal Trade Commission in its
chain store investigation.

From the data shown in Table 13, it appears that independent
grocery stores rendering credit or delivery services to the extent
of 11 to 50 per cent of their business charged the same prices as
stores operating on a cash-and-carry basis. Whatever the cost
of making delivery or extending credit may have been, apparently
such cost was not passed on to the consumer in the form of higher
prices. However, independent grocers delivering from 51 to
80 per cent of their sales or extending credit on similar propor-
tions of their business charged a somewhat higher price for their
goods than cash-and-carry stores or stores with more limited
service accommodations. The difference in prices of such serv-
ice stores represented a relatively small amount, namely, 1.8 per
cent. Independent grocery stores extending delivery and/or
credit services on over 80 per cent of their sales charged their
customers 2.7 per cent more than either cash-and-carry stores or
stores servicing up to 50 per cent of their volume.

These differences in prices incident to the degree of service are
not so significant as may appear at first blush. Such a conclu-
sion may be drawn for several reasons. In the first place, the
number of stores which charged 2.7 per cent more for their goods,
presumably because they serviced over 80 per cent of their sales,
was too small to have any significance. This higher price applied
only to 7 of the 174 independent grocery stores. In the second
place, no difference in prices may be discerned between grocery
stores servicing from 1 to 50 per cent of their business and those
selling on a cash-and-carry basis. If services in the form of
credit or delivery are responsible for differences in prices, the
90 stores representing over one-half of all independents contrib-
uting this information should have reported higher prices than
cash-and-carry stores. Third, inasmuch as practically 47 per
cent of the grocery chain stores also rendered some degree of
credit or delivery service, the disparity in prices between chains
and independents attributable to services tends to be minimized.

In other words, it is not a question entirely of comparing prices
charged by chain stores which operate strictly as cash-and-carry
stores with prices charged by independents operated on a full-
service basis. Both service and non-service stores may be found
among chains as well as among independents, although there

SELLING PRICES

107

is a difference in the proportions between the two types of stores.
It would thus appear that very little, if any, of the differences in
prices obtaining between chain and independent grocery stores
need be discounted on the score of special services to customers.
As shown in Table 13, some variation in prices as between
service grocery stores obtained in certain of the commodity
groups. In corroboration of a previous conclusion, to the effect

TABLE 13. COMPARISON OP PRICES AT INDEPENDENT GROCERY STORES

RENDERING CREDIT AND DELIVERY SERVICE WITH INDEPENDENT

GROCERY STORES OPERATING ON A CASH-AND-CARRY BASIS

Degree of service expressed as per cent of net sales

Degree of service

Cash and

11-50%

51-80%

81-100 %

Commodity group

Price

Aver-

ratio

Aver-

Price

Aver-

Price

Aver-

Price

age

ratio

age

ratio

age

ratio

price

100 %

All commodities

16 9

100

100 1

17 2

101 8

17.48

102 7

Bakery products

6.4

100

6.4

100

6 4

100

6.4

100.0

27.8

100

27.6

99 9

27 5

99 6

27 6

101.9

13.2

100

13 3

100 5

13 4

101 4

13 4

101.3

Canned fruits and vegetables .

100

17 9

97 4

18 1

101 3

18 1

91 8

Other canned goods

13 2

100

13 2

100 5

13 6

103

13 3

101.5

Condiments and salad dressings

21 5

100

21.9

101 9

21.9

101 9

21 1

100.5

Farinaceous foods

100

97.2

20 4

107.4

20 1

106.4

Other food products

15 9

100

16 1

101 3

16 5

103 4

16 1

101.7

Soaps and cleansers

10 9

100

11 1

101

11 1

100.2

Other nonfood products . . .

31.2

100.0

31.6

99 7

31 3

101

33 9

104 9

that no special significance need be attached to the higher prices
charged by independent grocers servicing more than 80 per cent
of the sales, it should be pointed out that at least in one group of
commodities, viz., canned fruits and vegetables, these higher
priced stores undersold cash-and-carry groceries by 8.2 per cent.
In two other commodity groups their prices were approximately
the same as those charged by cash-and-carry stores. While it
costs something to operate on a credit basis and to deliver goods
to consumers, few of the retail grocers rendering such services

108 THE CHAIN STORE PROBLEM

seem to pass on these extra operating expenses to consumers
through higher prices.
Comparison of Grocery Store Selling Prices, by Size of Town.

For purposes of handling and presenting price data for groceries,
five geographic divisions were provided. It may be argued that
price data collected from stores located in different communities
and in cities of various sizes, when averaged together, do not
produce satisfactory results. While this contention may be
invalidated through an elaborate citation of facts to the contrary,
nevertheless, at least for checking purposes, an attempt was
made to segregate the data both geographically and by size of
cities.

Geographic Areas Used in the Grocery Store Survey. The
first division, designated A, includes the three largest cities in the
state, each having a population of more than 100,000 inhabitants.
In this group are covered the grocery stores located in Jackson-
ville, Miami, and Tampa.

Division B includes grocery stores located in the four cities of
St. Petersburg, Orlando, Pensacola, and West Palm Beach, each
having a population of moie than 25,000 but less than 100,000.
Division C comprises stores located in the northern part of the
state, outside of the cities named above, whose economic char-
acteristics differ to a considerable extent from those obtained in
the other sections of the state. In this division are included
grocery stores located in 26 different communities, each having
a population of less than 25,000.

In Division D are included grocery stores located in the central
part of the state, which may be referred to as the citrus-fruit
region. As many as 26 communities, each having a population
of less than 25,000, were canvassed in this part of the state. The
last division, designated as Division E comprises grocery stores
located in the southern part of the state and on the Atlantic Coast,
as well as in the Mexican Gulf area, commonly referred to as the
tourist section of the state. Data were obtained in this sec-
tion from stores located in 13 communities, each having a popu-
lation of less than 25,000.

In this manner, it is possible to present grocery store price
figures for the three largest cities in which many of the grocery
chains operate, and separately for the four medium-sized com-
munities, as well as for the smaller communities located in each

SELLING PRICES 109

of the three economic regions into which the state may be con-
veniently divided.
Average Price of Grocery Store Items, by Geographic Divisions.

Detailed statistics showing average prices for each commodity by
each of the five geographic divisions and for every class of stores
were collected and tabulated, but cannot be presented here for
lack of space. Only a summary of these facts is presented in
Table 14. The principal purpose to be served by such detailed
data is to shed light on the competition existing in large cities,
in medium-sized communities and in the smaller towns located
in three different parts of the state. It is believed, however, that
a truer picture of the chain store situation on the score of prices
charged by them in comparison to those charged by independent
stores is obtained through totals from all stores. In the first
place, the sample is larger. Secondly, the effect of a few erratic
prices tends to be minimized. In the third place, peculiar condi-
tions which may prevail in a single community are offset when
placed in the proper perspective to the entire situation existing
throughout the state.

On the other hand, the weakness in the price figures for grocery
stores in this survey lies in the fact that an unusually large pro-
portion of chain stores were canvassed in the smaller communities
because so few of them are to be found there. As shown in
Table 14, the tendency is for the price differential between
chain stores and independents to narrow in the smaller com-
munities. For that reason, average prices presented as totals
for the entire state are of necessity conservative and an under-
statement of conditions prevailing in cities like Jacksonville
or Tampa, where many chains operate in the grocery trade and
where competition with independents is much keener than in the
smaller communities. For these various reasons, summarized
price statistics are shown in Table 14 separately by geographic
areas.

An examination of the figures in Table 14 reveals the fact that
the decline in prices of chains was more precipitous in the larger
cities than smaller towns. Grocery chain stores located in
Division A undersold independents as follows : 2 to 3 store chains,
by 3.97 per cent; 7 to 10 store chains, by 4.40 per cent; 11 to
15 store chains, by 5.89 per cent; and chains of 16 stores and over,
by 5.02 per cent. In the medium-sized cities grocery chain stores

110

THE CHAIN STORE PROBLEM

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SELLING PRICES 111

undersold independents as follows: 2 to 3 store chains, by 2.43
per cent; 7 to 10 store chains, by 1.69 per cent; and chains oper-
ating 16 stores, and more, undersold independents by 4.06 per
cent. In the smaller communities included in Divisions C, D,
and E, the amount by which chain stores undersold independents
was somewhat less. This indicates that chain stores as a group
charged higher prices on groceries, in proportion to those charged
by independents, in the smaller communities than they did in the
larger cities.

Despite the slight differences in results obtained in the differ-
ent-sized cities and in the various sections of the state, one is
forced to the conclusion that the general inferences drawn herein-
before generally apply to grocery stores of the various classes
throughout the state. Furthermore, because of the relatively
large number of chains canvassed in the smaller towns, the con-
clusion based upon average prices for the entire state seems to be
conservative. Finally, only the larger and better managed inde-
pendent grocery stores were generally included in the survey.
Data could not be obtained from most of the smaller independent
stores, largely because of their limited stocks. It is a matter of
common knowledge that these smaller independent stores charge
higher prices than the better managed grocery stores of the same
class. Many of the better managed independent grocery stores
have attempted to meet chain store competition through price
reduction and through various other devices used by chains.
Partly for this reason, it is believed that the final results obtained
in this study, particularly for groceries, distinctly represent some-
what of an understatement of the differentials in prices existing
between chains and independents.

The Extent to Which Chain Stores Undersell Independent
Merchants and the Trend. The study described in the preceding
pages and other comparative price investigations show that
there is no doubt that chain grocery stores do undersell their
independent rivals, but there is considerable discrepancy in the
extent to which they undersell. The first few studies made in
1929 and 1930 revealed that chains were charging probably 10 to
12 per cent less than were independent grocers for the identical
merchandise. This advantage has been gradually reduced by
the independents and the latest price survey (the Florida study)
reveals that the chain advantage has been reduced approxi-

112

THE CHAIN STORE PROBLEM

mately one-half in seven years. The results of representative
price studies made in the past several years are shown in Table
15. They reveal a very definite shrinkage in the variation
between chain and independent grocery store prices. Two of
the studies, those conducted by Professors Taylor and Phillips,
were repeated, and the second studies disclosed a reduction of
almost 3 per cent in the chain price advantage in a four-year
period.

TABLE 15. CHAIN GROCERY STORE PRICE ADVANTAGE OVER INDEPENDENT

STORES, 1929-1935"

Year

Identification of study 6

study
was

Chain store
advantage

made

Taylor, Durham, N. C

1929

13 79

Federal Trade Commission, Washington, D. C

1929

6.40

Bjorklund and Palmer, Chicago, 111

1930

9.32-11.39'

Palmer Lexington, Ky

1930

14 30

Phillips, central New York State . .

1930

12 82

Dowe, New York City

1931

8.53

Converse, Champaign-Urbana, 111..

1931

8.40

Taylor, Durham, N. C

1933

11.00

Phillips, central New York State . .

1934

10.02

Beckman, Florida

1935

3 18- 4.56*

a Independent prices = 100%.

6 For a fuller description of the price studies, see footnote, p. 78.
First figure for cash-and-carry independents, second for service independents.
d First figure for chains of two and three stores, second figure for chains of more than
16 stores.

This narrowing spread between chain and independent grocery
store prices is probably due to a combination of two factors
increasing chain store costs and the economies secured by inde-
pendent merchants through group buying.

Influence of Service on Retail Grocery Prices. In defense of
higher independent store prices it has been alleged that a portion
of the price differential may be ascribed to the fact that numerous
independent grocers render service. The studies that have been
made to date seem to indicate that service has only a minor effect
on grocery prices. Three of the four studies that have given this
factor consideration are in agreement in minimizing the influence
of service on retail grocery prices. The Federal Trade Commis-

SELLING PRICES 113

sion found that the difference in prices charged by non-service
independents and service independents was less than 2 per cent
and even this variation was partially due to other factors. 1
Professor Palmer of the University of Chicago found that cash-
and-carry independents undersold service independents only
two-thirds of 1 per cent. 2 The Florida survey corroborates
further the general conclusion that retail grocers rendering
service charge but slightly more than those who operate on a
cash-and-carry policy.

Voluntary Chain Store Prices. There are some who maintain
that voluntary chain grocers are meeting the prices charged by
corporate chains. The two studies that have considered this
phase of the comparative-price problem indicate that voluntary
chain grocery stores undersell the regular independents by only a
slight margin. The Federal Trade Commission found that
prices charged by voluntary chains in the grocery field ranged from
0.9 of 1 per cent to 2.4 per cent lower than the prices charged
by other independents. Phillips, in 1934, found that the
voluntary chain had a price advantage of 3.63 per cent over the
independent whereas the regular chain's advantage was 10.02 per
cent. 3 In view of the above, it would seem that though voluntary
chains have secured certain advantages for their members, they
have not been able as yet or have been unwilling to match the
advantages of the regular chain organizations in the matter of
price.

Causes of Underselling by Chains. No analysis of chain and
independent selling prices would be complete without some refer-
ence to the reasons for the chain store's ability to undersell its
local competitors. As far as the authors know, only one study
has been made that has attempted to give a measured answer to
this problem. The Federal Trade Commission in the course of its
price studies tried to account for the differences between chain and
independent store prices, and they were able to trace more than
two-thirds of the differential in prices between chain and inde-
pendent grocery stores in Washington, D. C., for 274 standard-
federal Trade Commission, " Chain Stores: Prices and Margins of
Chain and Independent Distribution, Washington, D. C. Grocery/' p. 19,
U.S. Government Printing Office, Washington, 1933.

2 BJORKLUND and PALMER, op. tit.

3 PHILLIPS, C. F., "Chain, Voluntary Chain, and Independent Grocery
Store Prices, 1930 and 1934," Journal of Business, April, 1935, p. 145.

114 THE CHAIN STORE PROBLEM

brand articles. They accounted for the following differences in
the cost of the above mentioned items:

Difference in purchase cost in favor of chains $1 . 2972 or 32 .8%

Difference in wage cost in favor of chains . 8905 or 22.3%

Difference in service cost in favor of chains 0. 1600 or 4.5%

Difference in rent cost in favor of chains 0.0968 or 2.5% l

The Federal Trade Commission price studies in other cities
produced similar results. Although the evidence is by no means
conclusive, it would seem that approximately one-third of the
chain store price differential is accounted for by its buying
advantage, and the balance may be largely attributed to lower
operating costs and to other factors.

With the enactment of the Robinson-Patman Act and other
legislation designed to limit chain store buying advantages,
coupled with the probable unionization of retail store employees,
it is very likely that the ability of chain stores to undersell in the
future may be considerably curtailed.

1 Computations based on information contained in "Prices and Margins
of Chain and Independent Distributors," Federal Trade Commission,
U.S. Government Printing Office, Washington, 1933.

CHAPTER VIII

SELLING PRICES IN CHAIN AND INDEPENDENT
DRUGSTORES

The studies of prices in chain and independent stores that have
been made to date have been almost entirely confined to
the grocery business, and very little light has been cast on the
problem of price differentials in other fields. It is the pur-
pose of this chapter to remove part of the haze which envelops
this question outside the grocery field. This is done by present-
ing the results of a careful and comprehensive price survey con-
ducted at the time of the grocery study by one of the authors, by
summarizing the results of other studies in the same field, and by
interpreting the results so as to make them more vivid.

Obviously there are many fundamental differences between
grocery store operations and those of other types of retail stores.
As a result, a somewhat different treatment of at least certain
phases of the subject may be required. Grocery store products
may generally be classified as necessities while many items sold in
drug- or auto-accessory stores cannot be regarded as essential to
human life. Partly for this reason, groceries command a larger
share of the consumer's budget. Another factor which must be
given consideration is the wide spread between drug and other
commodity costs and selling prices as compared to a much nar-
rower spread between costs and retail selling prices in the grocery
field. A wider range naturally provides an opportunity for
greater variation in selling prices. A third factor in the situation
is the difference in the unit value of groceries as compared to
many other products. In the former class of merchandise, the
unit value of an item is much lower than is true of drug and many
shopping goods such as clothing. Fourth, the stock-turn in the
grocery business is several times as rapid as in most other retail
fields.

These factors, among others, militate against a treatment of the
two classes of merchandise in the same fashion. For example,
while average prices expressed up to a single decimal place are

115

116 THE CHAIN STORE PROBLEM

regarded as adequate for drug commodities, for grocery items,
where the variation in prices is smaller, the spread narrower, the
stock-turn much higher, and the unit value of the item lower,
average prices must be carried out to two decimal places in order
to insure accuracy. Certain other differences in treatment,
though relatively slight, will be discerned later in the discussion,
and such differences will be explained as they occur.

The Drugstore -Price Survey. The study of comparative retail
prices charged by chain and independent drugstores was carried
out along the same lines and with the same care and exactness as
the grocery survey already described. The 160 commodities
finally used were selected only after wholesalers and retailers had
been consulted and a previous study by the Federal Trade
Commission examined. The schedule was prepared with a view
to securing only accurate data (see Appendix C). Because of the
desire to controvert any possible question as to the scientific
value of this study, 216 of the 669 drugstores in the territory
covered by the survey were visited for comparative prices, thus
presenting a sample involving 32.3 per cent of all drugstores.

Summary of Findings. From the data gathered in the drug-
store-price study conducted in August, 1935, in Florida, three
summary price tables were prepared which are shown as Tables
16, 17, and 18.

According to the data in Table 16, the unweighted average price
(though weighted by the number of quotations) for the 160 articles
in independent drugstores was 49.75 cents. For chains with 2 to
3 stores the average price was 49.13 cents; for chains with 4 to 6
stores, 47.08 cents; for chains with 7 to 10 stores, 43.39 cents; for
chains with 11 to 15 stores, 44.89 cents; and for chains having 16,
or more, stores in Florida the average price for all items was
42.50 cents. Using the "market-basket" concept for expressing
these differences in prices, it means that if a consumer were to
purchase one unit of each of the 160 commodities in each of the
classes of stores under survey, he would have had to pay the fol-
lowing amounts to each of the store classes shown below:

Independent store $79 . 60

Chains with 2-3 stores 78 . 60

Chains with 4-6 stores 75 .33

Chains with 7-10 stores 69.42

Chains with 11-15 stores 71 .82

Chains with 16 stores or more 68.00

SELLING PRICES

117

When the average price for all commodities for each class of
chain stores is expressed in percentages of the average price of
independent stores, as shown in Table 17 and Fig. 4, it appears
that the average price charged by stores belonging to chains with
2 to 3 stores was 98.75 per cent of the average price charged by
independents, and that the average prices charged by the other
classes of chains, expressed as relatives of the average independent
store price, were 94.63 per cent for chains with 4 to 6 stores,
87.22 per cent for chains with 7 to 10 stores, 90.23 per cent for
chains with 11 to 15 stores, and 85.43 per cent for chains with 16
stores and over. Stated otherwise, the total of the prices for all

TABLE 16. AVERAGE DRUGSTORE PRICES, EXPRESSED IN AMOUNTS

Average of Prices Quoted by Chain and Independent Drugstores, on Selected

Standard Items, by Commodity Groups

Inde-

Chai

n store

average

price,

cents

Commodity group

Num-
ber
of
items

pendent-
store
average
price,
cents
(Class
1)

2-3

stores
(Class
2)

4-6

stores
(Class
3)

7-10
stores
(Class
4)

11-15

stores
(Class
5)

stores
and
over
(Class
6)

160

49 75

49 13

47.08

43 39

44.89

42 50

46 36

44 33

42 87

37 29

39 22

36 90

98 52

96 77

90.89

84 23

86 46

83.47

48.81

49.11

46 36

42.30

45.35

41.71

Other patent and proprietary medi-

51 83

51 11

48 35

43 56

45 22

43 87

Dental preparations

40 29

39 98

37 70

33 97

36 05

32 78

Shaving preparations . . .

34 29

33 65

31 91

28 67

30 24

29 29

Soaps . . .

11 78

12 09

11 42

10 05

10 91

10 20

Face creams

82 92

81 48

80 71

75 60

78 67

75 58

Cosmetics

45 13

44 89

44 83

41 93

43 51

39 92

Hair preparations

56 10

55.25

55 31

49 06

49 30

48.56

All other toiletries

45 78

45 64

43 86

42 15

42 60

40 95

Miscellaneous

43 11

42 95

39 99

38 22

39.14

35 75

items charged by chains with 2 to 3 stores was 1.25 per cent
lower than the total of the prices for all commodities at the
independent stores. Chains with 4 to 6 stores sold for 5.36 per
cent less than independents; chains with 7 to 10 stores sold for
12.79 per cent less than independents; chains with 11 to 15 stores
sold for 9.77 per cent less than independents; and chains with
16 stores, and over, undersold independents by 14.57 per cent.

118

THE CHAIN STORE PROBLEM

Again using the " market-basket" concept, it means that the
consumer would have been able to purchase the 160 drugstore
items at the following savings from each of the chain classes
shown below:

Class of chain

Saving over independ-
ent-store price

Saving over price
charged by preceding
class of store

Amount

% a

Amount

% a

2-3 stores

$ 1.00
4.27
10.18
7.78
11.60

1.26
5.36
12.79
9.77
14.57

$1.00
3.27
5.91
2.40*
3.82

1.26
4.16
7.85
3.46*
5.32

46 stores

710 stores

1115 stores

16 stores and over

The slight differences between these percentages and those shown in the text, imme-
diately above, are due to the fact that the average prices of all commodities are expressed
only to one decimal place, while the market-basket price has been determined by adding
the average prices of each of the 160 commodities.

6 Increase.

As far as drugs are concerned, these data show conclusively
that in the state of Florida, chain stores sold at prices lower than
those charged by independents, and that the price advantage

100
95

?90
a

85
80

Independent store price * 100%

00
95

90 fc
a.

* Class 4 prices represent the prices
of a single chain which operates
nationally although it has only
a few stores in Florida

L 6 C N D 6

2 'OasstfchainsofMstores) 4-Class4 (Chains of 7-10 stores)
3 -Class 3 (Chains of 4-6 stores) 5 -Class 5 (Chains of IMS stores)
6 - Class 6 (Chains of 16 or more stores)

FIG. 4. Comparison of average selling prices of chain and independent drug-
stores: all commodities.

given to the consumer increased as the number of store units in
the chain increased. To this statement there is but one excep-
tion. There is one chain in Class 4 with 7 to 10 drugstores in

SELLING PRICES

119

Florida which, probably because of its tremendous size nationally,
undersells not only independents and classes of chains in the
lower size groups but also undersells the stores in the chain
immediately following, although the relationship between price
advantage and the number of store units in the chain was not
necessarily proportional or in direct ratio.

TABLE 17. AVERAGE DRUGSTORE CHAIN PRICES AS A PERCENTAGE OF

INDEPENDENT-STORE PRICES

Average of Prices Quoted by Chain and Independent Drugstores, Expressed
as a Percentage of Average Prices of Independent Stores, by Commodity

Groups

Commodity group

Inde-
pendent
stores,
average
price =
100%
(Class 1)

Chain stores

2-3

stores
(Class
2)

4-6
stores
(Class
3)

7-10
stores

(Class
4)

11-15
stores
(Class
5)

16
stores
and
over
(Class
6)

All commodities

100.0
100.0
100.0
100.0

100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

98.75
95.62
98.22
100.61

98.61
99.23
98.13
102.63
98.26
99.47
98.48
99.69
99.63

94.63
92.47
92.26
94.98

93.29
93.57
93.06
96.94
97.33
99.34
98.59
95.81
92.76

87.22
80.44
85.50
86.66

84.04
84.31
83 61
85.31
91.17
92.91
87.45
92.07
88.66

90.23
84.60
87.76
92.91

87.25
89.48
88.19
92.61
94.87
96.41
87.88
93.05
90.79

85.43
79.59
84.72
85.45

84.64
81.36
85.42
86.59
91.15
88.46
86.56
89.45
82.93

Laxatives

Tonics

Headache remedies

Other patent and proprietary
medicines . .

Dental preparations

Shaving preparations
Soaps

Face creams

Cosmetics

Hair preparations

All other toiletries

Miscellaneous

The arithmetic average was selected for primary use in this
survey for a number of reasons. As already explained in the
preceding chapter, a number of alternatives were considered, but
the arithmetic average was finally adjudged the least objection-
able and probably the most representative method.

Comparison of Drugstore Selling Prices, by Commodity
Groups. Tables 16, 17, and 18 not only summarize the essential
facts concerning chain store prices on drug articles, as compared

120

THE CHAIN STORE PROBLEM

with independent store prices for all commodities combined, but
also present the information for each of 12 commodity groups into
which the 160 items had been classified. Chains as a group had
lower average prices than independents in all of the 12 commodity
groups (see Fig. 5). These prices descended, as the number of
units in the chain increased, in 6 of the 12 groups. In only one

LEGEND
2 -Class 2 Chains of 2-3 stores

3 -Class 3 Chains of 4-6 stores

4 -Class 4 Chains of 7- 10 stores
5-Cfoss5 Chains of IJ-15 stores
6-Oass 6 Chains of/6 or more stores

IUU

IE 95

o. 85

? flO

2 i

95 1
90*
85 &
flO

, 5

TONICS

Independent store
price --100%

* Class 4 prices represent
the prices of a single chain
which operates nationally
although it has only a
few stores in Florida
HEADACHE REMEDIES

OTHER PATENT MEDICINES DENTAL PREPARATIONS SHAVING PREPARATIONS

, .,, .,., r~ . , ... , inn . .,, ... ., ,. ... , inn , ^ -~ ^, , ,. ,,. ,1

3 t/.

^
^

95
90
85
80

100
95
90
85
80

'*,

FACE CREAMS

-^-i

.3_

t-M 1 -

90 ~
85
80

COSMETICS

ALL OTHER TOILETRIES

MISCELLANEOUS

-6-J

95 t
<u
90

85
80

FIG. 5. Comparison of average prices of chain and independent drugstores; by

commodity groups.

of the groups, the chains operating 11 to 16 stores charged
somewhat higher average prices than chains having 7 to 10 stores.
It is significant that each of the classes of chains reported lower
average prices than those charged by independents for each of
the 12 commodity groups, with two exceptions. These excep-
tions are to be found in the headache remedies and the soaps
groups, where the average prices charged by chains with 2 to 3
stores were slightly above those of independent stores. The

SELLING PRICES 121

large chains, however, sold items in these groups at average
prices about 14 per cent below the independents.

Chains with 2 to 3 stores showed the smallest average price
differential, as compared with independent-store average prices,
of any of the chain classes. Although stores in this class of chains
undersold independents by 1.25 per cent for all commodities
combined, in four of the commodity groups the differential was
less than 1 per cent and in two groups the average price was
somewhat higher. As far as all classes of chains are concerned,
the greatest differential in average prices is to be found in the
laxative group, the chains with 2 to 3 stores selling below inde-
pendent store prices by 4.38 per cent; chains with 4 to 6 stores
underselling independents by 5.53 per cent; chains with 7 to 10
stores selling below independents by 19.56 per cent; chains with
11 to 15 stores giving the consumer a price advantage of 16.4 per
cent; and chains with 16 stores, or more, offering a price differen-
tial of 21.41 per cent.

Drugstore Price Comparison of Individual Items. The Florida
study revealed a vast amount of information as to the prices on
each of the 160 drugstore items or commodities (for detailed data
see Appendix D). An examination of the relative independent-
and chain store prices on the individual items disclosed the
following:

1. Chains with 2 to 3 stores were underselling independents on
106 of the 160 commodities. On 53 items their average prices
were higher than, and on 1 commodity the average retail price
was the same as, at independent drugstores. Of the 106 com-
modities on which this class of chain stores undersold independent
stores, the price differential was less than 5 per cent for 100 items.
On the other hand, of the 53 items for which 2 to 3 drugstore
chains charged more than independents, 32 were less than 1 per
cent higher, while 15 items were from 1 to 5 per cent higher, and
6 commodities were more than 5 per cent higher.

2. Chains with 4 to 6 drug stores were underselling independ-
ents on 140 commodities of the 160 studied, while on 20 items
their prices were higher. On only 7 of the 140 items were the
chain drugstore selling prices less than 1 per cent lower than the
independent store selling price. On 45 items it was from 1 to 5 per
cent lower; on 65 items average prices were from 5 to 10 per cent
lower; on 21 items from 10 to 15 per cent lower; and on 2 items

122

THE CHAIN STORE PROBLEM

the 4 to 6 store chain selling prices were more than 15 per cent
lower than the independent drugstore selling prices. On 5 of the
20 commodities for which this class of chain drugstores, averaged
a higher selling price than independents, the price was less than
1 per cent higher, and on 11 items the average prices were less
than 5 per cent higher.

TABLE 18. AVERAGE DRUGSTORE PRICE RATIOS, BY COMMODITY GROUPS

Chain stores

Inde-

pendent-

Commodity group

store
price

2-3

stores

4-6
stores

7-10
stores

11-15
stores

stores
and

ratio =
innc/

(Class

over

1UU 70

(Class 1)

(Class
6)

All commodities

100.0

99.13

94.79

86.96

90 28

85 36

Laxatives .

100

97.39

92.26

81.56

85 55

80 27

Tonics

100.0

98.36

92.22

85.58

88 04

84.84

Headache remedies

100.0

100.39

94.16

86.58

92.27

84.30

Other patent and proprietary

medicines ... .

100.0

98.64

93.41

84.57

87.78

84.37

Dental preparations

100

99.41

94.13

85 14

90 06

80 80

Shaving preparations

100.0

98.33

93.41

83.83

88 20

84 85

Soaps

100.0

102 . 38

96.38

85.64

91.50

86.20

Face creams

100

98 02

96 17

88.99

93 44

89 04

Cosmetics. . .

100.0

99.43

99.44

92.45

95.45

88.37

Hair preparations. . . .

100.0

98.03

98.00

88.40

87.98

86 98

All other toiletries

100

99.22

95.23

90.12

90.97

86.79

Miscellaneous

100.0

100.08

93.90

87.97

91.55

86.80

3. Chains with 7 to 10 drugstores each were underselling inde-
pendents on 150 items, and on only 10 commodities their prices
were higher. Of the 150 items, in only two cases was the dif-
ference in price less than 1 per cent, and in 12 others it ranged
from 1 to 5 per cent. On 23 commodities the price was from
5 to 10 per cent lower; on 43 from 10 to 15 per cent lower; on
51 from 15 to 20 per cent lower; on 12 from 20 to 25 per cent
lower; and on the remaining 7 items it was in excess of 25 per
cent lower than the average retail selling price in independent
drugstores. On 9 of the 10 commodities on which this class of

SELLING PRICES 123

chain drugstores charged higher average prices than independents,
the difference was less than 2 per cent.

4. Chains with 11 to 15 drug stores were underselling inde-
pendents on 139 of the 160 commodities, while on 21 items their
prices were higher. On only 16 items were prices lower by less
than 5 per cent. On 35 items the average price was from 5 to
10 per cent lower; on 51 items from 10 to 15 per cent lower; on
31 items from 15 to 20 per cent; and in the remaining 6 items the
difference ranged from 15 to 20 per cent. Of the 21 items on
which these chains charged higher prices, in 15 cases the difference
was less than 4 per cent.

5. Chains with 16 stores or more were underselling independ-
ents on 150 of the 160 commodities, while on only 10 items did
they charge higher prices. On only 9 commodities was the aver-
age selling price by chain drugstores lower by less than 5 per cent.
On 22 items the chains sold from 5 to 10 per cent lower; on 28
items from 10 to 15 per cent lower; on 56 items from 15 to 20 per
cent lower; on 26 items from 20 to 25 per cent lower; and on 9
items over 25 per cent lower. On 3 of the 10 commodities for
which chains charged a higher price the increase was less than
1 per cent.

It is apparent even to the most casual reader that the under-
selling on the part of chains as a group was quite general. It was
not confined to a limited number of commodities but pervaded
almost the entire range of the 160 items studied. It is also
apparent that the price differentials between the two types of
stores, independents and chains, increased as the number of
units in the chain increased. Whether or not this decrease in
prices (or increase in differential) is in direct ratio to the number
of stores in a chain, is not apparent from this study, but it is a
positive fact that there is a pronounced trend toward greater
variation in retail selling prices of drugs between independents
and chain stores as the size of the chain, measured in terms of
Btore units, increases.

In this connection attention is invited to the fact that 100,
or 94.3 per cent, of the commodities sold by 2 to 3 drugstore
chains at a lower price than at independents were less than 5 per
cent lower. In the 4 to 6 drugstore chain class, 86, or 61.4 per
cent, of the commodities sold for less than at independent stores,
prices were from 5 per cent to 15 per cent lower. In the 7 to

124 THE CHAIN STORE PROBLEM

10 unit chain drugstores, on 94, or 62.7 per cent of the com-
modities in which this class of chain undersold independents,
prices were from 10 to 20 per cent lower. In the 11 to 15 drug-
store chains, 82 items, or 59.0 per cent, of those selling for lower
prices were from 10 to 20 per cent lower. Finally, in the largest
size chains, those having 16, or more, drugstores each, on 60.6 per
cent of the commodities which sold for less than independent-
store prices the price difference was more than 15 per cent. This
clearly illustrates the progressive decrease in prices as the number
of units in the chain increases.

In most classes of chain drugstores the largest number of
commodities sold at a higher price than in independent stores is
in the group which sold for less than 1 per cent above the inde-
pendent-store price. The number of chain stores selling com-
modities at higher prices than independents was relatively
small. On the other hand, a relatively large percentage of the
items were sold for less by chains than by independents. In
the five chain store classes studied there were 160 commodities
surveyed in each class or a total of 800 average prices at chain
drugstores. Of these, 685, or 85.6 per cent, of the total average
prices were lower than independent drugstore average selling
prices.

Comparison of Retail Selling Prices of Service and Cash-and-
carry Drugstores. After the price data on the drug schedule had
been collected, the question arose as to whether differences in the
prices that may be discovered between chains and independent
stores may not be accounted for, at least to some extent, by the
credit and delivery services rendered to customers by independ-
ents. To throw light on this question a supplementary schedule
was prepared in an attempt to secure information on the size of
the store, measured in terms of net sales for the year 1934, and on
the degree of credit and delivery service normally rendered. The
latter two items were to be expressed in amounts, if possible,
although estimates in percentage of total sales were to be accepted.

Some difficulty was experienced in securing the information
called for by the supplementary schedule, partly because it
entailed a second visit to the store and partly on account of the
intimate information required, which in many cases necessitated
examining book figures. For these reasons only 150 supple-
mentary schedules were received for independent drugstores.

SELLING PRICES 125

Upon receipt of this information the reporting stores were coded
on the degree of service rendered. An arithmetic average of the
service percentage reported in answer to the questions was
obtained by adding the percentage of service in the form of credit
sales to the percentage of service in the form of delivery and
dividing the sum by two. This is regarded as an approved method
and is not unlike the one used by the Federal Trade Commission
in its chain store investigation. After this simple arithmetic
average of the two services was computed, the stores were divided
into two groups. In the first group were included all stores with
less than 10 per cent service, which may be regarded to all intents
and purposes as cash-and-carry stores. In the second group were
included stores rendering services to the extent of 11 to 50 per cent
of their sales. No drugstore was found to be giving service in
excess of 50 per cent of its sales.

A comparison of the prices charged by independent cash-and-
carry drugstores with those charged by independent service drug-
stores, reveals the enlightening fact that for all commodities
involved the difference in prices between the two types of stores
was practically negligible. Independent drugstores operating on
a cash-and-carry basis reported an average price in cents of
49.97 for all the items, as against an average price of 50.05 cents
for the service stores, a difference of but 0.2 per cent.

As shown in Table 19 below, there is very little difference in
prices in any of the commodity groups charged by the service and
cash-and-carry independents. In fact, the difference in the prices
charged by the two types of stores is so slight in the drug business
that it is possible that even these slight differences are due to
other causes than the extension of service. It must be remem-
bered that a certain degree of service is also rendered by drugstores
of the chain type. In consequence of this fact, and because of the
findings presented in Table 19, it would appear that as far as drug-
stores are concerned, prices are little, if any, affected by credit and
delivery services rendered by the stores, even though the render-
ing of such services necessarily entails some expense. It simply
means that this cost is not generally passed on to consumers
through higher prices. Hence all the differences in prices between
the various classes of chains and independents may be attributed
entirely to the chain method of operation rather than to differ-
ences in service.

126

THE CHAIN STORE PROBLEM

TABLE 19. COMPARISON OF PRICES AT INDEPENDENT DRUGSTORES

RENDERING SERVICE WITH INDEPENDENT DRUGSTORES

OPERATING ON A CASH-AND-CARRY BASIS

Commodity group

Cash and carry

Service

Average
price,
cents

Price
ratio =
100%

Average
price,
cents

Price
ratio

All commodities

49.97
46.2
97.5
47.8

51.6
40.8
33.8
12
83.0
46.5
55.9
48.3
42.8

100.0
100.0
100.0
100.0

100.0
100.0
100.0
100.0
100.0
100
100.0
100.0
100.0

50.04
46.2
98.6
48.5

51.8
40.4
35.2
11.9
82.9
45.6
56.4
47.9
43.2

100.2
100.5
101.2
101.4

100.5
99.0
101.1
99 6
99.9
98.5
100.7
99 2
114.2

Laxatives

Tonics

Headache remedies

Other patent and proprietary medi-
cine

Dental preparations . .

Shaving preparations
Soaps

Face creams

Cosmetics

Hair preparations

All other toiletries

Miscellaneous

Comparison of Drugstore Selling Prices, by Size of Town. For

purposes of tabulation of the price data, the schedules were
divided into three divisions, geographically. Those for Division
A comprising stores in the three largest cities of Florida
Jacksonville, Miami, and Tampa were included in one group.
In Division B were placed all schedules obtained from stores
located in the four cities with a population of 25,000 to 100,000.
In this group are the stores located in St. Petersburg, Orlando,
Pensacola, and West Palm Beach. In Division C were included
the reports from 44 towns with a population of 2,500 to 25,000 for
which price data were collected.

From these data a few general conclusions may be drawn :

1. Small drug chains (having two to three stores) apparently
compete more strongly with independents in the small towns, and
consequently do not show the same proportionate increase in
prices in small communities over large cities as do independents.

2. Since no chains with 11 to 15 stores were covered in Divisions
B and C, no special significance need be attached to the deviation

SELLING PRICES

127

shown for this class of stores in Division A. It probably repre-
sents the prices of a single chain operating in that area.

3. The large chains compete most strongly in the large cities
and undersell the least in the small towns where competition is not

TABLE 20. SUMMARY OF AVERAGE DRUGSTORE PRICES AND PRICE
RELATIVES, BY SIZE OF TOWN, ALL COMMODITIES

Division

Division B 6

Division C c

Class of store

Aver-

Price

Aver-

Price

Aver-

Price

age

rela-

age

rela-

age

rela-

price

tives

price

tives

price

tives

Independent stores

48.34

100.00

48.69

100.00

51.02

100.00

2-3 store chains ....

47.54

98.35

47.74

98.05

50.62

99.22

46 store chains

42 00

86.88

49.72

102.12

46.79

91.71

7-10 store chains

43 00

88.95

42.57

87.43

44.96

88.12

11-15 store chains

44.17

91.37

16-and-over store chains .

40.55

83.89

41.66

85.56

45.88

89.92

a Jacksonville, Miami, and Tampa

6 St Petersburg, Orlando, Penaacola, and West Palm Beach.

c Forty-four towns with a population of 2,500 to 25,000.

so keen. This is evidenced by their greater proportionate increase
in prices from those charged in the large cities.

4. Regardless of the size of the community, the general con-
clusions drawn hereinbefore seem to apply to drugstores of the
various classes throughout the state, but their application is par-
ticularly significant in the case of drugstores located in the three
large cities, where most of the chain stores are to be found.

Results of Federal Trade Commission Drug Studies. The
only other drugstore price study that has been made to date also
gives evidence that chain drugstores substantially undersell
independent drugstores. The difference is more pronounced
than in the case of groceries. The Commission's unweighted
price figures show that the price differential in favor of the chains
varied from 9.8 per cent in Cincinnati to 12.4 per cent in Memphis.
This compares to an underselling by chains in the Florida study
ranging from 1.26 per cent for 2 to 3 store chains to 14.57 per
cent for drug chains of 16, or more, units.

128 THE CHAIN STORE PROBLEM

SELLING PRICES OF PIECE GOODS AND FURNISHINGS IN CHAIN
AND INDEPENDENT STORES

Difficulties Encountered. In connection with the Florida
survey of prices in chain and independent stores, a special effort
was made to secure price information for other lines of merchandise
in addition to drugs and groceries. A number of experts in their
respective lines of business were brought together. Complete
specifications were drawn with great care. Experiments were
conducted in the field, but much of this endeavor proved futile,
because many lines of merchandise do not lend themselves to
direct price comparison. Any comparison of prices that may be
attempted on such goods is subject to just criticism and produces
but the wildest of approximations.

To illustrate, three men were called in who have had many
years of experience in the retailing of shoes, as traveling repre-
sentatives of leading shoe manufacturers selling shoes to the retail
trade, and in factory production. These men were selected
because of their thorough and unusual knowledge of the raw
materials and workmanship embodied in the finished product.
Elaborate and detailed specifications were prepared, but the
project of securing price comparisons on shoes had to be aban-
doned, after considerable field experimentation. It was found,
for example, that even an expert could not determine the exact
quality of some of the raw materials used without actually
dissecting the shoe. Whether real leather was used for the layer
next to the outer sole throughout the shoe, or only on the outside
with some other padding for the remainder of the sole, cannot be
determined by a superficial examination of the finished product.
Assuming that the quality and quantity of the materials entering
the product could be definitely ascertained, there is still the
problem of workmanship. In the making of a shoe there may be
over 200 distinct operations, most of which may vary considerably
in quality. To attempt to determine the exact quality of each of
these operations, in order to insure accuracy in pricing results, is
not only most difficult, if not impossible, but far from feasible on
economic grounds or from the standpoint of time.

In addition to the complications outlined above, there is the
matter of brands. It was found that few stores in any one com-
munity handle exactly the same brand of shoe or carry, at any

SELLING PRICES 129

given time, the same number of a given brand. When branded,
shoes are generally distributed on an exclusive agency basis, which
means that, unless the community is very large, no two stores
would handle the same brand. Even though a shoe is made by
the same manufacturer and of exactly the same materials and
workmanship, it is a different product when differently branded.
For this reason a shoe manufacturer often sells the same product
under several brand names. This practice attests to the impos-
sibility of making direct price comparisons on two products
designated by different brands or trade names, even though they
be otherwise identical. The important point is that in the
mind of the consumer the products are not the same; hence one
may be preferred over the other, regardless of differences or
agreement in price.

A still further complication arises out of the style element,
which either adds to, or subtracts from, the salability of a given
shoe. In women's shoes, the type or position of the buckle, or
some other apparently trifling matter, may be the decisive factor
in choosing the product. Even in men's shoes, the style element
is of some significance. For these various reasons, all effort to
make price comparisons on shoes was abandoned, but only after
conclusive evidence was obtained concerning the impracticability
of the plan.

Similar problems, of an almost insurmountable nature, were
faced in connection with other lines of merchandise. Men's
clothing, for example, differs not only in weight, quality, and style
of fabric, but also in workmanship, brand, cut, and any of a
number of tangible and intangible factors not to be encountered
in the sale of standardized and branded grocery or drug articles.

Consequently, the field was searched far and wide in order to
discover other items of merchandise, besides groceries and drugs,
on which worth-while and reliable price data could be collected,
particularly in lines of business in which chain stores operated in
the state of Florida. No doubt price comparisons could have
been made on certain items in the hardware field, but inasmuch
as no hardware chain stores are known to be in Florida an inquiry
into hardware items was beyond the scope of the survey. It was
finally decided to select as many items as possible for this purpose
from two distinctive and unrelated fields, covering dry goods and
furnishings in one and automobile accessories in the other.

130 THE CHAIN STORE PROBLEM

Piece goods and furnishings are normally handled in a number
of different kinds of stores. They are part of the stocks of
department stores, dry goods stores, variety stores, and other
specialty shops akin to dry goods stores. Since all of these
stores handle the items that were selected for study, they were all
included in the comparison of prices as between independently
operated establishments and those belonging to chains.

Selection of Commodities for Pricing. The bulk of the
merchandise handled by department stores is not subject to
direct price comparison. Most of the goods fall in the shopping
category, i.e., they are bought only after comparison on the part
of the consumer for quality, style, and price, usually in two or
more stores. Even this comparison is more in the nature of
judging since there is not normally any way for the consumer to
determine accurately differences in quality and style, and, hence,
differences in price. Specialty items, as certain electrical devices,
such as vacuum cleaners, refrigerators, radios, and the like, are
usually sold by brand and on an exclusive agency basis, so that
but a single store in the community, or very few at best, handle
the same product. Inasmuch as a comparison of prices between
chains and independents demands that the same merchandise be
handled by both types of stores located in the same community,
as an evidence of direct price competition, no prices were secured
on items that are exclusively distributed. These and other
considerations narrowed down the selection to a limited number
of commodities, comprising certain highly standardized items of
piece goods, house furnishings, hosiery, shirts, men's underwear,
and work clothing. All of the items chosen were described as to
size, grade, color, and, wherever possible, also by brand name.

Summary of Findings. Many of the 96 items of piece goods
and furnishings for which price data were collected were finally
discarded in the editing process. The most common reasons for
the elimination of items from the tabulations were : too few quota-
tions or no quotations at all, important differences in brand
discovered during the canvass, lack of standardization, and
inadequate specifications. As a consequence, only 32 items were
actually tabulated.

The information on piece goods and furnishings was obtained
from 25 department stores, 40 variety stores, and 52 dry goods
stores, but for tabulation purposes data were used for a smaller

SELLING PRICES

131

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132 THE CHAIN STORE PROBLEM

number of stores, since some of the stores failed to quote prices on
identical items. A total of 1,818 quotations was obtained from
the stores included in the tabulations. Of this number approxi-
mately 46 per cent were secured from chain stores and 54 per cent
from independently owned stores.

As shown in Table 21, the unweighted average price for all of
the 32 commodities in independent stores was 38.35 cents. For
chains with 2 to 3 stores the average price was 37.16 cents; for
chains with 4 to 6 stores, 34.38 cents; for chains with 7 to 10
stores, 34.99 cents; for chains with 11 to 15 stores, 31.52 cents;
and for chains with more than 15 stores in Florida the average
price was 32.05 cents.

Stated otherwise, it means that if a consumer were to purchase
one unit of each of the 32 commodities in each of the classes of
stores set up for purposes of this survey, he would have to pay the
following amount to each of the store classes shown below:

Independent stores $12 . 275

Chains with 2-3 stores . 11 .895

Chains with 4-6 stores 11 .002

Chains with 7-10 stores 11 . 196

Chains with 11-15 stores 10.087

Chains with more than 15 stores 10.251

When the average price for all commodities for each class of
chain stores is expressed in percentages of the average price of
independent stores, as shown in Table 21, it is evident that the
average price charged by stores which are part of a chain with
2 to 3 units was 90.90 per cent of the average price charged by
independents. The average prices charged by the other classes
of chains, expressed as relatives of the average price of independ-
ent stores, were 89.65 per cent for chains with 4 to 6 stores, 91.24
per cent for chains having 7 to 10 stores, 82.19 per cent for chains
with 11 to 15 stores, and 83.57 per cent for stores belonging to
chains with more than 15 units in the state. Thus the total of
the prices for items charged by chains with 2 to 3 stores was 3.1
per cent lower than the total of the prices for all of the items at
independent stores. Stores belonging to chains with 4 to 6 units
in the state undersold independents by 10.35 per cent; stores
belonging to chains operating 7 to 10 units sold for 8.76 per cent
less than independents; chains with 11 to 15 units in the state
undersold independents by 17.81 per cent; and the amount by

SELLING PRICES 133

which chains with more than 15 stores in the state undersold
independents was 16.43 per cent.

From these data, insufficient and fragmentary though they
may be, the following inferences may be drawn:

1. On the total of the 32 commodities on which price data were
collected in the state of Florida, chain stores as a group sold at
prices below those charged by independents.

2. The longer chains generally undersold independents by a
greater amount than the shorter chains.

3. While the tendency was for the larger chains to sell at
prices below those charged by chains in the next lower classifica-
tion, this tendency was not uninterrupted.

4. While the trend in prices was generally in relation to, it was
not exactly in proportion to, the number of units in the chain.

5. If prices of chain stores are expressed in terms of price
ratios for all commodities combined, there is, with the exception
of chains with 7 to 10 units each, a progressive decline in prices as
the number of units in the chain increases.

6. When examined in the light of individual commodities it
appears that the longer chains not only undersold by a larger
amount than the shorter chains, but they also undersold inde-
pendents on a larger number of items until the longest chains in
the group undersold on all of the 32 items, and the chains in
the class immediately preceding undersold on all but 2 of the
items.

Prices of Automobile Parts and Accessories in Chain and
Independent Stores. The greater percentage of automobile
parts and accessories consists of branded merchandise which is
normally distributed on an exclusive agency basis. Because of
this fact, there are few stores in a single community that handle
exactly the same brand of parts or accessories used for the same
make of car. Considerable difficulty was therefore experienced
in selecting a number of items which are sufficiently standardized
and yet which are handled by both independent stores and chain
stores in the same community, in order to reflect accurately the
competitive position of the two types of stores.

Summary of Findings. Price information for automobile parts
and accessories was collected from 95 independent stores and
from 18 stores belonging to chains, a total of 113 retail establish-
ments. Of the 24 items for which data were collected, only

134 THE CHAIN STORE PROBLEM

one-half of them were distinctly identified by brand and used in
the tabulation. The other 12 items originally included and
identified only by specification were finally discarded because of
inadequacies of specifications, too limited a number of quotations,
or important differences in the brands of articles priced.

A total of 807 quotations was obtained from the stores included
in the tabulations. A little over 20 per cent of these quotations
were secured from chain stores, the remainder being obtained
from separately owned retail establishments.

From the data gathered Table 22 was prepared. This latter
table shows the average prices for independent stores and for
each of the classes of chain stores.

On account of the limited information which was found usable
for this line of business, few conclusions can be drawn or even
inferred. The information is presented merely for what it is
worth. It is significant, nevertheless, to observe that even from
these few statistics a trend is to be discerned, not only for chains
as a group to sell below independents as a group, but also for the
longer chains to undersell independents by a larger amount. The
average price for the 12 commodities at independent stores was
$1.123; for chains with 2 to 3 stores it was $1.004; for chains
operating 4 to 6 stores, $1.118; and for chains with 7 to 10 stores,
$.851. When the average prices charged by chain stores are
expressed as a percentage of the independent store price, the
average price charged by stores belonging to chains with 2 to 3
units was 89.4 per cent of the average price charged by inde-
pendents. The average prices charged by other classes of chains,
expressed as relatives of the average price at independent stores,
were 99.6 per cent for chains with 4 to 6 stores and 75.8 per cent
for chains with 7 to 10 units. Thus, the total of the prices for the
12 items charged by chains with 2 to 3 stores was 10.6 per cent
lower than the total of the prices for the same items at inde-
pendent stores. For the longest chains in the group the average
price for the 12 items was 24.2 per cent below the price charged
by independent stores.

With the exception of the stores operated by chains with 4 to
6 units, underselling of independents was general throughout the
the list. All of the 12 items were sold by stores with 2 to 3 units
at lower prices than at independents, while the longest chains
undersold independents on all but 1 of the 12 items. The

SELLING PRICES

135

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136 THE CHAIN STORE PROBLEM

amount, however, by which the longest chains undersold was
considerably greater than that recorded for the shorter chains.

Summary of Chain and Independent-store Prices. From the
data presented and analyzed in the present and the preceding
chapters there can be little doubt but that chain stores sub-
stantially undersell their independent competitors. In every
line of trade that has been studied the chains enjoy a price differ-
ential that increases, though not in exact proportion, with the
number of units operated. Not only do the longer chains offer
the lowest prices but the price differential is somewhat propor-
tional to the size of the margin. Businesses with a relatively
small margin afford less opportunity for reducing consumer
prices. Another significant factor is that the independent
merchants are apparently finding ways and means to cut down
the chain price differential. The earlier studies revealed con-
sistently wider price differences than the more recent ones.

One very important question related to comparative prices is
that which concerns the ability of chain stores to pass on to con-
sumers all or a portion of the special taxes that have been levied
on them. Do chain stores undersell competitors to the extent
that they may include a sizable portion of the chain store taxes
in the prices charged to consumers without materially injuring
their competitive position? From the evidence presented in the
preceding pages it would seem that in most businesses they can
do this. From the consumer's viewpoint it might not be the most
suitable method of meeting the situation, but the chain store price
advantage, with but few exceptions, appears to be sufficient so
that any increase in prices which is necessary, because of existing
chain license taxes, may be made without a marked competitive
repercussion and without confiscating the property of chains,
unless, of course, a substantial increase in such taxes is
forthcoming.

CHAPTER IX
CHAIN STORE COSTS AND PROFITS

In preceding chapters it was shown that from 25 to 30 per cent
of the nation's retail trading is done at chain stores, the percent-
age varying largely with the definition adopted. Naturally, it
should be of considerable interest and import to know what
becomes of each dollar spent in such stores. An analysis of this
phase of the subject is the burden of the present chapter.

Each dollar that a chain store receives in exchange for its goods
and services is composed of three elements: (1) the cost of the
merchandise itself as purchased from the manufacturer, producer,
or middleman ; (2) the chain's cost of doing business ; and (3) the
net profit. For most chain stores the largest slice of the con-
sumer's dollar is required to cover the cost of merchandise, but
since that important factor has been discussed elsewhere at
considerable length (for example, see Chap. IV on buying advan-
tages) it will not be further considered at this point. It is on
the remainder, or the gross margin, consisting of operating
expenses and net profits, that attention is focused in the following
pages.

The term cost or expense of doing business is subject to various
definitions, but the concept that forms the basis of the present
discussion is essentially the bookkeeping concept. While it is, in
a sense, a superficial concept of cost, it is an eminently practical
and useful one for both business men and economists. According
to this meaning, cost would include the money expenditures
incurred by the chain organization in performing its marketing
functions, such as buying, selling, storage, delivery to the stores,
and store supervision.

Importance of Knowing Chain Store Costs. The expense of
bridging the gap between producer and consumer determines not
only the ability of a merchandising institution to pay dividends
but also the ability to serve the consumer effectively. Therefore,
relative cost of doing business is a measure of social usefulness and
the chain store champions have found it an exceedingly effective

137

138 THE CHAIN STORE PROBLEM

argument in combating charges hurled at them of being anti-
social. Chains claim that they are doing for distribution what
large scale production has done for manufacturing. On the other
hand, the alleged fact that chains are able to operate at a lower
cost adds fuel to the fire built by opponents in combating the
so-called chain store evil. Thus it is asserted that chain stores
should be taxed heavily since they are able to stand it, because of
their relatively greater operating efficiency, and since it will
prevent them from driving independents completely out of
business by the same efficiency. Regardless of one's attitude
toward chains, it is important to know just how efficient chain
stores really are. It is only by means of a study of relative costs
that this important criterion can be at least partially evaluated.

Another reason for obtaining a knowledge of costs is that
expense is a vitally important factor in price determination.
What the consumer must pay for merchandise is largely depend-
ent on the three elements previously mentioned, and, of the three,
retail institutions probably retain more control over operating
expense than on the others. It was shown in the two preceding
chapters that chain stores consistently undersell independent
merchants, but what makes that underselling possible was but
partially explained. A study of relative costs should throw
some light on perhaps the most significant of the factors influenc-
ing prices charged the consumer.

A third reason for studying costs is to determine trends in
chain store expenses. Are the operating costs of chain stores
tending to increase or decrease? What influence does size have
on these expenses? An answer to this latter question also has a
direct bearing on the rationality of the laws which place chains in
different tax brackets based on size as reflected by the number of
units. In order that chain stores may be viewed in the proper
perspective, it is essential that ample consideration be given to
the subject of comparative costs.

Defects in Available Cost Data. Unfortunately, retail costs
are difficult to measure quantitatively for comparative purposes.
It is a relatively simple matter to determine with some degree of
accuracy the costs of a particular retail store but to obtain
accurate cost figures for a large enough number of stores so as to
have at least a representative sample, is an entirely different
matter.

CHAIN STORE COSTS AND PROFITS 139

Several factors complicate the use of chain store cost data for
comparative purposes. First, chains engage in different kinds of
business, and expense figures, to be of value for such purposes,
must include only data from stores selling essentially the same
products, i.e., stores in the same line of business. To compare
operating costs of grocery chains with those dealing in drugs is
analogous to comparing apples with potatoes. This is a gross
error of which many analysts of chain store costs must be declared
guilty. Unfortunately, it is more difficult to discover such an
error when operating costs for all chains are compared with
operating costs of all independents, despite the fact that chains
concentrate in lines which usually have low costs of doing busi-
ness. Even the Bureau of the Census has fallen into this error,
which makes those phases of its reports on " Retail Chains,"
" Retail Operating Expenses," and " Types of Operation," which
attempt to compare chain store costs of doing business with those
of independents, almost valueless. That the two items are alto-
gether incomparable and the results misleading should be obvious
even to the uninitiated.

Although of less significance, nevertheless comparisons should
be made of expenses incurred by stores not only in the same line
of business but operating in substantially the same manner.
Some stores are self-service, some grant credit, and others render
delivery service. Cost figures that do not take these factors into
account are bound to admit an element of error. In the case of
chain grocery stores it is generally assumed that they all conduct
essentially the same kind of business, yet many individual units
are essentially supermarkets, and, while the majority engage in a
cash-and-carry business, many food chains in the metropolitan
areas render some degree of credit or delivery service.

A third factor that makes cost comparisons difficult is that
such costs vary with the size of the chain. This pertains espe-
cially to those chains that engage in wholesale as well as retail
activities. The larger chains are more apt to operate chain store
warehouses and to do their own wholesaling than the smaller
organizations. That being the case, one would expect the costs
reported by the larger chains to be relatively greater than those
reported by the small ones, unless the figures are segregated for
the retail units. Unless allowances are made for such conditions,
entirely wrong conclusions may be drawn. For example, in the

140 THE CHAIN STORE PROBLEM

Federal Trade Commission Investigation allowance was not made
for wholesaling costs and the Commission drew the following
conclusion :

The tendency for operating expenses to increase with increases in the
size of the chain is especially noticeable in the grocery group where the
percentage of operating expenses to sales rises, with some irregularities,
from 13.05% in the 2 to 5 store group to 18.77 % in the over 1,000 stores
group. 1

It is only natural to expect the expenses of a chain organization
doing both wholesaling and retailing to be higher than one which
engages merely in retailing. Yet from the analysis presented by
the Commission it would appear that the larger chains are less
efficient than their smaller competitors.

Many data are available on chain store costs, but few of them
can be used for comparative purposes. The most comprehensive
statistics are those assembled by the Bureau of the Census for
1929, 1933, and 1935. In the 1929 enumeration the costs of
operating chain stores were gathered and separated for the retail
and wholesale divisions of the business, but in 1933 and 1935,
chain store warehouse costs were apparently not separated so
that comparison for the three Censuses must make allowances
for this situation. The Federal Trade Commission conducted a
comprehensive study and gathered statistics for the years 1913,
1919, 1922, 1925, 1927, 1928, 1929, and 1930 from 1,337 different
chain store organizations. Few agencies outside the Federal
Government have assembled cost facts relating to chain stores.
The Bureau of Business Research of Harvard University, how-
ever, published several noteworthy studies on marketing costs of
several groups of chain stores in various lines of business.

The available data on chain store costs, while excellent from
some points of view, are hardly adequate for comparative pur-
poses. As will be shown in the following pages, the authors have
felt it necessary to make a number of arbitrary calculations to
obtain a truer picture of chain store costs than depicted by the
data heretofore published.

The determination of costs of doing business for independent
merchants is beset with many of the obstacles that obstruct the

1 Federal Trade Commission, " Chain Stores Sales, Costs and Profits of
Retail Chains," p. 53, U.S. Government Printing Office, 1932.

CHAIN STORE COSTS AND PROFITS 141

accurate determination of chain store costs. Many merchants
sell several lines of goods, the sizes of independent stores vary
greatly, and some purchase considerable quantities of merchan-
dise direct from producers. All these factors complicate cost
determination for comparative purposes. For example, the 1935
Census of Distribution revealed that 44.5 per cent of the inde-
pendent stores in the United States had annual sales of less than
$5,000 and 31.3 per cent of all independent stores reported annual
sales under $3,000. It is believed that many of these establish-
ments are not stores operating on a full-time basis, or they are
operated as secondary endeavors by their owners with the
principal income being derived from other occupations. For
these reasons one may even question the inclusion of such estab-
lishments among the totals for retail stores. Naturally, statistics
gathered from establishments of that kind are hardly comparable
with data secured from chain stores whose average sales are more
than 10 times as great.

In comparing the costs of marketing through the independent
and the chain store channels of distribution, it is necessary to add
wholesale costs to the independent retail store expenses. Since
some purchases by retailers are made from full-service wholesalers,
some from commission men, some from cash-and-carry whole-
salers, as well as from many other sources, it becomes extremely
difficult to obtain an accurate cost figure for the distribution of
goods through independent merchants. Approximations must
therefore be resorted to which are not altogether satisfactory.

Several sources of cost data for independent merchants are
available, the most comprehensive being the census studies.
But this material lacks adequate data on the very significant item
of proprietors' wages or salaries. Some arbitrary method of
calculating this vitally important cost must be made in order to
secure a total-cost figure. For small selected groups of inde-
pendent stores a number of excellent sources are available. Dun
& Bradstreet's " Retail Survey" is especially valuable in this
connection. Other sources include the Harvard University
Bureau of Business Research, the National Cash Register Com-
pany, a few trade associations and some trade periodicals. In the
data which follow the authors have found it necessary to make a
number of arbitrary calculations which are fully explained in the
appropriate places.

142

THE CHAIN STORE PROBLEM

Chain Store Costs. To determine chain store expenses is a
very difficult task, as was shown in the preceding paragraphs.
Most of the cost studies made to date fail to separate retail store
expenses from chain store warehouse expense. Therefore the
resultant cost figure is a combination of retail expenses plus some
wholesale costs, since not all of the chains operate warehouses
even in lines of trade where warehouses are common. It is a
hybrid cost not a retail or a ret ail- wholesale cost figure. How-
ever, costs of that nature do serve a useful purpose in showing the
approximate relative expenses incurred in conducting different
types of chain stores and also in disclosing trends so long as the
data are taken merely as rough approximations. Table 23 shows
the operating expenses of various kinds of chain stores for the
years 1929, 1933, and 1935.

TABLE 23. CHAIN STORE OPERATING COSTS, BY KIND OF BUSINESS, 1929,

1933, 1935

Kind of business

% of consumer's dollar

1929

1933

1935

Drue

28.8
16.0
31 9
25 2
23. 8*
37. 9 6
26. 9*
29. 9*
31 S b

28.0
18.5
31.8
29
32 4"
42.0
29.7
30.6
35 4

26 5
16.8
29 5
27 2
29 2 a
36.3
21.9
28 8
30.8

Grocery, and grocery and meats
Shoe

Variety ....
Filling station
Furniture

Hardware

Women's ready-to-wear

Men's clothing and furnishing.

Source. Computed from data published by the Bureau of the Census.
a Does not include the cost of operating bulk-tank stations which is the wholesale part
of the business

6 Does not include costs of operating chain store warehouses.

The cost of operating different types of stores varies con-
siderably. For example, chain furniture stores take relatively
more than twice as much of the consumer's dollar to cover their
operating expenses as do chain grocery stores. It does not
follow necessarily that the latter are more than twice as efficient,
since it is naturally much more difficult and costly to retail
furniture than groceries.

CHAIN STORE COSTS AND PROFITS 143

When subjected to interpretative analysis, the cost data for the
chain stores reveal many significant facts. For example, a com-
parison of expense ratios for 1929 and 1935 with those for 1933
discloses the fact that although chain stores were adversely
affected by the depression, they fared better than most other
types of industry. While costs rose during 1933, the increases
were not great and, as will be shown later in this chapter, profits
were made by practically every class of chain stores during the
depression years. An explanation for this stability lies in the
fact that chain stores are predominantly engaged in marketing
low-priced convenience merchandise, and sales volume in this
type of goods during depression periods suffers less than in other
types of merchandise.

It has been frequently intimated that chain store costs are
gradually rising and thereby tend to reduce their competitive
advantage. The data shown in Table 23 appear to discredit any
such conclusion. Expenses did increase in 1933 over 1929, but in
all the nine kinds of business under consideration the 1935 costs
were lower than in 1933, and in at least six out of the nine lines
of business 1935 costs were lower than those incurred in 1929.
This tends to show that chain stores as a class are at least holding
their own in keeping down distribution costs.

Comparison of Chain and Independent-store Expenses. A
question of cardinal importance to the chain store problem is the
relative efficiency of chain and independent stores, and it is only
through a careful study of the respective operating costs and func-
tions of the two systems of distribution that needed light can be
thrown on this controversial issue. The paucity of data on this
point is indeed appalling. While many statistics on costs have
been gathered, few of them can be used for comparison. This is
a rather sad commentary on the quality of research in this field
and points to the need for gathering perhaps fewer figures, but
more meaningful ones, and on a comparable basis.

Because many chain organizations normally perform their own
wholesaling functions, usually through the maintenance of chain
store warehouses, while independent retailers buy a considerable
portion of their goods from independent wholesalers, it is neces-
sary to compare the gross margins and operating expenses of
chain stores (including chain store warehouses), on the one hand,
with gross margins and operating expenses of independent stores

144 THE CHAIN STORE PROBLEM

plus independent wholesalers on the other (see Table 24). The
data in this table are extremely incomplete because recent
figures relating to costs and profits are difficult to obtain for other
than individual chains. Statistics on scattered individual com-
panies are available but they are not necessarily representative,
and many of them include the costs of manufacturing and the
performance of other non-comparable functions.

It is significant that chains appear to be a more economical
method of distribution than the independent wholesaler-retailer
channel for most kinds of business. In the case of grocery
products the gross margin for corporate chains is 18.5 per cent as
compared to 28.7 per cent for the independent merchant- whole-
saler method, a difference of 10.2 per cent in favor of the former.
These figures tend to distort actual conditions, however, and
certain allowances must be made to reduce or correct the distor-
tion. First, the gross margin figure for chains should be raised
by 1.1 per cent to a total of 19.6 per cent to take into account the
fact that only 69.5 per cent of the merchandise billed through
chain store warehouses is actually handled by them. 1 On the
other hand, the expenses for the wholesaler-independent-retailer
method of distribution should be reduced possibly 3 or 4 per cent
to allow for the purchases that are made by the independent
retailers direct from manufacturers or through limited-function
middlemen whose costs are less than those of full-service whole-
salers. Even considering these allowances the chain system has
a cost advantage of 5 or 6 per cent in the distribution of food
products. This figure corresponds rather closely to the actual
difference in prices to consumers shown in Chap. VII. 2

A more striking cost advantage for the chain stores is shown
for most of the other lines of business. In the merchandising of
drugs the apparent difference in gross margins is 16.5 per cent in
favor of the chains. This figure, however, should be reduced to
allow for the considerable quantity of direct purchases made by
independent drugstores. When this factor is considered, it is

1 BECKMAN, T. N., and ENGLE, N. H., " Wholesaling Principles and Prac-
tice/' p. 494, Ronald Press Company, New York, 1937.

2 If the independent stores whose annual sales volume per store is less
than $10,000 were eliminated from consideration (and a very good case
could be made for eliminating them), then even a smaller cost differential
would result. As a matter of fact, in all studies other than the ones by the
Census no independent stores of such small size are included.

CHAIN STORE COSTS AND PROFITS

145

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* Percentage profit ta
e Computed from dat
d These are estimates
See Table 23.
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' Profit computed fro

146 THE CHAIN STORE PROBLEM

doubtful if the actual differential reaches 10 per cent and it may
even be less. This wide variation in expenses is due in no small
measure to the fact that chain drugstores had average net sales
of $85,000 per store as contrasted to the sales of only slightly
more than $17,000 for independent drugstores.

For the other lines of trade shown in Table 24, wholesale
margins were not considered, since the majority of these stores
purchase direct from manufacturers. The relative marketing
costs for the lines shown disclose a consistent differential in favor
of chains except for filling stations. Here the independents
appear to be able to operate with expenses 4.4 per cent below their
chain competitors. This fact may partially explain the move-
ment now underway for the widespread withdrawal of the major
oil companies from the retail distribution of petroleum
products.

The independent variety and furniture store operators have
managed to keep their costs in close proximity to those of their
larger rivals. In neither trade do their expenses exceed the chain
store figures by as much as 3 per cent. Local variety stores,
however, find themselves at a prohibitive purchasing disadvan-
tage and, indeed, they enjoy but a very small fraction of the
business. Chain apparel stores merchandise their goods at lower
costs than do independents, and the differential appears to vary
from 4 to 6 per cent.

Although comparative data reveal that chain stores have a
general cost advantage, it must not be assumed that all independ-
ent merchants find themselves in an inferior cost position. In
individual cases costs may actually be less for independent
retailers than for their chain rivals. Operating results for selected
grocery stores were recently published showing average retail
costs but 13.3 per cent for 1934. l This figure is even lower than
that attained by some of the leading grocery chains.

Effect of Size on Chain Store Costs. Whether chain store
merchandising is a business of decreasing costs is a vitally impor-
tant consideration at the present time. Most of the so-called
" discriminatory " taxes levied on chains are based on that assump-
tion, and several other types of chain store legislation have given
much weight to that premise. The data on this salient factor,
though highly desirable, are very fragmentary. In the majority

1 DIPMAN, CARL W., "Average Operating Statement of 24 Selected
Grocerv Stores 1934." The Proareasive Grocer. Ainmst. 1Q3A.

CHAIN STORE COSTS AND PROFITS

147

of cases, no data are presented by size of chain. Even where the
data are so analyzed, different bases and standards are used. To
illustrate, the data published on chain stores by the Harvard
Bureau of Business Research are analyzed by size of chain based
on sales volume rather than the number of stores in the organiza-
tion. Moreover, it would appear that none or few of the real
small chains are included in the figures. Thus, from those studies

TABLE 25. RETAIL CHAIN STORE OPERATING EXPENSES, BY SIZE OP CHAIN,

1929
Expressed as a percentage of net sales

Kind of business

Total,
all
chains

Less
than 6
units

6-10
units

11-25

units

26-50
units

51-100
units

101-
500

units

501
unite,
and
over

Drug .

27 64

26.52

27.4

27.36

26.14

25 45

28 51 6

Groceries and meats

14 31

16 42/

17 40

14 99

13 82*

Shoes (women)

29 87

32 17

30 20

33 58

28 99

31 04 6

Variety

25 15

23 16

22 19

26 35

30 37

27 70

24 82*

Filling station

23 77

21 71

22 93

21 32

24 58

25 32

30 50

22 00

Furniture

37 92

43 59

37.51

35 22

32 73<*

Hardware

26 92

26 13

26 33

31 90

Women's ready-to-wear
Men's clothing and furnishing

29 87
31.84

30 93
30.04

28.54
31.69

32 87
33 17<

24 18

24.88-

Source: Census of Distribution, Retail Distribution, "Retail Chains."
The operating expenses listed do not include wholesaling costs such as are incurred in
operating chain store warehouses.
b More than 100 units.
c More than 10 units.
d More than 25 units.
More than 50 units.
/ Less than 26 units.
101 to 1,000 units.
h More than 1,000 units.

it is impossible to secure cost facts for chains with 2, 6, or 10
stores each. Even where an attempt has been made to analyze
the statistics by size of chain, as determined by the number of
units, down to the smallest chain organization, both retail and
chain store warehouse costs were included, as was done by the
Federal Trade Commission. The only study, therefore, that the
authors were able to uncover, that made a separation of retail and
wholesale costs, in which small as well as large chains were
included and in which chains were classified by the number of
retail units operated, was the Census of American Business of
1929. From that source Table 25 has been compiled. It is to
be regretted that no such data were presented for 1933 or 1935.

148 THE CHAIN STORE PROBLEM

According to the data in Table 25, economies do not invariably
arise from extending operations over a number of units. A
tendency for operating costs to decrease as the number of units
increases is apparent in the furniture, women's ready-to-wear,
and grocery and meat chains. Hardware and men's wear chain
costs tend to increase when units are added, whereas no definite
trend is discernible in the other lines.

Stated otherwise, increasing chain volume through the addition
of retail units does not necessarily result in a decrease in relative
operating costs when all lines of trade are considered, but the
exceptions are very important. For example, in the case of
grocery and meat chains, the expense differential between the
chains operating 1,000 stores or more and those operating 11 to
25 is 2.6 per cent, which in itself may not seem to be a significant
difference when expressed as a percentage. However, it means a
difference of approximately $1,000 per store when expressed in
dollars, and that is significant, especially when the ability to pay
graduated license taxes is considered.

CH4IN STORE PROFITS

Closely akin to operating costs in chain store distribution is
the problem of net profits. Indeed it is common business par-
lance to speak of gross margins, which include operating costs, as
gross profits. Profit is an illusive concept for business men and
economists alike; hence a word of clarification is needed. From
the business man's standpoint, profits, or the hope of them,
represent a primary reason for being in business. He looks upon
them as a measure of his success as a business man. He finds
them, if there are any, in the difference between his business
income and his outgo, or between his receipts and his merchandise
costs plus the costs of doing business. The economist, with a
scientific approach, delves a little deeper into the subject of
profits than does the business man. In the end, both come out
at about the same place. Profits, in a dynamic economy, are
essentially the price which society places upon the services of
business men as entrepreneurs. They tend to measure at once
society's demand for such services and the business man's
appraisal of his own worth.

Profits are essentially a residue. They are what is left after
paying for merchandise purchased, wages for services rendered,

CHAIN STORE COSTS AND PROFITS 149

rents for building and land occupied, interest for borrowed
capital, and taxes levied by governmental agencies. They com-
prise the funds available after deducting the costs of conducting
the business, including the cost of the merchandise.

Several sources of information relating to chain store profits
are available. The Federal Trade Commission gathered rather
complete data prior to 1930, the Harvard University Bureau of
Business Research compiles statistics for several classes of chain
stores, and the annual reports of individual corporations contain
much valuable material. But sources of recent chain store earn-
ings are few and widely scattered.

Federal Trade Commission Data on Chain Store Profits.
There is a wide variation in the percentages of net operating
profits realized by different kinds of business. Table 26 reveals

TABLE 26. NET OPERATING PROFITS OF CHAIN STORES
(Average for eight years)

Operating
Profits, % of
Kind of Chain Net Sales

Grocery . 2.10

Grocery and meat. 2.82

Meat . 2.45

Confectionery . 6 . 04

Drug . 4.21

Tobacco 2.68

Variety ($1 limit) . .9.16

Variety ($5 limit) ... .2.88

Variety (unlimited) .0.23

Men's ready-to-wear .... . . 2 . 39

Women's ready-to-wear. .. . 4.35

Men and women's ready-to-wear 8 84

Men's furnishings . 75

Women's accessories .. . 2.69

Hats and caps . . . 42 (loss)

Millinery .2.36

Men's shoes . 4 . 64

Women's shoes . . 3 . 45

Men's and women's shoes . . ..3.17

Dry goods . . 1.15

Dry goods and apparel 5 . 93

General merchandise 3 66

Furniture 1 1 . 46

Hardware 3.24

Source: Federal Trade Commission, "Chain Stores Sales, Costs, and Profits of Retail
Chains," p. 18. U.S. Government Printing Office, Washington, 1932.

150 THE CHAIN STORE PROBLEM

the net profits on sales for a wide variety of trades which the
Federal Trade Commission gathered for the years 1913, 1919,
1922, 1925, 1927, 1928, 1929, and 1930.

With one insignificant exception chains as a class showed net
profits in all trades, though the variation among the different
kinds of business was very great. Food chains showed profits
ranging from 2.10 per cent for groceries to 2.82 per cent for com-
bination grocery and meat stores. Furniture stores earning a
net operating profit of 11.46 per cent and variety stores ($1 limit)
with a profit of 9.16 per cent proved to be the most successful
kinds of chain stores during these years when judged from the
profitableness of the business. Inasmuch as the sales volume per
store for these various types of trade varies considerably, the
profits earned per store vary even more widely than do the sales
percentage figures.

The Commission also attempted to determine the influence of
the length of the chain upon net profits, and, as shown in Table 9,
Chap. IV, no uniform tendency was visible. In some trades
profits increased with the size of the chain, and in others they
decreased, although it is true that in those lines of business in
which chain stores are most prominent, there was an inclination
for net profits expressed as a percentage of net sales to become
greater with the increase of chain store units.

Profit on Invested Capital. When expressed as a percentage of
invested capital the profit percentages earned by various types of
chain stores loom much larger than when expressed in terms of
net sales. Table 27 shows the net gain of a number of chain
systems individually and by groups for the years 1929 through
1936 as a percentage of net worth. It is evident that the return
on the net investment compares very favorably with other types
of business. In fact, few businesses were as fortunate as the chain
stores during the depression.

The net earnings of all the chain organizations listed in Table
27 average better than 10 per cent, which is truly remarkable
since the years covered are largely depression years. It is doubt-
ful if any other large industry was able to show such a record.
Individually, there was considerable variation between companies
but when considered by groups, earnings were relatively stable
and high. The grocery chains show net profits of about 10 per
cent on net worth, the variety chains about 14 per cent, the shoe

CHAIN STORE COSTS AND PROFITS

151

TABLE 27. CHAIN STORE NET PROFITS" AS A PERCENTAGE OP

NET WORTH

Kind of chain

1929

1930

1931

1932

1933

1934

1935

1936

Grocery chains:
The Great A. & P. Tea Co .
Kroger Groc. <fe Bak. Co. . .

20 6
11 2
15 9

22 5
4.3
10.1

19.7
5 3
11.5

14.4
5.9
12.4

12.7
9 7
9 4

10 3
8 8
8 5

10 3
8 4
7 5

10.2
7 1
9 o

American Stores

15.2

13 3

13.5

12.3

12 9

8 1

First National Stores
National Tea Co

24.1
12 9

22.0
6 5

21.2
4

17.1
5 8

16 5

7 1

22
2 8

12
2 2

13 9
1 6

25.4

22 9

18 9

8 7

6 2

7 3

7 5

Dominion Stores ...

14 1

12 3

11 9

8 3

D b

Southern Grocery Co

D<>

D b

7 4

5 1

7 2

9 4

8 1

David Pender

12 4

1 8

5 5

9 3

5 7

8 8

Shaffer Stores . . ...

2 3

1 8

3 4

3 1

3 7

6 4

10.8

9 6

7 4

7 3

2 5

D b

Average earnings per dol-
lar of net worth*

17.9

15.4

14 7

11 5

9 4

8 6

8 9

Limited-price variety chains:
F W Woolworth Co

22 4

20 5

24 9

13 6

16 9

18 2

16 9

S. S. Kresge Co

17.9

12.4

11.1

6 6

9 2

10 4

10 2

10 7

McCrory Stores

8 3

7 7

3 9

22 1

21 2

J J. Newberry . ....

10 6

15 2

7 1

5 4

9 s

12 4

13 9

McLellan Stores ... .

10 7

2 8

4 6

23 5

22 8

Neisner Brothers . ,

18 5

/>*

D*>

9 4

13 5

13 7

16 1

G C Murphy

13 4

9 6

11 9

8 8

16 2

20 1

20 2

22 7

W. T. Grant

14 8

14 6

12 5

6 4

12 2

9 1

10 9

14 2

S H. Kress & Co

16 6

9 8

8 7

5 7

8 1

8 9

8 6

8 5

Average earnings per dol-
lar of net worth 6

18 6

15 1

15.8

9.5

12 9

14.5

13.3

14.2

Shoe chains:
Melville Shoe Co

20 6

16 8

11 7

10 5

18 6

20 7

21 6

24 5

G R. Kmney Co
Schiff Co . ...

8 4
19 4

1 1

13 7

Db
8 5

Db
19.2

2 9
14.2

4
11 2

2 1

13 9

Average earnings per dol-
lar of net worth c

14 9

9 1

3 3

6 5

10 7

13.4

13.8

15 6

Drug chains:
Walgreen

18.6

9 5*

11.8

11 5

13 3

16.8

14.0

15.8

Peoples Drug Stores

17 1

12 2

10 8

8 6

10 4

19 2

16 3

21 7

Average earnings per dol-
lar of net worth . . .

18 3

10 2

11 7

10 8

12 4

17.5

14 7

17.3

Net profit after deduction of Federal tax.

& Deficits deducted when computing average return on net worth.

Average earnings are weighted and not merely arithmetic averages.

* Computed on basis of returns for first nine months of the year and therefore possibly a
little low.

D Deficit

R In receivership

X Figures not available

Source: Computed from annual reports in Moody 's, Standard Statistics, and other
services.

152

THE CHAIN STORE PROBLEM

chains slightly lower, perhaps 13 per cent, and drug chains,
about 14 per cent.

As a corporation's earning power is generally judged on
the basis of its ability to return profits on the capital invested,

TABLE 28. CHAIN STORE NET PROFITS PER STORE, FOR SELECTED TRADES,

1920-1936

Kind of chain

Year

Grocery, and

grocery and

Shoe"

Drug 4

Variety*

meat 6

1920

$ 882

$8,821

$ 5,399

$ 7,760

1921

1,241

9,341

10,852

10,925

1922

1,225

7,838

14,042

15,929

1923

1,279

6,764

9,727

17,996

1924

1,324

4,851

11,423

16,909

1925

1,206

4,327

11,260

18,611

1926

1,259

3,147

10,127

19,020

1927

1,334

3,514

9,456

20,127

1928

1,578

3,459

11,137

18,749

1929

1,694

3,242

7,841

16,237

1930

1,490

1,811

4,144

13,690

1931

1,518

542

4,608

13,360

1932

1,231

3,594

7,600

1933

1,228

1,566

4,200

10,738

1934

1,338

2,002

6,298

13,382

1935

950

2,030

5,569

12,532

1936

838

2,416

6,582

14,014

Net profit computed from data presented in " The Cham Stores Come of Age," by Hugh
M. Foster, Printers' Ink Monthly, April 1937, pp. 79-94.

ft Sample for computing net profit includes 72.7 per cent of total chain store volume in
groceries.

c Sample for computing net profit includes 21.6 per cent of total chain store volume in
shoes

d Sample for computing net profit includes 24.3 per cent of total chain store volume in
drugs.

Sample for computing net profit includes practically 100 per cent of total variety chain
sales.

it follows that chains qualify as both lucrative and stable dividend
producers. By practically all standards, large corporate chains
have been, over a period of years, extremely profitable enterprises.
Operating Profits per Store. In view of the recent legislation
affecting chain stores, a significant analysis of earnings is that of
the net profits per store. Previously it was shown that earnings

CHAIN STORE COSTS AND PROFITS

153

expressed as a percentage of net sales vary widely among the
different classes of chain stores. The data in Table 28 show that
the profits per store vary in even greater degree. Variety store
profits are many times greater than chain grocery store earnings.
The latter are now averaging approximately $1,000 per store,
while the former are running well-nigh 15 times that figure.
Chain shoe stores are netting about $2,500 annually and chain
drugstores in excess of $6,000 each. These profit figures are
somewhat understated, as Federal income taxes were deducted
before computing the net profit.

18,000
16,000
14,000
^_ 12,000
*o 10,000

8000
z
6000

4000
2000

<$y

\
\

^-x

\
\

^x.

% o

\
\

/
/

Xx ^

\
\

^ f ,

Greet

ry a

nd a

pocei

x ">

-y <^/7

*""",*

^/7?e

-,4

u \

.^^_

s CT' Q> CT O^ p-N CT"* C^ ^ O^ CT CT^ CT^ O^ O^ O*- s

FIG. 6. Chain store net profits per store, for selected trades, 1920-1936.

The trend of profits per store during the past 17 years is
revealed by Fig. 6. Several interesting tendencies are worthy of
mention. In the case of grocery chains, profits have remained
rather steady in the neighborhood of $1,200 per store, with a
definite downward tendency in recent years. These declining
profits are not due to an increase in expenses, as it was shown
earlier in the chapter that chain grocery costs have declined since
1933. Nor are they due to a fall in sales volume, since Table 29
and Fig. 7 show that volume per store has increased rather than
decreased in recent years. Nor can the decline in net profit be
traceable to the chain store tax as that is too recent a development
materially to affect the profit figures shown. Even though the
tax were affecting chain stores, it would show up in an increase in

154

THE CHAIN STORE PROBLEM

net operating costs. There has been no noticeable increase in
that direction. The elimination of the above possibilities leaves
only one probable explanation, and that is that competition has
become more intense for the grocery chains and they have been
forced to lower their prices to meet the competition of other
chains, the more efficient independents, and the supermarkets.

Variety store sales and profits per store were adversely affected
by the depression, but the trend for both figures is definitely

TABLE 29. CHAIN STORE SALES PER STORE FOR SELECTED TRADES,

1920-1936*

Kind of chain

Year

Grocery, and

grocery and

Shoe

Drug

Variety

meat

1920

$51 , 146

$189,235

$170,062

$137,069

1921

43,728

129,677

154,648

149,527

1922

38,572

115,035

170,465

162,112

1923

37,750

107,111

147,184

177,260

1924

35,463

87,295

152,945

184,120

1925

35,532

70,401

190,920

194,184

1926

42,206

62,491

153,984

198,622

1927

47,532

58,345

149,387

197,657

1928

56,546

58,113

136,089

190,911

1929

60,882

59,116

122,133

184,791

1930

60,514

55,295

104,268

170,144

1931

58,692

47,632

126,025

161,667

1932

50,478

37,278

107,426

141,072

1933

49,431

39,115

104,991

145,130

1934

52,983

44,454

118,363

158,437

1935

56,402

46,682

125,150

159,897

1936

69,730

51,437

132,648

177,295

Computed from same source as data in Table 28 and the samples are the same.

upward with the return of more prosperous business conditions.
Shoe chain stores have demonstrated a very decided downward
trend in both sales and profits per store. During 1920 sales
averaged $189,235 for each of the 101 chain shoe stores listed, but
during the past ten years average sales per store have in no year
reached $60,000, nor have profits gone above $3,514. Shoe chains
felt the effects of the depression acutely, and during 1932 their
profits were virtually eliminated when the 1,109 units averaged

CHAIN STORE COSTS AND PROFITS

155

but $90 net profit per store. Conditions in the chain shoe trade
reflect the changes that have resulted from the entrance of many
chain store companies into that business, although their net
profits in relation to net worth are still substantial.

Chain drugstore sales and profits per store, while showing the
results of the depression, have remained relatively stable. Sales

$ 200,000
180,000
160,000
140.000
120,000
- 100,000

"> 80,000
60,000
40,000
20,000

^ *
\

"^s

\
\

S <

,- '

" \

^^ c

^ n

^ _^

,/ x

^^^

and

^/~oc<

r/jL

eoft^.

s-fc "^

"**

"""-

--'

^^'*

5 OJ ?~^ ^f i-O <Q r~~ GO CS^ O ~~ ^^ r*O ^" to cO
^ OO CvJ f^J Cv/ cvj cvi ^J C^J cv ro t**") r ^ rO rO rO ro

FIG. 7. Chain sales per store, for selected trades, 1920-1936.

per store average well over $100,000, and profits are running
about 4 or 5 per cent.

One outstanding feature revealed by the above data is that
sales and profits for different kinds of chain stores vary greatly.
This is especially significant in view of recent chain store taxation
which classifies chain stores merely on the basis of the number
of units operated. It would appear that a more equitable con-
dition would result if variations were also made among the differ-
ent kinds of stores. Certainly stores netting upwards of $10,000
annually exhibit greater capacity to pay taxes than chains
earning a tenth, or less, of that amount per store unit.

CHAPTER X

CONSUMER PATRONAGE OF CHAIN AND
INDEPENDENT STORES

A disputed question of long standing is one that relates to the
attitude of consumers toward chain and independent stores, the
extent to which they patronize the two types of stores, and
the particular reasons for such patronage.

It is to be assumed that consumers as a rule know what they
want. One often hears the expressions : " The consumer is King/'
or "The consumer is the court of last resort." This is certainly
true to the extent that the consumer rejects or accepts what the
business man offers. It is, therefore, an axiomatic principle of
merchandising to have the goods which consumers desire, at the
places where they are wanted, at a time to meet consumer
demand, and at prices which consumers prefer to pay or readily
accept.

In pursuing this principle, there has been a vague notion that
consumers desire any number of things, but considerable differ-
ence of opinion is current as to just what those things are and the
relative intensity of the consumer's desire or demand for them.
For example, chain store executives have been contending that
price is the sole desideratum from the consumer's viewpoint and
that consumers patronize their stores merely because they can
secure merchandise at lower prices than charged by independents.
This sort of reasoning has been advanced in opposition to sugges-
tions that chain stores should pass on to the consumers at least a
part of the chain store tax which is now being levied in some 20
states. Many others, however, contend that the chains have so
many advantages that they may pass on part of the tax by raising
prices, absorb the difference out of profits, and still undersell the
independent or the smaller chains. It is also alleged that price
does not occupy so high a place in the consumer's mind when it
comes to choosing the type of store from which to buy.

Purpose of Consumer Buying -preference Surveys. Just what
place price occupies as a patronage motive no one can tell without
further investigation. As far as the authors know, only four

156

CONSUMER PATRONAGE OF CHAIN STORES 157

studies have been made to date on this score, one by Professor
Paul D. Converse, of the University of Illinois, one by the Federal
Trade Commission, one by Professor George E. Fouch, of
Wittenberg College, and one was conducted in Florida by one of
the authors. The first study 1 was made in Champaign-Urbana,
111., and the number of consumers interviewed was not given, but
it is believed to have been very small. The second 2 investigation
covered 30 communities, but these towns had an average popula-
tion in 1930 of less than 4,000 inhabitants, and the largest town
numbered but 5,106 persons. Furthermore, the number of con-
sumers interrogated on their attitudes toward chains or inde-
pendents was limited to 495, only 312 of whom gave information
as to reasons for buying from chain or independent stores. More-
over, in the Commission's Report it is stated that only 85 of these
persons represented "what is probably the typical consumer/'
the remainder consisting of business and professional men,
bankers, and others, whose attitudes are not typical of the average
consumer. The study conducted by Professor Fouch was made in
Springfield, Ohio, 3 and, though the sample secured was ample, it
can hardly be claimed that the city studied is typical of the chain
store situation in the United States generally. Springfield, a city
of 69,000 persons, has only 15 national chain grocery stores and
some 68 grocery stores belonging to local chains. The authors
feel, however, that this latter study reveals some very interesting
data relative to consumers' attitudes and for that reason are
drawing freely on this particular survey which was made under
the supervision of one of the authors.

Nature of the Florida Consumer Buying -preference Survey.
With the view to determining factually consumer reactions to
various patronage motives, a survey was undertaken in four
Florida cities on Aug. 27, 1935. Jacksonville was chosen to

1 CONVERSE, PAUL D., "Prices and Services of Chain and Independent
Stores in Champaign-Urbana, Illinois/' The Bulletin of the National
Association of Teachers of Marketing and Advertising, 1931 series, October,
No. 4, New York.

2 Federal Trade Commission, " Chain Stores The Chain Store in the
Small Town/' pp. 50-60, U. S. Government Printing Office, Washington,
1934.

3 FOUCH, GEORGE E., " Patronage Motivation in the Purchasing of
Groceries by Springfield, Ohio, Consumers,' 1 a thesis submitted for the
degree of Master in Business Administration, Ohio State University, 1937-

158 THE CHAIN STORE PROBLEM

represent the largest cities, Orlando was selected as representative
of the intermediate-sized cities, and Lakeland and Tallahassee as
representative of cities having less than 25,000 inhabitants.

The schedule used in this survey (shown in Appendix F) was
designed to yield information along the following lines :

1. The type of store, chain or independent, from which the
bulk of the family groceries, drugs, shoes, and women's ready-to-
wear are normally purchased was ascertained. These classes of
stores were selected principally for two reasons. In the first
place, they represent kinds of business in which chains play a
prominent role. Second, they represent the two most important
classes of merchandise, namely, convenience goods and shopping
goods.

Parenthetically, it may be stated that convenience goods which
are typified in this study by groceries and drugs are those items
of merchandise which are purchased by the average consumer at
the most convenient place, at frequent intervals, and in small
amounts. The unit value of such items is usually small and
hence does not justify much shopping on the part of the house-
wife. Furthermore, most articles in the convenience goods
field are generally well known to the housewife, the consumer is
conscious of his need, and immediate satisfaction of the need is
usually desired. Shopping goods, on the other hand, which are
typified by shoes and women's ready-to-wear are those articles
of merchandise which the average consumer normally buys
after visiting two or more stores for the purpose of making com-
parisons of quality, price, and, particularly, style. Such mer-
chandise is of a higher unit value than convenience goods, it is
not purchased so frequently by the average housewife, and
immediate satisfaction of the need is not so essential.

2. A second point in the survey dealt with the reasons why the
housewife prefers to buy most of her groceries in a given type of
store. An attempt was made to secure three reasons from each
respondent for patronizing a chain or independent grocery store,
and every effort was made to secure the honest first reactions
of the consumer. Interviewers were instructed to mark the
reasons stated as "first," "second," and "third" in the order
in which they were given expression. To facilitate the securing
of these data on a more or less uniform basis, 10 of the more
common reasons were listed on the schedule and additional

CONSUMER PATRONAGE OF CHAIN STORES 159

space was provided so that reasons other than listed could be
indicated if specified by the consumer.

3. A third question was designed to elicit information from the
consumer on reasons for buying women's ready-to-wear from
chain or independent stores. It was felt that reasons for buying
groceries also applied to the other class of convenience goods
consisting of drugs, and that reasons for buying women's ready-
to-wear would be equally applicable to the purchase of shoes,
particularly for women and children. In addition to the 10
more or less common or general reasons listed under groceries
for convenience in checking, another reason relating to style was
included in Question 3 of the schedule.

4. With a view to securing precise information as to the
economic condition of the families covered in the survey, provi-
sion was made on the schedule for an inquiry of the monthly
rental of the dwelling occupied by the respondent. For this
purpose the families interviewed were divided into those on
relief, those occupying dwellings whose monthly rental was
estimated at $15.00 and under, those whose dwellings commanded
a monthly rental of from $16.00 to $25.00, those with a monthly
rental of from $26.00 to $50.00, and residences with a monthly
rental value of more than $50.00.

5. Adequate space was provided on the schedule for remarks
either by the interviewer or by the respondent. Every schedule
was dated and signed by the interviewer who was required care-
fully to report on the schedule the name of the consumer inter-
viewed and the address.

The Canvass. As previously indicated, the survey was con-
ducted in four cities representative of different-sized Florida
communities. The canvass was made in all the cities within a
period of five days in the latter part of August, 1935.

The interviewers were selected with the greatest of care and
were carefully trained before going into the field. The desire to
secure only accurate information was impressed upon the can-
vassers. They were allowed some leeway in gathering the data
but were directed to secure information only from the housewife,
who may be regarded as the typical consumer and the one who
actually does the purchasing. 1

1 A more detailed explanation of the canvass is to be found in "Prices in
Chain and Independent Stores in Florida " by T. N. Beckman, pp. 154-155.

160 THE CHAIN STORE PROBLEM

The schedules secured by the interviewers were carefully
examined for completeness and consistency. Schedules showing
irregularities that could not be corrected by the editors were
discarded. Thanks to the care exercised during the canvass,
relatively few schedules had to be discarded.

Representativeness of the Sample. An attempt was made to
secure a sample of approximately 5 per cent of the families found
in the cities canvassed in the survey. Inasmuch as there were
47,938 families in the four cities 1 studied, an actual sample of
5.74 per cent was obtained by securing satisfactory schedules
from 2,752 families. Even allowing for the increase in popula-
tion that has taken place since 1930, the sample would still be
somewhat in excess of 5 per cent.

In order that due consideration might be given to possible
variations in consumer attitudes and buying preferences because
of differences in their standards of living and income levels, an
attempt was made to secure information from consumers in all
strata of society and the interviewers grouped them in one of five
categories according to the monthly rental of the homes they
occupied. For tabulating purposes, the families in the two lowest
income groups were treated as one class, designated as the "very
low income group/' They included those on relief and families
which resided in homes whose monthly rental was $15 or under.
The low-income group included families residing in places with
a monthly rental valued at $16 to $25. The medium-income
group included families living in dwellings with an estimated
monthly rental of $26 to $50. The last, or "higher income
group/' included all families occupying homes with an estimated
rental value of more than $50.

Table 30 shows the distribution of respondents by income
groups. It indicates that adequate representation was given
to all classes of consumers by income groups, if it is assumed
that the rental value of the property occupied as a residence is
indicative of a family's station in life and that there is a direct
relationship between income received and the amount spent for
rent or its equivalent.

1 Fifteenth Census of the United States. 1930, Population Bulletin
Families, Florida, Tables 9 and 21, U.S. Government Printing Office,
Washington, 1932.

CONSUMER PATRONAGE OF CHAIN STORES

161

As might be expected, the largest proportion of the families
canvassed was in the low-income group within which more
consumers are to be found than in any other class, at least in
the area surveyed. The number of consumers interrogated in
the other income groups was in relation, although perhaps not
in exact ratio, to the relative number of consumers in each of
those groups.

TABLE 30. DISTRIBUTION OF 2,752 FAMILIES ACCORDING TO INCOME

GROUPS, BY CITIES

City

Income groups

Total
for all
income
groups

Very
low

Low

Medium

High

All cities:
Number

2,752
100.0

2,016
100.0

319
100.0

267
100

150
100.0

849
30.8

619
30.7

103
32.3

111
41.5

16
10.7

963
35.0

702
34.8

135
42.3

95
35 6

31
20.7

709
25.8

524
26.0

74
23.2

48
18.0

63
42.0

231

8.4

171
8.5

7
2.2

13
4.9

40
26.6

Per cent

Jacksonville :
Number
Per cent ....

Orlando :
Number ...

Per cent . . .
Lakeland :
Number ....
Per cent
Tallahassee :
Number . .

Per cent

Division of Purchases between Chains and Independents.
Of the 2,752 consumers from whom information was obtained in
answer to the question, "At what type of store do you purchase
most of your groceries?" 1,496, or 54.36 per cent, indicated that
they bought most of their groceries from chain stores, while
1,154, constituting 41.93 per cent, purchased the bulk of their
groceries from independents, and 102, or 3.71 per cent, stated
that their purchases were about equally divided between chains
and independents.

162

THE CHAIN STORE PROBLEM

In the case of drugs, only 34.81 per cent of the 2,752 consumers
purchased the bulk of such merchandise from chains, while
60.36 per cent largely patronized independents, and 4.83 per
cent claimed to divide their purchases of drugs equally between
chains and independents. In the purchase of shoes, 37.90 per
cent of the consumers bought largely from chains, while 52.58
per cent purchased most of their shoes from independents, and
9.52 per cent divided their purchases equally between the two
types of stores. Women's ready-to-wear, while also in the shop-
ping class, like shoes, was bought largely from chains by a smaller
percentage of the consumers than in the case of shoes. Con-
siderably over one half (55.7 per cent) of the consumers made
purchases of women's ready-to-wear regularly from independent
stores, and 13.27 per cent of the consumers had no special
preference but claimed to divide their purchases of such goods
equally between chains and independents.

TABLE 31. NUMBER AND PROPORTION OF CONSUMERS PURCHASING
SPECIFIED LINES OF MERCHANDISE FROM CHAIN AND INDEPENDENT

STORES, ALL CITIES
Total number of consumers = 2,752

Kind of
business

Buy most of the goods from

Divide purchases
equally

Chains

Independents

Number
of con-
sumers

%of
all con-
sumers

Number
of con-
sumers

%of
all con-
sumers

Number
of con-
sumers

%of
all con-
sumers

Total .

4,351
1,496
958
1,043

854

5,795
1,154
1,661
1,447

1,533

862
102
133
262

365

3.71

4.83
9.52

13.27

Groceries

54.36
J34.81
37.90

31.63

41.93
60.36
52.58

55.70

Drugs

Shoes

Women's ready-
to-wear

Summing up the data appearing in Table 31, one may conclude
that consumers favor chains more than independents in the
purchase of groceries, but the reverse is true in their purchases
of drugs. Next to groceries, chains operating shoe stores meet
with the greatest favor of consumers, followed by drugstore

CONSUMER PATRONAGE OF CHAIN STORES 163

chains and by women's ready-to-wear chain stores, respectively.
In all cases except groceries, over one-half of the consumers buy
most of their goods from independents. In women's ready-to-
wear, where the style element is of some importance, a larger
number of consumers failed to express any special preference than
was true of any of the other classes of merchandise.

Substantial differences may be noted in the division of con-
sumer patronage between chains and independents in the different
cities (see Table 32). The largest proportion of consumers who
buy most of their groceries from chain stores are to be found in
Jacksonville, while each of the remaining three cities showed a
consistently lower preference for chains in the purchase of
groceries. While in Jacksonville 60.37 per cent of the consumers
buy the bulk of their groceries from chain stores, in Orlando
only 34.80 per cent give most of their patronage to chain grocery
stores and in Lakeland only 35.96 per cent; but in Tallahassee
as many as 48 per cent of the consumers prefer to buy most of
their groceries from chains. In the purchase of shopping goods,
Jacksonville leads in the preference for chains, followed by Lake-
land, and Orlando. Only 6 per cent of the consumers interviewed
in Tallahassee buy most of their shoes and women's ready-to-
wear from chain stores. No doubt in some of the cases the
availability of chain stores in a given line of business in the com-
munity may be as potent a factor in influencing consumer choice
of the type of store as is the consumer's attitude which is based
on other grounds.

Conversely, the preference for independent stores is greater in
smaller communities than in the large cities where trading is more
impersonal. In the smaller towns a larger percentage of the con-
sumers also seem to divide their purchases of women's ready-to-
wear equally between chains and independents, indicating that a
number of consumers have no strong feelings in the matter as
yet, whereas in the larger cities consumer attitudes toward chain
stores and independents are apparently more crystallized. The
latter circumstance may have been occasioned by the longer
existence of chains in the large cities. On the other hand, the
relatively recent invasion of the smaller cities by chains has not
as yet resulted in a large following.

Division of Purchases between Chains and Independents, by
Income Groups. In Table 33 an analysis by income groups is

164

THE CHAIN STORE PROBLEM

TABLE 32. NUMBER AND PROPORTION OF CONSUMERS PURCHASING
SPECIFIED LINES OF MERCHANDISE FROM CHAIN AND
INDEPENDENT STORES, BY CITIES

Kind of
business

Buy most goods from

Divide purchases
equally

Chains

Independents

Number
of con-
sumers

% of all
con-
sumers

Number
of con-

% of all
con-

Number
of con-

% of all
con-

sumers

Jacksonville

Grocery

1 217

60.37

736

36 51

3 12

Drug
Shoe

779
909

38.64
45.09

1,135
894

56.30
44.35

102
213

5.06
10.56

Women's ready-
to-wear

730

36.21

1,040

51.59

246

12.20

Orlando

Grocery

Ill

34.80

201

63.01

2.19

Drug
Shoe
Women's ready-
to-wear

46
59

14.42
18.50

16.93

263
250

247

82.44
78.36

77.43

10
10

3.14
3.14

5 64

Lakeland

Grocery

35.96

157

58.80

5.24

Drue

102

38.20

156

58.43

3.37

Shoe
Women's ready-
to-wear ....

66
61

24.72
22.85

182
137

68.16
51.31

19
69

7.12
25.84

Tallahassee

Grocery

48.00

40.00

12.00

Drue

20.67

107

71.33

8.00

Shoe

6.00

121

80.87

13.33

Women's ready-
to-wear

6.00

109

72.67

21.33

CONSUMER PATRONAGE OF CHAIN STORES

165

presented of consumer preferences for buying groceries from chain
stores and from independents. The data are given for all four
cities combined. Not all of the consumers interviewed expressed
a definite preference. There were 102 of the 2,752 consumers
interviewed who stated that they divided their purchases of
groceries equally between chains and independents. Conse-
quently, the data in Table 33 are shown for only 2,650 families.

TABLE 33. NUMBER AND PROPORTION OP CONSUMERS BUYING MOST OF

THEIR GROCERIES PROM CHAINS AND INDEPENDENTS, CLASSIFIED

ACCORDING TO INCOME GROUPS

Income group

Percentage
distribu-
tion by
income
groups

Total

Consumers buying
most of their
groceries from

Num-
ber

Chains

Inde-
pendent

Num-
ber

All income groups ....
Very low income group. .
Low-income group

100.0
31 1
35 6
25 5

7.8

2,650
823
943
676
208

100.0
100.0
100.0
100.0
100.0

1,496
420
524
422
130

56.5
51
55.6
62.4
62.5

1,154
403
419
254

43.5
49.0
44.4
37.6
37.5

Medium-income group . .
Higher income group ....

From this table it will be noted that the distribution of the
families for which data are presented is representative as between
the different income groups, especially as related to the distribu-
tion shown in Table 30. It will be further noted that consumers
in the very low income group patronize chain grocery stores the
least and that a much larger proportion of the consumers in the
medium- and higher income groups buy most of their groceries
from chain stores. These proportions are 51 per cent for con-
sumers in the very low income group, 55.6 per cent for consumers
in the low-income group, 62.4 per cent for consumers in the
medium-income group, and 62.5 per cent for consumers in the
higher income classification. Naturally, the reverse is true of
independent store patronage. While only 37.5 per cent of the
consumers in the higher income group buy the bulk of their
groceries from independent stores, as much as 49 per cent of the

166

THE CHAIN STORE PROBLEM

consumers in the very low income group extend such patronage to
independent merchants. This fact takes on significance when
related to the reasons for patronage that will be discussed in the
following pages.

A similar analysis was made for women's ready-to-wear.
Table 34 shows the number and proportion of consumers buying
most of their requirements in such merchandise from chain stores
or from independents. Not all of the consumers expressed a
definite preference for either chain stores or independents in the
purchase of women's ready-to-wear; hence, the data on this class
of merchandise are given for only 2,387 of the 2,752 families
interviewed. The remaining 365 consumers claimed to divide
their purchases equally among chains and independents.

From the second column of Table 34 it is evident that the
distribution of the consumers indicating the type of store from
which they buy the bulk of women's ready-to-wear is representa-
tive of the various strata or economic groups. In this tabulation
consumers in the very low income group made up 29.1 per cent,

TABLE 34. NUMBER AND PROPORTION OF CONSUMERS BUYING MOST OF

THEIR REQUIREMENTS IN WOMEN'S READY-TO-WEAR FROM CHAINS

AND INDEPENDENTS, CLASSIFIED ACCORDING TO INCOME GROUPS

Income group

Percentage
distribu-
tion by
income
groups

Total

Consumers buying
most of their women's
ready-to-wear from

Num-
ber

Chains

Inde-
pendents

Num-
ber

All income groups ....
Very low income group. .
Low-income group

100.0
29.1
35.5
27.4
8.0

2,387

694
847
655
191

100.0
100.0
100.0
100.0
100.0

854
291
348
182
36

35.8
41.9
40.7
27.9
18.9

1,533
403
502
473
155

64.2
58.1
59.3
72.1
81.1

Medium-income group. .
Higher income group

consumers in the low-income group constituted 35.5 per cent of
the total number included, consumers in the medium-income
group represented 27.5 per cent, and consumers in the higher
income group comprised 8.0 per cent of all consumers for whom

CONSUMER PATRONAGE OF CHAIN STORES 167

data are given in the table. These figures compare with the
relative importance of all the consumers shown in Table 30 by
income groups, with 30.8 per cent, 35.0 per cent, 25.8 per cent,
and 8.4 per cent, respectively.

Unlike the experience recorded for groceries, consumers in the
very low income group patronize chain stores in their purchase of
women's ready-to-wear more than the consumers in the higher
income groups. Of the 2,387 consumers who gave their experi-
ences in this regard, 35.8 per cent buy most of their requirements
in such merchandise from chain stores, and 64.2 per cent buy the
bulk of these goods from independently operated stores. In the
very low income group, 41.9 per cent of the consumers give their
patronage largely to chains and 58.1 per cent to independents.
In the low-income group, only 40.7 per cent of the consumers
give the bulk of their business to chain stores, while in the
medium-income group the percentage of consumers giving most
of their business in ready-to-wear to chain stores drops to 27.9
per cent, and in the higher income group it is as low as 18.9 per
cent. This, of course, means that fully 81.1 per cent of the
consumers in the higher income group buy most of their needs in
women's ready-to-wear from separately owned stores, and as
many as 72.1 per cent of the consumers in the medium-income
group do likewise. Just what the reasons are for such differences
in consumer attitudes and reactions will be analyzed in sub-
sequent chapters.

CHAPTER XI

WHY CONSUMERS BUY GROCERIES FROM CHAIN
OR INDEPENDENT STORES

In any attempt to analyze the reasons why consumers in any
given section of the United States patronize either chain stores or
independent merchants, several factors must be given due con-
sideration. In the first place, it is very difficult, although not
impossible, to determine accurately by means of interviews the
various factors which motivate consumers to buy at a certain type
of store. The difficulty can be largely overcome by employing
only carefully trained interviewers. Second, in seeking the
causes which motivate consumers to patronize one store in prefer-
ence to another, it must be remembered that while a single reason
may dominate, the choice is usually governed by a whole set of
circumstances. It becomes necessary, therefore, to consider not
only one but several patronage motives. Third, since the posi-
tion of a factor in a schedule may influence the consumer's reac-
tion to that factor, it becomes necessary to vary its location in the
schedule. l It may be necessary to place it first on some schedules,
second on others, etc. As far as it was possible, the above safe-
guards were followed in the Florida study in order that only
wholesome and unbiased results would be obtained.

Summary of Findings in the Florida Consumer Survey. The
consumer patronage portion of the Florida study made in 1935
revealed some intensely interesting information as to the reasons
why consumers choose to buy from either chain or independent
stores. The summarized results of this investigation are pre-
sented in Table 35.

In the case of consumers who give the bulk of their patronage
in groceries to chain stores, the most frequently stated reason for

1 Since much of the controversy regarding chain store patronage appeals
centers about the element of price, the position of that important factor was
altered on the various schedules of the Florida study. A checkup revealed
that the position of price on the schedule made little difference in the results
obtained since the schedule was not shown to the consumer.

168

WHY CONSUMERS BUY GROCERIES FROM CHAIN STORES 169

such action is lower price. Under this heading fall 1,248, or
28.14 per cent, of the 4,435 reasons. No other single reason for
buying from chain stores approaches it in importance, although at
least three other reasons were stated frequently. These reasons,
in the order of their importance judged by the number of times
they were mentioned, are wider selection of goods, convenient
location, and better quality. The force of these motives for

TABLE 35. REASONS WHY CONSUMERS BUY MOST OF THE FAMILY
GROCERIES FROM CHAINS OR FROM INDEPENDENT MERCHANTS

Buying from chain

Buying from inde-

stores

pendent stores

Reason

Number

of reasons

% of total

of reasons

% of total

given by

reasons

given by

reasons

1,496

given

1,154

given

persons

Lower price

1,248

28.14

416

12 39

Convenient location . .

698

15.74

675

20.11

Better quality

631

14.23

487

14.51

Wider selection of goods . .

832

18 76

247

7 36

Pleasing personality ....

320

7.22

518

15 43

Credit

1.08

403

12 00

Delivery

104

2.34

235

7 00

Sanitary and clean ... .

152

3.43

117

3.49

Advertising

231

5.21

1 52

Good store appearance

1.51

1.10

Other reasons . .

104

2.34

171

5 09

Total reasons

4,435

100.00

3,357

100.00

patronizing chain grocery stores is shown by the fact that wider
selection of goods was mentioned 832 times by the 1,496 con-
sumers, representing 18.76 per cent of all the reasons given.
Convenient location of the stores was mentioned 698 times, or
15.74 per cent of all the reasons mentioned. These two reasons
together were mentioned more times than lower price. Fourth
in importance is better quality of the merchandise, which was
mentioned 631 times out of total of 4,435. Pleasing personality
of the store manager or of any of the employees was fifth in the
trade-pulling power of grocery chain stores, followed by advertis-

170

THE CHAIN STORE PROBLEM

ing, cleanliness of the store, delivery service offered to customers,
good store appearance, and credit. All other reasons combined
accounted for only 2.34 per cent of the total number of reasons.
The reason most often advanced for buying from independent
grocers is convenient location of the store. This reason was men-
tioned 675 times by the 1,154 consumers who trade largely with
independents, or 20.11 per cent of the total number of reasons
given by these persons. Next in importance is the pleasing

CHAINS

r- N>

INDEPENDENTS

Lower price
W/der selection of goods
Convenient location
Better quality
Pleasing personality

Advertising
Sanitary and clean
BiSSffi Delivery
Vtfffl Good store appearance

I \ Other reasons
FIG. 8. Percentage distributions of reasons given by consumers for buying

groceries from chain or independent stores.*
* The chart is based upon an analysis of totals of first, second, and third reasons.

personality of the proprietor or his employees, this reason being
mentioned 518 times, or 15.4 per cent of the total. Third in
patronage attraction is better quality of merchandise, which
followed closely behind pleasing personality, the former being
mentioned 487 times, or 14.51 per cent of the total number of
reasons. The fourth most important reason for buying from
independent grocers is lower price. It was mentioned 416 times
by the 1,154 persons. Obviously, the chain stores do not have a
monopoly on the price appeal; some independents apparently

WHY CONSUMERS BUY GROCERIES FROM CHAIN STORES 171

make such an appeal with equal force. The fifth reason is
credit, which was given 403 times, or 12 per cent of the total,
followed by wider selection of goods, delivery service, cleanliness
of the store, advertising, and good store appearance. All other
reasons combined were mentioned 171 times, constituting 5.09
per cent of the total number of reasons mentioned by the 1,154
persons.

A careful examination of the data presented in Table 35 and
Fig. 8 reveals the following significant facts :

1. In the case of grocery chain stores lower price is the single
most important patronage motive.

2. Lower price, however, is not the only reason why con-
sumers buy from chains. All of the other reasons combined
represent 71.86 per cent of the total number of reasons mentioned
by regular chain store customers.

3. Florida consumers are attracted to chain grocery stores by
appeals other than price, the three most powerful incentives in
addition to lower price being wider selection of goods, convenient
store location, and better quality of the merchandise.

4. If the total pulling power of grocery chains is to be meas-
ured by the aggregate of the reasons mentioned for such patron-
age, lower price represents but a little over one-fourth of the
attraction, while the three reasons next in importance represent
almost one-half of the attraction.

5. It is significant that 3.42 per cent of the reasons for buying
groceries from chain stores are to be found in the delivery and
credit service given by the stores, although such stores are not
supposed to render such services.

6. Convenient store location ranks first in trade-pulling-power
of independents, exceeding in importance both credit and delivery
services. This is a significant factor also in the choice of chain
stores.

7. While price is also an important factor in attracting patron-
age to independent stores, being mentioned 416 times, or 12.39
per cent of total reasons given for such patronage, it is of much
less significance than in the case of chain stores.

8. The most important reasons given for chain store patronage
are fewer in number than in the case of independents. The four
most important incentives to trade at chain stores account for
76.87 per cent of all reasons mentioned, while in the case of

172 THE CHAIN STORE PROBLEM

independent grocers the five most important reasons account for
but 74.44 per cent of all reasons mentioned.

9. Pleasing personality of store personnel is a much more
important attraction in the case of independents than it is in
chain stores.

10. Advertising as a reason for buying from grocery chain
stores was mentioned by more than three and one-half times as
many customers as in the case of independent-store customers,
although in neither case is it an outstanding factor possibly
because the consumer is more apt to think of the appeals con-
veyed through the advertisements than of advertising per se.

11. Better quality of merchandise is referred to in less than
one-sixth of the total number of reasons and occupies about the
same rank for both chains and independents.

12. Wider selection of merchandise is named 2J^ times as
often by chain store customers as by the customers of
independents.

13. The proportion of favorable mention with respect to
cleanliness of the store is about the same for both chains and
independents.

14. The combined advantages enjoyed by independent grocers
in the matter of price and services (credit and delivery) just about
equal the combined advantages enjoyed by chains from the
same sources, although chains fare better on the price question
by more than two to one as compared with independents.

A number of the significant facts revealed in the Florida study
are highlighted to an even greater degree in the Springfield, Ohio,
survey, summarized in Table 36. This investigation disclosed
that the price appeal was actually of less importance in influenc-
ing consumers to trade at either chain or independent stores than
was the factor of convenience of location, and what may appear
even more startling was the fact that it was relatively more impor-
tant in the patronage of independent stores than in chain stores.
A partial explanation of this situation is that the bulk of the chain
store grocery business of Springfield is done by local chains which
presumably place less emphasis on price than do the larger
national chain organizations. But, regardless of this fact, it is
further proof that the magnetic force of price has been over-
emphasized. It apparently is not so essential to successful chain
store merchandising as many have believed it to be.

WHY CONSUMERS BUY GROCERIES FROM CHAIN STORES 173

Analysis of "First" Reasons for Buying Groceries from Chain
or Independent Stores. As indicated in a previous connection,
each consumer interviewed was asked to give several reasons for
buying most of the family groceries from the type of store favored
by the respondent. The interviewer was required to record the
first three reasons in the order in which they were mentioned.

TABLE 36. TOTAL REASONS GIVEN BY 902 SPRINGFIELD, OHIO, FAMILIES

FOB BUYING MOST OF THEIR GROCERIES AT CHAIN OR

INDEPENDENT STORES

Number of reasons

Percentage dis-

given

tribution

Reasons for patronage

Chain

Inde-
pendent

Total

Chain

Inde-
pendent

Total

Convenient location.

284

223

507

25 6

21 4

23 6

Lower price ...

186

178

364

16 8

17 1

16.9

Better quality.

188

150

338

14.4

15.7

Wider selection

137

104

241

12 3

11.2

Pleasing personality.

103

119

222

9 3

11 4

10.3

Delivery . .

102

3 3

6.2

4.7

Friends and relatives . .

3 2

5 6

4.3

Credit

2 3

4.4

3.4

Sanitary and clean

2 7

Good store appearance.

1.9

1.5

1 7

Advertising . .

0.6

0.4

Other....

109

5 2

5.1

Total

1,109

1,042

2,151

100.0

100

100.0

Source: FOUCH, G. E. "Patronage Motivation in the Purchasing of Groceries by Spring-
field, Ohio, Consumers," a thesis presented for the Degree of Master in Business Administra-
tion, Ohio State University, 1937.

This does not necessarily mean that the reasons were given by
consumers in the order of their relative importance. It may well
be that two of the reasons mentioned in any one case were of
equal significance but they naturally could not be mentioned in
the same breath. Furthermore, certain reasons might have come
first to mind when the question was asked although others may
normally occupy a more prominent position. Certainly there is
no ground for the belief that in a great number of cases the
elimination of the first reason mentioned would cause customers
to change their choice of stores, since final action on this score is

174

THE CHAIN STORE PROBLEM

usually a resultant of a number of motivating forces. Con-
sequently no attempt was made to weight the three reasons
recorded for each consumer on the basis of first, second, or third
mention. These factors may also account for the fact that in its
Chain Store Investigation, the Federal Trade Commission
included in the analysis the total numbers of reasons advanced by
the persons interviewed concerning their choice of store as

TABLE 37. WHY CONSUMERS BUT MOST OF THE FAMILY GROCERIES FROM
CHAIN OR INDEPENDENT STORES, ANALYZED BY REASON MENTIONED

FIRST

Reason

First reason for buying
from chain stores

First reason for buying
from independents

Number of
consumers

%of
total

Number of
consumers

%of
total

Lower price

888
17
21
78
96
225
43
82
1
7
38

59.36
1.14
1 40
5.21
6.42
15.04
2.87
5.48
0.07
0.47
2.54

210
41
240
39
110
272
10
122
3
11
96

18.20
3.55
20 80
3 38
9.53
23 57
87
10.57
0.26
0.95
8.32

Delivery

Credit

Wider selection of goods . .
Better quality
Convenient location
Advertising

Pleasing personality. . . .
Good store appearance
Sanitary and clean

Other reasons

Total

1,496

100.00

1,154

100.00

between chains and independents, and did not even distinguish
the reasons by rank of mention when two or more reasons were
given by a single informant. 1 Similar treatment was given to
such results in a University of Buffalo study made in 1932. It is
specifically stated therein that "when more than one reason was
given, all were tabulated and the percentage of all reasons is
shown." 2

1 Federal Trade Commission, " Chain Stores The Chain Store in the
Small Town/' pp. 52-55, U.S. Government Printing Office, Washington,
1934.

2 McGARRY, EDMUND D., "Consumers' Buying Habits in Satellite Cities,"
Supplement, Statistical Survey, the University of Buffalo Bureau of Business
and Social Research, November, 1932.

WHY CONSUMERS BUY GROCERIES FROM CHAIN STORES 175

Despite the fact that the reason first mentioned may not
necessarily be the primary reason or of such importance as to
outweigh all other reasons, it is felt that greater weight should be
attached to it, since on the whole it probably occupies a more
important place in the customer's mind than either of the two
reasons mentioned second or third. In conformity with this
thinking, a separate tabulation of first reasons, i.e., reasons
mentioned first and not necessarily the reasons of primary

All consumers
2650 replies

Chain store patrons
1496 replies

Independent store
patrons- 1 154 replies

100

50
Per cent

| Lower prices RSSSSafl Pleasing personality

I Convenient- location \&Zt'^ Wider selection

I Credit teiAVfl Delivery

I Better quality of goods K&&3I Advertising

FIG. 9. Percentage distributions of first reasons for buying groceries from chains

and independents.

importance, has been prepared and is presented in summarized
form in Table 37 (see also Fig. 9).

Out of every 100 consumers claiming to buy most of their
grocery requirements from chain stores, 59 mentioned lower price
first, as a reason for their choice of store, while 41 of such cus-
tomers considered reasons other than lower price as the most
important incentive for patronizing chains. Of these other
reasons, convenient store location leads the list, with 15 out of
every 100 regular chain store customers giving that as the first
reason for buying from stores of their selection. Another 17 out
of every 100 regular chain store customers patronize the stores of
their choice because of better quality of merchandise, pleasing
personality of store employees, and wider selection of goods, given
in the order of their relative importance. These five reasons,

176 THE CHAIN STORE PROBLEM

taken together, account for 91.51 per cent of all the first reasons
given for chain store patronage.

In the case of the 1,154 consumers who buy most of their
groceries from independent stores, about 24 out of every 100
mentioned first convenient store location as a reason for their
regular patronage. Credit is a close second, with about 21 out of
every 100 customers giving that as the first reason. Third in
importance in trade-pulling power when reckoned in terms of
first reasons only, is lower price. Strange as it may seem, over
18 out of every 100 consumers who buy most of their groceries
from independent merchants do so mainly because of lower prices
obtained at such stores, indicating that the price appeal is not
peculiar to chain store merchandising. Pleasing personality of
the proprietor or his employees and better quality of merchandise
are next in importance, with 10.57 and 9.53 per cent of all the
first reasons, respectively, being assigned to them. Thus, the
major five reasons for chain store patronage, based on the reasons
mentioned first are, in the order of their relative importance, lower
price, convenient location, better quality, pleasing personality,
and wider selection of goods. For independent grocers the five
major appeals similarly determined are convenient location,
credit, lower price, pleasing personality, and better quality.

From the above it will be noted that, on the basis of the first
reasons given by consumers for the choice of chain or independent
stores, of the five leading appeals four are the same for both
chains and independents and but one, namely credit, stands, out
prominently as a patronage motive for independents but has
little significance in attracting trade to the chain grocery stores.
However, the four major appeals which apply to both types of
stores vary in relative importance as between the types of stores
to which they apply. Convenient location is an important factor
in both cases, although it is a little over 1^ times as important in
attracting trade to independents as to chains. A similar situa-
tion obtains in the case of better quality. Pleasing personality
has twice as much pulling power for independents as for chains.
On the other hand, the price appeal is a little over three times as
powerful a motive in attracting trade to the chain stores as it is in
attracting business to independent grocers, if it is assumed that
the reason given first by each consumer is the most important or
the primary motive for the choicfe of the type of store.

WHY CONSUMERS BUY GROCERIES FROM CHAIN STORES 1 77

The relative importance of lower price as a factor in attracting
trade to chain grocery stores is not so great as may appear at a
first examination of the results of the reasons mentioned first.
In the first place, the price appeal is apparently also utilized
to a considerable extent by independent stores, as shown by
the fact that 18 out of every 100 regular independent-store
customers are primarily motivated by that appeal. In the
second place, it is significant that 41 per cent of the regular chain
store customers are not primarily interested in price. Third, it
should be repeated that even in the case of the 59 regular chain
store customers out of every 100 who mentioned price first as a
reason for their chain store patronage there are other reasons
which influence their choice of stores. As shown in Appendix G,
almost 29 out of every 100 regular grocery chain customers
consider wider selection of goods as a second reason, 19 regard
better quality as second in importance, 15 refer to convenient
location as a second patronage incentive, 6 mention pleasing
appearance, and only 5 are secondarily attracted by the chain
store advertising. It should also be mentioned that of the rea-
sons ranked as second, 16 out of every 100 gave lower price.
This refers, of course, to those who consider some reason other
than lower price as the first incentive.

On the basis of these facts, one is, therefore, forced to the con-
clusion that, while price is a powerful patronage appeal of the
chain grocery stores, it is but one of a number of major appeals
that are being made by such stores and that grocery chain cus-
tomers are influenced by a number of important factors all of
which can be utilized successfully by both chain stores and
independents as sales promotional devices and as a means of
tying customers to the store. Both types of stores may compete
for business not only through lower prices, but also by locating
the stores at convenient points, by hiring more engaging employ-
ees, by stocking the stores with a wider assortment of merchan-
dise, and by improving the quality of the goods.

Analysis of First Reasons for Buying Groceries from Chain or
Independent Stores, by Income Groups. Obviously, the relative
importance of lower price and other appeals as motivating factors
for store patronage will vary widely according to the income
status of the consumer. From a preceding analysis of first
reasons for patronage in the purchase of groceries by Florida

178

THE CHAIN STORE PROBLEM

consumers it is evident that lower price is a leading motive,
particularly insofar as chain store trade is concerned. As might
be expected, lower price is the principal motive in the selection of
grocery stores by consumers in the very low income group (see
Table 38). Of the 823 consumers in this group, that were inter-
viewed on this subject, 51.52 per cent gave lower price as the
first reason in choosing a given type of store for regular dealings.
Furthermore, of the 420 consumers in this group which patronize

TABLE 38. WHY CONSUMERS IN THE VERY Low INCOME GROUP BUY MOST

OF THEIR GROCERIES FROM CHAIN OR INDEPENDENT STORES, ANALYZED

BY REASON MENTIONED FIRST

Reason

First reason for buying from

Total

Chains

Independents

Num-
ber of
con-
sumers

%of
total

Num-
ber of
con-
sumers

%of
total

Num-
ber of
con-
sumers

%of
total

Lower price

317
2
10
15
20
36
5
12

75.48
0.48
2.38
3.57
4.76
8.57
1.19
2.86

107
3
112
13
16
98
1
29
1
4
19

26.55
0.74
27.79
3.23
3.97
24.32
0.25
7.20
0.25
0.99
4.71

424
5
122
28
36
134
6
41
1
4
22

51.52
0.61
14.82
3.40
4.37
16.28
0.73
4.98
0.12
0.49
2 68

Delivery

Credit

Wider selection of goods . .

Better quality

Convenient location

Advertising

Pleasing personality

Good store appearance

Sanitary and clean

Other reasons

0.71

Total

420

100.00

403

100 00

823

100 00

chain stores regularly, 75.48 per cent are primarily motivated by
lower price, and 26.55 per cent of the consumers in this group
buy regularly from independents for the same reason. This
bears out the contention that lower price is a strong motivating
factor in the grocery purchases of consumers with very little
income, and also indicates that while three-fourths of chain store
patronage from this class of trade is attracted to such stores
largely through price, over one-fourth of the patronage of like
consumers is attracted to independents for similar reasons.

WHY CONSUMERS BUY GROCERIES FROM CHAIN STORES 179

For consumers in the very low income group who purchase
largely from chain stores, the convenient location of the store
ranks second in importance. This is followed by better quality of
goods, wider selection of merchandise, and credit. Patronage of
independent grocers on the part of consumers in the very low
income class is motivated mainly by three factors, roughly of
equal importance. These are: credit, lower price, and convenient
store location. Credit is given as a first reason for buying
principally from independent merchants by 27.79 per cent, lower
price by 26.55 per cent, and convenient location by 24.32 per cent
of the consumers.

TABLE 39. WHY CONSUMERS IN THE LOW-INCOME GROUP BUY MOST OP

THEIR GROCERIES FROM CHAIN OR INDEPENDENT STORES, ANALYZED

BY REASON MENTIONED FIRST

Reason

Chains

Independents

Total

Num-
ber of
con-
sumers

%of
total

Num-
ber of
con-
sumers

%of
total

Num-
ber of
con-
sumers

%of
total

Lower price

292
11
6
29
31
84
30
25
1
3
12

55.73
2.10
1.15
5.53
5.92
16.03
5.72
4.77
0.19
0.57
2.29

60
20
82
13
44
99
9
57
2
1
32

14.32
4.77
19.57
3.10
10 50
23.63
2.15
13.60
0.48
0.24
7.64

352
31
88
42
75
183
39
82
3
4
44

37 33
3 29
9.33
4.45
7.95
19 40
4.14
8.70
0.32
0.42
4.67

Delivery

Credit

Wider selection of goods

Better quality

Convenient location . .

Advertising

Pleasing personality

Good store appearance

Sanitary and clean

Other reasons

Total

524

100.00

419

100.00

943

100.00

In the low-income group, lower price was given as a first reason
for patronage of grocery stores in 37.33 per cent of the cases (see
Table 39) . But of the consumers in this income group, who buy
most of their groceries from chain stores, the price appeal is
mentioned first in 55.73 per cent of the cases, and only in 14.32
per cent of the cases where consumers in this group buy largely
from independent grocers.

180

THE CHAIN STORE PROBLEM

A substantial proportion of customers falling in this income
category who buy regularly from chain grocery stores are pri-
marily attracted to the stores by the convenient location, better
quality of the goods, advertising, and wider selection of goods.
Independent grocery store patronage from this group of con-
sumers is secured principally through convenient location,
credit, lower price, pleasing personality, and better quality of
goods.

TABLE 40. WHY CONSUMERS IN THE MEDIUM- INCOME GROUP BUY MOST OF

THEIR GROCERIES FROM CHAIN OR INDEPENDENT STORES, ANALYZED

BY REASON MENTIONED FIRST

Reason

Chains

Independents

Total

Num-
ber of
con-
sumers

%of
total

Num-
ber of
con-
sumers

%of
total

Num-
ber of
con-
sumers

%of
total

Lower price

214
3
4
23
29
83
7
38

4
17

50.71
0.71
0.95
5.45
6.87
19.67
1.66
9.00

34
15
33
9
37
64

13.39
5.91
12.99
3.54
14.46
25.20

248
18
37
32
66
147
7
65
1
9
46

36.69
2.66
5.47
4 73
9.76
21.75
1.04
9.62
0.15
1.33
6.80

Delivery
Credit

Wider selection of goods
Better quality . .

Convenient location . .
Advertising

Pleasing personality ....
Good store appearance . .
Sanitary and clean ....
Other reasons . . .

Total

27
1
5
29

10.63
0.39
1.97
11.42

0.95
4 03

422

100.00

254

100.00

676

100.00

Thus, in this income group the relative importance of price in
attracting trade is much less than in the very low income group.
Furthermore, for all consumers in this income group the reasons
other than lower price, collectively, are almost twice as important
as is price in attracting business, but for those who buy largely
from chain stores, reasons other than price, taken collectively,
are almost as important as price.

The general tendency is for lower price as a patronage appeal
to become less and less important as the income of the consumer
increases. For consumers in the medium-income group, lower

WHY CONSUMERS BUY GROCERIES FROM CHAIN STORES 181

price is indicated as a first reason by 36.69 per cent of the replies
(see Table 40). For consumers in this income group who buy
largely from chain stores, 50.71 per cent give lower price as a first
reason and of those who buy largely from independents 13.39 per
cent give lower price as a first reason. In the case of chain store
patrons falling in this income group, next to lower price as a first
reason for patronage comes convenient location, followed by
pleasing personality, better quality of goods, and wider selection

TABLE 41. WHY CONSUMERS IN THE HIGHER INCOME GROUP BUY MOST

OF THEIR GROCERIES FROM CHAIN OR INDEPENDENT STORES, ANALYZED BY

REASON MENTIONED FIRST

Chains

Independents

Total

Reason

Num-

ber of

%of

ber of

%of

ber of

%of

con-

total

con-

total

con-

total

sumers

Lower price .

50 00

11 54

35.58

Delivery

0.77

3 85

1.92

Credit

0.77

16.67

6 73

Wider selection of goods .

8.46

5 13

7.21

Better quality

12 31

17 95

14.42

Convenient location ....

16 92

14.10

15.87

Advertising

0.77

0.48

Pleasing personality ....

5.38

10 26

7.21

Good store appearance. . .

Sanitary and clean . .

Other reasons

4.62

20.50

10.58

Total

130

100.00

208

100.00

of merchandise. The principal patronage appeals, judged by the
first reasons, of independent stores in attracting business from
consumers in the medium-income group are convenient location,
better quality, lower price, credit, and pleasing personality.

In the higher income group only 35.58 per cent of the consumers
give lower price as a first reason in choosing the type of grocery
store to patronize (see Table 41). Of the 130 consumers in this
group who buy largely from grocery chains, 50 per cent indicated
lower price as the first reason for such patronage. This was
followed by convenient location, better quality, and wider selec-

182 THE CHAIN STORE PROBLEM

tion of goods. Of those in this group who purchase mainly from
independent grocers, only 11.54 per cent give lower price as the
first reason, the most important appeals being better quality of
merchandise, credit, and convenient location.

An analysis of the first reasons for patronage given by con-
sumers in the various income groups reveals a distinct inverse
relation between the size of income and the importance of the
credit factor. This reason is given in 14.82, 9.33, 5.47, and 6.73
per cent of the replies, respectively, for those in the very low
income group, low-income group, medium-income group, and
higher income group. For the consumers buying largely from
independents these percentages are 27.79, 19.57, 12.99, and 16.67,
respectively, for the groups in the order indicated above.

The tendency for credit to become less important a factor in
securing grocery business as income brackets increase does not
seem to apply in the case of consumers in the higher income
group. This slight deviation may be explained by the fact that
patrons in this class utilize credit more as a convenience rather
than as a necessity, whereas in the lower income groups credit is
more of a necessity.

The analysis also reveals that as price and credit become less
important progressively through the income groups, convenient
location takes on greater significance. To this, again, an excep-
tion is found in the higher income group. To consumers in this
stratum, location is apparently less important because of the
general availability of transportation facilities in the form of
motor vehicles.

From the data presented in Table 33 it is seen that larger and
larger proportions of the consumers buy regularly from grocery
chains as one progresses to the higher income groups. While
only 51 per cent of the consumers in the very low income group
buy most of their groceries from chain stores, the same is true of
55.6 per cent of the consumers in the low-income group, of 62.4
per cent of the consumers in the medium-income group, and of
62.5 per cent of the consumers in the higher income group. On
the other hand, the data in Tables 38 to 41 show that lower price
as a patronage motive becomes less important progressively
through the income groups. This indicates that there is a very
close inverse relationship, by income groups, between the impor-
tance of the price factor and the proportionate amount of patron-

WHY CONSUMERS BUY GROCERIES FROM CHAIN STORES 183

age enjoyed by chain grocery stores. Stated otherwise, it means
that grocery chain stores secure a larger proportion of the busi-
ness from the medium and higher income classes of the population
than from the lower income groups and that in the case of the
consumers economically better situated the price factor is not so
important as it is for the other classes of society. In fact, it is
believed to be even less important than indicated by the statistics,
since many consumers in the higher income groups who gave
lower price as a first reason for choosing a given type of grocery
store probably did so for effect in order to rationalize their action.

CHAPTER XII

CONSUMER ATTITUDE TOWARD CHAIN STORES IN
THE PURCHASE OF SHOPPING GOODS

In the preceding chapter are shown the results of an analysis
of reasons for buying groceries from chain or independent stores.
While these results are probably equally applicable to other lines
of merchandise in the convenience goods class, such as drugs and
hardware, the same assumption cannot be made concerning
consumer motives in selecting the type of store at which to buy
shopping goods. In the case of shopping goods (i.e., goods which
are bought by consumers, usually women, generally after com-
parison has been made, in two or more stores, of such matters as
style, quality, price, and any number of other factors) consumers
are motivated more by different patronage appeals than they are
when buying convenience goods. Style and the variety of selec-
tion offered would naturally be more important in the purchase
of merchandise of this type, and one would expect to find price
and convenience of location of less influence.

In order to determine just how consumers react when selecting
the type of store at which to purchase shopping goods, a survey of
consumer patronage motives in shopping goods was made in
Florida by one of the authors in conjunction with the grocery
study. It was felt that an analysis of the reasons for buying
women's ready-to-wear was also applicable to other lines of
shopping goods such as women's shoes, dry goods, costume
jewelry, and the like. The summarized results of that study are
given in the succeeding pages.

Summary of Findings. A total of 2,752 consumers were inter-
viewed in order to determine the extent to which they patronize
chain stores or independents and the reasons therefor. Of this
number, 365 indicated no special preference for either type of
store insofar as the purchase of women's ready-to-wear is con-
cerned. In fact, they claimed to divide their purchases of such
goods equally between the two types of retail stores. However,

184

CONSUMER ATTITUDE TOWARD CHAIN STORES 185

2,387, or 86.73 per cent of the consumers expressed a definite
preference for a given type of store. Of these, only 854 con-
sumers stated that they buy most of their requirements in
women's ready-to-wear from chain stores. This represents but
31.03 per cent of the consumers expressing a preference for chain
stores as contrasted to 54.36 per cent of all the consumers express-
ing such a preference in the case of groceries.

The 854 consumers gave a total of 2,515 reasons for patronizing
chain stores regularly. The 1,533 consumers who stated that
they buy most of their women's ready-to-wear requirements from
independent stores gave a total of 4,488 reasons for such action.
The number of reasons advanced by the 2,387 consumers who
voiced their preferences are classified and presented in Table 42
(see also Fig. 10).

The most frequently stated reason for buying the bulk of
women's ready-to-wear from the chain stores is lower price. In
this classification fall 668, or 26.56 per cent of the 2,515 reasons
given by regular chain store patrons. While no other reason for
buying from chain stores approaches it in importance, lower price
is not so significant in the purchase of this kind of merchandise as
it is in buying groceries from chains, and at least three other
reasons were stated with great frequency. These reasons, in the
order of their importance as judged by the number of times they
were mentioned, are wider selection of goods, better quality, and
style. The first of these three reasons was mentioned 464 times
by the 854 regular chain store customers, representing 18.45 per
cent of all the reasons given. Better quality of merchandise was
mentioned 461 times, or 18.33 per cent of the total number of
reasons. On the basis of all reasons mentioned, these two factors
can therefore be regarded as of equal importance in the mind of
the consumer. These two reasons together were mentioned
more than 1^ as many times as lower price.

Fourth in importance is style, which was mentioned 355 times
out of total mentions of 2,515, constituting 14.11 per cent of the
total number of reasons given for buying largely from chain stores.
When the weight of the style factor is added to that of wider
selection of goods and better quality, the three reasons combined
are almost as important as lower price in trade-pulling power.

Advertising is the next most powerful factor in attracting trade
to the women's ready-to-wear chain stores, followed by the pleas-

186

THE CHAIN STORE PROBLEM

ing personality of the store manager or other employees,
convenient location of the store, credit facilities provided for cus-
tomers, store appearance, cleanliness of the premises, and delivery
service. " Other reasons" accounted for 19 mentions, or 0.76 per
cent of the total reasons given.

In attracting trade to independent stores in the women's
ready-to-wear field, better quality of merchandise leads all other

TABLE 42. REASONS WHY CONSUMERS BUY MOST OF THEIR WOMEN'S
READY-TO-WEAR FROM CHAINS OR INDEPENDENTS

Reason

Buying from chains

Buying from
independents

Number of
reasons
given
by 854
persons

% of total
reasons
given

Number of
reasons
given
by 1,533
persons

% of total
reasons
given

Lower price . . .
Better quality ...
Wider selection
Style

668
461
464
355
150
170
54
102
46
12
14
19

26 56
18 33
18.45
14.11
5.96
6.76
2.15
4 05
1 83
48
0.56
0.76

604
982
578
714
526
189
333
192
94
89
23
164

13.46
21 88
12 88
15 91
11 72
4 21
7.42
4.28
2.09
1.98
0.51
3 66

Pleasing personality. . . .
Advertising . .
Credit

Convenient location
Good store appearance . .
Delivery
Sanitary and clean

Other reasons

Total

2,515

100.00

4,488

100.00

appeals. This reason was mentioned 982 times by the 1,533 con-
sumers who trade largely in such stores, constituting 21.88 per
cent of the total number of reasons given for such patronage. As
might be expected, style is second in importance, this reason being
mentioned 714 times, or 15.91 per cent of the total. The next
three reasons are of approximately the same weight; they are as
follows: lower price, with 604 mentions, or 13.46 per cent of all
reasons given; wider selection of goods, with 578 mentions, or
12.88 per cent; and pleasing personality, being mentioned 526

CONSUMER ATTITUDE TOWARD CHAIN STORES 187

times, or 11.72 per cent of all mentions. Sixth in importance as a
patronage motive for buying from independents is credit, followed
by store location, store advertising, store appearance, delivery
service, and cleanliness of the place of business. " Other reasons "
were mentioned 164 times, or 3.66 per cent of the total.

CHAINS

INDEPENDENTS

Pleasing personality

Convenient location

Credit

Good store appearance

Delivery

Lower price

Wider selection of goods
Better quality
Style
B8S888I Advertising

| | Other reasons (includes sanitary and clean)

Fia. 10. Reasons why consumers buy most of their women's ready-to-wear

from chain or independent stores.*
* This chart is based on an analysis of totals of first, second, and third reasons.

The following significant facts may be gleaned from a close
analysis of the data shown in Table 42. These conclusions are
based on the assumption that the total number of mentions equal
100 per cent and that each mention is given the same weight.

1. In the case of the chain stores operating in the women's
ready-to-wear field lower price is the single most significant pat-
ronage motive, but it is only twice as important as it is in attract-
ing trade to the independent merchants engaged in the same line
of business.

2. Lower price is not the only reason why consumers buy
women's ready-to-wear from chain stores. All of the other

188 THE CHAIN STORE PROBLEM

reasons combined represent 73.44 per cent of the total number of
reasons mentioned by regular chain store customers.

3. Consumers are attracted to ready-to-wear chain stores by
appeals other than lower price, the three most powerful incentives
next to lower price being wider selection of goods, better quality,
and style.

4. If the total pulling power of women's ready-to-wear chain
stores is to be measured by the aggregate of the reasons mentioned
for such patronage, lower price represents but a little over one-
fourth of the attraction, while the three reasons next in impor-
tance represent over one-half of the attraction and, taken
together, are about twice as important as lower price.

5. Better quality of merchandise ranks first in trade pulling
power of independent stores, exceeding in importance any of the
other patronage motives by a considerable margin. While
this is also significant in attracting trade to chain stores, it
occupies a third position and is less significant than in the case
of independents.

6. While price is also an important factor in drawing trade to
independents it is one-half as significant as in the case of chain
stores.

7. Style is second in importance as a patronage appeal of
independents but occupies only fourth position among the chain
store appeals. It is believed, however, that the element of style
is also implied in the consumer's desire for a wider selection of
goods. In the case of shopping goods, the wider assortment of
merchandise usually affords an opportunity for a better style
selection. When wider selection of goods and style are taken
together, the chain stores have the edge over independents, since
in the former these two factors account for 32.56 per cent of all
reasons given for patronizing such stores, while only 28.79 per cent
of the reasons for patronizing the latter type of store are to be
accounted for in the same manner.

8. The number of important appeals at the chain store's dis-
posal appears to be smaller than that at the command of inde-
pendents. The four most important incentives to trade at chain
stores account for 77.45 per cent of all reasons mentioned, while
in the case of independents the four most important reasons
account for only 64.13 per cent of all reasons mentioned for such
patronage.

CONSUMER ATTITUDE TOWARD CHAIN STORES 189

9* Credit is more than three times as important a patronage
motive in trading with independents than with chain stores,
despite the fact that among the chains are to be found the purely
installment stores handling the cheaper varieties of merchandise.
This seems to be overbalanced by the chain units which sell
largely or entirely for cash.

10. Chain stores attract a relatively larger proportion of their
trade through a wider assortment of merchandise than do
independents, the ratio being approximately 1J to 1.

11. Store location as a patronage appeal is not a very significant
factor, since most of such stores are generally located in shopping
areas, and no variation is to be noted in this factor as between
the two types of stores. This emphasizes further the distinction
in consumer attitudes based upon classes of merchandise. It will
be recalled that convenient store location ranks first as a patron-
age motive in buying groceries from independents and also
occupies third rank in attracting business to grocery chains.
However, in the purchase of ready-to-wear this factor holds
seventh place in trade attraction to independents as well as to
chain stores.

12. Chain store advertising apparently has 1}^ times the pull-
ing power of independents.

13. Pleasing personality of the management or the employees
has double the attraction for independent-store patronage as
compared with that of chain stores. Not only that, but it ranks
high in the case of independent stores, this reason being mentioned
by 526 customers and accounting for 11.72 per cent of all the
reasons mentioned for buying regularly from independents. This
same factor accounts for but 5.96 per cent of the reasons for buy-
ing regularly from chain stores.

14. No special difference may be noted in the effect upon
customers of store appearance, sanitation, and cleanliness. Both
types of stores are equally attractive in these respects, and in
neither case are those factors significant, probably because such
conditions are taken for granted in the apparel line of business.

15. A larger proportion of regular independent-store patrons
named reasons not specifically provided for on the questionnaire
than in the case of regular chain store patrons, the proportion
being 3.68 per cent and 0.76 per cent, respectively, of the total
number of reasons given in each case.

190

THE CHAIN STORE PROBLEM

"First" Reasons for Buying Women's Ready-to-wear from
Chain or Independent Stores. The analysis of reasons for buying
women's ready-to-wear from chain or independent stores pre-
sented in the preceding pages was based on the total number of
reasons given by consumers. As pointed out in several other
connections, three reasons were recorded for most consumers, on
the theory that consumers are prompted to buy at a certain type
of store for a number of reasons, even though a single motive may

TABLE 43. WHY CONSUMERS BUY MOST OF THE REQUIREMENTS IN

WOMEN'S READY-TO-WEAR FROM CHAIN OR INDEPENDENT STORES,

ANALYZED BY REASON MENTIONED FIRST

Reason

First reason for buying
from chain stores

First reason for buying
from independents

Number of
consumers

% of total

Number of
consumers

% of total

Lower price

436
132
73
72
39
22
48
14
5
2
1
10

51.05
15.45
8.55
8.43
4.57
2.58
5.62
1.64
0.59
0.23
0.12
1.17

290
243
298
169
210
107
45
53
16
11
3
88

18.92
15.85
19.44
11.02
13.70
6.98
2.94
3.46
1.04
0.72
0.19
5.74

Style

Better quality

Wider selection of goods . . .
Credit

Pleasing personality

Advertising

Convenient location . .

Delivery

Good store appearance
Sanitary arid clean ....

Other reasons

Total

854

100.00

1,533

100.00

dominate at any given time. That this is actually the case is a
truism and needs no special justification or discussion. Never-
theless, the reasons given were ranked according to the order in
which they were mentioned. It was also indicated in that con-
nection that the foregoing analysis based on total mentions is
sound and generally accepted, or at least has precedents. But in
order to throw further light on the subject and to supplement the
preceding discussion, a separate tabulation was prepared of first
reasons, i.e., of reasons mentioned first, and the results are pre-
sented in Table 43 (see also Fig. 11).

CONSUMER ATTITUDE TOWARD CHAIN STORES 191

Out of every 100 consumers buying most of their needs in
women's ready-to-wear from chain stores, 51 gave lower price as a
first reason. On the other hand, 19 out of every 100 consumers
who stated that they buy most of such goods from independents
also gave lower price as the first reason. Almost one-half of the
regular chain store patrons consider other reasons than lower
price as the major incentive for patronizing the stores of their
choice. Of these other reasons, style is by far the most impor-
tant; in fact, it is almost twice as important as any of the reasons

All consumers
2387 replies

Cham store patrons
854 replies

Independent store
patrons -1533 replies

I Lower prices

I Style

I Better quality

Credit
I Wider selection of goods

FIG. 11. Percentage distributions of first reasons given by consumers for
buying most of their women's ready-to-wear from chain or independent stores.

Pleasing personality

Advertising

Convenient location

Delivery

All other reasons

given except that of "price." Over 15 per cent of the consumers
using chain stores chiefly, gave style as a first reason for buying
from such stores. Better quality of goods and wider selection are
of practically the same relative importance, the first accounting
for 8.55 per cent and the second one for 8.43 per cent of the regular
chain store patrons. Fifth in rank from the standpoint of trade
attraction of chain stores is advertising, followed by credit.
These six reasons, taken together, account for 93.67 per cent of the
first reasons for chain store patronage.

In the case of the 1,533 consumers who buy most of their
women's ready-to-wear from independently operated stores,
almost 20 out of every 100 patronize such stores because of better
quality as a first reason. Lower price is second in importance in

192 THE CHAIN STORE PROBLEM

motivating power, with 18.92 per cent of the consumers giving
that as the first reason. Style ranks third, being given as first
reason in 15.85 per cent of the cases, and credit is fourth, with 13.7
per cent of the consumers mentioning it first. Wider selection of
goods holds sixth place, with pleasing personality in seventh posi-
tion. The leading six reasons, together, account for 85.91 per
cent of all first reasons for buying from independent stores,
indicating less of a concentration in patronage motives than in
the case of chain stores.

Thus, the six major reasons for chain store patronage in the line
of merchandise under consideration, based on reasons mentioned
first, are, in the order of their relative importance, lower price,
style, better quality, wider selection of goods, advertising, and
credit. For independent stores operating in the same business
the six major appeals similarly determined and ranked are better
quality, lower price, style, credit, wider selection of goods, and
pleasing personality. It appears, therefore, that five out of the
six major appeals apply to both types of stores and that while
advertising occupies fifth place in the eyes of chain store patrons,
it is not one of the six major appeals for independent store
patronage. Instead, pleasing personality of the store manage-
ment or salespeople is given as a major first reason.

While five of the major appeals are the same for both types of
stores, they vary considerably in relative importance. Better
quality of merchandise is more than twice as important in attract-
ing business to independents than it is in drawing trade to chain
stores. Style is of equal significance for both types of stores,
while credit has about three times the pulling power for inde-
pendents as for chains. On the other hand, the price appeal is a
little over two and one-half times as powerful a motive in attract-
ing trade to chain stores as it is in attracting business to inde-
pendent merchants. However, the relative importance of price
as a factor in bringing trade to chain stores in the women's ready-
to-wear field is less than would appear from a superficial examina-
tion of the reasons mentioned first.

As shown in Table 43, the price appeal also ranks high with
independent stores, almost 19 out of every 100 patrons giving that
as a first reason for buying from those stores. Moreover, almost
one-half of the regular chain store customers are not primarily
interested in price, since they did not give price as a first reason.

CONSUMER ATTITUDE TOWARD CHAIN STORES 193

Besides, even in the case of the 51 per cent of the consumers who
buy regularly from chain stores and who gave lower price as a
first reason, there are other reasons which influence their choice of
stores. As shown in Appendix H, almost 30 out of every 100
regular chain store patrons consider wider selection of goods as a
second reason, 22 regard better quality as a second reason, and
12 refer to style as a factor of second importance. Almost 6 per
cent of the chain store customers are secondarily attracted by the
store's advertising and another 6 per cent by the pleasing per-
sonality of the store management or employees. Of the reasons
mentioned second, 16.77 per cent refer to lower price. This was
given, of course, by those who do not consider lower price of
greatest importance or by those who did not mention lower price
as a first reason.

When the reasons mentioned third are also included in the
analysis, it is quite evident that even chain store customers who
gave lower price as a first reason are motivated by other advan-
tages offered by chain stores. The most important motives for
chain store patronage that were mentioned third are better
quality and wider selection of goods, with 24.45 and 17.31 per
cent, respectively.

In view of the foregoing, it would appear that, although price
is a powerful patronage motive in the purchase of women's
ready-to-wear, it is not so significant as in the purchase of
groceries, and is but one of a number of major appeals that are
being made by chain stores. It is also evident that consumers
are influenced by a number of factors, most of which apply to
both chain and independent-store patrons. Aside from price,
chain stores will find powerful sales promotional allies in the stock-
ing of up-to-date merchandise, in carrying a well-assorted line of
goods, in emphasizing quality, in superior credit accommoda-
tions, and in aggressive advertising. Much can also be gained
through the employment of a more engaging store personnel.

Analysis of First Reasons for Buying Women's Ready-to-wear
from Chain or Independent Stores, by Income Groups.
In order to determine to what extent the choice of a given type
of store (chain or independent) is governed by the economic
status of the purchaser, an analysis of the first reasons given by
the consumers interviewed was made according to income groups
and the results are presented in Tables 44 to 47 inclusive.

194

THE CHAIN STORE PROBLEM

Of all the 2,387 consumers who expressed a definite preference
for either independent stores or chain stores, 30.41 per cent are
primarily motivated in their choice of store by lower price. As
might be expected, consumers in the lower income groups place
more emphasis on the price factor than those more favorably
situated from an economic standpoint. In the very low income
group price is the most important single factor in choosing the

TABLE 44. WHY CONSUMERS IN THE VERY Low INCOME GROUP BUY MOST

OF THEIR WOMEN'S READY-TO-WEAR FROM CHAIN OR INDEPENDENT

STORES, ANALYZED BY REASON MENTIONED FIRST

Reason

First reason for buying from

Total

Chains

Independents

Num-
ber of
con-
sumers

%of
total

Num-
ber of
con-
sumers

%of
total

Num-
ber of
con-
sumers

%of
total

Lower price

181
2
3
19
23
5
10
8
1

62.20
0.69
1.03
6 53
7.90
1.72
3.44
2.75
0.34

140
3
54
39
52
15
22
23
1
1
41
12

34.74
0.74
13 40
9 68
12 90
3 72
5.46
5.71
25
0.25
10.17
2.98

321

5
57
58
75
20
32
31
2
1
77
15

46.25
0.72
8 21
8.36
10.81
2 88
4.61
4 47
0.29
0.14
11.10
2.16

Delivery

Credit

Wider selection of goods ... .
Better quality
Convenient location . ...
Advertising

Pleasing personality

Good store appearance
Sanitary and clean

Style

36
3

12.37
1.03

Other reasons . ...

Total

291

100.00

403

100.00

694

100 00

type of store from which to buy, this factor being given as a first
reason by 46.25 per cent of the persons included in this group.
In the low-, medium-, and higher income groups the importance
of price diminishes, for in these groups only 27.51 per cent, 20.76
per cent, and 18.85 per cent of the consumers, respectively, select
the stores at which to trade primarily because goods are sold at
lower prices.

While 694 consumers in the very low income group gave expres-
sion to their preferences as to type of store, 291 of them indicated

CONSUMER ATTITUDE TOWARD CHAIN STORES 195

that they buy most of the goods in women's ready-to-wear from
chain stores, and 403 make such purchases regularly from
independent merchants. Of consumers in this income group who
buy from chains, lower price is given as a first reason by 62.20 per
cent, and 34.74 per cent of the consumers in this income group
who chiefly patronize independents are motivated by the same
reason (see Table 44). This indicates that price is a major
consideration in the purchase of women 's ready-to-wear by con-
sumers with very little means, regardless of whether such pur-
chases are made from chain stores or independent stores.

Consumers in the very low income group who purchase largely
from chain stores are motivated, next to price, by the matter of
style. The two major appeals next in rank are better quality and
wider selection of goods, although neither of them occupies a
very prominent position in the customer's mind when judged on
the basis of reasons mentioned first. For consumers in this
income group the four reasons above stated account for 89 per
cent of all first reasons given for chain store patronage, the
remaining 11 per cent of the first reasons being scattered over a
number of motives.

Patronage of independent stores in the purchase of women's
ready-to-wear is governed principally on the part of consumers in
the very low income group by the factors of price, credit, quality,
style, and wider assortment of merchandise. As many as 13.40
per cent of the first reasons for buying from these stores fall
under the heading of credit, giving that reason second rank in the
array of appeals. Only a little over 1 per cent of the first reasons
are shown, under the heading credit, for consumers of like income
who buy from chains. The matter of style seems to be a little
less important to customers of the independents, but quality is
much more significant. Of every 100 independent-store patrons
drawn from the very low income group about 35 are motivated
primarily by lower price, 13 by credit facilities, 13 by quality,
10 by style, and 10 by wider selection of goods.

A larger number of consumers expressing preferences are to be
found in the low-income group. Of the 847 consumers in this
group, 345, or 40.7 per cent, buy chiefly from chain stores, and
502, or 59.3 per cent, give the bulk of their business to independ-
ents. Of the consumers in this group who buy principally from
chains, lower price is given as a first reason by only 43.48 per cent

196

THE CHAIN STORE PROBLEM

of the persons (see Table 45). The element of style takes on
greater importance with consumers in this income group as com-
pared with those on the next lower level of income. Of every 100
regular chain store customers belonging to this income group,
15 give style as a first reason for such patronage, about 11 refer
to wider selection of merchandise, and around 8 each refer to
advertising, better quality, and credit.

Of the consumers in the low-income group who buy principally
from independents, only 16.53 per cent of the first reasons given
refer to lower price, a fact which gives the matter of price third

TABLE 45. WHY CONSUMERS IN THE LOW-INCOME GROUP BUY MOST OP

THEIR WOMEN'S READY-TO-WEAR FROM CHAIN OR INDEPENDENT

STORES, ANALYZED BY REASON MENTIONED FIRST

First reason for buying from

Total

Chains

Independents

Reason

Num-

ber of

%of

ber of

%of

ber of

%of

con-

total

con-

total

con-

total

sumers

Lower price

150

43 48

16 53

233

27 51

Delivery

Credit

7.83

15.54

105

12.40

Wider selection of goods . .

10.72

11.95

11.45

Better quality. .

8.40

19.12

125

14.76

Convenient location

1.74

3.59

2.83

Advertising . . . ...

8.41

2.99

5.19

Pleasing personality

2.61

6.77

5.08

Good store appearance

0.29

Sanitary and clean

0.29

0.20

0.23

Style . ..

15.07

17.93

142

16.77

Other reasons .

0.58

3.59

2.36

Total

345

100.00

502

100.00

847

100.00

rank. It is superseded by the element of quality, followed by the
style factor, and credit. As compared to the appeals made by
chain stores, lower price is only a little over one-third as impor-
tant; advertising is also one-third as powerful; style is some-
what more prominent; and pleasing personality attracts more
than twice the proportion of customers.

CONSUMER ATTITUDE TOWARD CHAIN STORES 197

A general tendency may be discerned for lower price as a
patronage appeal to become less important as the income of the
consumer increases. This is as might naturally be expected, but
it does not necessarily hold for those in the higher income groups
who largely buy from chain stores. Thus, of the 182 chain
store customers in the medium-income group, 86, or 47.25 per
cent, give lower price as a first reason (see Table 46). When it

TABLE 46. WHY CONSUMERS IN THE MEDIUM-INCOME GROUP BUY MOST

OF THEIR WOMEN'S READY-TO-WEAR FROM CHAIN OR INDEPENDENT

STORES, ANALYZED BY REASON MENTIONED FIRST

Reason

First reason for buying from

Total

Chains

Independents

Num-
ber of
con-
sumers

%of
total

Num-
ber of
con-
sumers

%of
total

Num-
ber of
con-
sumers

%of
total

Lower price ....

47.25

30
6
58
55
103
15
8
41
6
86
44

10.57
1.27
12.26
11.63
21.78
3.17
1.69
8.67
1.27
18.18
9 30

136
6
67
70
118
17
15
46
6
124
49

20.76
0.92
10.23
10.69
18 01
2.60
2.29
7.02
0.92
18.93
7.63

Delivery

Credit

9
15
15
2

7
5

4.94
8.24
8.24
1.10
3.85
2.75

Wider selection of goods
Better quality

Convenient location
Advertising

Pleasing personality

Good store appearance

Style

38
5

20.88
2.75

Other reasons

Total

182

100.00

452

100 00

654

100.00

is remembered, however, that only 27.9 per cent of the con-
sumers in this income group buy regularly from chain stores the
significance of the proportion of consumers in this group who are
primarily interested in price is greatly diminished. As a matter
of fact, the number of consumers in this and the next higher
income class who are motivated principally by lower prices is so
small, as compared to the total included in the groups, that they
may well be regarded as belonging to the species normally
referred to as "bargain hunters."

198 THE CHAIN STORE PROBLEM

Chain store patrons in this income group are motivated, next to
lower price as a first reason, by style, quality, and wider selection
of goods. Judged by the first reasons given, the principal patron-
age appeals of independent stores which attract consumers in the
medium-income group are better quality, style, credit, wider
selection of goods, and lower price. As compared with the
appeals made by chain stores, those of the independents are as
follows: (a) price is a little more than one-fifth as important; (6)
credit is about 2^ times as powerful; (c) wider assortment
attracts proportionately a little less than one-third more cus-
tomers; (d) better quality is more than 2^4 times as potent; (e)
advertising is one-half as forceful; (/) pleasing personality is
about three times as significant a patronage appeal; and (g) style
is somewhat under that of chain stores in trade-pulling power.

Of the 191 consumers included in the higher-income group, only
18.9 per cent buy the bulk of their requirements in women's
ready-to-wear from chain stores. With this number, however,
price seems to be an important factor, 52.78 per cent claiming
that as a first reason (see Table 47). Style and quality are of
about equal importance to chain store patrons in this income
group, each claiming the same number of first reasons. The
total number of chain store patrons included in this group, while
representative of conditions, is too small to justify conclusions or
elaborate explanations.

Outstanding in importance as a patronage appeal made by
independent stores to customers in the higher income group is the
matter of quality. Of all first reasons given by such customers,
30.32 per cent refer to better quality. Next in importance
is style, with 16.77 per cent of all the first reasons. Credit,
probably used more as a convenience than a necessity, comes
third in rank; lower price is fourth, and wider selection of goods
is fifth.

It is evident from the foregoing analysis that when all con-
sumers are considered there is a distinct inverse relation between
the size of income and the importance of price as a patronage
appeal. Of all consumers expressing preference for either chain
stores or independents, 30.41 per cent give lower price as a first
reason. For the consumers in the very low income group, how-
ever, 46.25 per cent give lower price as a first reason. The
importance of this factor then diminishes with increases in income,

CONSUMER ATTITUDE TOWARD CHAIN STORES 199

so that it figures as a first reason for only 27.51 per cent of the
consumers in the low-income group, for 20.76 per cent of the
consumers in the medium-income group, and for 18.85 per cent
of the consumers in the higher income group. However, for
consumers who buy women's ready-to-wear from chain stores,
prices are the most important single reason in all four income

TABLE 47. WHY CONSUMERS IN THE HIGHER-INCOME GROUP BUY MOST

OF THEIR WOMEN'S READY-TO-WEAR FROM CHAIN OR INDEPENDENT

STORES, ANALYZED BY REASON MENTIONED FIRST

Reason

First reason for buying from

Total

Chains

Independents

Num-
ber of
con-
sumers

%of
total

Num-
ber of
con-
sumers

%of
total

Num-
ber of
con-
sumers

%of
total

Lower price

19
1

52.78
2 78

2.78
16 66
2.78
5.55

17
2
20
15
47
5

10 97
1 29
12 90
9 68
30 32
3.23

36
3
20
16
53
6
2
9

18 85
1 57
10.47
8 38
27.75
3 14
1.05
4.71

16 75
7 33

Delivery

Credit

Wider selection of goods . . .

1
6
1
2

Better quality

Convenient location

Advertising

Pleasing personality

26
14

5.81

16.77
9.03

Good store appearance

16.67

Sanitary and clean

Style

Other reasons

Total

100.00

155

100.00

191

100.00

groups, although it tends to become relatively less important for
consumers enjoying larger incomes. This type of reason accounts
for 62.20 per cent of the first reasons given by chain store cus-
tomers in the very low income group, 43.48 per cent in the low-
income group, 47.25 per cent in the medium-income group, and
52.78 per cent in the higher income group.

It is interesting to note that of the consumers in the very low
income group who are primarily interested in price 43.61 per cent
trade with independent merchants. Similar percentages for the

200 THE CHAIN STORE PROBLEM

other income groups, are 35.62, 36.76, and 47.22 for the low-,
medium-, and higher income groups, respectively. Further-
more, while slightly over one-half of the consumers who buy
regularly from chain stores are primarily motivated by lower
prices, only 60.04 per cent of all consumers who are primarily
interested in price trade at chain stores.

Next to lower prices, style and better quality are the most
important reasons. In all income groups, 15.71 per cent of these
shoppers give style as their reason for merchant preference, and
15.54 per cent give better quality. The influence of these factors
is greater in the other groups than in the very low income group.
In the latter, 10.81 per cent base their preferences on better
quality, while 14.76 per cent, 18.01 per cent and 27.75 per cent
of the low-, medium-, and higher income groups, respectively, are
motivated by better quality. Style influences 11.10 per cent of
the very low, 16.77 per cent of the low-, 18.93 per cent of the
medium-, and 16.75 per cent of the higher income groups.

Preference for independent merchants over chain stores is
shown by consumers who desire credit accommodations, better
quality, or style. Of those selecting stores for credit facilities,
86.32 per cent patronize independent establishments; 80.32 per
cent of those motivated by better quality trade with independent
merchants; and so do 64.80 per cent of those influenced by style.

The credit factor seems to be most important for consumers in
the low-income group in dealings with both chain stores and inde-
pendent merchants. Credit as a first reason for buying from
chain stores is of little importance with consumers in the very
low income group, probably because such consumers do not
generally qualify for this accommodation. Credit is also an
important factor in the purchase of goods by persons in the
medium-income group, probably more as a convenience than a
necessity, and the same applies to consumers in the higher
income group.

Summary. From the data collected in this survey it is evident
that no single motive can be said to dominate the consumer's
choice of a given type of store from which to buy his goods.
Furthermore, the motives vary with the line of merchandise and
with the income status of the purchaser. Above all, it must be
remembered that while price is an important factor in attracting
trade to a chain store it is but one of many factors and is greatly

CONSUMER ATTITUDE TOWARD CHAIN STORES 201

outweighed in the consumer's mind by other appeals. Chain
stores themselves have recognized this point in the past, as
evidenced from some of their own preachings. In an address
delivered several years ago by the then executive secretary of the
National Chain Store Association, the following principles of
success were laid down: 1

1. A retail store must be well located must have ready access to
consumers.

2. The store must be attractive in its exterior and interior design,
and must constitute a happy trading place for its customers.

3. It must maintain a steady supply of adequate stocks of good and
salable merchandise.

4. The factor of service must be carefully weighed and measured
in relation to the needs and demands of customers and the requirements
of competition.

5. The relations of employees to consumers must be carefully studied
and intelligently disciplined and developed.

6. Good management, which suggests the proper correlation and
direction of every department of the business, must be present.

7. Prices must be reasonable.

It is significant that in the paper referred to above the price
factor was but one of seven principles enunciated and was given
last place rather than first. Again, in the June, 1931, issue of
Chain Store Progress a tabulation is presented, entitled "Why
Customers Quit/' in which the following array of reasons was
given with the percentages of "quits" that each accounted for:
indifference of salespeople, 9 per cent; haughtiness of salespeople,
7 per cent; over-insistence of salespeople, 6 per cent; misrepre-
sentation of goods, 5 per cent; ignorance of merchandise, 3 per
cent; delays in service, 10 per cent; errors, 7 per cent; tricky
methods, 6 per cent; attempted substitution, 6 per cent; reluc-
tance to exchange goods, 4 per cent; overcharging, 14 per cent;
poor arrangement or appearance of store, 6 per cent. Here,
again, the price factor is only one of the reasons for quitting and
is less important than the faults of the sales personnel.

All of this suggests the possibility that both chain stores and
independents may profit considerably if they pay somewhat less
attention to price as a patronage appeal and more to otluer fac-

1 LYONS, R. W., "The Business Principles Underlying Chain Store
Development," Chain Store Progress, May, 1929.

202 THE CHAIN STORE PROBLEM

tors. Much trade can, no doubt, be attracted on a competitive
basis through the following: more convenient store locations;
hiring more engaging employees; stocking the stores with a wider
assortment of goods; making more frequent quality appeals;
improvements in salesmanship; continued straightforward and
honest dealings with customers; maintaining clean and attrac-
tive stores; and the application of other sound merchandising
principles.

CHAPTER XIII

ECONOMIC AND BUSINESS EFFECTS OF CHAIN

STORES

Any institution that has made the rapid progress recorded by
the chains in this country is bound to produce broad and far-
reaching consequences. Growth from comparative obscurity to
a position of commanding influence in the distributive mechanism
cannot but result in fundamental disturbances and readjustments
throughout the economic and social order. Some of the effects
produced are highly beneficial while others are detrimental or
socially undesirable.

In order to obtain a clearer understanding of the chain store
problem, the effects of chain stores have been divided into four
types economic, business, social, and political. In general, it
would seem that the effects of an economic or business nature have
proved to be largely beneficial, whereas many of the social and
political effects tended to be contrary to the public good. In
some cases the distinctions between these types of effects are
undoubtedly on the borderline and indeed shadowy. It is
believed, nevertheless, that such a classification is necessary to
an intelligent treatment of the subject. The present chapter
is concerned with a discussion of the economic and business
effects and the chapter that follows is devoted to a consideration
of the social and political influences.

The economic effects of chain stores are those influences
directly or indirectly attributable to the rise and growth of chains
which tend to modify our economic life and structure. They
refer to the effects upon our producing and distributing system in
the way of fundamental and substantial alterations. Business
effects, on the other hand, relate to changes or developments in
the characteristic methods and techniques of doing business
within a particular enterprise or industry and trade. Stated
otherwise, the business effects differ from the economic in that
they do not alter or substantially modify the basic elements of
our economic system but merely affect the manner of conducting

203

204 THE CHAIN STORE PROBLEM

or doing business and the internal functioning of the business
organization.

ECONOMIC EFFECTS OF CHAIN STORES

Chain stores are alleged to have influenced our economic
system in a number of significant ways. An analysis of the
allegations, however, discloses that many of them are unfounded,
whether they are for chains or against them. Furthermore,
even those which possess a certain measure of validity vary
considerably in their influence. Unfortunately, very little statis-
tical evidence is now available for the measuring of the extent of
influence exerted by the different factors. Consequently, much
of the discussion that follows is based largely on logic and often is
a matter of sheer opinion and judgment.

Consumer Price-consciousness. Chain stores are probably
more responsible for the present consumer price-consciousness
than any other single factor. Emphasis on price has always been
an integral part of their merchandising policy and this constant
pounding on price through various appeals has had its effect. As
a result, the average buyer is now quite aware of price as well as
of the quality which that price represents. He is intensely
interested in comparing the prices and values offered by compet-
ing stores and the tendency to shop around has been greatly
accentuated. Moreover, as shown in Chap. X, this desire to
compare and shop for prices is not limited to the consumers in the
lower income brackets but has also become characteristic of the
higher income classes. To the extent that the emphasis on price
has resulted in more careful buying on the part of consumers and
to the degree that it has encouraged business men to offer better
values, society has been the beneficiary. There is no denying
that chain stores have fostered a sounder consumer attitude in
this respect than prevailed before their advent.

Lower Wage Standards. Just what influence chain stores have
exerted on wage standards is a question of a distinctly contro-
versial nature. It is often charged that chain stores pay lower
wages than competing retailers, and that the wages paid do not
allow workers to maintain a decent standard of living. The
chains, on the other hand, counter by claiming that actually they
pay higher wages than their independent competitors. It would
seem that this controversy could be settled definitely by a simple

ECONOMIC AND BUSINESS EFFECTS OF CHAIN STORES 205

analysis of the facts. The subject, however, has never been fully
investigated. The Federal Trade Commission delved into it; the
Census accumulated some statistics; and several independent
investigators have gathered data; but in no case has a really
comprehensive study been made of this important phase of the
chain store problem.

As shown in Chap. IV, the Federal Trade Commission found
that chain stores paid lower wages to selling employees than did
competing independents. The data in Table 48 show the
comparative wages paid by several types of retailing and the
advantage seems to be in favor of the independent stores in every
kind of business studied. The data appear to substantiate the
often repeated charge of chain foes that chain store employees
are paid less than independent employees for the same type of

TABLE 48. AVERAGE WEEKLY WAGES OF FULL-TIME INDEPENDENT AND
CHAIN STORE SELLING EMPLOYEES, BY KIND OF BUSINESS

Kind of business

Number of
stores

Number of
store selling
employees

Average
weekly wage

Inde-
pend-
ent

Chain

Inde-
pend-
ent

Chain

Inde-
pend-
ent

Chain

Grocery

226
327
671
54
88
50
32
101

10,073
33,779
2,393
1,640
2,047
2,934
2,343
120

423
801
1,419
78
625
136
238
213

11,609
45,529
16,330
3,309
9,732
6,969
13,109
448

$24.91
25.90
30.07
25.52
31.11
33.48
25.06
28.77

$20.40
18.98
25.07
23.77
26.77
27.83
19.61
28.12

Grocery and meat

Drug

Tobacco

Ready-to-wear . .

Shoes

Dry goods and apparel

Hardware

Weighted average

1,549

55,329

3,933

107,035

28.48

21.61

Source: Federal Trade Commission, "Chain Stores Chain Store Wages," p. 19, U.S.
Government Printing Office, Washington, 1933.

work. There are, however, certain weaknesses in the Commis-
sion's data which make it necessary to proceed with caution when
drawing conclusions. The sample for independents is hardly
adequate and it is not sufficiently representative. Only 1,549
independent stores employing 3,933 persons are represented as

206 THE CHAIN STORE PROBLEM

compared to 55,329 chain stores employing 107,035 persons. The
disparity in size of the sample might well occasion a distorted
picture, but an analysis of the kind of stores may result in even
greater misinterpretation. The average annual sales volume per
store for those included in the study was hardly typical of inde-
pendent retailers in their respective lines of business. The
grocery sales, for example, were much greater than the average
grocery sales per store as revealed by the 1929 Census. Further-
more, all of the independent stores used for this comparison
were located in cities of more than 25,000 population, whereas a
number of the chain units were located in communities of less
than 25,000 1 an important factor when comparing wage scales.

But despite the shortcomings of the Commission's study, it is
probably the best that has been made to date. Even allowing for
certain inadequacies, it tends to show that chain stores are paying
their employees less than independent merchants pay for similar
work.

Several other studies lead to the same general conclusion as the
Federal Trade Commission study. One of them covering about
the same period as in the Federal Trade Commission investigation
revealed that chain store wages were approximately 20 per cent
under wages paid by independent merchants. 2 In a later study
the Bureau of Labor Statistics found that full-time selling clerks
in grocery and grocery and meat chains received an average of
three dollars per week less than the same type clerks employed
in independent stores. 3 In ready-to-wear, dry goods and apparel,
department store, and general merchandise chains the average
wage for full-time sales clerks was $1.70 less per week than in
comparable independent stores.

Chain stores deny that they pay lower wages and point to the
census figures which apparently substantiate their position.
These figures, however, do not give a true picture of the situation
as the pay-roll data include the salaries of chain store managers
but do not include the salaries of independent store owners.

1 Federal Trade Commission, "Chain Stores Chain Store Wages," p. 18>
U.S. Government Printing Office, Washington, 1933.

2 ERNST, EDWIN G., and HARTL, EMIL M., "Chain Management and
Labor," The Nation, Nov. 26, 1930, pp. 574-576.

8 "Comparative Wages in Chain and Independent Stores," Monthly Labor
Review, October, 1933, pp. 943-945 (U.S. Government Printing Office,
Washington).

ECONOMIC AND BUSINESS EFFECTS OF CHAIN STORES 207

Before making any comparison, adjustments must be made for
this discrepancy. Furthermore, the census figures include a
multitude of small stores that can only be classed as retailers by
a liberal interpretation of the term retail store. The Census of
1933 shows that more than 65 per cent of the independent stores
had annual sales of less than $5,000 and, in 1935, 44^ per cent of
the independent stores sold less than $5,000 worth of goods during
the year. Fair comparisons cannot be made without due allow-
ance for these factors, and when such allowances are made, even
census figures show that independent store employees are paid
more than chain store employees.

Any attempt to settle the question of comparative wages paid
by chain and independent stores by resorting to average figures
savors of the unscientific, unless the averages refer to comparable
groups. Few of the available wage statistics contain data of that
nature. It would appear that the true relationship between the
wages paid by local merchants and chain store organizations can
only be approximated until a comprehensive study of the earnings
of the two groups of workers under substantially similar condi-
tions is undertaken.

However, from the information that is available at the present
time, it would appear that chain stores do pay lower wages than
independent stores for the same type of work, though the evidence
is not altogether conclusive. A quotation from an article of one
of the country's most prominent chain store operators appears to
substantiate this view. Mr. J. C. Penney stated that, "the low
wage theory as applied to chain stores is just as dangerous as the
low wage theory in manufacturing. It can not long survive for
intelligent chains, which pay high wages, will put the others out
of business unless they change to modern methods." 1

To the extent that chain stores are guilty of paying lower wages
than competing independents they are producing an anti-social
effect. From the previous analyses of chain store prices, costs,
and profits it would appear that they have no legitimate reason
for paying lower wages than paid by other merchants.

Although it may be true that chain stores are paying lower
wages than independents, it does not follow that they are paying
less than other kinds of businesses. The Federal Trade Com-

1 PENNEY, J. C., and CROWTHER, SAMUEL, "The Community and the
Chain Store," Saturday Evening Post, Feb. 22, 1930, pp. 10-11.

208 THE CHAIN STORE PROBLEM

mission made a tabulation of comparative wages in different
businesses on the basis of their own studies and from data secured
from the Bureau of Labor Statistics. The results shown in
Table 49 reveal that chain store wages compare favorably with
those paid by other employers. The dangers of comparing wages
in different industries are many, but some generalizations may be
found. In the case at hand it appears that chain stores pay
wages that are higher than those paid in industries which employ
a large proportion of women, as in hotels and in canning and
preserving, but are lower than in most industries, and much
below those paid by independent merchants.

TABLE 49. WAGES FOR SPECIFIED TYPES OF BUSINESS AND INDUSTRY

Average Weekly
Industry or Trade Wage

Manufacturing $22 48

Anthracite mining 28.41

Bituminous mining . 19 . 95

Public utilities . . 30 . 09

Hotels 16.47

Canning and preserving . . . 16 . 74

Wholesale trade . 30 79

Retail trade (total) . . 24 . 05

Chains (without managers) .... 20 . 48

Chains (including managers) ... 25 . 49

Independents (selling employees) ... 23 . 45

Source: Federal Trade Commission, "Cham Stores Chain Store Wages," p. 23, U.S.

Government Printing office, Washington, 1933.

Effect on Employment. It has been repeatedly asserted that
chain stores create a certain amount of unemployment by curtail-
ing services and by obviating the necessity for manufacturers' and
wholesalers' salesmen. Naturally, the chains do not have to
employ truck drivers to deliver to consumers, bookkeepers in the
individual stores, or collectors, if they do not render credit and
delivery services to their customers, nor is it necessary for them
to employ salesmen to contact their individual units.

It would appear that although certain employees are displaced
through the curtailment of service, actually total employment is
not necessarily reduced, providing the resultant savings are
passed on to the consumer. This charge is akin to that which
claims that automatic machinery creates unemployment, and it
is too controversial a subject to be discussed at length at this
point. Economists generally agree that although new develop-

ECONOMIC AND BUSINESS EFFECTS OF CHAIN STORES 209

ments and more efficient methods displace workers, actually
little unemployment results from this process. As long as the
elimination of these services enables industry to reduce prices,
consumers are able to spend their savings for other types of goods
so that the total employment is not necessarily decreased.
Although employment in the retail field might be reduced,
workers would have to be employed to make the additional goods
bought with the savings. All of this is the long-run effect. In
the short run, however, it does result in the loss of jobs and less
employment.

One particularly disturbing effect that chain stores have on
employment results from their insistence on young employees.
It may be generally observed that chain store employees are
predominantly youthful, and men or women over 45 years of age
find that their opportunities are distinctly limited in large-scale
retailing organizations. Some companies refuse to hire persons
over this age limit while others even go so far as to weed out the
older workers, the assumption being that youth is essential to
merchandising efficiency. While employers have the legal right
to utilize only those who fit into their business methods, they are
helping to create a perplexing economic problem by thrusting the
responsibility for older employees upon society.

A retail worker who has reached the age when his serviceability
to chain stores has diminished, finds it acutely difficult to locate
other uses for his ability. If unable to retire, only three possi-
bilities are open to him. He may find employment in other lines
of endeavor, although here too his opportunities are limited since
industry is sending thousands of others on the same quest. He
may secure employment with independent merchants, but they
too will probably prefer a younger man. As a last resort he may
desire to enter the retail business on his own, but the competition
from chain stores and other distributors reduces his chances for
success even in that field. His predicament is a major economic
problem of our present era of big business. It is a situation that
is replete with lamentable economic consequences for society.

Shorter Channels of Distribution. Prior to the extensive
development of the chain store system, the typical flow of mer-
chandise was from the manufacturer to the wholesaler to the
retailer. In many cases, goods passed through additional
middlemen such as brokers, manufacturers' agents, and selling

210 THE CHAIN STORE PROBLEM

agents. Thus a channel might consist of a manufacturer,
broker, wholesaler and retailer, or of various combinations of
these or other middlemen. Each of these middlemen grew up
because of a need for specialized service each had a function to
perform.

The chain system has not eliminated the functions of these
middlemen, but it has integrated them into one organization,
although the bulk of goods still passes through the older or more
orthodox channels. This integration shortened the channel
through which goods move from production to consumption.
In the chain system the channel is usually from manufacturer to
chain store warehouse to the retail unit, or it may be from the
manufacturer to the retail unit direct. This tends to shorten the
time it takes for goods to flow through the channel of distribution,
and it reduces the number of hands through which merchandise
must pass in reaching the consumer.

This change in the channel of distribution is beneficial to the
consumer if it either reduces the cost of goods or brings them to
him in a fresher and more desirable condition ; it is probable that
this integration has accomplished both objectives, at least in part.
As shown in Chaps. IV and IX, certain savings have been
effected by chains over their competitors, resulting in narrower
gross margins. Part of these economies is being passed on to
consumers, as shown in Chaps VII and VIII. Furthermore,
goods frequently reach the consumer more rapidly through the
chain system than through the wholesaler-retailer route. Chains
usually enjoy a more rapid stock turnover, and this change has
certainly benefited the consuming public through fresher mer-
chandise at more reasonable prices.

From this discussion it must not be inferred that a shortening
in the channel of distribution inevitably results in lower costs of
operation. Since functions of middlemen cannot normally be
altogether eliminated, integration through the chain method
effects economies only when the chain operates efficiently. It
should be noted further that many of the economies have come
about more through a curtailment of services and through large-
scale operation than by short-circuiting middlemen; also through
a shifting of functions to the manufacturer.

The Formation of Voluntary Chains. In order to compete
with the centralized chain systems independent merchants

ECONOMIC AND BUSINESS EFFECTS OF CHAIN STORES 211

attempted to reinforce their buying power and increase their
efficiency through cooperative action. Voluntary chains have
been utilized to obtain some of the advantages of the corporate
chain at the same time retaining the advantages inherent in
individual or independent ownership of the store.

Starting in the grocery field the voluntary chain movement
spread rapidly and at the present time there are more grocery
stores in the so-called " voluntary chain" movement than there
are corporate grocery chain stores. 1 The movement is spreading
to other fields and recently voluntary chains were formed in
drugs, hardware, and clothing. The substitution of collective for
individual action among independent retailers is largely the result
of the competition furnished by the corporate chains. Thus the
latter have indirectly contributed to increased merchandising
efficiency insofar as the voluntary chain movement has brought
it about.

Stabilizing Effect on Business. A leading historian stated that
chains "introduce the word stabilization into a troubled retail
business and what is more important the practice of stabilization
by careful management." 2 This is not altogether true, for whole-
salers have long before followed similar practices. Chains never-
theless exercised a profound influence in this direction. Being a
form of large-scale retailing, the chains place orders well in
advance so that manufacturers are able to stabilize their produc-
tion. They also stabilize business in general by being able to
weather financial crises through their superior management and
financial strength. In that way they prevent the market turmoil
which follows the widespread bankruptcy of the smaller busi-
nesses occurring during years of business stress.

Another way in which the chains introduce stability in business
is through their ability to pay regular rents. Although during
the depression which began in 1929 a number of chains were
forced to readjust their leases, landlords who had chain tenants
were much more fortunate than those with independent tenants.
There is little doubt that a real estate owner would much prefer

1 The "1936 Chain Store Manual" states that there were 802 voluntary
chain grocery and food groups representing 107,141 individually owned retail
outlets which are estimated to handle over one-third of the food and grocery
business in the United States today.

2 BEARD, CHARLES A., "Planning and the Chain Store, " New Republic,
Nov. 30, 1932, p. 66.

212 THE CHAIN STORE PROBLEM

to lease his property to a large chain organization than to the
average local business man. The skilled management and
greater financial resources of the corporate chain make the land-
lord feel more certain that he will collect his rentals.

There certainly is need for more stability in business, and,
insofar as the chains tend to increase it, the effect is beneficial
to business and society as a whole.

Larger Trading Areas of Smaller Communities. There can be
little doubt but that chains have materially affected the business
of the small rural towns in which they have opened units. In
many cases the opening of a store by a prominent chain system
has helped to recreate the trade of those towns and to keep it
from going to the larger cities. Consumers like to patronize the
trade centers if they have an opportunity to purchase goods of a
quality and a price that compare with those offered in the larger
cities. The chain store in a small town provides price competi-
tion which attracts the price-conscious farmer. It usually offers
a wider selection of merchandise than many of the older general
stores. It provides more opportunity for shopping for the
desired type, quality, or price of goods. It has introduced better
business and merchandising methods to these communities.
These qualities contribute to the trade-pulling power for the
entire community. Many towns owe their importance as trading
centers to the chain stores that have chosen to locate within their
boundaries.

Wider Assortment of Goods. Although chain stores usually
concentrate their attention on a few lines, they often give the
consumer an opportunity to buy kinds and varieties of merchan-
dise which he cannot secure from other retailers. An investiga-
tion would probably show that chains not only have stimulated
the distribution of a greater assortment of goods to the consumer
but today, in many cases, offer the widest selection of goods to the
consumer within their price range. This has come about first
through a careful study of buying demands and habits which
enabled chains to establish stores that could supply the exact
needs of their customers. Chains do not attempt to carry every
possible item but handle a variety of merchandise and a wide
range of quality and prices of those items which are in greatest
demand. In addition they offer a wide selection of seasonal
goods at appropriate times.

ECONOMIC AND BUSINESS EFFECTS OF CHAIN STORES 213

The second way in which the chains offer a wider selection of
goods is through the stimulus which they have given to large-scale
production. Through their cooperation with manufacturers,
many items are now brought to the consumer which other-
wise would never have been developed at a price which the
average person could pay. The five-and-ten-cent stores are
notably active in this direction. They developed hundreds of
items which now can be sold within their price limits but which
formerly sold at considerably higher prices.

Surely, merchandising institutions that offer the consumer a
greater variety and bring to him articles which he otherwise
would not have been able to purchase are rendering a real eco-
nomic service. The chains deserve much credit for doing just
that.

Absentee Ownership and Control. Large-scale business is
characteristic of our present economic system and, of course,
chain store merchandising is a phase of this development. It has
been responsible for certain economies for the consumer, but it
has also tended to remove the control and ownership of the retail
stores from the particular community in which they are located.
Absentee ownership and control are characteristic of a goodly pro-
portion of our chain stores. This situation led to many bitter
attacks upon chains by local business men who object to having
the local business dominated by outsiders. It is contended that
the absentee managers are not interested in furthering the interest
of the local community.

It was inevitable that the ownership and control of large busi-
ness enterprises should be concentrated in a few centers. This
resulted in certain operating efficiencies, but there can be little
doubt that these economies have been paid for in a loss of com-
munity personality. As long as chain stores are a minor factor
in the life of any town, this loss will probably not be great, but as
chain stores absorb more of an area's retail business, the results
become more serious.

Reduction in Distribution Waste. From the chain store point
of view, their most important contribution to our economic
development has been the reduction of distribution costs. Chain
stores more than any other single factor in the past generation
have been responsible for making reductions in the costs of
distributing merchandise from producer to consumer.

214 THE CHAIN STORE PROBLEM

Our marketing system has been repeatedly attacked for the
so-called excessive cost of distribution. Engineers and econ-
omists point out the savings effected in production and in turn
point with scorn to the increased costs of distribution, both in
absolute amounts and relative to the costs of production.
Undoubtedly the outstanding problem of our present distribution
system concerns the ways and means of reducing the margin
between what the producer, on the one hand, gets for his product
and what the consumer, on the other, pays for that product. It is
freely admitted that this margin contains a considerable amount
of waste, and it is to the credit of the chains that they have done
much to reduce it. We know that many of the smaller inde-
pendent merchants are notoriously inefficient. Many operate
businesses with total sales of less than $10,000. According to the
1935 Census of Distribution more than 44 per cent of the inde-
pendent merchants have an annual volume of less than $5,000,
64 per cent have annual sales of less than $10,000, and more than
81 per cent have sales of less than $20,000 per year. 1 Naturally,
retailing carried on on this scale is bound to result in increased
costs not only for the retailer but also for the wholesaler who
must fill the order, make the delivery, and invoice many small
sales.

Chains have done much to correct such wasteful situations as
these. Normally chains do not attempt to operate units which
do not gross reasonable annual volume. In the chain grocery
business it is felt that a store with annual sales less than $40,000
should be closed out. At the present time there is a distinct
tendency to raise this limit even higher. Certain grocery
chains are now averaging more than $100,000 annual sales per
store. 2

To the extent that the chain stores have reduced operating
costs they must certainly be considered a boon to society, and it
has been shown in Chap. IX that they have effected material
economies in most lines of retailing. In helping reduce the cost of
distribution the chains are contributing to our material prosperity,
provided that the reduction in distribution costs is passed on to

Census of Business: 1935, Retail Distribution, Vol. VI, p. 156, U.S.
Department of Commerce, Washington, 1937.

2 The Safeway Stores in 1936 had average annual sales of $102,723 for
each of its 3,370 units.

ECONOMIC AND BUSINESS EFFECTS OF CHAIN STORES 215

consumers, and provided further that the economies do not result
from a shifting of functions back to the manufacturer or to the
consumer.

Lower Prices to Consumers. In Chaps. VII and VIII it was
shown that chain stores materially undersell their independent
competitors. In the case of groceries it approximates 5 per cent,
whereas in the drug field and others it probably runs considerably
higher. Practically all of the comparative-price surveys that
have been made to date point conclusively to underselling on the
part of the chains. Since this point has been fully discussed in
the preceding chapters, it is only necessary to point out here that
it is an important economic effect of chain stores for which they
deserve a measure of credit.

A Motivating Force in Distribution Progress. In the past 20
years the chain store has probably been the most important
motivating force in retailing progress. New and improved
methods of merchandising inaugurated by chain stores have done
much to stimulate retail advance. Alert merchantvS soon found
that they could adapt many of the chain store practices to their
own business with beneficial results. Obviously, many of the
chain store advantages can be attained by smaller merchants.
Few are exclusive possessions of multiple-store selling. Con-
venient and pleasant stores, adequate inventories, clean, fresh
merchandise can all be featured by the independent merchants to
the benefit of consumers.

Chain stores have been a potent competitive force. In order
to compete with them, independent merchants were forced to
modernize their stores, to use more effective advertising, and to
apply better business methods generally. The independent
merchant who has been able to withstand the chain store com-
petition has done so through increased efficiency and initiative.
He has developed superservice, practiced cooperative buying, and
curtailed his costs to make his prices comparable to those in effect
in chain stores. The independents who lacked the initiative to
keep in step were quite generally left by the wayside.

Competition has always been regarded as good for the country,
and to the extent that chain store competition has been fair, it
certainly has been beneficial. It has helped to bring about lower
prices, fresher merchandise, more attractive stores, and better
merchandising methods in retailing.

216 THE CHAIN STORE PROBLEM

Chain Stores Exhibit Monopolistic Tendencies. The growing
importance of chain stores leads many to fear that they will some
day constitute a monopoly. It has been said that chain stores
will drive individual merchants out of business and gain a
monopoly so that, by agreement among them, the business could
be divided and prices controlled. As Senator Brookhart of Iowa
stated in an address before the Institute of Public Affairs at the
University of Virginia on July 1931, "The growth of the chain
store is perhaps the most startling development of monopoly in
our country at the present moment/'

Those who seek to defend the chains claim that the dangers of
chain store monopolies are much more imaginary than real. It is
inconceivable, they claim, for monopolistic tendencies to develop
in the merchandising field. They point to the fact that in
practically every kind of retail business the independent stores
outnumber the chain stores and also do a larger volume of busi-
ness. They also state that the competition which chain stores
furnish to each other removes the opportunity for control of
retail distribution. It is said that even though the natural
restrictions of competition did not exist, chain stores would still
be prevented from establishing monopolies by governmental
restrictions such as the Sherman Anti-Trust Law, the Clayton
Act, and the Federal Trade Commission Act.

There is undoubtedly considerable truth in the chain store
defense, but at the same time an impartial observer would find
that, even though chains do not at the present time constitute a
real monopoly, there is a danger that they might develop monop-
olistic tendencies. Even now they occupy semi-monopolistic
positions in some instances. The following quotations from the
Federal Trade Commission investigation substantiate this view:

. . . chain-store systems as possible monopolies under the Sherman Act.
. . . The competition which they furnish to each other, supplemented
by that of independent stores, would seem to negative monopoly by any
individual chain. ... A study of the extent to which chain-store com-
panies have invaded the general field of retail distribution of commodities
does not indicate a monopolization of that field, taken as a whole. ... A
much stronger showing might be made from the standpoint of particular
chain companies and their percentage of control in the particular line of
commodity distribution of which each is a part. It is possible, also,
that a monopolistic condition might be established in a given section of the

ECONOMIC AND BUSINESS EFFECTS OF CHAIN STORES 217

country and not for the country as a whole. . . . The broad prohibition of
the Sherman Law against monopoly has been narrowed by interpretation
of the courts to mean that only actual as distinguished from potential,
monopoly is unlawful, and that the mere possession of monopolistic
power, in the absence of overt acts indicating an illegal use thereof, is not
a violation of this statute. 1

It is evident that chain stores may possibly secure a partial
monopoly in a given section of the country and not in the country
as a whole. Since chains are concentrated in the larger cities,
they exercise more influence in urban centers. As was shown in
an earlier chapter, in certain large cities the chains have virtually
driven independent merchants out of some lines of business. In
Cleveland, Ohio, for example, chain food stores do more than
71 per cent of the total business in that line. In the state of
Pennsylvania two chain store companies, the Great Atlantic &
Pacific Tea Company and the American Stores Company, do
approximately 40 per cent of all the grocery business of that
state. In the variety store field the chains do more than 90 per
cent of the total business of that kind, and in many large cities
they do practically 100 per cent of the total. When it is con-
sidered that chain stores are clustered in the large cities, it is not
difficult to prove the existence of monopolistic power.

BUSINESS EFFECTS OF CHAIN STORES

Business effects refer to those changes or developments which
modify the characteristic methods and technique of doing busi-
ness within a particular enterprise or within an industry or trade.
In the following discussion these effects are viewed largely from
the angle of business men rather than from the standpoint of
society as a whole. For that reason, there will be some repetition
of the facts discussed in preceding chapters.

Loss Leaders. Although chain stores deny that they sell
popular brands at a loss, it is a matter of common knowledge
that they have made extensive use of reduced prices on nationally
branded merchandise in order to encourage consumers to patron-
ize their stores. The Federal Trade Commission found that
chain stores generally practice " leader " selling, and almost 12

1 Federal Trade Commission, "Chain Store Investigation, Final Report/'
p. 19, U.S. Government Printing Office, Washington, 1935. The italics
are those of the authors for purposes of emphasis.

218 THE CHAIN STORE PROBLEM

per cent of the reporting chains admitted selling some articles
even below net purchase cost. 1 No doubt a number of other
items were also sold below their normal selling prices. This
practice on the part of chains has encouraged independent
merchants to follow such leadership. Certain price-cutting
independents feature " leader-selling " as effectively as do chain
stores.

It would seem that this practice on the part of either the chains
or the independents is justified so long as the reduced price reflects
honest differences in cost. If the practice, however, is used to
entice consumers to visit these stores with the expectation of
finding all prices reduced similarly, it is hardly an ethical proce-
dure. Playing on the gullibility of the public by creating the
impression that bargains are obtainable on all goods in stock,
when such is not the case, may well be classed as an unfair trade
practice. Merchants and wholesalers faced with undue price
cutting find it expedient to handle national brands which are
not being used as price " footballs 7 ' and also to adopt private
branding.

It is not intended to discuss at this point the relative merits of
loss leaders or price cutting but merely to mention that this
practice can largely be traced to chain stores. It is a bit of busi-
ness strategy that has been used for many years, but it was the
chain store which really popularized this method of attracting
trade. The responsibility for stimulating price cutting can be
laid largely at the foot of chains and other types of large-scale
merchandising. The present fair-trade legislation is directed
principally at this allegedly pernicious practice (see Chap. XVII).

Curtailed Services. One practice very widely featured by
chain stores is that of selling goods on a cash-and-carry basis. In
an effort to cut costs and to give a visible reason to the consumer
for price cutting, the chains have very widely curtailed certain
services. The elimination of credit and delivery has been an
almost universal practice of the grocery chains. Chain drug-
stores, clothing stores, variety stores, and others have followed
suit. In this manner, chains have emphasized the savings which
they could then pass on to the consumer. Operating costs have

1 Federal Trade Commission Investigation, " Chain Stores Chain Store
Leaders and Loss Leaders," p. 20, U.S. Government Printing Office,
Washington, 1932.

ECONOMIC AND BUSINESS EFFECTS OF CHAIN STORES 219

been reduced as the result, and many consumers do not feel that
they have been materially inconvenienced. That the chain
stores have effected economies by curtailing services, there is no
doubt. As was shown in Chap. IV, it costs more than 2 per cent
to offer credit and delivery services to grocery customers, but it
must not be supposed that this necessarily gives the non-service
chains an opportunity to undersell the independents by this
margin. Service independents absorb a portion of this cost
themselves.

The elimination of service may or may not be a benefit to
society. It permits a certain reduction in prices, but it also
increases the inconvenience of the customer in obtaining his
merchandise. But whether or not it is a social benefit does not
alter the fact that the chain stores have popularized this merchan-
dising feature.

Chains Have Encouraged the One-price Policy. The old
practice of exacting from each customer as much as he would pay
has been almost abandoned in present-day retailing. Chain
stores have materially aided in changing the condition previously
prevalent, although department stores have preceded them in
this respect. Patrons know that they all pay the same prices
when they enter a chain store, and this encourages independent
merchants to follow the same practice. The chain emphasis on
price quite generally forces retailers to offer merchandise to
customers on a one-price basis. That this practice is distinctly
beneficial to consumers as well as to the merchant is generally
conceded. All customers are treated alike, and the poor bargainer
is not penalized. It facilitates more efficient buying and permits
sales emphasis to be placed on the goods rather than on the price.
It eliminates bickering, higgling, and browbeating, and con-
sequently removes the stigma under which tradesmen of former
ages generally labored. Sales are effected with considerable
economy as long as price is taken for granted, and the time of both
buyer and seller is saved. One need stretch his imagination but
little to appreciate the time that would be consumed in the
bargaining process in connection with each of the thousands of
retail transactions that are made daily.

Impersonal Atmosphere in the Stores. Chain merchandisers
tend to make retailing a strictly business endeavor and by doing
so surround their stores with an impersonal atmosphere. It

220 THE CHAIN STORE PROBLEM

apparently is the aim of chain stores to attract the customer,
secure his money, and get him out as rapidly as possible. This
attitude is hard and mechanical as contrasted to the social and
personal service of many independent merchants. Chains felt it
expedient to follow this practice since they are not able to empha-
size the personal appeal to the same extent as independents.
Whether the businesslike atmosphere of chains is more beneficial
to the consumer than the personal attitude of the independent
stores rests largely with the individual. The fact remains that
the store of today is primarily a business enterprise, not a social
center.

Wider Uses of Package Goods. Originally many staples such
as rice, sugar, and beans were sold in bulk. They were packaged
and weighed at the time of sale. In recent years, however, the
chains have seen the advantage of using prepacked goods. They
have developed the practice of packaging goods in advance of
sale in order to save time and also to give the buyer a more
attractive and sanitary container. To the extent that this has
been accomplished at no greatly increased cost to the consumer,
it has proved beneficial.

Complete Stores. In the days of the butcher, the baker, and
the candlestickmaker the housewife bought meat freshly killed
and dressed at the butcher shop, bread at the baker's, and staple
groceries at the little corner grocery store, but the chain stores
have done much to alter this condition. They have combined
the butcher shop, the bakery, and the grocery store into one
complete unit to which they have added fresh fruits and vege-
tables and miscellaneous items. There is a decided tendency
among grocery chains to develop complete food markets. For
example, more than 75 per cent of the Safeway Stores are com-
plete food markets, 1 and others are rapidly converting their
grocery stores into food emporiums.

In the drug trade the department drugstores which are common
in the larger cities are primarily a chain development. Adding
item after item in an effort to boost volume, chain drugstores, in
many cases, have evolved into quasi department stores which are
termed for want of a better term drug department stores.
Handling a variety of merchandise such as sporting goods, house-
hold utensils, books, and even clothing, in addition to the normal

1 "Standard Statistics Investment Service, 1935," p. 3106, New York.

ECONOMIC AND BUSINESS EFFECTS OF CHAIN STORES 221

drugstore items, these stores are becoming a new type of merchan-
dising institution.

The success of the large corporate chain stores has encouraged
independent merchants to follow suit. Independent super-
markets and drug department stores are becoming almost as
prominent as chain stores of the same type.

Combination Sales. Since chains depend upon large sales
volume, they find it highly desirable to increase the unit volume
of each sale. This is often accomplished through multi-unit and
combination sales. The consumer is encouraged to buy more
than one unit at a time by offering, for example, one can of
tomatoes for 10 cents or three cans for 25 cents. Or the unit of
sale is increased by combining several similar items of merchan-
dise at a special price for example they might feature a box of
soap chips plus 10 bars of soap at a reduced price. Independent
merchants have found that this chain practice produces extra
profit for them.

Chains Have Caused the Independents to Develop Better
Business Methods. In order to meet chain store competition
local merchants adopted chain practices in the conduct of their
own business. The introduction of more efficient accounting
practices, the stimulation of better store layouts, the wide use of
scientific store location, the development of inventory control,
the emphasis on rapid turnover have all been utilized by inde-
pendent merchants to their advantage. New standards of
service, courtesy, window display and cleanliness can be traceable
to the examples set by chain stores. Advertising, pricing, and
buying practices have been similarly copied. Chain stores can
well be proud of their contribution to the development of better
business methods among retail merchants. This is probably the
most notable contribution of the chains the awakening of the
independent merchant from his lethargy.

SUMMARY

It is evident that the chains have contributed much to the
development of distribution in America. They have been largely
responsible for many advances in retailing progress the stimula-
tion of scientific merchandising, the reduction of distribution
wastes, and the development of certain newer types of retailing
institutions. But they must be held accountable for certain

222 THE CHAIN STORE PROBLEM

economic and business effects that are contrary to the public
welfare. It would be difficult to perceive how the local com-
munity benefits when it loses the ownership and control of its
retailing institutions. Certainly they sacrifice much through the
depersonalization of their retail outlets. Nor can it be said that
society gains from the tendency for large-scale retailers to pay
relatively low wages and to contribute to the unemployment of
older workers. But these detrimental effects would seem to be
considerably outweighed by the economic and business advan-
tages of chain stores.

CHAPTER XIV

SOCIAL AND POLITICAL EFFECTS OF CHAIN STORES

In addition to affecting profoundly our economic system and
business practice, chain stores are also responsible for widespread
social and political changes. These latter changes, while more
abstract than those discussed in the preceding chapter, have been
more influential in arousing popular discussion of the chain store
problem.

In order to evaluate the influence of chain stores upon our
social and political life it is necessary to define clearly, although
perhaps arbitrarily, what is included in each of these categories.
The social effects may be defined as the changes in the habits and
customs of the mass of our citizens. While at first glance it
might seem that this definition conflicts with that of economic
effects, yet a more thorough consideration will reveal that each is
concerned with a distinctly different phase of human interest or
organization.

Political effects may be described as those changes or develop-
ments growing out of chain store methods of doing business which
involve the additional consideration of the legislative, judicial,
or executive branches of the government. More simply stated,
anything of a political nature which would not have occurred had
chains not existed may be considered as a political effect.

SOCIAL EFFECTS OF CHAIN STORES

Changed Consumer Buying Habits. Chain stores have done
much to alter consumer buying habits. More than any other
single factor they are responsible for the present popularity of the
cash-and-carry method of buying and for the personal shopping
tendencies now so prevalent. Few independents featured this
type of service before the chain stores publicized the economies
that were thereby effected.

Another consumer buying habit that the chain stores have
helped change is related to the farmer's buying tendencies. By

223

224 THE CHAIN STORE PROBLEM

providing the towns in which their units are located with modern
stores, fresh seasonal merchandise, and low prices, chain stores
tend to attract customers from rural areas. This has been
especially true of Montgomery Ward and Sears-Roebuck stores.
They have done much to draw the farmers to those communities
in which their stores are established.

Sharper Lines of Class Distinction in the United States. Dur-
ing the past few years, there has been a noticeable growth of class
consciousness among the people of the United States. Ample
evidence of this is found in the wide popularity of taxes on wealth
and the public approval given to legislation which imposes restric-
tions on big business. The chain store, being a form of big
business, and very often owned and controlled by those who live
away from the communities in which the stores are located, has
frequently been attacked as an anti-social form of enterprise
which should be handicapped. They are frequently pictured as
devices that " Wall-streeters " use for draining the smaller com-
munities of their wealth. Naturally, this arouses bitterness
among the working classes who are made to feel that the chain
store owners are exploiting them in order to enjoy a life of luxury
and ease. It is no wonder that many people feel that chains
should not be allowed to enjoy unhindered the results of fortunate
economic opportunity. Measures attacking the chain stores are
popular with many persons who see in them an opportunity to
penalize those who are receiving disproportionate shares of the
national income. It is a feature of the present prevalent attitude
of " soaking the rich and powerful."

There is no doubt that a growing class consciousness is detri-
mental to the best interests of society and though the chain stores
are not directly contributing to this attitude, they are accom-
plishing the same end indirectly. It may all be a natural reac-
tion to the present trend of our economic development but, even
so, it is an unhealthy state of affairs. Chains may find it difficult
to alter the situation, but undoubtedly an attempt at better
public relations would help. It would appear that they could well
afford to expend more energy in informing the public of the social
values that accrue from large-scale merchandising.

Lessened Individual Opportunity. When analyzing the effect
that chain stores have had on individual initiative, attention is
naturally focused on two questions: first, have chain stores

SOCIAL AND POLITICAL EFFECTS OF CHAIN STORES 225

limited the opportunities for ambitious men to engage in business
on their own account? Secondly, is it necessary to engage in
business as an entrepreneur in order to carve out for oneself a
successful business career?

The chain store is accused of turning us into a nation of clerks
by depriving individuals of the opportunity of establishing their
own businesses and, in that way, impairing individual initiative,
since standardized merchandising operations tend to make of
employees mere routine workers. Although those favoring chain
stores are wont to ridicule such an assertion, it does contain
considerable truth. The rapid expansion of chain stores into
many types of retailing would appear to be prima facie evidence
that there is less opportunity to establish oneself successfully in
independent merchandising today than a generation or two ago.
Certainly it would be difficult for one to engage profitably in the
variety store business in most of our cities. The natural advan-
tages of large-scale merchandisers in that field, coupled with
their present virtual monopoly, would make any such venture
extremely hazardous. The same situation prevails to a lesser
degree in other prominent lines of trade such as the retailing of
shoes, groceries, and drugs.

The important factor that lessens an individual's chances for
successfully entering the retail field is that chain stores possess
certain inherent advantages that place them in a favored position
as compared with the independent. The benefits accruing from
quantity buying, specialization, spreading of risk, and other
characteristics of multiple-store merchandising materially limit
an independent merchant's opportunities. To be sure, certain
persons can and will make a success in retailing under all cir-
cumstances, but the chains are restricting the possibilities for
successful operation for the multitude of would-be retailers.

Protagonists of chain stores attempt to refute the validity of
the assertion that the opportunities for young men are being
limited by chain stores. They point to the fact that there are
more independent merchants today than there were in the past.
The Census of Distribution is cited as ample proof since it shows
that in 1935 there were 1,419,855 independent stores as compared
to 1,230,300 in 1929. From these data one must conclude that
individuals are establishing their own enterprises and in absolute
numbers there are more independent stores today than there have

226 THE CHAIN STORE PROBLEM

been in the past. There is, however, room for more stores today
than ever before on account of the increase in population, the
growth of new consumer desires, and the marketing of new
types of merchandise. Although independent proprietors might
hold their own in absolute numbers, they still may be decreasing
in relative importance, especially in certain lines of retailing,
and that is exactly what is happening.

It appears to be an entirely proper conclusion that the number
of individual retail entrepreneurs would be considerably in excess
of the present number if retailing were entirely in the hands of
independent merchants. It is only necessary to compare the
number of active proprietors and firm members in each type of
business to substantiate that assertion. The 1935 Census of
Distribution listed 1,447,214 independent proprietors and
partners and only 2,702 chain store proprietors or corporate
officers. More startling figures are obtained from a glance at the
number of variety store proprietors. While less than 10 per cent
of the total business of that kind is done by independent stores,
there are more than 40 times as many independent entrepreneurs
as chain store entrepreneurs. The same type of situation is
found in other lines where the chain stores are active.

The contention that chain stores do not tend to limit the
opportunities for individuals to establish businesses of their own
is based on the assumption that chain stores create their own
business and do not take from independent merchants any sales
volume that the latter would receive. Any such assumption
must necessarily be unsound. It is obvious that sales in the
grocery and other convenience goods fields cannot be expanded
sufficiently by chain store sales promotional activities to com-
pensate independent merchants for the share of that business
which the chains have absorbed. The fact remains that each
year an increasingly larger number of independent retailers is
competing for a progressively decreasing volume of business that
is left for them.

Even though the opportunities for owning an individual busi-
ness are somewhat limited today, it does not follow that young
men can not work out successful careers in the field in distribu-
tion. Ownership is not necessarily an indispensable feature of a
successful business career. Many exceedingly successful men in
every line of industry and commerce have been employees. If

SOCIAL AND POLITICAL EFFECTS OF CHAIN STORES 227

one has the requisite qualities of a business executive, he can reap
a rich reward even though he works for others. Nor is ownership
essential to the rendering of constructive social service. One
may find ample opportunity for benefiting his fellow men despite
his affiliation with chain stores. It must be granted that a man
who possesses ability and initiative may still find opportunities
for constructive service to humanity. But will those oppor-
tunities be limited by his status as an employee instead of an
employer? Furthermore, are there enough responsible positions
in the chain organizations for all who qualify and who might
otherwise operate stores of their own?

Little factual substantiation can be given the assertion that the
substitution of store managers for store owners involves the
restriction of individuality, individual initiative, personal respon-
sibility, and self-reliance. It is generally felt, however, that
owners possess those qualities in greater degree than employees.
Possibly this is the result of a feeling of greater security on the
part of the entrepreneur. It may partially be due to the fact
that proprietors are looked upon with more esteem than paid
managers. To some degree it may be traceable to the fact that
successful owners generally reap from business greater rewards
than do those who work for others.

Decline of the Store as a Social Center, For many years the
retail store was the community gathering place, and customers
came in to exchange the latest news and gossip as well as to
purchase merchandise. Today this is no longer true except in the
smaller communities. The tempo of a successful modern retail
business is much too fast to permit extended social intercourse
between a clerk and customers or among the customers them-
selves. The modern store is very different from the old corner or
general store, and the chain store has been partially responsible
for this change. It has stimulated the modern impersonal
environment and, undoubtedly, has done much to eliminate the
retail store as a social center.

This change is less of a social handicap today than it would
have been some years ago. With radios, automobiles, movies,
and numerous sources of recreation, people find less need for the
social contacts of the retail store. Instead of getting the latest
bit of gossip or spending a pleasant hour at his favorite store, the
man of today listens to his radio, plays golf, or takes a drive in

228 THE CHAIN STORE PROBLEM

his car. The chain stores are accentuating a social change that
is partially the result of other causes. It would be hard to
imagine a busy A. and P. grocery, or a Woolworth five and ten,
the social center of any community, as the local store so often is.

POLITICAL EFFECTS OF CHAIN STORES

The chain stores are a prolific source of political controversy.
Probably no other retailing institution has been the subject of as
many political attacks or as many attempts to curb or regulate by
legislation as have the chain stores. For the past 10 years they
have been more or less consistently involved in some form of
political action. Chain store enemies were not slow in discover-
ing that some of their most potent weapons were political in
nature.

Source of Material for Politicians. Those who seek to gain
political recognition are apt to be constantly on the lookout for
issues on which they can take vote-getting positions, and the
chain store provides just such an issue. Practically all voters are
familiar with them and are aware of some of the so-called "evil
effects " that the chains are producing. Many small independent
merchants find it difficult to exist amidst strenuous competition,
and the blame for their plight is quite generally placed on the
chain stores. Human sympathy being what it is, many persons
side with the i Bunder-dog" against his oppressor, and the chain
store is widely regarded as the latter. Numerous politicians
find it expedient to champion the anti-chain cause while others
take active part because they sincerely feel that the chain store
problem needs legislative action.

Some of the nation's most prominent political characters have
taken a leading role in the controversies relating to the chain store.
The late Huey Long, United States senator from Louisiana, was
especially prominent in the anti-chain campaign, and the results
of his work were but recently brought to light again. The
Louisiana chain store tax, that was enacted at his insistence to
curb out-of-state corporations, was declared constitutional by the
United States Supreme Court in May, 1937. l His attitude toward
chain stores can best be expressed by quoting from one of his
speeches. When fighting for the enactment of his tax on chain
stores he said, "I would rather have thieves and gangsters than

1 See Louisiana decision, Chap. XVI, pp. 256-260.

SOCIAL AND POLITICAL EFFECTS OF CHAIN STORES 229

chain stores in Louisiana. " Representative Patman of Texas
and Governor Earle of Pennsylvania are other prominent political
personalities who have been active in securing legislative action
against chain stores. The Pennsylvania chain tax was enacted
largely at the determined insistence of the latter who placed it on
his list of "legislative musts."

The chain store has provided numerous politicians with some
of their most popular issues. Many have used them to form the
backbone of their public campaigns while others utilize them
when expediency dictates. In practically every instance where
the politician has been vociferous regarding the chain store, he
opposes them. Those who favor chain stores have not felt it
wise to give wide public expression to their views. That attitude
results in widespread loss of prestige by the chains in the eyes of
the public.

Cause of New Regulatory Legislation. The chains have been
an important factor in the enactment of several new types of
regulatory legislation. The numerous fair-trade and minimum-
price laws are aimed largely at the chain stores. The independ-
ents, both retailer and wholesaler, attempted to curb the
underselling practice of chains by fostering legislation that would
prohibit such practices. One of the most important regulatory
measures affecting distribution today is the Robinson-Patman
Act, and this can be traced directly to the chain store (see Chap.
XVII, p. 275) . Congress felt that the chain stores utilized certain
unfair trade practices with which the small business man was
unable to cope without legislative assistance, and they sought to
give him that aid. This type of legislation is important enough
to warrant special treatment, and for that reason Chap. XVII is
devoted largely to a discussion of it, with special emphasis on its
effects upon chain stores.

Chains and Taxation. A very important effect on the chains,
and one that has seriously disturbed them, is caused by the
enactment of special chain store taxation measures. Some 20
states are now collecting special taxes from chain stores. An
increasing amount of chain store taxation springs from the desire
to check the development of the chain store and from the need for
additional revenue on the part of various states. Practically
every state legislature has been confronted with at least one bill
calling for the enactment of taxes directed at chains. It is not

230 THE CHAIN STORE PROBLEM

the purpose of this chapter to discuss this vitally important
subject, since it will be treated at length in Chap. XVII, but it is
mentioned here as a very important political result of multiple
store operation.

Chain Store Government Investigations. Governmental
agencies have conducted several investigations of chain stores in
order to secure reliable information as a basis for legislative
action. Legislative bodies felt the need for factual information as
a guide in handling legislative measures directed at chain stores.
Of the several studies undertaken, the most complete one was
that made by the Federal Trade Commission. It attempted to
cover as completely as possible the many phases of chain store
operation, and it gave the public the first comprehensive picture
of the chain store situation. This investigation contributed
much to our knowledge of the subject.

A second important study was the Patman investigation which
culminated in the passage of the Robinson-Patman Act. The
revelations of the Patman Committee have proved extremely
costly to and embarrassing for the chains. The demand for
Federal legislation was so insistent, following the disclosures of
various chain store practices, that the chains were helpless to
stop it.

If all legislative action were based on studies as comprehensive
as the two mentioned in the preceding paragraphs, there would be
far less complaint when the bills finally became laws. Too many
statutes are approved, however, without the benefit of a thorough
analysis of the needs or consequences.

Chain Store Referendums. No other type of merchandising
institution has been the subject of so many or so wide public
referendums as the chain stores. Two important state-wide con-
tests were held on chain store issues. Both the states of Colorado
and California balloted on the issue of chain store taxation. Also
several communities voted upon the desirability of placing legisla-
tive restrictions on such institutions.

This type of political action assures each side in a controversy
an opportunity to be heard which would appear highly desirable
when not too costly. An institution that has an opportunity to
present its case to all the voters would have little reason to object
if that verdict were against it. No one is in a better position to
decide whether particular legislation is in the public interest than

SOCIAL AND POLITICAL EFFECTS OF CHAIN STORES 231

the people themselves, provided that they are impartially
informed.

The Development of Pressure Groups. The chains have been
indirectly responsible for the formation of various pressure
groups. Two types of organization have appeared largely as a
result of chain store controversies. The first are the legitimate
organizations of retail merchants, wholesalers, chain store owners,
and others interested in legislative action affecting chain stores.
Of the second type are the sniper groups, whose sole purpose
apparently is to make money out of the situation. The first
mentioned groups have as their purpose the curbing of chain
store competition or the defense of anti-chain legislation. As a
second purpose, they attempt to educate their members as to
ways and means of successfully combating competition.

The sniper organization is usually sponsored by a fly-by-night
organizer who uses various schemes to make money out of inde-
pendent retailers. In many instances, independent merchants
have been fleeced of money which was supposedly solicited for
anti-chain store campaigns, but which largely found its way into
the pockets of the organizers.

One of the most colorful personalities, and probably the most
important anti-chain store campaigner, was W. K. Henderson,
owner of radio station KWKH, at Shreveport, La. He continu-
ally denounced the chains over his station and organized the
Merchant Minute Men, a large anti-chain organization. The
chain store " peril" was vividly portrayed by this ardent enemy
of big business.

These pressure groups have been very influential in securing
political action, but such action is not always in the best interests
of society. The primary function of such groups is to further
their own particular ends, and it is difficult to see how the public
welfare is served by that objective. It appears that the forma-
tion of these organizations has been an unfortunate result of
chain store development.

SUMMARY

In the previous chapter it was observed that the business
and economic effects of chain stores are largely favorable to
society, but the same cannot be said of the social and political
effects. It is in connection with the latter that the chain stores

232 THE CHAIN STORE PROBLEM

have been so vigorously attacked. To be sure, they have con-
tributed largely to the economical distribution of goods but at the
same time they have seriously disturbed our social and political
equanimity. Not all of these disturbances can be laid directly
at the doorstep of the chain stores, but, in the main, they may be
regarded as the results of chain store operation.

CHAPTER XV

PUBLIC ATTITUDE TOWARD CHAINS

The mushroomlike growth of the chain store in the past two
decades has stirred up a bitter controversy as to the ultimate
public benefit to be derived from this type of institution. Inde-
pendent merchants and wholesalers, who watched this new busi-
ness giant carve off a huge slice of their trade, were aroused to
vindictive fury. They fought the invader with every weapon at
their command. As more and more independents felt the com-
petition of chain stores, the attacks on this new retailing titan
increased in magnitude and in poignancy. The ears of the
public were filled with frantic pleas to save the community by
patronizing and aiding the independent. Radio stations, such as
the now famous KWHK, WBT, WDGY, and others, broadcast
violent and scathing denouncements of chains ; numerous publica-
tions, such as Chained Menace, Truth, Chained, and Hello World,
sprang up to assail them; certain established periodicals and
newspapers joined in the battle; politicians made the chain store
" peril" the basis for campaign speeches; manufacturers, farmers,
and others, with varying troubles which they partially ascribed
to chains, joined hands with the independents in an attempt to
curb their common enemy.

The chains were slow to make a determined effort to meet this
attack. They contented themselves by sitting back and saying
that the storm would soon blow over. They felt that it was
merely history repeating itself. The same tumult had been
aroused when department stores first appeared and again when
the mail order houses made their bow, but in time it largely
subsided. It was said that the disturbance was typical of those
that precede the ultimate acceptance of any major change in
retailing institutions. But the chain store proponents had
greatly underestimated the temper and the ability of their
attackers. The opposition was well organized, and before the
chains were able to devise an effective defense, the charges

233

234 THE CHAIN STORE PROBLEM

leveled at them had considerably damaged their prestige in the
eyes of the public and before the various legislative bodies.

The charges which were directed at the chains were frequently
based on the flimsiest factual evidence, and many were largely
emotional rather than rational, but they seemed plausible to a
goodly share of the public. It must not be supposed, however,
that all the charges are unsubstantiated, since several contain a
considerable measure of truth. But whether they were true or
false, the important consideration was that a sizable portion of
the public felt that these accusations reflected actual conditions.

Principal Criticisms of Chain Stores, The present chapter is
concerned with the various charges that presumably influenced
the public attitude toward chain stores, regardless of whether
those charges can be substantiated or not. Some of the indict-
ments are the result of certain effects of chain store operation
noted in the preceding two chapters. Such points will not be
evaluated again but will be briefly mentioned because of their
influence on public opinion. Certain other charges, however,
especially those which are based largely on flimsy factual evi-
dence, will be appraised at some length in this chapter. When
they can be definitely substantiated they are justly regarded as
effects and hence are discussed under that heading. The prin-
cipal charges popularly and commercially directed against chains
are as follows:

1. They impoverish the local communities by taking money
out of town and sending it to the larger cities.

2. They do not patronize local business.

3. They increase absentee ownership which destroys oppor-
tunities for young men.

4. They tend toward monopoly.

5. They pay exceptionally low wages.

6. They do not bear their share of the tax burden.

7. They destroy the flavor of local community life by their
policies of standardization and tend to rob communities of their
individuality.

8. They increase unemployment by lessening the oppor-
tunities for traveling salesmen, wholesale, hotel, and railroad
employees.

9. They destroy the small business man who is the " backbone
of the nation/'

PUBLIC ATTITUDE TOWARD CHAINS 235

10. They are tending to produce a "nation of clerks."

11. They resort to unfair trade practices in order to drive out
local merchants.

12. They do not actually undersell as they attract trade by
means of loss leaders and charge exorbitant prices for their
private brands.

13. The pressure they exert when buying forces producers to
sell at prices that are too low, and, consequently, these producers
must unreasonably reduce wages and other costs and also charge
higher prices to wholesalers who serve the independents.

Though at first glance it would seem that several of these
charges might be waived aside as obviously unfounded, it is
nevertheless true that each of them has helped influence public
opinion. Not only that, but all of them have been cited at one
time or another by the courts as justification for certain decisions
rendered against chain stores. For example, a unanimous
decision of a three-judge Federal court upholding the validity of
Iowa's chain store tax (later outlawed by the U.S. Supreme
Court) contained the following statement :

. . . through the operation of the chain stores and chain store systems
within the United States, and particularly within the State of Iowa, there
has been an injurious effect to the smaller towns and cities of the State.
Some of the effects being as follows :

a. Replacement of individually owned stores;

b. Tendency toward monopolies;

c. Lessening the number of traveling salesmen with consequent loss
of business to hotels, railroads, and other lines of business;

d. Increase in absentee ownership;

e. Withdrawal of credit and currency from the smaller town local
banks to the larger cities. 1

It is no wonder that these charges which the chains are wont to
waive aside as being ridiculous have helped build up an unfriendly
public attitude toward chain stores when they are cited by the
Federal courts in decisions.

It is not the purpose of the present chapter to analyze the
economic soundness of the charges made against chain stores, but
rather to cite their effect on the public attitude toward these
organizations. The authors feel, however, that a brief appraisal

1 The Northwestern Merchant, January, 1936.

236 THE CHAIN STORE PROBLEM

of some of the more prominent accusations is necessary in order
that a better understanding of the entire problem may be
secured.
Chains Take Money Out of Local Communities. One of the

most frequently mentioned criticisms of chain stores is that they
take money out of the local communities. The idea is so plausi-
ble and has in it so much that seems true that almost anyone will
believe it, as well as the implications that go with it, unless it is
subjected to careful analysis. But when one scrutinizes the
charge it becomes evident that no single community may retain
all its wealth within its own boundaries. This type of reasoning
is reminiscent of medieval thinking which was conditioned by the
simple economy then prevailing. It harks back to the times when
wants were few, life more or less simple, and each community was
economically self-sufficient. Today the conditions are altogether
different. Not unlike the chain store, even the local merchant
must send money away from his locality to buy products that are
manufactured elsewhere as no community in this day of special-
ization can produce all or a substantial part of the goods that it
consumes. Both types employ local help in their stores, pay rent
to local property owners, and advertise in local papers. In fact,
chain stores patronize local newspapers to a larger extent than
independents. The only money that the local merchant may
retain in the community, which the larger chains do not expend
locally, is his net profit, and this usually amounts to but a small
percentage of sales. And in the case of chain stores not all the
net profit is actually taken away since a certain share of the total
chain business is done by local organizations, and that profit is
naturally retained in the community. Of the profit taken out by
other chain groups, a portion comes back to the local community
in the form of dividends to scattered stockholders.

It must be admitted, however, that part of the net profit made
by chains is sent to the larger financial centers, but, even though
that is true, the community may not suffer because of it, since the
same amount of money, or even more, may leave if consumers
confine their purchases to independents. The latter do charge
higher prices, and a portion of those higher prices is due to
increased cost of merchandise which is often bought from distant
sources of supply.

PUBLIC ATTITUDE TOWARD CHAINS 237

Chains Destroy the Small Business Man. It cannot be denied
that chain stores have forced out of business certain independent
retailers. To the extent that these merchants are desirable
citizens and a valued part of the social life of the community, the
community suffers. This phenomenon, however, seems to be an
integral part of our competitive economic system. Those in all
walks of life who cannot survive the fair competition of others
must fall by the wayside. Generally speaking, the community
leaves them to solve their own problems so long as the competition
which compels their departure is not legally or ethically unfair.
We can, if we choose, change our philosophy in this respect, but
we seem to have preferred to let economic motives prevail over
social. 1

Chains Standardize Communities. The criticism that chain
stores are depriving local communities of their individuality
through the distribution of standardized articles is in a measure
true. Chain stores must handle goods for which there is a large
demand, and they do not foster selective buying for the individual
demands of a community. But this tendency is in step with our
present economic development. Merchandisers must adapt
themselves to the social and economic changes that are being
wrought in this country through the influence of motion pictures,
radios, periodicals, and automobiles. They are all proving to be
strong forces for the general acceptance of similar products
in all sections of the nation. The citizens of Bangor, Maine,
desire the same types of goods that the residents of San Diego,
Calif., use. From reading the same magazines, seeing the same
movies, and listening to the same radio programs, Americans
generally develop desires for essentially the same things. The
chain stores are only doing what all distributors find expedient to
do they are supplying a demand that already exists. We are
sacrificing a degree of individuality for the economies which
follow standardization. The question is, "Is society willing to
sacrifice its individuality for the expediencies of mass production
and distribution?" From the amount of patronage accorded to
chains, it would seem that a substantial part of society prefers
higher standards of living to an individualized existence. That

1 PALMER, J. L., " Are These Twelve Charges against the Chains True?"
Retail Ledger, July 1, 1929.

238 THE CHAIN STORE PROBLEM

being the case, it hardly seems fair to accuse the chains of bringing
about a situation which is contrary to society's welfare, when, in
fact, it seems to be in line with a general trend that has wide
public approbation.

Chains Do Not Patronize Local Business. In the minds of
many persons one of the most damning indictments of chain
stores is that they do not patronize local business. It is charged
that the services of local insurance men, local manufacturers,
local lawyers, and others are not used by chain stores. Except
for the local chains, whose numbers are rapidly decreasing, this
charge is largely true.

In our present economic order every business man has the
opportunity to purchase products or services wherever he feels
he can profit most, and in the case of chain stores they generally
find that the local community is less able to serve them than
specialists in other places. It is a natural development of our
competitive economic system. It would seem, however, that the
chain stores might do well to sacrifice some of the benefits of
specialization in return for better relations with the public in the
communities in which they operate.

Chains Do Not Pay Their Fair Share of Taxes. It has been
repeatedly charged that chain stores do not pay their fair share of
taxes, but it seems that this controversy centers largely about
what is meant by "fair." In meeting this criticism, chains cite
the long list of Federal, state, county, and city taxes which they
pay. They claim that they are subject to all the taxes that are
levied on the independents and actually pay considerably more in
corporate income and franchise taxes. The local merchants
counter, however, by claiming that these taxes do not fall so
heavily on chain stores as on independents, that the small
independent merchants pay more taxes per dollar of sales than
the chain stores with their larger volume of business and their
more rapid turnover. It is also claimed that chain stores have
larger earnings per store and therefore have greater ability to pay
taxes, and it has long been the practice to levy taxes according to
the ability to pay. l

1 For a more complete discussion of the relative tax burden on chain and
independent stores, see the evidence of Professors Martin, Waldradt, and
Phelps in the case of Stewart Dry Goods Company v. Lews, et al. t 294 U.S.
550 (1935).

PUBLIC ATTITUDE TOWARD CHAINS 239

It is quite possible that chain stores pay less taxes per dollar
of sales partly because they are more efficient than their competi-
tors, arid although it seems hardly equitable to penalize a person
because he is more efficient than his competitors, it is, neverthe-
less, a common practice. For example, income taxes fall most
heavily on those who profit the most in their businesses. But
regardless of the relative tax burden on chain and independent
merchants, it is doubtful whether the public is particularly inter-
ested in this factor. Local retailers may be much disturbed by
this charge but it probably has had little effect on the public
attitude toward chain stores.

Efforts of Chains to Meet Indictments. The chain store
attitude in regard to charges hurled at them has been largely
defensive. For quite some time they contented themselves by
merely denying the validity of the criticisms and it has been only
in the past few years that any aggressive counter attack has been
attempted. As the rising tide of popular resentment against
them began to produce unfavorable legislation, chain organiza-
tions awakened to the need for more vigorous and positive action.
This resulted in propagandizing educators, furnishing debaters
with pro-chain store information, urging their employees to join
civic clubs and participate actively in community affairs, in
sizable donations to community fund drives, and in advertising
space in newspapers and periodicals designed to create a more
friendly public attitude. But the campaign was handicapped by
a late start and a growing public prejudice against "big business"
of all kinds. On the whole, relatively little headway was made
in winning back the public favor.

Although as consumers the public continued to patronize chain
stores, nevertheless it remained sympathetic to attempts to curb
further chain expansion. Blanket denials of the charges directed
at them accomplished little in the way of placing chains in the
public's good graces. The claims that chains were saving the
American consumers hundreds of millions of dollars annually and
have contributed largely to our welfare were considerably dis-
counted or disregarded by the public, and rightly so. Many of
these claims are so extravagant and ill founded that little credence
can be given to them except by the unwary and unsophisti-
cated. For example, in a recent pro-chain publication that is
widely used, it is claimed that chain stores contribute more than

240 THE CHAIN STORE PROBLEM

$8 billions to the United States, consisting of $5 billions in
purchases from manufacturers and other producers, over $450
millions in rents paid to thousands of real estate owners, $200
millions spent for advertising, nearly a billion dollars in wages
paid to chain store employees, nearly $175 millions in state and
local taxes, and over three-quarters of a billion dollars in savings
to consumers through lower retail prices.

The absurdity of this type of reasoning is quite apparent. In
the first place, it is assumed that this volume of business would be
entirely lost to the United States were chains nonexistent, instead
of other types of retail institutions transacting it. Second, the
statement on savings is grossly overstated as shown in a preced-
ing chapter. Third, the very immensity of the contribu-
tion, if such it may be called, is enough to scare the public and
to call unfavorable attention to the giant stalking in our midst.
For similar reasons, the assertions of special services
rendered farmers and manufacturers also held little interest for
consumers.

In their public relations, chain stores had definitely failed to
take advantage of their opportunities. They outdistanced the
independent merchants in effecting operating economies, but, in
turn, they have been outmatched (at least until recently) in
building favorable public sentiment. The need for acquainting
the public with the blessings bestowed by chain stores was
brought forcibly to the attention of chain operators by the first
public referendum conducted on anti-chain legislation. Recently
the chains have been somewhat more successful in developing a
favorable attitude of the public.

Referendums on Anti-chain Legislation. Undoubtedly one of
the best tests of the public attitude toward chain stores is the
popular referendum on anti-chain legislation. The first refer-
endums conducted on this subject proved very disappointing to
the chain store champions. They had assumed that the public
was favorably inclined to chain stores, as evidenced by continued
patronage as consumers, but it was soon discovered that, even
though consumers traded at chain stores, they were opposed to
certain phases of their operation which were regarded as inimical
to the general welfare of the people.

The first important referendum on an anti-chain act was the
one held in Portland, Ore. ; in November, 1932. Portland had

PUBLIC ATTITUDE TOWARD CHAINS 241

enacted a chain store tax ordinance, and it was placed before the
voters under the " referendum" provision of the Oregon constitu-
tion. A spirited campaign was waged by both advocates and
opponents of the law and the act was finally sustained by a vote
of 53,871 to 51,782. The vote was close and indecisive. It gave
evidence, however, that anti-chain legislation was not universally
popular with the public. Shortly thereafter, the referendum on
the Colorado state chain store tax also resulted in a defeat for the
chains.

These setbacks made the chain organizations realize the neces-
sity for better public relations, and rather tardily they set about
to remedy the unfavorable situation in which they found them-
selves. They then embarked upon a campaign of acquainting
the public with the social benefits of chain stores, and they were
especially desirous of preventing public opinion being molded
against them in the form of laws, organizations, and the like.
Their "educational" program in the form of paid advertisements,
a speakers' bureau, radio broadcasts, lobbying, and research was
soon in full sway. It was not successful in stopping the rising
tide of public resentment against chain stores, but undoubtedly
it had a deterring effect.

The full flood of chain store propaganda was loosed in California
when that state held a referendum in the fall of 1936 on its chain
store tax law and the result was more satisfactory to the chains.
The chain stores had learned through experience that a defensive
campaign, and one which attempted to inform the public of the
benefits they were bestowing on it, was not very successful. In
the California " battle" they hit upon a scheme for giving more
concrete evidence of their desire and ability to serve the com-
munity. A bumper peach crop in California gave the chains an
opportunity to swing a goodly share of the farm vote to their side,
and they were not slow to take advantage of this condition. The
overproduction of peaches threatened to demoralize the market,
and the chain stores, by means of special canned-peach sales
drives, removed the threat of a glutted market. California peach
growers and canners were saved from financial embarrassment,
and they showed their appreciation at the polls by helping defeat
the chain store tax. It is said that a similar campaign on behalf
of the Maine potato farmers was an important factor in the repeal
of that state's chain store tax,

242 THE CHAIN STORE PROBLEM

It would seem that the chain stores are becoming more expert
in swaying public opinion, but it is doubtful if, under present
conditions, they can successfully institute a nation-wide campaign
that will prove as satisfactory for them as the California and
Maine campaigns.

Studies of the Public Attitude toward Chain Stores. Few
attempts at objective studies have been made to measure public
reaction to chain stores. In fact, the authors were able to find
only fragmentary and scattered data on this exceedingly impor-
tant phase of the chain store problem. The American Institute
of Public Opinion has gathered some answers during August,
1936, to the question, "Are you in favor of legislation requiring
chain stores in your state to pay special taxes?' 7 The results of
the returns showed that approximately 69 per cent of the respond-
ents favored a chain store tax, but that percentage varied among
different geographical areas and among different classes of
people. 1 For example, the poll revealed that in the Central and
Southern sections of the country 70 per cent of the respondents
looked with favor upon chain store taxation, whereas the percent-
age was smaller in the New England and Far Western States.
Only 67 per cent of the New Englanders, 65 per cent of the
residents in the Mountain states, and 61 per cent of the Pacific
Coast citizens voted in favor of chain store taxes. The New
England vote is partially the result of the conservative nature of
its inhabitants but even here the majority of people regard
the chains with disfavor. The vote in the Far West reflects
the vigorous campaign conducted by the chain stores to
defeat the California chain store tax at the general election
of 1936.

The results of the Institute's poll among different groups of
persons show some significant trends. For example, 75 per cent
of the Democrats interviewed were favorable to chain store taxa-
tion while only 60 per cent of the Republicans regard it in the
same light; 72 per cent of small-town residents and only 67 per
cent of the urban population favored it. Only 64 per cent of the
younger persons (under 25 years) voted for these special taxes.
The wide general approval of chain store taxation which these
data reveal indicates that the chains have a real problem on their

1 Letter from Lawrence E. Benson of the American Institute of Public
Opinion, June 9, 1937.

PUBLIC ATTITUDE TOWARD CHAINS 243

hands if they are to curb unfavorable legislation by changing
public opinion.

Springfield, Ohio, Study. 1 A small but recent survey in
Springfield, Ohio, reveals some interesting information on con-
sumer reactions toward chain and independent grocery stores.
In connection with this patronage-motivation study, a limited
number of answers were obtained to queries regarding consumer
prejudices against chain and independent grocery stores. Con-
sumers were asked "Why don't you patronize chain grocery
stores?' 7 or "Why don't you patronize independent grocery
stores?" in order to secure negative reactions to these stores.

Out of 902 Springfield, Ohio, families interviewed in the latter
part of 1936, 51.3 per cent indicated their disfavor of chain stores
in the retail grocery field; only 5.3 per cent of the families indi-
cated that they were prejudiced against the independent type of
store; while the remainder, some 43.3 per cent, were neutral rela-
tive to the matter. Two very significant factors are revealed in
these data: first, that over 50 per cent of the consumers are
definitely prejudiced against chain stores; and second, that
almost ten times as many persons regard the chains unfavorably
as those who regard independents unfavorably. This would
seem to indicate that chain grocery stores are faced with a serious
public-relations problem if they are to avert even more stringent
types of anti-chain legislation than they have already experienced.

The reasons for not patronizing chain stores, which were given
by those interviewed, are shown in Table 50. It is of particular
interest to note the influence of the charge that chain stores take
money out of the community. This belief was mentioned as a
first reason for bias in the minds of 43.2 per cent of all persons
admitting a prejudice against chain grocery stores. The most
frequently mentioned second reason was the statement that
chain stores do not patronize local businesses. This accounted
for 34.2 per cent of all second reasons given and was also the
most frequently mentioned third reason. Combining the first,
second, and third reasons into total reasons, it will be observed
that taking money out of the community and not patronizing
local businesses account for 56.5 per cent of all reasons given by

1 FOUCH, G. E., "Patronage Motivation in the Purchasing of Groceries by
Springfield, Ohio, Consumers/' a thesis presented for degree of Master in
Business Administration, Ohio State University, Columbus, Ohio, 1937.

244

THE CHAIN STORE PROBLEM

the consumers interrogated for being antagonistic to chain
stores.

From data revealed in this study it would appear that chains
would do well to concentrate their propaganda on removing
these prejudices from the minds of consumers. Inasmuch as
these indictments of chain stores are more potent in arousing
anti-chain store feeling than the other charges, even though they
may not be so valid, they deserve more consideration.

TABLE 50. REASONS GIVEN BY 463 SPRINGFIELD, OHIO, CONSUMERS FOR
PREFERRING NOT TO PATRONIZE CHAIN GROCERY STORES

Reason for not
patronizing chain
stores

Number of reasons
given

Percentage distribution

1st

Total

1st

Total

Take money out of com-
munity

200
80

32
62
12
9
13
17
7
4
2
25

85
112

30
14
24
18
13
9
8
5
3
7

17
34

24
6
19
11
6
6
4
1
1
8

302
226

86
82
55
38
32
32
19
10
6
40

43.2
17.3

6.9
13.4
2.6
1.9
2.8
3.7
1.5
0.9
0.4
5.4

25.9
34.2

9.2
4.3
7.3
5.5
4.0
2.7
2.4
1.5
0.9
2.1

12.4
24.8

17.5
4.4
13.9
8.0
4.4
4.4
2.9
0.7
0.7
5.9

32.3
24.3

9.5
8.8
5.9
4.1
3.5
3.5
2.1
1.1
0.7
4.2

Do not patronize local
businesses

Tend toward monopoly
control

Unsympathetic

Make too much profit ....
Pay employees low wages .
Dishonest

Dislike policies

Inferior products

Don't help civic projects .
Don't pay taxes

Other

Total

463

328

137

928

100.0

The reasons given by consumers for preferring not to deal with
independent stores were too few to merit serious consideration,
but they related largely to the inefficiency of the local retailers.
Consumers objected to the out-moded stores and the poorly
trained sales clerks, but they were not disturbed by any unsocial
effects of independent stores.

Present Status of Public Attitude toward Chains. From the
foregoing it appears that chain stores are held in wide disfavor
by the public generally, and they have been rather slow in recog-

PUBLIC ATTITUDE TOWARD CHAINS 245

nizing that they must convince the consumer of their social value
in other ways than by merely selling goods cheaply. They must
acquaint the public with the economic service they are rendering
their customers in order that they may retain their present share
of the nation's retail volume and also that they may prevent the
enactment of stringent legislative restrictions on their activities.
Public sentiment once turned against an economic institution is
difficult to combat. There have been numerous instances, how-
ever, of businesses faced with public hostility which have
eliminated that prejudice by means of well-planned publicity
campaigns and honesty in their public relations, and the chain
stores have the same opportunity. Whether they can success-
fully instill in the consumer an appreciation of their true eco-
nomic usefulness, only time can tell.

CHAPTER XVI
CHAIN STORE TAXATION

From time immemorial governments have made extensive use
of their taxing power to control and regulate business. The right
to tax in such instances has been exercised for the ostensible
purpose of equalizing competition but in reality for the purpose
of eliminating or definitely curtailing the business done by
certain forms of business enterprise.

On many occasions in the field of retailing attempts have been
made to place legislative limitations on a particular type of
retailer as the competitive situation changed. In the latter part
of the nineteenth century, when agitation against the growing
department store type of merchandising was strong, efforts were
made to restrain its development by legislation. The state of
Missouri passed a law calling for a tax of $500 on each classifica-
tion of goods sold by any store. In Pennsylvania an effort was
made to collect $100,000 in license fees from the department
stores of the state, but the bill failed to pass. 1 A few years later
attempts were made to curb the growth of mail order houses and
after the World War the house-to-house salesman was bitterly
assailed. But in all these attempts to combat an aggressive
merchandising foe little was accomplished in a concrete way. A
great hue and cry was raised but little was done by legislative
means actually to stop their further progress. Some public
resentment evidenced itself against these retailers and large-scale
business generally, but their development was ultimately curbed
not by legislation, but by their own natural limitations.

Early Attempts to Curb Chain Store Growth. The next form
of retailing to feel the resentment of the established merchandisers
was the chain store. Growing by leaps and bounds after the
World War, the chains soon pinched existing merchants to the
point of active resentment. As early as 1922 an organized
effort to stop chain stores was definitely on foot and the anti-

1 PHILLIPS, CHARLES F., "State Discriminatory Chain Store Taxation,"
Harvard Business Review, Spring, 1936, pp. 349359.

246

CHAIN STORE TAXATION 247

chain store movement once under way spread like wildfire. By
1929 active local organizations were formed in more than 400
cities and towns throughout the United States to fight the
so-called "chain store menace. "* Their first efforts were
directed at manufacturers, in an attempt to force the latter to
stop selling to chain stores, but all such pressures met with little
success. Next they sought to influence the consumer to withhold
his patronage from the chain store. The radio was brought into
play, the mails were flooded, and orators waxed eloquent all in
an attempt to induce consumers to cease buying from chain stores.
But still the chains grew.

Taking heed from their past failures, the anti-chain store
organizations sought allies to help fight their battle. Mindful of
the fact that the government had frequently enacted restrictive
legislation to express disapproval of various industrial, financial,
and marketing developments, the chain store antagonists asked
for and received political aid. Governors, state legislators, and
even congressmen were drawn into the ever-widening group of
those who were opposed to the chain store industry. Some
joined the anti-chain movement because they sincerely believed
that some governmental check on this expanding industry was
necessary; some because they realized that here was a ready-made
issue upon which a great deal of popular sentiment could be
aroused, and that it gave them an opportunity to "lambast" big
business; and still others offered their services because taxing
chain stores presented an opportunity to raise revenue to help
fill the depleted public purse. But regardless of their motives,
the legislators were not slow to swing into action.

Reasons for Chain Store Taxation. The pressing need for
additional state revenue during the past ten years presented a
ready-made reason for enacting new types of taxes, and those who
sought to arrest the development of chain stores, introduced
restrictive chain store legislation in the form of revenue-producing
taxes. It was then possible to rationalize that the passage of the
bill was necessary in order to raise much-needed state funds, and,
in certain cases, it was true that the proposed chain store tax
would produce a sizable portion of the needed revenue. In most
states, however, the proposed law was calculated to produce only

1 NICHOLS, JOHN P., " Chain Stores and Their Special Tax Problems,"
p. 1, Limited Price Variety Stores Association, New York, 1935.

248 THE CHAIN STORE PROBLEM

incidental rather than substantial amounts of revenue. The
revenue feature was largely a smoke screen, used in many cases
to hide the real purpose of the tax, which was to handicap chain
stores. If the real purpose had been to produce a sufficient
amount of revenue to aid materially in solving the fiscal problems
of any state, the tax imposed would have been so great as to
destroy the existence of many chain stores, thereby defeating any
genuine fiscal objective.

Since the desire to produce revenue was, with few exceptions,
largely an incidental objective of chain store taxation and the
primary purpose was to curb chain store growth, just what
reasons were brought forth to justify this course of action? The
chain antagonists produced many. They charged the chains
with unfair price cutting, evading taxes, coercing producers into
giving excessive discounts on purchases, instituting dangerous
monopolies, practicing short weights, unfair treatment of labor,
failure to cooperate in community undertakings, sending money
out of the community, and other abuses. 1 Farmers complained
that chain store buyers were partly responsible for the low prices
for farm products. Some insisted on taxing the chains because
they have the ability to pay such taxes. Others joined in because
they were opposed to any form of "big business/' The chain
store foes lined up an impressive array of charges which they
were not slow in utilizing when pressing for chain store tax
legislation.

Legal Precedents. Legislation enacted for the purpose of
checking the growth of a new form of competition or for expressing
governmental disapproval is new neither in this country nor
abroad. In the United States, as already indicated, we have had
legislation directed against department stores, mail order houses,
and house-to-house salesmen. Outside the field of distribution
the government has frequently legislated for the protection of
certain influential groups. Protective tariffs and subsidies have
long been employed to protect favored factions from outside
competition. Progressive income and estate taxes have been
utilized for expressing disapproval of large fortunes; with one
argument or another, corporations have been subjected to special
imposts; and graduated-profits taxes, excess-profits taxes, and the

1 BUEHLER, ALFRED G., " Chain Store Taxes," a paper read at annual
meeting of The National Association of Marketing Teachers, Dec. 29, 1936.

CHAIN STORE TAXATION 249

federal undistributed-profits tax have been adopted not only to
raise revenue but also to check the concentration of corporate
control. The chain store tax measures, therefore, are not with-
out numerous precedents in American tax history.

Abroad we find governments imposing chain store taxes as
early as 1910 when Bavaria placed a 5 per cent tax on the sales of
all chain organizations. 1 Two years later " France discriminated
against ' multiple' stores by increasing the patente (a tax based
on the number of employees, rentals, and other factors varying
with the size of the business) 25 per cent for chains of five to ten
units, 33^ per cent for companies of eleven to twenty stores,
50 per cent for chains of from 21 to 50 units, and 100 per cent for
larger chains." 2 According to Dr. Moride, these increases were
imposed largely as a result of the efforts of small retailers who
sought to restrain the further growth of chain stores rather than
to improve their own efficiency.

Growth of State Chain Store Taxation. The first attempts to
enact specific chain store taxes in the United States were made in
1925 when the legislatures of two states considered such measures.
Although both of these failed of enactment, the chain store
opponents now had hit upon a concrete method of striking at the
chains, and they thus rallied about the cause of chain store taxa-
tion. The movement once under way was pushed with vigor.
In 1927, 13 chain store tax bills were introduced in state legisla-
tures, and 4 were enacted into laws. Success seemed assured to
those who sought to hamper chain store expansion and practically
every state government was urged to enact this new type of tax.
A study of Table 51 will show the rapid progress made by the
anti-chain groups in securing the passage of tax legislation
designed to impede multiple store development. It will be
noted that the greatest activity has taken place in odd years
when most legislatures meet, the even years being "off" years
for many state law-making bodies.

In 1931 a tremendous amount of activity was manifest in chain
store taxation; 152 separate tax bills were introduced during that
year in various state legislatures, although only two were finally
enacted. A very definite change in the trend of chain store

1 MORIDE, P., "Les maisons a succursales multiples, en France et a
1'etranger," p. 165, F. Alcan, 1913.

1 PHILLIPS, C. F., "State Discriminatory Chain Store Taxation," Harvard
Business Review, Spring, 1936, p. 350.

250

THE CHAIN STORE PROBLEM

taxation was evident. What had been but a ripple a few years
back had now become a flood. State legislators were engulfed in
anti-chain proposals. What were the causes of this sudden
change in sentiment? The reasons were numerous, but two
stood out:

1. The effect of a growing economic depression had drained
ritate treasuries. Usually productive sources of tax money were
drying up and the states eagerly sought additional means of
obtaining badly needed tax revenue. Chain stores appeared to
be a lucrative source whose taxing would also please many
influential groups.

2. The United States Supreme Court had declared valid the
Indiana chain store tax in May of 1931 and had in that way
removed the unconstitutionality barrier. Previous to this
decision there was a considerable doubt as to the ultimate
legality of this form of legislation and naturally it hampered the
enactment of chain tax measures.

TABLE 51. GROWTH OF STATE CHAIN STORE TAX LEGISLATION, 1925-1937

Year

Bills
introduced

Laws
enacted

1925

1926

1927

1928

1929

1930

1931

175

1932

125

1933

225

1934

1935

152

1936

1937

Totals

916

Source: Institute of Distribution, Inc., 570 Seventh Avenue, New York City
The 1937 figures cover only the first five months of the year.

The pressing need for general funds supplied the motive and
the Indiana decision suggested the method. The result was
electric. The anti-chain movement after much fruitless agitation

CHAIN STORE TAXATION 251

was now articulate. Chain store tax bills flooded the nation's
law-making bodies, and many achieved legal status. Through
the thirties right up to the present moment there has been no
abatement in the tide of anti-chain store taxation. The efforts
to tax chain stores had become so numerous that John T. Flynn
could write with a great deal of truth that, " Wherever a little
band of lawmakers are gathered together in the sacred name of
legislation, you may be sure that they are putting their heads
together and thinking up things they can do to the chain stores." 1
Types of Chain Store Tax Laws. The chain store tax laws that
have been enacted fall largely into two classes, the graduated
license tax and the graduated gross sales tax. 2 The first chain
store tax laws were either of the flat sum or graduated license tax
variety and were quite generally rejected by the courts on
constitutional grounds. Those pressing for anti-chain store
legislation were undaunted and proposed an increasing number of
bills of the same type. Their efforts were rewarded when the
United States Supreme Court declared the Indiana graduated
chain store license tax legal and a host of such tax proposals then
poured into legislative halls. Under the Indiana law a single
store under one ownership or management was taxed $3 annually.
If there were from two to five stores under the same control
within the state, the tax was $10 on each of these additional units.
The tax per store increased with additional stores, reaching a
maximum rate of $25 on the twenty-first store. Neither the
kind of goods sold, the size of the stores, nor net income affected
the amount of the tax. In the meantime, however, several
states turned to graduated gross sales taxes as more effective
devices than license taxes in restraining chain store expansion.
Kentucky passed such an act in 1930. This tax was a progressive
levy on gross sales rather than on the units operated. Sales of
one organization were considered as a unit whether or not the
organization was a chain. The rates started at }^o of 1 per cent
of gross sales not exceeding $400,000 and rose to 1 per cent of
the excess of sales over $1,000,000. Ultimately the United

1 PHILLIPS, C. F., " State Discriminatory Chain Store Taxation," Harvard
Business Review, Spring, 1936, p. 354.

2 Virginia enacted a chain store warehouse tax, but it is relatively unim-
portant compared with the two types of taxes listed above and, for that
reason, it is omitted from discussion.

252

THE CHAIN STORE PROBLEM

States Supreme Court declared this law unconstitutional, and,
as a result, only a comparatively few graduated sales taxes have
been enacted since. The vast majority of all chain store tax
proposals have therefore been of the license type.

At the present time, twenty states are enforcing chain store
license taxes, viz., Alabama, Colorado, Florida, Georgia, Idaho,
Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan,
Minnesota, Mississippi, Montana, North Carolina, Pennsylvania,
South Carolina, South Dakota, Tennessee, and West Virginia.
In the state of Texas the collection of the tax is being restrained
by court action. l A typical graduated license tax is the Michigan
act whose main provisions are as follows*

THE TAX SCALE OF THE MICHIGAN CHAIN STORE TAX

Number of

Bracket

stores operated

Tax on Michigan units

in Michigan

2-3

$10 for each in excess of 1

4-5

$25 for each in excess of 3

6-10

$50 for each in excess of 5

11-15

$100 for each in excess of 10

16-20

$150 for each in excess of 16

21-25

$200 for each in excess of 20

26, and over

$250 for each in excess of 25

Under the Michigan law, a chain operating 35 units in the
state would be required to pay a tax of $10 per store for the
second and third units, $25 per store for the fourth and fifth
units, $50 per store for the next five units, $100 per store for the
following five units, $150 per store for an additional five units,
$200 per store for the five units from 21 to 25, and $250 per store
for the 10 stores in excess of 25, making a total tax of $5,070. If,
however, the Florida plan of graduated license tax were followed
by Michigan, the $250 per store would apply to all of the 35 units
operated by the chain used as an example, and the total tax
would be $8,750.

The tax rates vary widely from state to state, from $30 per
store for all stores over 10 in Montana to $550 per store for each

1 For a complete list of state chain store tax laws, showing their principal
provisions and the legal rulings on such acts, see Appendices I and J.

CHAIN STORE TAXATION 253

store operated within the boundaries of Louisiana if the chain
organization consists of 500 or more units. The Great Atlantic
& Pacific Tea Company would pay the state of Montana only
$205 for the privilege of operating 11 stores within the state's
borders, whereas the state of Louisiana would exact a levy of
$6,050 for the same number of stores operated within the state
simply because, under the Louisiana law, the company falls in the
highest bracket, i.e., 500 or more stores operated anywhere by the
organization.

Despite the fact that the United States Supreme Court has
ruled adversely on the graduated sales tax, one state is still
enforcing that type of tax. Minnesota exacts such a tax on the
gross sales of mercantile establishments, the tax starting from
^o of 1 per cent on sales of less than $100,000, and increasing to
1 per cent on sales of over $1,000,000. Chains find this type of
tax burdensome because all the sales of the various units of the
organization are lumped together for tax purposes and the stores
are not regarded as separate entities in the computation of the
tax. It is plain to be seen that a chain organization would pay
several times the tax of competing independent merchants. It
must be remembered, however, that this type of tax also bears
heavily on individually owned department stores and on other
stores having a large volume of sales. For that reason depart-
ment store owners have quite generally fought this type of tax,
shoulder to shoulder with chain stores.

One graduated sales tax that provided for exceptionally severe
levies was the Iowa law. It provided for graduated sales taxes
reaching 10 per cent on all sales of $9 millions and over. The
effect of this upon the larger chains would indeed have been
confiscatory and would have forced drastic changes in some
cases. Fortunately for many chain stores, this law was ruled
invalid by the United States Supreme Court in 1936.

Attitude of the Courts toward Chain Store License Taxes.
Chain stores did not accept the new taxes levied on them without
a bitter fight in the courts. At every opportunity they appealed
to the judiciary for protection, and their efforts were frequently
crowned with success. The first few chain store tax statutes
were quite uniformly ruled invalid by the lower courts, because of
the general contention that they represented " unjustified dis-
crimination between the chain stores and other stores of the same

254 THE CHAIN STORE PROBLEM

general class." 1 The exact legal status of these laws was quite
indefinite, however, as the lower courts had held both for and
against the constitutionality of the new taxes, and until 1931 none
had been reviewed by the United States Supreme Court.

The situation needed the clarifying influence of a Supreme
Court decision. In 1929 the opportunity presented itself when a
three-judge Federal court declared the Indiana chain store tax
unconstitutional, and the case was appealed to the United States
Supreme Court. On May 18, 1931 the Supreme Court rendered
a five-to-four decision reversing the lower court and affirming the
validity of Indiana's tax. It was a momentous decision in chain
store history. The court based its decision on the ground that a
reasonable distinction for tax purposes existed between chain and
independent stores. It did not feel disposed to consider the
justness or propriety of the law, but concerned itself largely with
an inquiry into the right of a state to levy such a tax. In the
words of the Court,

The principles which govern the decision of this case are well settled.
The power of taxation is fundamental to the very existence of the govern-
ment of the states. The restriction that it shall not be so exercised as
to deny to any the equal protection of the laws does not compel the
adoption of an iron rule of equal taxation, nor prevent variety of differ-
ence in taxation, or discretion in the selection of the subjects, or the
classification for taxation of properties, businesses, trades, callings, or
occupations. . . . The fact that a statute discriminates in favor of
a certain class does not make it arbitrary, if the discrimination is founded
upon a reasonable distinction. . . . The statute treats upon a similar
basis all owners of chain stores similarly situated. In the light of what
we have said this is all that the Constitution requires. 2

The Court took the view that as long as the law taxed all stores
of the same class equally, it was not discriminatory. The
validity of chain store taxation then hinges on the question as to
whether chain stores are a class separate and distinct from inde-
pendent stores of the same type. So far the courts have held
that they are. It is alleged that chains possess certain advan-
tages in organization, management, advertising, and other prac-

1 Great Atlantic & Pacific Tea Company et al. v. Doughton, 196 N. C. 145
(1928).

2 State Board of Tax Commissioners of Indiana v. Jackson, 283 U.S. 527
(1931).

CHAIN STORE TAXATION 255

tices and procedures which are not available to independent
merchants; consequently, they may be classified, at least for
taxation purposes, differently than independent merchants.

Subsequent decisions of the Supreme Court have reaffirmed the
stand taken in the Indiana case. The North Carolina tax was
appealed to the United States Supreme Court in the same year
as the Indiana law, and it too was declared constitutional. 1
In 1933 the first Florida chain store tax law was appealed and
though the Supreme Court ruled that particular law unconstitu-
tional, the principle evolved in the Indiana case was reaffirmed. 2

More recent cases have helped to clarify still further the consti-
tutionality of chain store license taxes. The two West Virginia
cases have been particularly enlightening. The state of West
Virginia had required gasoline filling stations to be taxed as retail
stores. The court upheld the classification of filling stations as
stores for purposes of taxation in the first case, and in the next it
declared that the leasing of filling stations by gasoline distributors
to the operators did not exempt the leased stations from paying
the chain store taxes.

In the first West Virginia case the Supreme Court rendered a
decision that was particularly depressing to chain store organiza-
tions. It stated that the rates of the tax might be graduated to
the point where the average tax per store for a large chain would
exceed the average profits per store. If a chain organization
should therefore multiply its units to the point where the tax
on its stores was greater than the profits, the responsibility would
be its own, and it could not obtain redress from the courts. The
United States Supreme Court declared in this case that, 3 " When
the power to tax exists, the extent of the burden is a matter for the
discretion of the lawmakers. . . . Even if the tax should destroy
a business, it would not be made invalid or require compensation
upon that ground alone." The Court also held that the feature
of graduated chain store license taxes was a proper exercise of the

1 Great Atlantic & Pacific Tea Company v. Maxwell, 284 U.S. 584 (1932).

2 Liggett v. Lee, 288 U.S. 51 (1933). The Supreme Court conceded the
right of Florida to segregate chain stores from other retail institutions for
purposes of taxation but denied that the state had the right to distinguish
between chains operating in one county and those operating in more than
one because this distinction withdrew from the latter the equal protection
of the law.

3 Fox v. Standard Oil Co., 294 U.S. 87-99 (1935).

256 THE CHAIN STORE PROBLEM

taxing power, its attitude being that the advantages of chain
stores increased with the number of units and that the social and
economic consequences became more far-reaching as more stores
were added. "For that reason/' the Court said, "The state may
tax the larger chains more heavily than the small ones and upon a
graduated scale. "

The Louisiana Decision, a New Precedent. The most recent
chain store tax decision rendered by the United States Supreme
Court not only reaffirmed the right of a state to tax the longer
chains more severely than the shorter ones, but it also upheld the
right of a state to classify a chain in a given bracket on the basis of
the number of units it operates regardless of the location of such
units. Louisiana, in 1934, enacted a chain store tax which classi-
fies chains by size based, not upon the number of stores within its
boundaries, but on the number of units in the whole chain
organization regardless of their location, the law imposing a tax
of $550 on each link in a chain of more than 500 stores. By a
4 to 3 decision, 1 on May 17, 1937, the Court affirmed the tax,
holding that it was fully justified under the police powers of the
state. The decision is of utmost importance because of two
factors: first, it gives judicial sanction to the principle of gradu-
ated chain store taxation without mincing words, and second, it
upholds the right of a state to make the classification of chains
dependent on the number of units operated outside as well as
within its borders.

Justice Roberts, in the majority opinion, stated that the " addi-
tion of units to a chain increases the competitive advantage of
each store in the chain/' and that,

If, in the interest of the people of the state the Legislature deemed it
necessary either to mitigate evils of competition as between single stores
and chains or to neutralize disadvantages of small chains in their
competition with large ones, or to discourage merchandising within the
state by chains grown so large as to become a menace to the general
welfare, it was at liberty to regulate the matter directly or to resort to
the type of tax evidenced by the Act of 1934 as a means of regulation. 2

Justice Roberts said further that the advantages of large chains
were amply supported by evidence and cited the special discounts

1 Justices Van Devanter and Stone took no part in the decision.

2 Great Atlantic & Pacific Tea Company et aL v. Alice Lee Grosjean, 81
U.S. 735, 1937 (Lawyers' Edition).

CHAIN STORE TAXATION 257

and allowances of $8,105,000 received by the Great Atlantic &
Pacific Tea Company in the year 1934.

In disposing of the contention that the Louisiana law was an
attempt to secure revenue by an extra-territorial tax, to dis-
criminate in favor of local against national chains, and as a
burden on interstate commerce, the majority opinion stated,
" We hold the legislation impregnable to attack on these grounds."
It stated further that,

If the competitive advantages of a chain increase with the number of
its component links, it is hard to see how these advantages cease at the
State boundary. . . . Under the findings a store belonging to a chain
of one hundred all located in Louisiana, has not the same competitive
advantages as one of one hundred Louisiana stores belonging to a
national chain of 15,000 stores.

Amplifying more clearly the state's rights to tax property
within its borders on the basis of the whole organization of which
such property is but a part, the Court continued,

In legal contemplation the State does not lay a tax upon property
lying beyond her borders nor does she tax any privilege exercised and
enjoyed by the taxpayer in other states. . . . The law rates the privilege
enjoyed in Louisiana according to the nature and extent of that privilege
in the light of the advantages, the capacity and the comparative ability
of the chain's stores in Louisiana considered not by themselves, as if they
constituted the whole organization, but in their setting as integral parts
of a much larger organization.

In the Louisiana decision, as in several previous instances, the
Supreme Court has affirmed the legality of graduated chain store
license taxes imposed by states. This was based, at least in part,
on the assumption that chain stores inherently possess certain
advantages which are denied to independents. The validity of
this assumption has already been demonstrated by discussions in
preceding chapters. But the Supreme Court further assumed
that the advantages inherent in the chain method of operation
are to be found in a larger measure in the longer chains (i.e., chains
with many store units) than in the shorter chains. For proof of
this latter point the Court almost wholly relied upon the evidence
obtained and on the findings made by the lower courts. It is on
this score that the Supreme Court may be justifiably criticized,
even though it pursued sound legal practice in not delving into

258 THE CHAIN STORE PROBLEM

the findings of the lower courts. On a question that is subject to
as much dispute as this, the Supreme Court might have inquired
into the nature and comprehensiveness of the evidence upon
which the lower courts based their findings.

Even sharper criticism must be leveled against the lower courts
for basing important findings upon flimsy and incomplete data.
There is altogether too little statistical information to warrant
the assumption that the longer chains are in a more advantageous
position than the shorter chains. It is believed that there is some
truth in this contention when the very small chains, viz., those
having 2 or 3 stores, are compared with those having 10 or 15
stores, and it is probable that chains with 50 or 100 stores have
an advantage over those operating 20 or 25 stores. Even on this
point there is but fragmentary factual evidence. But when a
comparison is made between chains having, say, 300 stores and
those operating 400 or 500 stores, there is serious doubt as to the
superior ability of the latter. Whatever statistical evidence there
is on this score (see Chap. IX) is not convincing one way or the
other.

Except in a very general way, the courts are incorrect in assum-
ing that " the greater the number of units, the greater the purchas-
ing power of the chain." In the first place, as shown in Chap. IX,
there is considerable difference in the sales per store of chains in
different lines of trade and even among chains in the same line
of trade. Consequently, a chain with 50 stores may operate
on a larger scale than another having three times the number of
stores. This is more than a mere assumption; it is founded in
actuality. Second, much of the buying advantage heretofore
enjoyed by the larger, though not necessarily the longer, chains,
is likely to be eliminated under the Robinson-Patman Act, as
will be shown in Chap. XVII. Assuming a reasonable degree
of enforcement, this law will definitely limit the total buying
advantage of the chains to the amount of savings incurred by a
vendor in selling to them. To the extent that the Robinson-
Patman law will prove effective, to that extent will the need for
special taxation of chain stores on a graduated basis diminish,
unless it is desired to take purely punitive measures against them
with the definite view toward their curtailment or complete
annihilation.

CHAIN STORE TAXATION 259

Aside from the buying advantage which is supposed to be
possessed by chains in some ratio to the number of unit stores
within the state or within the entire organization, the courts have
assumed that the longer chains possess certain other advantages
over the shorter ones. In reaching such a conclusion the courts
have obviously resorted largely to rationalization. So far as is
known, no conclusive evidence has as yet been presented on a
large scale to show that the longer chains are able to earn greater
net profits than the shorter chains. Yet it is because of the
absence of such a relationship (between volume of sales and net
profits) that the graduated gross sales tax laws were ruled invalid
by the Supreme Court. Neither is there conclusive evidence
that the longer chains incur lower operating expenses than the
smaller chains (see Chap. IX).

To be sure, there is some evidence that the longer chains under-
sell independents by a larger amount and on more items than the
shorter ones. Such facts were uncovered in the Florida survey
conducted by one of the authors of this volume (see Chaps.
VII and VIII). This would seem to indicate superior ability
on the part of the longer chains as a result of greater purchasing
power and economies in operation. But these facts, while
showing a tendency in the direction indicated, do not reveal what
prices the larger chains charge, comparatively, on goods bearing
their private label. It may well be that the longer chains have
been featuring lower prices on well-known products bearing
manufacturers' brands, while at the same time they are charging
somewhat higher prices on goods of their own brand. Because of
the difficulty in making direct comparison between private label
and manufacturer's brand merchandise, the chains may well
claim that the prices charged on their own goods are lower.
If it be true that higher prices are being charged relatively on
private label goods, then the larger chains would have the
advantage over the smaller ones, since the former sell a larger
proportion of their goods under private brand. In either case, it
would seem that the longer chains have the advantage over the
shorter ones in the matter of price. Insofar as price may reflect
other advantages inherent in size, it can be said that the longer
chains have greater ability to pay taxes than the smaller chains.
But such a conclusion can be reached only indirectly, for the lack

260 THE CHAIN STORE PROBLEM

of concrete evidence on operating expenses and net profits accord-
ing to size of organization.

Granted that the longer chains possess certain advantages in a
larger measure than is inherent in the shorter organizations, an
assumption that is not wholly founded on fact but is based largely
on a general tendency in that direction, there is still a question as
to whether the advantages increase in any definite ratio as the
number of units in the chain is increased. As far as is known, no
direct ratio has been established between the number of units in a
chain and the advantage which that chain has in buying, operat-
ing cost, prices offered to consumers, or in net profits. Yet a
reasonable distinction must be shown between chains in the differ-
ent tax brackets, lest the tax classification be declared arbitrary.
All that can be said is that there seems to be some relationship
of this kind, but it is not so clear and definite as is implied by any
of the systems of graduated license taxes enacted to date.
Certainly, the wide variations in the tax brackets established by
many of the state laws may be seriously questioned on this score.
But as long as these brackets distinguish between stores with
relatively few units the laws are on sounder ground than when an
attempt is made to differentiate between the various chains whose
units by brackets run into the hundreds or thousands.

The Court's Attitude toward Graduated Sales Taxes. In
their battle against graduated sales taxes, the chains have been
more fortunate. In fact, they have been as successful in such
efforts as they have been unfortunate in their fight against
graduated license taxes. The three graduated sales tax cases
that were carried before the supreme tribunal have all been
declared unconstitutional.

The first of the graduated retail sales tax laws carried to the
United States Supreme Court was the Kentucky statute.
Kentucky had levied a tax on retail sales which varied from ^o
of 1 per cent on sales of $400,000 or less, up to 1 per cent on sales
of more than $1,000,000. The law covered all retailing institu-
tions, whether chain or independent; hence the large independent
merchants were found side by side with the chain store companies
in their battle to quash this tax.

When the Supreme Court handed down its decision in 1935, it
was declared that the classification of stores according to the gross
volume of their sales for graduated rates of taxation was arbitrary

CHAIN STORE TAXATION 261

and unequal, primarily because gross sales bear no relationship to
net profits. l The Court reiterated this stand in the Iowa decision
of 1936 and found the graduated sales tax of that state unconstitu-
tional. 2 In the face of these unfavorable decisions it seems
hardly likely that further graduated sales taxes will stand the
legal test. It is possible, however, that some form of similar tax
may be held constitutional. Many feel that the courts might hold
valid a tax on the net profits of retailers, at graduated rates. It
has also been suggested that the above decisions might not
prohibit a gross sales tax at graduated rates on chain stores if
they were given a classification distinct from other retailers.
The courts have previously affirmed the rights of states to estab-
lish a separate classification for chain stores for purposes of
taxation. 3

From the legal standpoint it appears that graduated chain store
license taxes are definitely approved by the courts. The courts
have held that chain stores may be classified separately for tax
purposes. Graduated sales taxes, however, have been ruled out
and there is only a slight immediate possibility of a reversal of
this position. But as long as it is possible to impose one type of
taxation on chain stores, the chain store organizations can expect
little aid from the courts in their efforts to escape the so-called
discriminatory or punitive tax.

City Chain Store Taxes. Following the example set by state
governments, municipalities soon seized upon the opportunity to
enact chain store ordinances. Although sporadic attempts to
invoke that type of legislation had been made in the late twenties,
the first municipal corporation to ratify an ordinance classifying
chain stores for special taxation was Portland, Ore. During the
autumn of 1931, the City Council of that city passed an ordinance
providing for the licensing of retail stores starting at $6 for the first
store and progressing to $50 for each store over 20. 4 The law was
later ratified, by a very narrow margin, at a popular referendum.

1 Stewart Dry Goods Company v. Lewis, 294 U.S. 550 (1935).

2 Great Atlantic & Pacific Tea Company et at. v. Valentine, 12 Fed. Suppl.
760 (1936).

8 See Honorable Fred L. Fox, Tax Commissioner of West Virginia, "The
Taxation of Chain Stores," p. 10, a paper read at the 1936 conference of the
National Tax Association.

4 NICHOLS, JOHN P., "Chain Stores and Their Special Tax Problems,"
p. 36, Limited Price Variety Stores Association, New York, 1935.

262 THE CHAIN STORE PROBLEM

The vogue for the new municipal chain store tax soon spread to
other sections of the country. Cities in New Jersey, New York,
North Carolina, Michigan, Tennessee, Arkansas, Virginia,
Missouri, and in other states have adopted this type of legislation.
In many cases the laws were later repealed or quashed by the
courts. 1 But the movement seemed to gather momentum with
the passing of time, and now more than 50 cities are collecting
special chain store taxes.

Those acts that have been invalidated by the courts have been
ruled illegal largely for one of two reasons: either the ordinance
was regarded as an unwarranted exercise of the municipal taxing
power, or the courts looked upon the tax as discriminatory. In
view of the decisions handed down by the United States Supreme
Court, it would seem that municipal governing bodies would be
able to enact legislation that would not be ruled out because of
the latter reason. Nor should the first reason given prove
particularly comforting to chain stores. More than 3,000 towns
and cities in the United States are legally able to enact chain
store ordinances without special enabling authority by their
respective state legislatures, 2 and many others may readily secure
the necessary authority from friendly state law-making bodies.

A feature of municipal taxation that proves particularly vexing
for chain stores is that, in many cases, the ordinance is enacted
so quickly and quietly that the chains have little opportunity to
be heard before the actual enactment of the tax. The old adage,
"an ounce of prevention is worth a pound of cure/' apparently
applies to all things including chain store taxation. From the
chain store viewpoint it is infinitely preferable and much less
hazardous and costly to oppose this type of legislation before its
enactment, than it is to battle over it in the courts after it
becomes law. There apparently is no agency whose business it
is to give advance information that chain store ordinances are
being considered by the respective municipal corporations. In
several instances the first knowledge that chain organizations had
of special local taxation was the notice of taxes due which they
received from the local tax authorities.

1 For a complete list of cities that are enforcing municipal chain store
taxes and the legal status of such acts, together with the principal provisions,
see Appendix K.

2 NICHOLS, op. cit., p. 40.

CHAIN STORE TAXATION 263

Incidence of Chain Store Taxation. Since chain store taxes
have been so widely applied, the question naturally arises, Upon
whose shoulders will these taxes fall? It is obvious that there
are only three possible places for them to rest. Barring funda-
mental changes in the chain store setup as a result, the tax may be
shifted to the consumer in the form of higher prices; the chains
might absorb it out of profits ; or a combination of the two could
be utilized to take care of the burden.

One may now inquire if it is really possible for chain stores to
shift the tax to the consumer as they have loudly declared they
must do. The answer is naturally contingent on the amount of
the tax and the type of chain store under consideration. If the
tax is nominal it might not be expedient to shift the burden to the
consumer. If the tax is a severe one, the chain might be forced to
shift all or part of it to those who buy from them. However, a
tax that may be of little consequence to certain chain units, as in
the department or variety store fields where large units are the
rule, may be of vital importance to a chain of units with a small
volume of sales each. Likewise, in highly competitive fields, as
in the grocery business, it might be a much more difficult task to
shift the tax to the consumer than it would be in the variety store
field where the tax would fall uniformly on the vast majority of
competing establishments. 1 We must appreciate at this point
that even though the tax laws treat all chain stores alike and draw
no lines of distinction between individual stores of varying sizes or
types, actually these differences do exist and cause the tax to
fall with unequal weight on various chains. Therefore, the ease
with which the tax may be shifted and the necessity for shifting it
will vary with the kind of business in which the chain engages and
the size of the store units it operates.

Inasmuch as the chain store business is still essentially com-
petitive rather than monopolistic and chain stores compete with
independent stores as well as with one another, does it follow that
they are likely to be placed at a disadvantage if they raise their
prices in an attempt to shift the tax? In the case of groceries, the
sales of the average chain store are approximately $50,000
annually. Such stores generally undersell the average inde-
pendent merchant by an amount varying from 3 to 10 per cent.

1 Over 90 per cent of the retail sales in the variety field is secured by chain
stores.

264 THE CHAIN STORE PROBLEM

That being the case, it follows that they would not be placed at a
material competitive disadvantage unless the chain tax would
cause them to raise their prices extensively. Another factor that
gives weight to that conclusion is that low price is not the only
reason for consumer patronage of chain grocery stores. Con-
venience of location, superior quality, variety of merchandise, and
other reasons also appear to motivate consumers to trade at
chain stores. l

It would seem that, except for certain of the smaller conven-
ience-goods stores and filling stations, 2 the majority of chain
stores are in a position to shift at least a portion of the tax to the
consumer. Certainly it will not cause them the competitive
difficulties that their proponents would have us believe.

Is it possible for the taxes to be absorbed out of chain store
profits? Obviously, a chain license or sales tax larger in amount
than the profits of the successful chain stores in a given line of
business could not be met in this way. Chain store profits in the
past, however, have been comparatively high per unit. Even
many chains in the grocery business have netted average profits of
close to $1,000 per store. 3 The chain stores operating in the
variety, department, and apparel fields show considerably higher
average earnings per store. On the other hand, filling stations
are not able to secure net profits in the range of most other types
of chain stores. It follows that chain store taxes imposed at
nominal rates, with certain exceptions, notably filling stations,
might well be absorbed out of profits; and even taxes as high as
$500 per unit may not seriously hamper chain stores as a group.
Undoubtedly, the taxes will fall more heavily on certain indi-
vidual chains and on organizations with relatively small net
profits, but they should not prove particularly burdensome to
most of the chains, particularly outside the grocery field.

It is evident from the foregoing that chain store taxes of any
great weight will have to be absorbed in part by the chains them-
selves, and the remainder would of necessity be passed on to the

1 For a more detailed discussion of reasons for consumer patronage, see
Chaps. X and XI.

2 Most states specifically exempt filling stations from the provisions of
their chain store tax laws. For a complete list of states exempting filling
stations, see Appendix H.

8 See Chap. IX for more detailed information on chain store profits.

CHAIN STORE TAXATION 265

consumer. Wherever possible chain stores will seek to shift such
taxes to the consumer, but the competition from independent
stores will cause them to pay part of the taxes out of profits. The
tax will not fall so directly on the consumer as many would have
us believe since, in most cases, a sizable portion of it will come
out of chain store profits. The higher the tax, however, the
more likely it is to be shifted to the consumer, to the detriment of
both the chain stores and their patrons.

Effect of Chain Store Taxes. The full effect of chain store
taxes has not as yet been appreciated in the United States. Thus
far the taxes have been in effect for a comparatively short time,
and most of them involved relatively small amounts, since the
earlier laws were less drastic. As tax rates advance, however, it
is entirely possible that they may result in far-reaching changes
in distribution. To date it has been very difficult to separate the
effects of such taxes from other marketing factors. With the
limited data and experience on this point, all that can be done
is to speculate on the possible effect of these taxes rather than to
state them categorically and with any degree of certainty.

One of the most publicized effects refers to the changes which
chain store taxes caused in certain lines of business. In Iowa the
chain store tax is blamed for the abandonment of the company-
owned filling stations of the Standard Oil Company of Indiana.
Likewise, the fear of chain store taxes is given as the reason in
other states for transferring numerous filling stations from com-
pany-owned to independently-operated units. The chain store
tax was blamed for the conversion of the James Butler chain of
grocery stores to a voluntary chain. In all of these instances,
however, it is generally conceded that the chain store tax was
only one of a number of factors leading to the change in policy.
In the case of the grocery company the primary reason for
the relinquishment of its stores apparently lay in financial diffi-
culty. In the other instances it is felt that the oil companies
seized upon this opportunity to blame the chain store tax when
the actual reason was that they sought to escape from the
unpleasant and frequently unprofitable responsibility of operating
their own retail outlets. Although this type of tax is blamed
in many cases for the contraction of chain store outlets, yet
until recently but a few actual cases have existed of chain stores
closing up units in order to avoid punitive taxes.

266 THE CHAIN STORE PROBLEM

According to the data in Table 52, chain store taxation has not
materially affected the number of stores operated by chains or
their proportion of the sales volume in the lines of trade in which
they operate extensively. Indiana is a state with eight years of
chain taxation experience, and an inspection of Table 52 shows
that chain store trends even there follow rather closely the trends
for the entire country.

Only in the filling station field has chain store taxation had any
marked effect on the number of units operated or upon the
volume of sales done by chain stores. In the states which include
filling stations in the tax, the decrease in the number of units
operated by chains is somewhat greater than the average decrease
in other states during the same period of time. But as was
pointed out above, the tax may have served merely to accelerate
the trend from chain to independent operation in the retailing of
petroleum products. In the case of grocery stores or drugstores
the percentage of change in stores operated and in volume of sales
made by chains in states having chain store tax laws follows very
closely the change for the entire country. During the period
from 1933 to 1935, when the effect of the chain store taxes should
have been evident, little effect can be discerned, except in the
filling station field. There has been some diminution in the
number of chain units, but this has been largely compensated by
the increase in sales volumes by the other units. The chain
organizations have shown a trend toward fewer and larger units
for some time, and chain store taxation has been only one of
several factors responsible for this change, for the trend was
under way several years before special taxes of any consequence
appeared on the scene.

In the states where the taxes are severe, there is little doubt
that chain store expansion has been slowed up. Nevertheless, as
shown in Chap. II, chain stores have expanded in the past few
years despite this adverse legislation, so that, rather than
actually causing a curtailment of chain stores, the most that
can be said is that these taxes may have slowed up further
expansion.

The effect which these taxes will have on chain store profits,
costs, and prices, is still problematical. As far as the authors
know, no objective study has been made to determine such effects,
and, until one is made in a state imposing a chain store tax, it

CHAIN STORE TAXATION

267

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268 THE CHAIN STORE PROBLEM

is only possible to hazard an opinion of what might be the effect
of the tax on these factors.

The most important influence that chain store taxes might
have is that relating to the consumer. Would the tax result in an
increase of prices to the consumer, as the chain protagonists have
charged? It is often claimed that chain store taxes will increase
the food bill of the average family 10 per cent or more. It would
seem, however, that this claim is fallacious. The competition
from supermarkets, independent merchants, and other chain
stores would make any chain organization hesitate before mate-
rially raising its prices. Undoubtedly, in certain cases prices
have been raised and will be raised, but it is hardly possible that
they can be sufficiently raised to take care of the entire tax
burden. Many of the increases in prices can be traced, however,
to other causes of a more general character. As long as retailing
is as highly competitive as it is today, chain stores can not expect
to pass on to the consumer, in the form of increased prices,
more than a portion of any substantial chain store tax.

Fairness of Chain Store Taxes. It has been repeatedly charged
that chain store taxation is an unwarranted exercise of the taxing
power of governmental agencies. Many fear that regulation by
taxation is a most objectionable practice despite its legal pre-
cedents. The chains label these taxes as discriminatory, and
they feel that they are being penalized for being efficient. They
also claim that this is an attempt to compel consumers against
their wishes to give more of their patronage to independent
retailers and less to chain stores. Allegedly, chains do not object
to paying their fair share of the taxes necessary to operate the
various governmental units, but they do strenuously object to
attempts at discrimination.

On the other hand, chain store taxation has been urged for
three primary reasons: first, because of the need for more revenue
by governmental agencies; second, because chains have a greater
ability to pay taxes than their independent competitors, and
ability to pay has always been an important factor in levying
taxes; and third, because it is claimed that chain stores are
opposed to the best interests of society, and taxation affords a
potent means of curbing their further development. It is further
asserted that chains enjoy certain privileges for which they should
pay in the form of special taxes. At least five secondary grounds

CHAIN STORE TAXATION 269

are cited in support of this position : first, chains now escape their
fair share of the tax burden; second, chain stores are the recipients
of special benefits because of their peculiar form of organization,
and, therefore, should pay special taxes for these privileges;
third, chain stores avoid their proper share of personal property
taxes because their inventories are listed for taxation at lower
values, since they buy more cheaply than independent retailers,
because they carry smaller inventories of stock than their com-
petitors, and because the tax assessors do not have access to the
chain store records in the distant central offices; fourth, the chain
organizations are large foreign corporations controlled by absentee
owners who take profits out of the local communities and should
pay special taxes for the privilege of operating in the state; fifth,
chain groups resort to unfair trade practices.

It is impossible at this point to discuss adequately these argu-
ments, but they are generally based on false assumptions or
simply represent half-truths. A more extensive treatment of this
subject is presented in Chaps. XIII and XIV. These allegations
are largely excuses for chain store taxes which have been devised
by revenue-seeking agencies rather than a sound justification for
them. One might well argue that the special benefits and
privileges of chain store organizations are reflected in their
profits and sales, and that states with corporate net income taxes
and with general sales taxes will obtain proportionately larger
revenues from chains. 1 It may also be argued that if chain stores
should be taxed more heavily because they are more efficient than
certain independent retailers, because they have a faster stock-
turn, and because they have a larger volume of sales and may earn
more profits, then the more capable and successful of the inde-
pendent retailers also should be singled out for special taxation in
order to lessen their advantages over the less efficient retailers.
If the arguments that are commonly advanced are carried to their
logical conclusion, taxation might be applied to the whole field of
distribution to punish the more alert and energetic enterprisers in
every line in order to protect the weaker members from the
ravages of competition.

It would seem that a plausible case could be made for either
side, but the fairness of chain store taxation, in the last analysis,
cannot be decided from the viewpoint of either the chain or

1 BUEHLER, op. cit.

270 THE CHAIN STORE PROBLEM

independent groups. Rather must it be decided on the basis of
its justification from the standpoint of society as a whole. Will
society benefit by imposing special taxes on chain stores? Is the
need for revenue sufficiently urgent to necessitate the enactment
of measures that may definitely handicap one type of retailing
institution to the benefit of another? In the answers to these
and similar questions lies a reasonable approach to the solu-
tion of the chain store problem, although as will be shown
later, taxation is but one way of coping with the chain store
situation.

Summary. The growing need for additional revenues, coupled
with the desire to curb chain store growth or even to discriminate
against chains, has led to numerous tax measures enacted by
states and municipalities. Practically all the state laws of this
type provide for graduated license taxes, according to which the
levies made upon chains with a large number of store units are
higher than those imposed upon chains with fewer store units.
The legality of such taxes has been upheld by the United States
Supreme Court on a number of occasions, climaxed by the
Louisiana decision that was handed down on May 17, 1937. In
the light of this last decision, it would seem that chain stores are
very much at the mercy of state legislatures. There is no doubt
but that other states will follow Louisiana's example and classify
chains in the various tax brackets according to the number of
store units operated by the chain as a whole, although the tax
will, of course, apply only to the number of stores operated by the
chain within the state in question.

One of the effects of discriminating against the larger chains
may be to sell the respective units to their operators and thus
form a so-called " voluntary" chain. This may be done in
states which choose to tax the national chains too heavily or in
states in which chains do a substantial volume of business. The
Pennsylvania chain store tax, which became law on June 5, 1937,
is a case in point. Not only is the tax relatively high ($500 for
each store of a chain operating more than 500 units) but it is the
first such tax enacted by a large-volume state. Such a levy
therefore is even more keenly felt than the somewhat higher
levy of $550 per store for chains with more than 500 units each
imposed by the Louisiana law*

CHAIN STORE TAXATION 271

A more immediate effect will be that of closing down the less
profitable and smaller stores. Many outlets with limited profits
will thus be eliminated, operating costs may be reduced through
larger stores, and the tax, when expressed in terms of sales volume,
would thus be reduced in importance. This movement was given
impetus by the recently enacted law in Pennsylvania. Already
some of the larger chains, including the A. and P. Company, the
American Stores Company, and the P. H. Butler Company, have
closed a number of such unprofitable outlets. To all of this there
are obviously definite limitations. It is not possible to increase
the size of grocery stores, for example, beyond certain limits.
Nor is it possible to reduce operating expenses progressively with
increases in sales volume. Very often, the optimum point, from
the standpoint of operating efficiency, may be reached at a
relatively low volume level. Consequently, a consolidation of
stores into larger units offers but a partial solution to the problem.
If the shutdown of outlets by chains is a matter of retaliation, it is
doubtful whether it will succeed in itself in stemming the tide. If,
however, it represents a bona fide attempt to eliminate unprofit-
able stores, then it is a sad commentary on supposed chain store
efficiency, and one wonders why such stores have not been closed
sooner and further whether the tax does not, after all, place a
premium on management efficiency. If it results in the latter it
may, from the standpoint of consumers, become a blessing rather
than a curse.

A third effect of the chain store tax will be to accelerate the
trend toward chain-owned supermarkets. To attribute the open-
ing of supermarkets by chains entirely to the tax laws is to dis-
regard actualities and recent history. Supermarkets have been a
cause of worry to the chains for several years. One way of meet-
ing this new competition has been in the chain's policy of opening
similar places of business. This was done even in states which do
not have any chain store tax laws, as in Ohio. It is felt, however,
that heavy special taxes on chains based on the number of units
will add strength and support to this policy. Partly because of
the lower overhead inherent in the supermarket method of opera-
tion, but largely because of the average volume of each of these
establishments, the tax would become less burdensome. It is
probable, however, that in time the same result would be attained

272 THE CHAIN STORE PROBLEM

if it is assumed that the supermarket has a definite and permanent
place in our retailing structure and if we further assume that the
corporate chains in their acquisitive desire would attempt to
effect all possible economies in retail distribution.

In the various decisions handed down by the Supreme Court, it
has been stated that the Court is not concerned with the extent of
the tax, so long as the right to levy a given tax has been estab-
lished. Nevertheless, the majority decision in the Louisiana case
stressed the fact that the large national chains enjoyed certain
advantages which the smaller chains did not have and cited the
large amount which the A. and P. Company obtained in 1934 in
rebates, secret allowances, and brokerage fees, although these
have been outlawed by the Robinson-Patman Act and will
presumably be eliminated in the future. This specific citation,
together with the numerous references to the large chain's
superior advantages, would seem to imply that the Supreme
Court is concerned with the reasonableness of the amount of the
tax that can be levied upon chains. Furthermore, the constitu-
tions of many of the states afford a measure of protection against
taxes that are so severe as to be confiscatory. Thus, while
punitive license taxes have been legalized and no limit has been
placed upon the amount of such levies, in actual practice these
taxes will probably be much below $1,000 per store and probably
around one-half that amount. To what extent such taxes may
be absorbed by the corporate chains or passed on to the consumer
has already been discussed at some length, as well as the test of
what constitutes fairness in such legislation.

CHAPTER XVII
RECENT LEGISLATION AFFECTING CHAINS

For generations rugged individualism and free-for-all competi-
tion characterized American business. Business men struggled
for the consumer's dollar under few restrictions. Individual
enterprises were small, and when a business man was over-
whelmed by the opposition he merely considered that he lost in
battle to more aggressive, more fortunate, or more skilled com-
petitors. The casualties of this ruthless warfare were appalling.
The battlefields of business were strewn with the corpses of busi-
ness firms that were unable to withstand the ever-advancing
forces of commercial progress. As long as the rivalry was confined
to small competing units, governmental aid was seldom sought by
hard pressed business men. They soon realized, however, that
their chances of success and the rewards of their victory were
greatly enhanced if they operated on a large scale. As a result,
corporations were formed, mergers effected, and control con-
centrated in few hands. It was then that the small independent
began to feel that he was no longer battling on an equal footing
with his larger rival. He did not regard himself a modern David
taking on the new Goliath. To his way of thinking his giant
competitors were waging unfair warfare against him, which was
frequently only too true as many investigations disclosed.
Unable to safeguard himself under the old rules of competition,
the small business man turned to the government for legislative
protection.

Anxious to preserve competition and prevent unfair practices,
governmental agencies sprang to the defense of the small business
man. Anti-Trust laws were promulgated, and certain businesses
were subjected to stringent governmental regulation. All effort
was directed to break up and prevent the formation of trusts and
monopolies, so that competition may hold sway over the markets.
But, despite governmental intervention, large-scale business
prospered and the trend toward bigger enterprises continued
unabated.

273

274 THE CHAIN STORE PROBLEM

In the field of retailing governmental restrictions accomplished
little in curbing the progress of "big business." The Sherman
Anti-Trust Act, the Clayton Anti-Trust Act, the act creating the
Federal Trade Commission, and other legislative measures failed
to give the small merchant the degree of protection he desired.
The clamor for specific legislation against the large-scale retailers
produced several kinds of legislation aimed at mass distribution
in general and chain stores in particular, viz., chain store taxes,
the Robinson-Patman anti-price discrimination law, and the
state fair-trade laws are three of the more important types of the
new r legislation. The preceding chapter treated in some detail
the first type of legislation and in the present chapter an attempt
is made to discuss the last two.

Purpose of Recent Restrictive Legislation. In general, the
purpose of recent legislation directed against chain stores and
other largo retailers is, with the exception of taxation, twofold.
First, it attempts to strengthen competition by curtailing or
limiting some of the advantages which chain stores have enjoyed
through discriminatory discounts, unjustified advertising allow-
ances, unearned brokerage fees, and objectionable "loss leader"
selling; and second, to equalize some of the special benefits which
chains derive either through size or through advantages peculiar
to their method of operation.

The Patman Investigation, conducting hearings in connection
with pending legislation, revealed an appalling amount of appar-
ently unfair discrimination in the form of these special discounts,
advertising allowances, and brokerage fees granted by many
manufacturers to chains in a greater degree than to independent
merchants. For example, a manufacturer in the food field used a
plan of progressive discounts, increasing them according to
volume from 10 cents per unit to 25 per cent per unit. It was
found that only three companies (all chains) purchased in suffi-
cient quantities to benefit from the maximum discounts. Fur-
thermore, it was even previously admitted by some manufacturers
that the bargaining ability of the buyer was frequently a
prime factor in determining the amount of the allowance or
discount. 1

federal Trade Commission, "Chain Stores Special Discounts and
Allowances: Tobacco/' p. 2, U.S. Government Printing Office, Washington,
1934.

REGENT LEGISLATION AFFECTING CHAINS 275

The legislation directed at large-scale merchandising is
envisaged as a protection for the individual business man, and all
that he has done and will do for the American community. It is
primarily a device for reinforcing the competitive position of
small merchants. Sponsors of such laws claim the measures are
bolstering the capacity of the neighborhood store to stand against
the onsweep of centralization in the distribution field. Once more
laissez faire is regarded as inadequate to meet new conditions.

THE ROBINSON-PATMAN ACT

Reasons for Enactment. The Seventy-fourth Congress wit-
nessed several attempts to amend the Clayton Act in the interest
of the small-scale distributor. This manifestation of concern for
the local retailer was stimulated by three distinct factors. The
first and foremost was the desire of Congress to curb or eliminate
some of the abuses of which chains have been accused (and found
guilty in many instances) in order to minimize their competitive
advantage when secured through unfair moans. Impressed by
the seeming inj ustice of the disclosures of the Patman Investiga-
tion and urged on by those who had considerable at stake,
Congress passed the bill in the closing days of the session.

A second reason for the passage of the Robinson-Patman Act
at that time was that it was a crystalization of a growing sentiment
against "big business. " It had become increasingly popular to
lay the blame for our economic ills on chain stores and other
forms of big business, and here was an opportunity to demonstrate
disapproval of this growing "evil." The opponents of bigness
were growing apprehensive lest the business and industrial
leviathans get out of hand and destroy the millions of independent
entrepreneurs, and here was an opportunity to check that
tendency. This sentiment was voiced by President Franklin D.
Roosevelt when, in a message to Congress on June 19, 1935,
pertaining to tax methods and policies, he declared "size begets
monopoly" and that "without such small enterprises our com-
petitive economic society would cease." 1

The third factor that apparently led to the passage of this law
was the widely held belief among independent distributors that
the National Industrial Recovery Act with its codes of fair

1 Congressional Record, Seventy-fourth Congress, first session, June 19,
1935, Vol. 79, No. 126, pp. 10041-10042, 10093-10094.

276 THE CHAIN STORE PROBLEM

competition had been highly beneficial to them since it had
attempted to restrain certain aspects of competition which were
deemed repugnant to smaller business men. Wholesalers, espe-
cially, felt the need for something to replace the codes and they
seized upon the Robinsori-Patman Act as a partial substitute.

Provisions of the Act. This act is at once an amendment to
the Clayton Act and an entirely new law. Section 1, which
amends the Clayton Act, makes it unlawful for sellers to dis-
criminate in price between different buyers of like grade and
quality where the effect of such discrimination may be sub-
stantially to lessen competition, to tend to create a monopoly, to
injure, destroy, or prevent competition with any person who
grants or knowingly receives the benefit of such discrimination or
with customers of either of them.

Certain defenses under the law are set up by this section. If
the price differentials make only due allowances for differences in
cost, including cost of manufacture, sales, and delivery for varying
quantities, they are not discriminatory, except that the Federal
Trade Commission may determine quantity limits where it finds
that available large-scale purchasers are so few as to render
quantity price differentials unjustly discriminatory or promotive
of monopoly. Under such conditions, quantity price differentials
must be limited to such differentials as the Federal Trade Com-
mission shall prescribe.

The amendment to the Clayton Act permits the selection of
customers where done in good faith and when not in restraint of
trade. It permits price changes under certain specified conditions
to meet market fluctuations, to dispose of perishables, to avoid
obsolescence of seasonal goods; it permits distress sales under
court order, and bona fide closing-out sales. If, however, anyone
feels that he is the victim of discrimination in price, services, or
facilities furnished, he may enter a complaint. If proof of such
discrimination is given at a hearing or otherwise obtained by the
Commission, the burden of justifying the deviations rests with
the accused, and he must refute the testimony against him,
or the Commission may order the discrimination stopped.
Several bases for justification are open to the defendant. He
may allege that the so-called " discrimination " was made
in good faith to meet competition; that the transactions were
in intrastate rather than interstate commerce; that the price

RECENT LEGISLATION AFFECTING CHAINS 277

differentials were the result of variations in actual costs ; that the
goods in dispute were sold for export; or that services and not
goods were the subject of sale. 1

The act further attempts to outlaw the practice of giving
brokerage payments to a so-called agent who actually works for a
buyer under the latter's control regardless of the services actually
performed. A broker may only collect a commission when he
acts as a bona fide third party. If he serves as a representative
of the seller to locate buyers, or as a representative of the buyer
to find sources of supply, and is really in business for himself, he
is discharging the true functions of a broker, insofar as the vendor
is concerned, and may be properly compensated. When one acts,
however, for or under the control of the buyer he is not a true
broker and no seller can be expected to pay this intermediary
for such service. 2 Furthermore, according to the first official
interpretation of this provision of the law issued on June 5,
1937, by the Federal Trade Commission attorneys, the law
prohibits " payment of brokerage fees from sellers to buyers
directly or indirectly/ 73 This means that even an independent
broker is not entitled to any fee from a vendor if all or part of
it is passed back to the buyer, as was done by the Biddle Pur-
chasing Company and some others. It is on this ground that
thivS company was ordered by the Commission to cease and
desist from such practices. The compensation must be primarily
for services rendered to the seller although the buyer may also
benefit therefrom, but not in a monetary way.

Advertising allowances to selected customers are also attacked
by the Robinson-Patman Act. In the words of the act, it is
"unlawful . . . to make any payment ... to ... a customer
... in consideration for any services . . . unless such payment
... is available on proportionally equal terms to all other customers
competing in the distribution of such products." 4 In oth?r
words, it becomes unlawful to offer advertising allowances as
subterfuges for special price concessions. If they are made

1 For an analysis of the legal implications of the Act, see Nelson B.
Gaskill, "What You May and May Not Do under the New Price Dis-
crimination Law," The Kiplinger Washington Agency, Washington, 1936.

2 Report of Mr. Utterback, Committee on the Judiciary, on HR8442,
Seventy-fourth Congress, second session, p. 15.

3 The Columbus Dispatch, June 5, 1937.

4 Italics supplied by authors for emphasis.

278 THE CHAIN STORE PROBLEM

available to one buyer, the seller has to offer them to all on
"proportionally equal terms. "

Discrimination between purchasers is further restricted by
requiring sellers to offer services or facilities for processing,
handling, or selling to all buyers on substantially the same terms.
And what is more, it is not only unlawful for the seller to dis-
criminate in favor of certain buyers but it is also contrary to law
for a business man knowingly to induce or receive a discrimina-
tion in price which is prohibited by any of the provisions hereto-
fore mentioned. The buyer as well as the seller becomes guilty
under the provisions of this Act.

The Robinson-Patman Act not only amended the Clayton Act,
but it also introduced several new provisions into Federal legisla-
tion pertaining to marketing. Specifically, the act contains
three sections of new law. The procedure for the Federal Trade
Commission on cases pending or in process under the original
Clayton Act is specified in the first section of the new law. The
second section exempts cooperative associations from penalties
under the act for returning patronage dividends to members,
although in all other respects the law applies to cooperatives as to
other types of business. The third section contains the following
three provisions, which, overlapping in part the provisions of the
amended Clayton Act, confuse the meaning of the new law:

1. It is unlawful to discriminate by giving discounts, rebates,
allowances, or advertising-service charges to one purchaser
which are not accorded to competitors who buy a like
grade, quality, and quantity.

2. It is unlawful to sell in one part of the country in order to
destroy competition or to eliminate a competitor by grant-
ing lower prices than those exacted elsewhere in the United
States.

3. It is unlawful to sell at unreasonably low prices to destroy
competition or to eliminate a competitor.

For violation, a penalty of $5,000 fine, imprisonment of not
more than one year, or both, is provided by this part of the act,
thus making it a criminal statute. 1

Principal Differences in the Robinson-Patman and Clayton
Acts. The Clayton Act declares price discrimination unlawful

1 BECKMANT, T. N., and ENGLE, N. H., " Wholesaling Principles and
Practice," p. 595, Ronald Press Company, New York, 1937.

RECENT LEGISLATION AFFECTING CHAINS 279

only " where the effect of such discrimination may be substantially
to lessen competition or tend to create a monopoly in any line of
commerce. " The Robinson-Patman Act adds to the above, "or
to injure, destroy, or prevent competition with any person who
either grants or knowingly receives the benefit of such discrimina-
tion, or with customers of either of them." This last extends the
prohibition to include any discrimination whose detrimental effect
may not be general. Under the old law, a chain might have
established a store in a small town and by means of discrimina-
tory prices received might have forced out one or more local
merchants, but so long as some independents still remained there
would be no general effect upon competition. Now, the removal
of a competitor is a violation of the law if it is accomplished by
means declared illegal by the amendment.

The Clayton Act formerly permitted a discrimination in price
based on "differences in the grade, quality, or quantity of the
commodity sold, or that makes due allowance for differences in
the cost of selling or transportation. . . . " The Robinson-
Patman Act deals only with commodities of like grade and
quality and permits price differentials based on quantity only,
to the extent to which differences in quantity reflect differences in
the cost of manufacture, sales, or delivery resulting from differing
methods or quantities in which the commodities concerned are
sold. Hence, the prohibition is limited to goods of like grade or
quality, and the law is broadened to permit also allowances due
to differences in the cost of manufacture. Since the Robinson-
Patman Act uses the words "due allowance" rather than "not to
exceed," it is presumed that the rule of reason will apply and that
the words "due allowance" will be interpreted to mean reason-
ably more or less than the savings effected. Differences in cost
based on quantity can hardly be determined with mathematical
precision. It is believed, therefore, that the courts and the
Federal Trade Commission will take the position that a reason-
able approximation of cost differences is sufficient to establish the
existence or nonexistence of discrimination, provided, of course,
good faith is present and a bona fide attempt has been made to
comply with the law.

Under the new law or amendment the Federal Trade Commis-
sion has power to set quantity limits beyond which quantity
price differentials will not be permitted even when supported by

280 THE CHAIN STORE PROBLEM

the differences in the cost of manufacture, sale, or delivery. This
can be done only after investigation and hearing. This proviso
is based on the assumption that even an admitted economy,
which is possible only to a few buyers of tremendous size in a
given trade or industry, may become an instrument to lessen
competition or to tend to create a monopoly.

The Clayton Act permitted " discrimination in price in the
same or different communities made in good faith to meet com-
petition." The Robinson-Patman Act does not permit such
things but permits a seller charged with violating the act to
rebut the prima-facie case against him by showing that his
lower price was made in good faith to meet the lower price of a
competitor.

The Clayton Act contained no prohibitions against discrimina-
tion in the type of services rendered by a seller for different
buyers, nor did it prohibit any allowances for services or special
facilities given by a buyer for the benefit of the vendor. The
Robinson-Patman Act requires the seller to make the payment or
consideration available on " proportionally equal terms " to all
other customers. As to what constitutes proportionally equal
terms is not very clear, although it is presumed that either physi-
cal units or dollar volume can be used as a basis.

Under the Clayton Act, the burden of proof that a person had
violated the act was upon the Federal Trade Commission. The
Robinson-Patman Act places the burden of proof upon the person
charged with the violation, and it thus creates a presumption that
upon complaint the discrimination exists and it is up to the
accused to show that the discrimination does not exist or that it
is justified. The enforcement of the law is thus made much sim-
pler, but introduces a rather new principle in our jurisprudence.

The Clayton Act does not prohibit the granting of commis-
sions, brokerage, or other compensation, or any allowance or
discount in lieu thereof to persons acting for or on behalf of the
purchaser. The amendment prohibits such payments or allow-
ances " except for services rendered. " In other words, brokerage
services to a vendor, who pays the commission or fee, must be
bona fide and must not have the effect of a payment by a seller
to a buyer.

The Clayton Act applied only to persons granting the price
discrimination. The Robinson-Patman Act is not one-sided.

RECENT LEGISLATION AFFECTING CHAINS 281

It makes it unlawful for any person knowingly to induce or
receive a discrimination in price of the type previously discussed,
as well as making it unlawful for the vendor to give such dis-
crimination. Both parties may be held guilty under the new
law, which is a considerable departure from previous practice and
tends to put teeth into the law by removing some of the pressure
to which sellers have been subjected.

The Robinson-Patman Act contains provisions dealing with
price cutting, which are absent in the old Clayton Act. It now
becomes a criminal offense to sell at unreasonably low prices in
order to destroy competition.

Under the Robinson-Patman Act cooperative associations are
specifically permitted to pay patronage dividends, and such
payments are not regarded as discriminations.

Effect of the Robinson-Patman Act on Chains. The imme-
diate effect of the passage of the new law was psychological; it
frightened business men. It gave them what many called "The
Robinson-Patman jitters." Rather than be cited under the act,
many producers discontinued discounts that they feared might
be labeled discriminatory. The instinctive desire to avoid
violating any legal mandate drove numerous buyers and sellers to
cover. The law focused attention on certain prevalent abuses.
Fear, however, was not the only motive that made sellers refrain
from granting excessive discounts to large buyers. Many manu-
facturers seized upon the new law as an excuse for discontinuing
certain unprofitable price policies. The act was a convenient
alibi for taking a step that many sellers had heretofore lacked the
courage to take.

A more lasting effect of the law is that concerning manufac-
turers' price structures. There is little doubt but that manufac-
turers' prices will be revised and usually to the detriment of the
chains and other large buyers, including among them some of the
large wholesalers and voluntary chains that buy through central-
ized purchasing offices. In many cases the discounts given to
large purchasers were much greater than the economies effected
as a result of the large volume of business or quantity bought.
But in some instances, the Robinson-Patman Act may serve as a
boomerang for the small buyers w r ho so enthusiastically urged its
passage. Careful analysis of differences in the cost of manufac-
ture, handling, and selling when dealing with chains may show

282 THE CHAIN STORE PROBLEM

that the latter do not receive so large a price differential as the
resulting economies justify.

One effect that will very definitely work to the detriment of
chains is that many manufacturers will dispense with allowances
altogether in preference to attempting to offer them to all
customers on proportionally equal terms. In many cases, the
difficulties in attempting to apportion allowances among small as
well as large buyers will make their use impossible. For example,
if an advertising allowance of $8 per 100 cases is offered to chain
stores, what should the manufacturer offer the small retailer who
buys but one case? Obviously, 8 cents would buy little in the
way of advertising. The obstacles in the path of a legal applica-
tion of allowances will force many to abandon their use entirely,
as has already been done in a number of cases.

In order to circumvent these disadvantages, it is very probable
that chains may enter into agreements with producers to buy
their entire output. In such an event, there is but one customer
served by a manufacturer, hence there can be no question of
price discrimination. Likewise, it is probable that some manu-
facturers will choose to sell only to chains and other large buyers,
and as long as each is offered substantially the same price the
element of discrimination is not a factor. Some chain organiza-
tions are already following the above practices. From the stand-
point of the manufacturer, this appears to be a very dangerous
procedure as he limits himself to one or a very few outlets. He is
in a position to be squeezed by the chains for lower prices, and
he may ultimately be squeezed out of business altogether. At
any rate, by restricting his outlets the manufacturer places
himself entirely at the mercy of these customers.

Although this new act has been in effect only a comparatively
short time, a very noticeable trend toward the use of private
brands has already become evident. Large buyers find it more
profitable to push their own brands rather than to promote the
sale of merchandise bearing the manufacturer's label. An inspec-
tion of the shelves of almost any large chain grocery store is
likely to show a considerable quantity of privately branded
merchandise. The trend toward private brands is not entirely
traceable directly to the Robinson-Patman Act since the tendency
was very definitely in that direction before the law was enacted.
Other recent legislation, especially the fair-trade laws, tends to

RECENT LEGISLATION AFFECTING CHAINS 283

produce the same effect. It is true, however, that the Federal
law accentuated the movement toward private brands.

As it becomes increasingly difficult to buy national brands
advantageously, there is likely to be a tendency for chain systems
to engage more extensively in manufacturing. Some already are
processing their own goods, and, in view of the limitations placed
upon chains by the Robinson-Patman Act and other recent legisla-
tion, the movement is sure to gain momentum. The net result
may be that chains will exercise even a greater influence on our
economic life by controlling a large share not only of the distri-
bution of goods but of the production as well.

A further result of the new law is that it will deprive chain
systems of brokerage fees and commissions which some of them
have been in the habit of collecting through "bogus" brokers.
Only independent brokerage firms can exact fees for services
performed, and organizations like "Procon," a so-called "coopera-
tive" brokerage firm established by a number of grocery chains,
are not entitled to charge sellers for facilitating distribution. In
the eyes of the law, these organizations are formed for the purpose
of "gleaning unearned fees." The chains which formed Procon
attempted to circumvent the law by claiming exemption under
Section 4 of the act which specifically exempts cooperatives. The
Federal Trade Commission maintained, however, that in fact
Procon was not a cooperative but a subterfuge for exacting fees
from sellers while acting in the capacity of the buyer's agent. In
the spring of 1937 the organization was dissolved before a judicial
decision could be secured, 1 but in view of the attitude of the
Commission and the wording of the law, there appears to be little
doubt but that brokerage organizations of this type will be
banned.

FAIR-TRADE LEGISLATION

While the Robinson-Patman Act is an attempt to remove some
of the alleged abuses charged to chains, another type of legislation
aimed primarily at price-cutting retailers has made its appearance.
Masquerading under the title of "fair-trade laws," statutes

1 United State 8 of America before the Federal Trade Commission in the
Matter of Procon Grocery Service Co., Inc., et al. y Docket No. 3076, Com-
plaint Issued on March 12, 1937, and Order Closing Case Issued on May 19,
1937.

284 THE CHAIN STORE PROBLEM

legalizing resale-price maintenance have been enacted by 42
states, the assumption being that prices must be maintained lest
"unfair practices " creep in. This is indeed a most peculiar
distortion of the term "unfair."

California was the first state to inaugurate a fair-trade law
when in 1931 its legislature approved a statute designed "to
protect trade-mark owners, distributors, and the public against
injurious and uneconomic practices in the distribution of articles
of standard quality under a distinguishable trade-mark, brand or
name." This type of legislation aims to put an elevated floor
under the prices charged for branded items of certain manufac-
turers. The laws generally stipulate that contracts containing
provisions "that the buyer will not resell [certain commodities
coming under the law] except at the price stipulated by the
vendor " are not illegal. 1 Such acts further stipulate that selling
below cost, the use of loss leaders, and certain unfair practices are
illegal. The California statute defines cost "as including the
cost of raw materials, labor and all necessary overhead expenses
of the producer; and, as applied to distribution, 'cost' shall mean
the cost of the article or product to the distributor and vendor
plus the cost of doing business by said distributor and the
vendor/ ' 2 although in some states a specified percentage is added
to the purchase price of the goods in determining cost under the
law.

Many fair-trade laws were enacted in 1935 and 1937, and,
though there was some doubt at first as to their constitutionality,
this barrier was removed on Dec. 7, 1936, by an epochal decision
of the United States Supreme Court. On that day, the Court
declared the California and Illinois fair-trade laws entirely con-
stitutional. At present, in all but six states a manufacturer has
the legal right under state law to fix minimum resale prices for
his products and may insist that those prices be respected. 3

1 Chap. 278, Statutes of California, 1931.

2 See Chaps. 260 and 504, Statutes of California, 1933, and Chap. 477,
1935. The 1935 amendment substituted for the words " 'cost' shall mean
the cost of the article or product to the distributor" the "invoice or replace-
ment cost, whichever is lower."

3 The six states that do not have fair-trade laws at present are: Texas,
Missouri, Mississippi, Alabama, Vermont, and Delaware. There is a
distinct probability that at least two of these states will enact fair-trade
legislation when their legislatures next convene.

RECENT LEGISLATION AFFECTING CHAINS 285

The Federal Resale-price Maintenance Legislation. 1 In

response to persistent pressure from independent retailers, whole-
salers, and certain manufacturers for protection against price
cutters, Congress enacted a fair-trade law during the summer
of 1937. Previous to the enactment of this law the courts
had held that contracts between manufacturers and wholesale
and retail merchants that fixed consumer prices violated the
Sherman Anti-Trust Act. There were but few methods by which
producers could control resale prices. The exclusive agency and
consignment selling were the most effective means of curbing the
activities of price cutters, but the obvious disadvantages of utiliz-
ing these methods restricted their adoption by manufacturers.

The new Federal law accorded to interstate commerce the
same privileges which the various state laws accorded to intra-
state commerce. In effect, the Federal fair-trade law, known
as the Miller-Tydings Act, amends the Sherman Anti-Trust
Act of 1890, which provides that every contract, combination
in the form of trust or otherwise, in restraint of trade or com-
merce among the several States, or with foreign nations, shall
be illegal and punishable. The new law exempts from the
operation of the older act all agreements prescribing minimum
prices for the resale of a commodity which carries the trade-
mark, brand, or name of the producer or distributor and which
is in free and open competition with commodities of the same
class produced or distributed by others whenever the state
in which the resale is to be made regards such agreements as
lawful either under a statute, such as a fair-trade law, or by
common law, or by public policy of the state. Price mainte-
nance agreements of this character do not constitute unfair com-
petition under the Federal Trade Commission Act of 1915, for
such agreements are vertical in nature and do not involve a
conspiracy among similar enterprises in restraint of trade. This
means that the new law still does not authorize "any contract or
agreement, providing for the establishment or maintenance of
minimum resale prices on any commodity herein involved,
between manufacturers, or between producers, or between whole-

1 For a more detailed discussion of resale-price fixing under the fair-trade
laws, see "Resale Price-Fixing Under the Fair Trade Laws," Business Week,
Aug. 28, 1937, pp. 37-44; and ZORN, BURTON A., et al, "Business Under the
New Price Laws," Prentice-Hall, Inc., New York, 1937.

286 THE CHAIN STORE PROBLEM

salers, or between brokers, or between retailers, or between
persons, firms, or corporations in competition with each other/'
The latter are agreements of a horizontal character and are still
illegal.

Alleged Benefits of Fair-trade Legislation. Allegedly, the
fair-trade laws are designed to eliminate those practices which
curb free and open competition. If that is true, it follows that
business should derive certain benefits if the laws have been
soundly conceived.

The manufacturer benefits by making contracts which enable
him to fix the minimum resale price of branded merchandise. In
the words of the United States Supreme Court, he profits by this
legislation because "The primary aim of the law is to protect the
property viz., the good will of the producer which is still his
own. The price restriction is adopted as an appropriate means
to that perfectly legitimate end and not as an end in itself. " l In
other words, the laws are supposed to benefit the manufacturer by
shielding him from unscrupulous price cutters who may do him
harm by injuring his good will. The producer thus secures a
degree of control over the market for his goods which he hitherto
did not possess.

The wholesaler benefits from this legislation through recogni-
tion of his margin by law and by having his market protected
against the attacks of price cutters. In some degree, the inde-
pendent retailer gains the same advantages. He is protected
against unrestricted price cutting; the large-scale merchants are
deprived of an effective competitive weapon; and the independent
is entrenched more firmly in our distributive structure.

When the benefits to the consumer are appraised, one is hard
put to justify legislation of this type. The question naturally
arises, was the consumer expected to profit? It seems contradic-
tory to claim that buyers benefit by the enactment of legislation
that has for its aim the raising of prices. The proponents of
these laws, however, aver that the consumer is served by fair-
trade acts as competition is saved by preserving the competitor.
Furthermore, it may well be that usual price cutters will charge
more for nationally advertised goods and less for their private-
brand merchandise. Similarly, independents may, because of
their ability now to sell nationally advertised items at better prices,
charge lower prices on items not so well known to the public.

1 "Now They Can Fix Resale Prices," Business Week, Dec. 12, 1936.

RECENT LEGISLATION AFFECTING CHAINS 287

Administration of the Law. Administering a law which so
deeply affects all retail outlets within a state is a herculean task.
Without the proper agencies for enforcing legislation of this type,
most states have proceeded with caution. At the present time
only in the drug, liquor, and publishing trades has the law been
widely applied, although the food stores of some states are also
operating under its provisions.

Legislation of this type will only be effective in so far as it is
enforced, and that necessitates the policing of thousands of retail
outlets. It means also that the multitude of stores affected must
be kept informed of the most recent minimum prices. When
goods are sold through many outlets, this becomes a rather
expensive procedure. For reports of violators the state Fair
Trade Committee (usually a private organization of interested
parties without legal status) generally relies on complaints from
merchants in the vicinity of the alleged law breaker; this may be
an effective, but in many respects a questionable, method of
enforcing our laws. The violator must then be warned by
registered mail to cease and desist. If the violation continues,
he is confronted with the charge and is brought into court.
Consequently, the effectiveness of the law is dependent largely
on its administration, which in turn is predicated upon the
number of manufacturers who desire or are coerced by dis-
tributors to operate under its provisions.

Effects of the Fair-trade Laws. Since these laws deal funda-
mentally with prices, the first approach to a consideration of their
effects is probably from that viewpoint. At what level will prices
be set by those manufacturers who are permitted under the law
to name the minimum resale prices of their products? Will they
be set high, will they be set low, or will an attempt be made to
arrive at a compromise price? If the producer chooses to set
prices at a level which will enable the high-cost retailer to remain
in business, what becomes of the savings of lower cost merchants?
There does not appear to be any way of passing that saving on to
the consumer, at least not directly on the goods affected. If the
price is set for the low-cost distributor, will other merchants
handle the goods, and, if they do, can they successfully compete?
Most certainly, tremendous pressure will be, and is being,
exerted to set profitable margins for the less efficient retailers.
Already movements are on foot to guarantee 40 and 50 per cent
margins on certain items to certain classes of merchants. The

288 THE CHAIN STORE PROBLEM

potential dangers to consumers from so-called " fair-trade laws' 7
would appear to outweigh the damage to producers that lies
in price cutting, as the Federal Trade Commission maintained
some years ago.

Fortunately, to date most manufacturers operating under such
laws have been sufficiently sagacious to set the minimum prices at
reasonable levels. In many cases the prices do not allow even a
normal margin for the average retailer but even then they are
higher than they formerly were on items which were used as a
football by price-cutters. Since there are still more independent
outlets than chain units, and if the effect will be for independents
to lower the prices on many of their items because of the more
reasonable price they now secure on nationally advertised
merchandise, the consumer may not suffer in the end. Much, of
course, depends on the farsightedness of manufacturers, whole-
salers, and retailers who choose or who are forced to operate under
the law.

So far, little attention has been given to the consumer in this
legislation and only one state, Wisconsin, established an agency to
determine a reasonable price. In all other states the consumer is
left to the mercy of manufacturers whose primary concern may
not be the welfare of society but the prosperity of their own
particular business.

The actual effect of this legislation on prices is now a matter
of mere conjecture, since the laws have not been in force a suffi-
cient length of time for reliable objective measurement. If
scattered reports can be relied on for a true picture of the situation,
it would appear that so far the laws have had a leveling effect.
The prices on nationally branded merchandise have been raised
by price cutters and lowered by other retailers who found it
expedient to sell at or near the minimum prices set by producers.
The trend of prices, however, has been upward, although other
factors in addition to fair-trade legislation are accentuating
this movement. The price-cutting possibilities of private
brands are acting as a check on unreasonable price increases on
national brands.

Inasmuch as loss-leader selling on national brands is now largely
within the control of the manufacturers, chains and other large
distributors will lose an important patronage appeal. No longer
will chains be able to undersell on national brands unless the

RECENT LEGISLATION AFFECTING CHAINS 289

producer gives his approval. That this will cause a vast change
in chain store merchandising is plainly evident. For the moment,
at least, independents will be placed in a more favorable competi-
tive position. They will be able to feature national brands
without fear of having consumers find the same products sold at
much lower prices in chain stores.

Working hand in hand with the Robinson-Patman Act, the
new legislation will spur chains to substitute private labels for
national brands. Unable to offer lower prices to consumers on
national brands and rendering fewer services, chain stores will
find it necessary to appeal to the bargain hunting instincts of
consumers by featuring their own private brands at apparent
reductions.

Net Effect of Recent Legislation. The object of the recent
wave of marketing legislation has been quite definitely to increase
the influence and competitive position of the independent
merchant and, despite certain warnings to the contrary, there
appears to be little likelihood of failure to accomplish this end.
Deprived of certain purchasing and price-cutting advantages, the
big distributor will no longer be the unconquerable competitor he
has been in the past. The small business man will find wider
opportunities in the field of distribution, and emphasis on size will
tend to be diminished.

Less discrepancy between chain and independent prices on
identical goods appears to be a logical result of the new laws. If
effectively enforced, the Robinson-Patman Act will remove some
of the unfair concessions chain stores exacted from manufacturers,
and it is entirely probable that independents will be able to buy
at better prices than they have in the past. Likewise, the fair-
trade laws tend to equalize prices, but in this instance it may be at
the consumer's expense. Present indications point to higher
prices for national brands in an attempt to keep independent
merchants in business. Whether consumers will fare better by
paying somewhat higher prices for the privilege of retaining the
social and other benefits of a competitive economy that is dotted
by numerous small business enterprises is for the future to
determine.

CHAPTER XVIII

FACING THE CHAIN STORE PROBLEM

At long last we are now in a position to face the chain store
problem squarely. Supported by an objective approach to the
problem and by all the reliable facts that could be mustered to
throw light on it, we are perhaps better fitted to pass judgment
on the various solutions that have been presented from time to
time than are those who are either biased in their point of view or
are unsupported by factual evidence. Having no axe to grind,
it is much simpler to present both sides of the question, to express
opinions warranted by facts and sound logic, and to let the chips
fall where they may.

To repeat, the chain store problem, as viewed in this volume,
is largely a question of what the public policy shall be; of what
attitude government, which is the public arbiter, shall adopt
toward chains. In essence, it resolves itself into a series of ques-
tions such as the following: Shall chain stores be let alone?
Shall they be completely eliminated from our economic system?
Shall they be regulated like the public utilities and certain trans-
portation agencies? Or shall they be permitted to function under
certain restrictions? If any restrictive legislation is found to be
desirable or essential, what principles might govern such legisla-
tion and how far may it go without serious handicaps to the
public? In this final chapter an attempt will be made to supply
some answers to these questions and to indicate the line of reason-
ing on which they are based and the extent to which those
answers suggest themselves from the analysis presented in the
preceding chapters of this book.

Let Chains Alone. In many quarters it is argued that no
interference whatsoever is necessary and that chains must not be
singled out over other types of retailing for any punitive or
restrictive legislation. Persons favoring this position invariably
regard any legislation against the chains as punitive, regardless of
whether it is intended as such. In support of their position, they

290

FACING THE CHAIN STORE PROBLEM 291

cite a number of benefits and blessings which the chains have
brought to the people of the United States and call attention to
the contribution which they have made to the efficient develop-
ment of distribution in this country.

Those who oppose any interference with the normal functioning
of this distribution giant claim that chain stores, through their
large organizations, are in a position to offer systematic help to
the farmer in marketing the latter's products. They can move
surplus crops through mammoth advertising campaigns and by
placing special sales emphasis on commodities on which a glut is
threatened. They also help the farmer, because they tend to
promote cooperative marketing of farm products, for it is much
easier for chains to work out arrangements with such groups than
with individual farmers. It is a relatively simple matter for a
few chain executives to confer with a few farm leaders and effect
agreements that are of benefit to the farmers.

It is alleged that chain stores are an equal blessing to the
manufacturer. Mass production in the United States is depend-
ent to no small degree upon the consumer's ability and, perhaps,
also willingness to absorb the increased output. This is, in turn,
greatly facilitated by the effective distribution mechanism which
the chains have developed. Mass distribution not only makes
possible but further extends the opportunities of mass production.
Furthermore, through their tremendous advertising appropria-
tions which run into the hundreds of millions of dollars, chains
exert a great influence over the purses of millions of consumers.
They may thus popularize manufacturers' brands and reduce the
need for the manufacturers' advertising and sales promotional
work. At the same time, they offer a ready market for the
manufacturer and an exceptionally good credit risk. Finally,
through their advance buying, chains presumably exercise a
stabilizing influence on industry.

Chain stores are also alleged to be a blessing to the various
communities in which they choose to locate their units. They
enlarge the trading areas of the small town, attract business from
the surrounding territory, and build trade for the community.
Independents share in this trade as well as the chains. They
benefit the community in still another way. A substantial part of
their annual receipts is spent in the localities in which the chain
units operate. Some of it is spent for wages, some in rentals paid

292 THE CHAIN STORE PROBLEM

to local landlords, some in local newspaper and handbill advertis-
ing, and the remainder for other expense items locally incurred.

It is even claimed that one of the greatest beneficiaries of the
chains are the independents who are supposed to be hurt
the most. Chains have fostered cleanliness and sanitation in the
stores, courteous treatment of customers, and the application of
scientific management to retailing. They put a premium on
efficiency and a prize on better methods and improved techniques
for the performance of the retailing functions. All retailers are
said to have benefited from the process. In order to remain in
business, the alert and aggressive independent merchants learned
from their new rivals and profited by their example. They
remodeled and modernized their stores, simulated chains in their
merchandising techniques, formed cooperative buying and
advertising groups, and finally many of them joined voluntary
chains.

But the consumer is said to have benefited most from the chain
method of distribution. He is supplied with fresher merchandise.
This is made possible by the more rapid stock turnover in chain
stores and through more scientific selling practices. Emphasis is
placed on dependable quality in merchandise. The tremendous
buying organization of the chain brings the most desirable goods
from every corner of the world to the smallest towns in which
they do business. And all this is accomplished at a lower cost,
which results in lower prices to consumers. It is claimed that the
savings effected through these lower prices approximate three-
quarters of a billion dollars a year and indirectly amount to much
more through the lower prices charged by competing independent
stores which are forced to follow the example of the chains.

Thus runs the argument against any interference with chains.
Chain stores, it is asserted, have benefited the farmer, the manu-
facturer, the retailer, and the consumer and have helped rather
than hampered the development of small communities. These
stores have been with us from time immemorial; they are a
venerable institution. They have revitalized the American dis-
tributive structure and substituted efficient mass distribution for
the older middleman system which has long outlived its usefulness.
In the last analysis, proponents claim, the value of chain stores
depends upon the savings effected for consumers. From that
standpoint, they are indeed great public benefactors, as already

FACING THE CHAIN STORE PROBLEM 293

shown in Chaps. VII and VIII, where prices charged by chains
are compared with those prevailing in independent stores. Con-
sequently, they should be let alone to function in a free and
untrammeled competitive system.

Just how much truth there is in these claims in favor of chain
stores can be gleaned from a careful study of the material pre-
sented in the preceding pages of this volume. Obviously, most
generalities are inaccurate and frequently false. It is altogether
too presumptuous to assume that the chain method of distribu-
tion has a corner or even a plain monopoly on efficiency. We
have had efficient distribution since long before the chains devel-
oped to any extent. Retailing, as well as other parts of our
distributive system, have been in a constant state of flux for
many years. Both the mail order house and the department
store marked specific stages of progress when they came to the
front. Before them, the specialty store was an improvement
over the general store, and the latter was a decided improvement
over the old trading post. It is therefore preposterous to assert
that before the advent of chain stores the retailing system was
dominated by inefficient merchants. While those merchants
may be regarded as inefficient, in terms of present-day standards,
such is not necessarily the case when they are viewed in the
proper time perspective. There is probably as much difference
in appearance and in merchandising efficiency between the chain
store of today and its early predecessor as there is between the
modern independent and his brother of yore.

From the facts presented in earlier chapters it appears that the
truth and validity of many of the statements made by chain
store advocates in favor of a let-alone policy may be seriously
questioned. Further light on this point will be shed by the brief
discussion in this chapter of the position taken by persons who
would like to have the chain system completely outlawed. Even
when the above statements in defense of the chains are taken at
face value, the wisdom of a let-alone policy is yet to be estab-
lished, for the benefits cited represent but the sunny side of the
chain store situation. There is, however, also a darker aspect.
Chain stores are alleged to possess certain undesirable features
that are definitely detrimental to the public and disruptive of an
otherwise wholesome distributive system, especially if certain of
the abuses that have grown about the chain method of operation

294 THE CHAIN STORE PROBLEM

are left unchecked. There is, for example, the possession of
monopolistic power in some cases and a definite trend toward
monopoly in the chain system as a whole. Then there are the
bad effects of absentee ownership and control, a tendency to
lower wage standards and limiting the employment opportunities
of white-collar workers, and a strong tendency to stifle individual
economic opportunity. Above all, there are certain abuses of
which chains have been found guilty, such as clubbing manufac-
turers into giving them unwarranted discounts and allowances of
various kinds. Similarly, it is claimed that chains have been
escaping their just share of certain taxes and community obliga-
tions. It is this liability side of the chain's position that
makes a let-alone or laissez-faire policy undesirable and
impractical.

Legislate Chains Out of Existence. At the other extreme is to
be found a growing demand for the outlawry of chain stores.
Advocates of this radical procedure place much of the blame for
the depression, which began in 1929, at the door of chain stores.
They assert that this country has had depressions before, but
each time the people extricated themselves from the economic
difficulties without any substantial assistance from the govern-
ment. Not so during the last depression. Not only was this
depression the deepest ever experienced but, despite our gigantic
efforts and the enormous aid given by the Federal government, it
has yet to be conquered. Millions of persons are still on relief,
the ranks of the unemployed are still long and thick, poverty
stalks in our midst, and hunger, misery, and destitution are
characteristics of the times in a land of "milk and honey. 7 ' The
so-called "chain store evil" is blamed for much of this suffering
because chain stores are alleged to have disrupted our normal
economic organization.

Specifically, it is charged that the nonresident ownership and
operation of the stores by chains have been a disruptive influence
in the life of the community. The economic opportunities of
independent merchants and other middlemen have been seriously
curtailed. Not only that, but the very economic life of the typi-
cal American community is threatened through the nonsupport
by the chains of local industry and other sources of merchandise
supply, through their failure to employ local attorneys for the
legal work, through their refusal to patronize local insurance

FACING THE CHAIN STORE PROBLEM 295

agents, and through the nonuse of the services of many other
professional groups and mechanical trades.

A considerable part, and sometimes all, the work is done from
some centralized point. Merchandise is purchased from distant
sources; equipment, such as typewriters, scales, refrigerators, and
the like, is bought from the headquarters of the producer instead
of from the numerous local dealers of these commodities. Fire
insurance for all stores is placed with a single organization;
delivery trucks and company automobiles are bought from a
single source, possibly direct from the factory; one firm of
attorneys handles all or most of the company's business; and
local people are denied the opportunity to share in the profits
earned by the units of the chains that operate in their respective
communities. Similarly, chains escape some of the obligations
to the various civic and religious organizations of the communities
in which their stores are located, although in recent years more of
them have been encouraging their local managers or at least the
district managers to participate more actively in civic affairs and
to contribute more liberally to the churches, the community
chest, and other worthy causes.

Chain store opponents argue that farmers are harmed rather
than benefited by the chain, that they are made to depend too
much upon a single outlet or a very limited number of outlets.
In some cases, the chains are so powerful in their domination of
the market that they can dictate the price the farmer may
receive for his products. Even when two or three powerful
chains operate in a given market, it still is possible through some
understanding among the chain store buyers to dictate the price
to the farmer. Such allegations have come to the authors' atten-
tion on numerous occasions. For example, without the assist-
ance of the three most important chains in a certain Midwestern
city, the local apple crop cannot be sold successfully. Sometime
ago it was alleged that the buyers of all three chains offered about
the same price and insisted upon the same conditions of pack and
delivery, even though such conditions worked a hardship on
the farmers. By the same token it is possible for chains to
cooperate with the farmers in moving crops on advantageous
terms to the growers. Not only may the chain stores dictate the
price to the farmer, but they generally set the price which the
independent is willing to pay in order that he may compete with

296 THE CHAIN STORE PROBLEM

his rival. In some cases, chains have even gone into farming,
thereby entering into direct competition with the farmer. Fur-
thermore, to the extent that chains have destroyed or minimized
economic opportunities to our citizens they have been responsible
for a decrease in the demand for farm products.

Many other charges are made against the chains in arguing for
their elimination. Practically all of them have been discussed in
earlier chapters of this book. Suffice it at this juncture to
catalog but a few of them. Chains tend toward monopoly. In
fact, in some communities and in certain lines of business, they
may have already attained a semi-monopoly. They pay low
wages; do not share in the local tax burden; increase unemploy-
ment by lessening the need for traveling salesmen and employees
in wholesale houses, hotels, and railroads; impoverish local com-
munities by taking money out of town and sending it to the larger
cities; resort to the use of loss leaders, a practice that is deceptive
to the public and detrimental to the manufacturer whose product
is used as bait; sharpen lines of class distinction by causing bitter
feeling against big business and "wallstreeters." Above all,
there is antagonism to the chain system because it has lessened
the economic opportunities for ambitious men who would like to
engage in businesses of their own, thereby turning us into a nation
of clerks and employees.

That there is much bias in the above contentions goes without
question. The reasoning on some of the points is utterly fallaci-
ous and in others will stand some scrutiny. Nevertheless, there
is some truth in those allegations. Indeed, the detrimental effect
of chains in certain quarters must be readily acknowledged. But
to say that this justifies the outlawing of the chain institution is
carrying the idea beyond reason. In addition to the liability side
there is also an asset position which must be taken into considera-
tion. Only the naive and unsophisticated can argue that chains
are thoroughly bad. The numerous and substantial benefits
traceable to the chain method of doing business cannot be over-
looked. There is no question but that chains have helped to
reduce the waste in distribution, sharpened competition, weeded
out the inefficient independents, improved the trading position of
many communities, given the consumer fresher goods in wider
assortments and at lower prices, encouraged the use of package
goods, and introduced many improved methods and techniques

FACING THE CHAIN STORE PROBLEM 297

into retailing. For these various reasons, any attempt to outlaw
the chains, even though it may be legally possible, should be
frowned upon. It is even more preposterous to think of such
action than it is to leave the chains to their own devices.

Regulate the Chains. A somewhat milder attitude on the part
of chain store opponents is expressed in a desire to regulate
chains, largely with a view toward curtailing their growth and
multiplication of units. Another aim in such regulation is to
reduce some of the advantages which chains enjoy in order to
make competition for the independent more tolerable. Essenti-
ally the same arguments are made in favor of regulation as are
advanced in favor of their complete abolition.

That it would be economic folly to attempt to outlaw the
chains has already been intimated. It would also set a bad
precedent and serve as a boomerang to other types of retailing
in the future. A similar position must be taken in regard to any
effort to curtail the further development of chains or to handicap
them through too much government regulation. All regulation
is largely negative. Whatever rules are laid down to prevent
abuses tend to inhibit business. Furthermore, unlike public
utilities supplying gas, electricity, water, or telephone service,
chain stores have not yet reached the monopoly stage. While
they may possess tendencies toward monopoly, there is so far,
with possibly a few exceptions, little evidence of monopoly con-
trol. Even in cities and in lines of business in which the chains do
the lion's share of the business, the trade is shared by several com-
peting chains. When these competing chains combine and begin
to exercise control over prices charged to consumers, then govern-
ment regulation may become inevitable. It is true that in certain
cases, chains may be regarded as monopolies de facto, if not de jure,
because a given business may be dominated by one or two large
concerns in a given geographic area. Moreover, if the trend
toward larger and larger chains continues, and if chains are
allowed to integrate their retailing and wholesaling operations
with manufacturing (a privilege denied the large meat packers on
the ground that it tends toward monopoly over the food busi-
ness), the time may come where a strong tendency toward monop-
oly may give way to actual monopoly. To prevent them from
taking undue advantage of the public, they may then have to be
effectively regulated and their operations subjected to the light

298 THE CHAIN STORE PROBLEM

of full publicity as are the railroads and various public utilities.
The threat of such an occurrence is not immediate. Conse-
quently, there is even less justification for the government regula-
tion of chain stores than there is for the regulation of the steel
business, sugar refining, copper production, or petroleum refining.

Eliminate Abuses of Chains. A saner approach to the chain
store problem would seem to lie in an attempt to retain all of the
advantages of chain store operation for the benefit of consumers
and the public at large, without having to suffer from the abuses
which have grown about that system of merchandising. As long
as the superiority of the chains is due to inherent efficiency or to
better management and operation, and as long as we profess to
adhere to a competitive system of economy, there can be no
quarrel with the chains. It then becomes a matter of the survival
of the fittest. But when superiority is achieved through foul
means and undeserved advantages, fairness in competition dis-
appears, and the government must step into the picture to insure
fair play.

That the chain stores have been guilty of a number of unfair
practices is now a matter of common knowledge. What is
needed is to make these ethically unfair practices definitely illegal.
Such was the intent of the Robinson-Patman Act discussed in
some detail in the preceding chapter. It aims to eliminate the
unfair advantages which the chains have enjoyed largely because
of their tremendous size and superior bargaining position, includ-
ing excessive discounts in the form of price reductions, secret
rebates, special allowances for advertising and other alleged
purposes, and unearned brokerage fees. The fair-trade laws,
already enacted by 42 states, although of less merit than the
Robinson-Patman law, aim at the loss-leader selling policy so
vigorously pursued by chains. It is believed that the direction
will be along the line of more, rather than less, restrictive legisla-
tion, especially if attempts are made to circumvent the type of
legislation referred to above. It would seem, further, that such
legislation, particularly when it aims to eliminate abuses, is not
only fully justified but may stave off more radical action against
the chains. The majority of the people of the United States still
respect the gains made in a sportsmanlike fashion but may be
moved to drastic action if the rules of the game are disregarded
and fair play is abandoned.

FACING THE CHAIN STORE PROBLEM 299

Equalize Chain Store Inequities. It is often argued that chain
stores do not pay their proper share of the local taxes. This is
especially true of property taxes, because chains carry smaller
inventories, because these inventories are priced at cost (which
does not include any wholesaling margin or transportation cost
as in the case of independent retailers), and because it is difficult
if not impossible for the local tax assessor to examine the books
of the chain which may be in a different city or state. To the
extent that this is true, the inequity may be wiped out by some
special tax which applies only to chains or which applies to them
in a larger measure. Among the other alleged inequities is the
unequal burden carried by chains and independents in the main-
tenance of certain civic institutions and activities. For this,
too, a somewhat higher tax may be imposed upon chains. One
may even go so far as to state that special chain store taxation is
justified on the ground that the chains are more able to pay taxes
than are the independents. Our income tax measures follow
very definitely the principle of taxation according to ability to
pay; hence, the rate progresses as the income increases. The
validity of this latter position has been well established by the
several decisions of the United States Supreme Court, as explained
in detail in Chap. XVI.

There seems to be nothing essentially wrong with a special
chain store tax as long as it is scientifically constructed either for
the purpose of equalizing some of the tax differences existing
between chains and independents or for equalizing some of the
differences in the contributions to community and other essential
public undertakings of the locality. While such a tax may be
equally justified on account of the chains' superior ability to pay
taxes, it is believed that a better approach to that problem may
be had when all businesses with similar ability to pay are con-
sidered rather than singling out the chains for the purpose. Not
only are the present state taxes aimed at chains crudely con-
structed from this standpoint, but they make no distinction
between the different kinds of business. As shown in Chap. IX,
sales per store vary considerably with the different kinds of busi-
ness in which chains operate. For the year 1936, for example,
the average sales per store for a group of grocery chains for which
such data were available were approximately $70,000, while those
for shoe chains were about $51,000, but for drug chains the aver-

300 THE CHAIN STORE PROBLEM

age sales per store were in excess of $132,000, and for variety
stores they exceeded $177,000. An even greater variation is
shown for the net profits per store for the chains operating in
different kinds of business. During the year 1936, for instance,
the average net profits per store operated by a group of grocery
chains, for which data were available, were $838; for shoe chains
they were $2,416 per store; for drug chains they amounted to
$6,582 per store; and variety chains cleared a net profit per store
of $14,014. To disregard such differences in sales and profits per
store in any chain store tax is to place an inequitable burden on
some chains and to give favored treatment to others. A much
sounder plan would be to vary the amount of the tax with the kind
of business in which the chain store operates. That such a tax
would stand the test of constitutionality is quite clear, for the
same reason that certain kinds of retailings, such as gasoline
stations, have been exempted from some of the chain store taxes
and such action has received the approval of the Supreme Court.

Most of the chain store taxes must also be criticized because
they tend to ignore the superior advantages of the long chains
over the shorter ones. From this standpoint, the Louisiana law
which has already been declared constitutional is superior to the
other types of legislation, for it takes cognizance of the fact that
the large chains have greater ability to pay taxes, and, hence, the
tax rates, while applying only to the number of stores within the
state, are based upon the total number of units in the chain any-
where in the United States. Even the Committee on Taxation
of the Twentieth Century Fund, Inc., which is opposed to any
kind of chain store taxation, favors the Louisiana type of law over
the others. 1

Chain store taxes are often used for other purposes than equaliz-
ing certain inequities. At times they are resorted to in order to
curtail chain growth or even to eliminate these institutions.
This would seem to be an abuse of the system of taxation, at least
from an economic point of view. The new Georgia Chain Store
Tax Act, in addition to taxing regular chains up to $200 per store
for all stores over 40 and smaller amounts for the chains with
fewer units, provides a license fee of $2,000 upon one store which
is operated " collateral to, and in conjunction with the operation

1 " Facing the Tax Problem," pp. 186, 504, Twentieth Century Fund, Inc.,
New York, 1937.

FACING THE CHAIN STORE PROBLEM 301

of a mail-order or catalogue sales type of business. " For a
chain of two such stores, the license fee is $4,000 per year per
store, and for such chains with more than four stores each, a
license fee of $10,000 per store is provided. Obviously, this type
of license tax is aimed at the elimination of a combination of
mail order business with over-the-counter selling. It is indica-
tive of what may happen when the legislatures learn how far
they can go with special-interest tax measures. It is legislation
of the boomerang type and may in time injure the very people
who are instigating such measures at present.

One must also look askance at any attempt by taxation to
equalize whatever economic advantages the chain stores possess.
To do so is tantamount to freezing our economic mechanism and
to deprive the consuming public of the benefits which improved
methods and superior management make possible. This is
contrary to the spirit underlying a competitive regime and is
definitely inimical to progress and advancement in our standard
of living. If an attempt were made to equalize competitive
advantages, no sooner would the chain store situation be in hand
than the same forces would clamor for similar legislation against
supermarkets, which are even more efficient than the regular
chains from the standpoint of cost of operation and lower prices
to consumers.

Summary. The period of vituperative denunciations of the
chains on one hand and bitter rejoinders to the independents'
charges on the other is definitely on the wane. Sheer vociferous-
ness must give way to reasoned argument. An armistice must
be declared to the battle of unfounded allegations. Neither the
chains nor their opponents have much to gain by a misrepresenta-
tion of facts or misinterpretation of actualities. The time has
come for a sane consideration of the problem. Allegations must
be based on facts facts scientifically obtained and objectively
presented.

If it is felt that chain stores evade certain taxes to which
independents are subject, the nature and extent of the evasion
should be factually and objectively determined. It may well be
that certain other taxes, aside from the so-called " discrimina-
tory" chain store taxes, may be imposed on chains from which
independents may be totally or partially exempt. These added
tax burdens may more than offset the savings incident to certain

302 THE CHAIN STORE PROBLEM

alleged tax evasions or exemptions. All this can be determined
only through carefully designed and properly executed sample
surveys and studies of the tax situation relating to chains and
their independent competitors. Similarly, if it is felt that chains
escape certain responsibilities to the community from which they
derive their business, the extent of such difference should be
ascertained instead of engaging in a battle of words which is
bound to arouse public sentiment one way or another, probably
against the chains.

A sane and constructive approach to the problem is sorely
needed. There is no question but that chains have carved for
themselves a definite niche in our economic system. The public
must not be deprived of the many benefits which inure from their
operations. But the same public must be equally protected from
certain evils and abuses which the chains have brought with them
in order that the benefits may be enjoyed over a long period of
time. Furthermore, it must be borne in mind that the social
effects of a business organization are fully as significant as are the
purely economic consequences. On this score, an enlightened
public opinion is the need of the hour. It is the only safeguard
against further punitive legislation and rash action and affords
similar protection for the consumer against unfair practices and
abuse.

APPENDIX A

SURVEY OF RETAIL PRICES OF CHAINS AND
INDEPENDENTS

GROCERY STORE SCHEDULE

Name of Concern-
City

Address-
County_

Chain
Canvasser-

No, of Branches-

Independent

Date.

(Signature)

Brand or grade

Unit

Unit
price

Com-
bina-
tion
price

Cliquot Club Ginger Ale (Pale)

Pint btl.

Sunsweet Prune Juice

Quart btl.

Grape Juice

Pint

Blue Ribbon Malt Syrup

3-lb. can

Maxwell House Coffee. .

1-lb. can

Sanka Coffee

1-lb. can

Ovaltine

Small can (6 oz.)

Chase & Sanborn Coffee

1-lb. pkg.

Instant Postum

4-oz. can

Lipton's Yellow Label Tea

K-lb. box

Banquet Tea

34-lb. box

Hershey's Cocoa

3^-lb. can

Baker's Cocoa

3^-lb. can

Walter Baker's Premium Chocolate

H-lb. bar

Water Ground Meal

5-lb. bag

Aunt Jemima Pancake Flour

1%-lb. box

Swansdown Cake Flour

2%-lb. box

Mother's Oats

20-oz. box

Quick Quaker Oats

20-oz. box

Quaker Puffed Wheat

3^-oz. box

303

304

THE CHAIN STORE PROBLEM

Brand or grade

Unit

Unit
price

Com-
bina-
tion
price

Quaker Hominy Grits. . . .

24-oz. box

Cream of Wheat

28-oz. box

Wheaties . . . .

Pkg.

Post Toasties

8-oz. box

Grape Nuts . .

12-oz. box

Grape Nut Flakes

7-oz. oker.

Heinz Rice Flakes

Pkg.

Kellogg's All Bran

11-oz. pkg

Shredded Wheat

12-biscuit box

Skinner's Macaroni

7-oz. box

Skinner's Pure Egg Noodles

4-oz. box

Mueller's Spaghetti

8-oz. Dkff.

Kellogg's Corn Flakes. . .

8-oz. pkg.

Skinner's Raisin Bran

Pkg.

Wesson Oil . ...

1-pt. can

Lea & Perrins Sauce . . . ....

5-oz. bottle

Pompeian Olive Oil

8-oz. btl.

Ritter's Catsup . .

14-oz. btl.

Heinz Catsup

14-oz. btl.

Campbell's Pork & Beans

16-oz. can

Standard Pork & Beans.

16-oz. can

Franco- American Spaghetti
Ritter's Spaghetti

15%-oz. can
15J^-oz. can

Campbell's Tomato Soup . . .

lOJ^-oz. can

Pet Milk

6-oz. can

Golden Key Milk (tall)

Can

Borden's Eagle Condensed Milk.

15-oz. can

Libby's Corned Beef

No. 1 can

Armour's Corned Beef . . ...

No. 1 can

Red Salmon (Argo)

No. 1 can

Pink Salmon "Standard"

No. 1 can

Gorton's Fish Cakes

Can

Gorton's Flaked Fish

Can

Calo Dog Food

Can

Victory Dog Food

Can

Armour's Tripe

No. 2 can

APPENDIX A

305

Brand or grade

Arm & Hammer Soda 8-oz. box

Rumford Baking Powder 12-oz. can

Calumet Baking Powder 1-lb. can

Crisco Vegetable Shortening 1-lb. can

Snowdrift Vegetable Shortening 1-lb. can

Brer Rabbit Molasses (gold label) iM-lb. can

Karo Syrup (red label) lK-lb. can

Log Cabin Syrup Table can

Jello Pkg.

Argo Corn Starch 1-lb. pkg.

Staley's Gloss Starch 8-oz. pkg.

Argo Laundry Starch 8-oz. pkg.

Minute Tapioca. ... 8-oz. box

Sun Maid Raisins, seeded 15-oz. box

Certo 8-oz. bottle

Morton's Salt 26-oz. pkg.

Hershey's Almond Bar 5ff bar

Wrigley's Gum 5ff pkg.

Domino Granulated Cane Sugar 2-lb. carton

Domino Confectioner's Sugar 1-lb. carton

Fancy Blue Rose Rice 5-lb. bulk

Choice Navy Beans Per Ib. bulk

Dried Lima Beans Per Ib. bulk

Dried Prunes 70/80 Per Ib. bulk

Sunsweet Prunes 1-lb. pkg.

Blackeyed Peas Per Ib. bulk

Granulated Sugar Per Ib. bulk

Wisconsin Full Cream Cheese, Mild Per Ib.

Libby's Apricots, Regular No. 1 can

Libby's Pears No. 2J^ can

Libby's Peaches Sliced No. 1 can

Libby's Peaches Halves No. 2% can

Libby's Pineapple Sliced No. 2 can

Del Monte Sliced Pineapple No. 2 can

Broken Sliced Pineapple " Standard " No. 2% can

Del Monte Peaches No. 2^ can

Unit

Unit
price

Com-
bina-
tion
price

306

THE CHAIN STORE PROBLEM

Brand or grade

Unit

Unit
price

Com-
bina-
tion
price

Libby's Spinach No. 2 can

Del Monte Spinach No. 2 can

Spinach "Standard" No. 2 can

Picnic Asparagus Picnic tin

Peas (Early June) " Standard" No. 2 can

Libby's Sauerkraut No. 2^ can

Tomatoes "Standard" No. 2 can

Corn "Standard" No. 2 can

Pumpkin "Standard" No. 2% can

Lifebuoy Soap Bar

Palmolive Soap Bar

Ivory Soap Medium bar

P & G Naphtha Soap Large bar

Lux Toilet Soap Bar

Lux Flakes Small box

Chipso Small pkg.

Chipso Large pkg.

O. K. Soap Small bar

Rinso Small pkg.

Supersuds Pkg.

Bon Ami Box

Old Dutch Cleanser Box

Saniflush 12-oz. tin

Waldorf Toilet Tissue . . Roll

Scot Tissue Paper. . . Roll

Drano . . . 12-oz. tin

Camel Cigarettes Carton (200)

Old Gold Cigarettes . . Pkg. 20's

Chesterfield Cigarettes . Pkg. 20's

Prince Albert Tobacco 1 can

Blue Ribbon Mayonnaise 1-pt. jar

Bread (Ward's) 1-lb. loaf

Rolls (Ward's) 1 doz.

Kraft's Miracle Whip Salad Dressing . . . 1-pt. jar

N.B.C. Uneeda Biscuit 5# box

N.B.C. Lemon Snaps 5^f box

APPENDIX A

307

Brand or grade

Unit

Unit
price

Com-
bina-
tion
price

N.B.C. Zuzus 5^ box

L. W. Chocolate Snaps 5?f box

L. W. Vanilla Wafers 5?f box

Clover Farm Butter 1 Ib.

Brookfield Butter 1 Ib.

Libby's Apple Butter 28-oz. jar

"Standard" Peanut Butter (Picnic) 2-lb. jar

Beech Nut Peanut Butter 1-lb. jar

Rosemary Grape Jam 16-oz. jar

Whitehouse Vinegar Quart btl.

Whitehouse Vinegar M~g a ^- btl.

Whitehouse Vinegar . . . . . . . . 1-gal. btl.

Best Foods Bread & Butter Pickles Jar

French's Mustard 6-oz. jar

Climalcne Small pkg.

Bisquick 2%-\b. pkg.

Black Flag Insecticide Pint

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Commodities

All commodities 6 . . .

Bakery products:
Bread (Ward's)

Rolls (Ward's)

N.B C.Uneeda Bis-
cuit

N.B.C. Zuzus . . .
L. W. Chocolate

Snaps
L. W. Vanilla

Beverages:
Cliquot Club G i n-
ger Ale (Pale) . . .

308

APPENDIX B

309

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Commodities

Kellogg's Corn
Flakes
Skinner's Raisin
Bran
anned fruits and

vegetables:
Libby's Apricots,
Regular

Libby's Pears
Libby's Peaches,

Sliced
Libby's Peaches,

Halves
Libby's Pineapple,

S 2

apple, Sliced . . !
Del Monte Peaches
Libby's Spinach .

Del Monte Spinach

Picnic Asparagus .
Libby's Sauerkraut

APPENDIX B

311

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Other canned goods:
Campbell's Pork

and Beans ...
Standard Pork and
Beans

Franco- American
Spaghetti

Ritter's Spaghetti. .
Campbell 's Tomato

Golden Key Milk
Tall

ni i inL

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pq ^ < A U > rt

Karo Syrup (Red
Label)
Log Cabin Syrup . .
Condiments and salad

dressings:
Wesson Oil

Lea and Perrin's
Sauce
Pompeian Olive Oil

Ritter's Catsup . .
Hemz Catsup

312

STORE PROBLEM

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Commodities

Morton's Salt
Blue Ribbon May-
onnaise
Kraft's Miracle

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APPENDIX B

313

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315

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APPENDIX C

SURVEY OF RETAIL PRICES OF CHAINS AND
INDEPENDENTS

Name of Store-
City

DRUGSTORE SCHEDULE

Address

County

Chain
Canvasser.

No. of Branche

Independent

Date.

Com-

Brand

Unit

Unit
price

bina-
tion

price

Drug Items

Scott's Emulsion
Borden's Malted Milk (powder)
Doan's Pills
Aromatic Cascara Sharpe and Dohme

6^-oz. btl.
1-lb. can
$0.75 size
4-oz. btl.

Pepsodent Antiseptic
Phillips' Milk Magnesia
Listerine
Bayer's Aspirin Tablets

16-oz. btL
12-oz. btl.
3-oz. btL
24 to btl.

Bayer's Aspirin Tablets
Feenamint
Ex-lax
Kelp-A-Malt Tablets

100 to btl.
$0.25 box
$0.25 box
$1.25 size

Syrup Pepsin
Edwards Olive Tablets
Nature's Remedy Tablets
Russian Mineral Oil

$0.60 size
$0.60 size
$0.50 size
32-oz. size

Hinkle's Pills (U.S.P.)
Fletcher's Castoria
Bromo Seltzer
Anacin Tablets

100 to btl.
$0.40 size
$0.60 size
50 to btl.

316

APPENDIX C

317

Com-

Brand

Unit

Unit
price

bina-
tion

price

Drug Items (Continued)

Syrup Figs (California)
Kruschen Salts
Zonite
Inner Clean

$0.60 btl.
$0.85 size
$0.60 size
$0.50 size

Adlerika
Pluto Water
Mexican Heat Powder
Ammens Heat Powder

16-oz. btl.
Large btl.
$0.30 can
$0.30 can

Ovaltine
Sloan's Liniment
Absorbine Jr.
Lavoris

$0.85 can
$0.35 size
4-oz. btl.
4-oz. btl.

Scholl's Zino Pads (corn)
Petrolagar
Cuticura Ointment
Cuticura Soap

$0.35 size
$1.25 size
$0.30 size
$0.30 size

Carter's Little Liver Pills
Bellans
Mentholatum
Resinol Ointment

40 to btl.
30 to btl.
Small jar
1^-oz. jar

Unguentine
Vick's Salve
Cystex Compound
Father John's Medicine

l-o z. tube
$0.35 jar
48 to box
4M-oz. btl.

Swamp Root
Grove's Bromo Quinine Tablets
Newbro Herpicide
Wine Cardui

$1.15 btl.
30 to box
8-oz. btl.
$1.00 size

Black Draught
Liquid Arvon
Myeladol
Six-Sixty-Six Liquid

$0.25 size
$1.00 size
$2.00 size
$0.25 size

318

THE CHAIN STORE PROBLEM

Com-

Brand

Unit

bina-

price

tion

price

Drug Items (Continued)

Grove's Chill Tonic
Wampole's Cod Liver Oil
Super D.
Sal Hepatica

$0.50 size
$1.00 size
8-oz. btl.
$0.60 size

Lydia Pinkham's Vegetable Compound
Pierce's Favorite Prescription
S.S.S.
Musterole

$1.50 size
$1.25 size
$1.25 size
$0.35 jar

Capudine
Pertussin
Pinex
Dextri-Maltose No. 1

$0.60 btl.
4-oz. btl.
$0.65 size
$0.85 can

Horlick's Malted Milk
Vince
Corega
B.C. Headache Powders

$1.00 size
$0.75 size
$0.35 size
$0.25 size

Squibb's Mineral Oil
Squibb's Castor Oil
Squibb's Cod Liver Oil
Vinol

16-oz. btl.
3-oz. btl.
12-oz. btl.
11-oz. btl.

Blue Jay Corn Plasters (6)
Sargeant's Pepsin
Seidlitz Powders

Box
20 to box
10 to box

Toilet Items

Ayer's Face Cream
Coty's Cold Cream
Hudnut's Three Flowers Vanishing Cream
Chesebrough Camphor Ice

$1.65 size
$1.00 size
$0.55 size
IJ^-oz. stick

Squibb's Magnesia Dental Cream
lodent Tooth Paste
Pepsodent Tooth Paste
Listerine Tooth Paste

Regular tube
Large tube
Large tube
$0.25 tube

APPENDIX C

319

Com-

Brand

Unit

Unit
price

bina-
tion

price

Toilet Items (Continued)

Forhan's Tooth Paste
Ipana Tooth Paste
Pebeco Tooth Paste
J. and J. Dental Floss

Large tube
$0.50 tube
$0.50 tube
$0.10 size

Angelus Rouge
Princess Pat Rouge (metal)
Houbigant's Quelques Fleurs Rouge
Coty's Compact Double

$0.60 size
$0.50 size
#1004 metal
#1165 box

Hudnut's Three Flowers Face Powder
Ehidnut's Three Flowers Talcum
Mennen's for Men Talcum Powder
Eau de Cologne Bath Salts

$0.75 size
Tin
4-oz. tin
#4711 jar

Coty's L'Origan Extract
Houbigant's Quelques Fleurs Extract
Cheramy Brilliantine, April Showers
Mum

$1.00 size
$1.00 size
#341 bottle
$0.35 size

O-Do-Ro-No
X-Basin Depilatory Powder
Fitch's Hair Tonic
Witch Hazel (double-distilled)

$0.35 size
IJ^-oz. size
$0.65 size
16-oz. btl.

Neet Depilatory
Lifebuoy Soap
Lux Flakes
Lady Esther Cream

$0.60 size
Cake
Small box
$0.75 jar

Vaseline Hair Tonic
Lyon's Tooth Powder
Junis Cream
Kotex

$0.40 size
$0.50 size
$0.50 size
12 to carton

Modess
Pond's Cold Cream
Lifebuoy Shaving Cream
Golden Glint Powder

12 to carton
$0.85 size
Regular tube
$0.25 paper

320

THE CHAIN STORE PROBLEM

Com-

Brand

Unit

Unit
price

bina-
tion

pnce

Toilet Items (Continued)

Cutex Liquid Polish Remover
Cutex Nail White
Cutex Nail Polish
Glazo Liquid Nail Polish

$0.35 size
$0.35 tube
$0.35 size
$0.30 btl.

Palmolive Soap
Palmolive Shaving Cream
Ivory Soap (Guest size)
Woodbury's Face Powder

Cake
2^-oz. tube
Cake
$0.25 size

Woodbury's Facial Cream
Woodbury's Facial Soap
Wildroot Hair Tonic
Frostilla

$0.50 jar
$0.10 cake
$0.35 size
2-oz. btl.

Jergen's Lotion
Hind's Honey and Almond Cream
J. and J. Baby Powder
Dr. West's Toothbrush Adult

$0.50 btl.
$0.50 btl.
$0.25 can
$0.50 size

Prophylactic Toothbrush
Maybelline
Italian Balm
Coty's L'Origan Face Powder

$0.50 size
$0.75 size
$0.60 size
$0.75 size

Cashmere Bouquet Face Powder
Stacomb
Mennen's Shaving Cream
Colgate's Shaving Cream

$0.25 size
Regular tube
$0.35 tube
$0.25 tube

Williams' Shaving Cream
Cashmere Bouquet Soap
Williams' Aqua Velva
Mahdeen Hair Tonic

$0.35 tube
$0.10 cake
$0.60 size
$0.60 size

Burma Shave
Lava Soap
Packer's Tar Soap
Packer's Tar Shampoo

$0.50 jar
$0.06 size
$0.25 size
$0.60 size

APPENDIX C

321

Com-

Brand

Unit

Unit
price

bina-
tion

price

Toilet Items (Continued)

Glover's Mange Remedy
Hoppers' Restorative Cream
Hudnut's Three Flowers Rouge
Hudnut's Permanent Lipstick

$0.60 size
$1.00 size
$0.55 size
#460 stick

Miscellaneous

Putnam's Dry Cleaner
Larvex (without atomizer)
Tintex, blue (box)
Lysol

6-oz. btl.
Pint btl.
$0.15 size
$0.30 size

Lysol
Black Flag Powder
Bee Brand
Flit

$1.25 size
$0.35 size
$0.25 size
Pint

Gillette Blue Blades
Ever Ready Blades
Putnam Dyes
Shumilk

5 to pkg.
5 to pkg.
$0.15 size
$0.25 size

Hygeia Nipples
Wrigley's Chewing Gum
Beechnut Chewing Gum
Luden's Cough Drops

$0.15 size
$0.05 pkg.
$0.05 pkg.
$0.05 pkg.

Hershey's Almond Bar

$0.05 bar

2 OT

Q ->

I l rf\ '""^

W fl W

o o

H W

H H
O O

. i

d o

O>U5OOOO-<OSOi"-t N -t > -*-lO>

2 2

to ooooooooooooooo

<o ooooooooooooot^oooooooooooooo

-rti

siljlil

rJ 4 S ^ ? ^ *5

322

APPENDIX D

323

i co o o co

i "* CM C* ** to "* O >

<OOOkQO^t l '^*O-*-HOvHi-icOO

t>.ooa5o>ooooosoooot^oooooo<56

> O O OO Oi - US ^

OOOOOOOOOOOO OOOCOOO OOb-OOOOOOOOOOOOO

tOi-(O<-iOOCO^f*

OO-^Olr-tOO5O5C^COOOO O -^ OO OO OS OO

^OOtOi-iiOCOWSOO^OJCO COjOOt^OJCO

COi-HOOrHCOCO

OO t^ CO t- ^H -f

OO -( -l i-t

QOOOOOt>OOOOOOQOOOOOOOOO OOOOOO*Ot>>00 OO t* OOOOOOOOOOOOOOOOOOOOOOOO

ioa < ^?5?SJ5 c ^ OOM *' rM cS

OOOCQi-i

I O OO O OO -<- O OO

1 - >Q 'X 00 rH CO C^ <

i t^- OO OO OO O OO OO

tOtCOtf5Oi-<COCO
T-O'-COOCOC5C^

l>.OOOOiCOCOOO'

SCO O CO *-H T t i
Oi OS Ql O O5

-^i CO CD CO -^ CO CO cOkOOcOcOCOCOcOCDCOcOcOCOiQ

p ^ CO O> OO CO OO CO

124

THE CHAIN STORE PROBLEM

Jli

oooooccoco gJ2J3S2$3$:><32532

00 OO OO OO OO CO OO OO OOOOOOQOOOOOOOOOOOOOOO

V t^> oo oo t* < " ^ t^ co o t> CM o o o F oo c^ J

tOiOkOtOkOCO^tO kOtAOkAtOkOU9iAio<4kA

cpcocococokococo cocococococococecococo

^ ^H r-l ~l CN *H T-t -( tHrHvH 2

' ' ' ' i i i i i 1 ; I ; I I I M

APPENDIX D

325

C4 O OO 00 CO ^* 00 OO 1O p 00 K> C<l O M9 fr O fr* ^* W p *^ ^* W 00 *^ C< CO >O O

f<c*oc4csie*-i^fi e4Oooooooc4 ooo >o M eo <o ^ t^ co ^* r e>4 e^

OOOOOOO*^I<O OOOOOOOOO O 00 OOOOkOO 00 O O O O

ootoocooooooooo oooooooooooooooooo oo <o oocoio-^rioooo to oo oo oo oo

co co to S5 io it^ o c^ o> co csi ^ *-4 eo O oo kft i>> ^M <o to u) C4 co ^ ft oo o co i^-

VH ^H

. H - g> - w - ^ ;|. d gfe a B -a il

f!l|;|

g pg g ;s rt jg a -- <- - = -- i* - -* -- * J B ja _3

l|i|||ll|&;

^SrffiSQ^^ttgC _

326

THE CHAIN STORE PROBLEM

Sll

SB &*

"2 I

OOOOOOOO9OOCOOOO OOSOOSOOOOOO

lOcoo^i icot^-to

OOOOOOOOOOOOOOl

c^cf-H^HCsieocoocooo^H <o-^coc<i-icococo

oooooooocot>.ooo

s 8

APPENDIX D

327

OOOt^OiOOOOOt^OcOOOOOOOO USOOOOOOOOOOOOOOO

ooooooooooooooooooc^ooootooooootoo (Doooooooooooooocooooooooooooo

CO-Hi-l^t*^i-HOi-t<MOOOOi^*<
OOOO5OOOJOit>-OOOOOOOOO

iCOC^OOOt^-^COCOl

;t--*eOOOsOOT-iOOI
OiOSOCOOOOiOOS

O O -< O <

SOJcOf COQJOOOQ
Tt<iO<MTt<Or-CO'-iw5

lOrHrHr-lTHCOOCDCDT-H

O OO OO O O> CD i

COOOt"COOOO'-tOi i

1 OO CO O5

oo oo t 1 ^ f^ oo i
iO CD o> oa w '

r- -H ^ o i>-

328

THE CHAIN STORE PROBLEM

oooocoooooooooooeoco

J o

relative

The price
All figures

<y
a
x

-^ ^

fill

-
b 8

CU >H o3 * ~3

o3
O ^

GO n
1 i

g-s

COoioiO^OiO
COC^COCOC^COCO

CO C5 CO

CQ <x>

t*i i
CO (M

f^ ^^ O^ t^ g O

tO CD CO 00 to i i cb
i i 00 iO C9 CO CO eg

t^-OCOr-lr-HOOOCO

rH r ( r 1

^ 2* ^r !^r - - - g

> : i IS

2 : -V 1 S

bO oo >>

pj .2

b^^I i s ? if ?

llli

329

APPENDIX F

CONSUMER BUYING-PREFERENCE SURVEY, FLORIDA

Code

Name of Consumer

Address City

1. At what type of store do you purchase most of your:

Chain Independent

a. Groceries

6. Drugs

c. Shoes

d. Women's ready-to-wear

2. Why do you buy most of your groceries at this type of store? Mark
three.

a. Lower price g. Advertising

b. Delivery h. Pleasing personality . . .

c. Credit i. Good store appearance

d. Wider selection of goods j. Sanitary and clean ....

e. Better quality k. Other (specify)

/. Convenient location

3. Why do you buy most of your women's ready-to-wear at this type of
store?

a. Lower price g. Advertising

6. Delivery h. Pleasing personality . . .

c. Credit i. Good store appearance

d. Wider selection of goods j. Sanitary and clean. . . .

e. Better quality k. Style

/. Convenient location 1. Other (specify)

4. Relief
$25.00

Monthly rental $15.00 and under
$26.00 to $50.00 I Over $50.00

$16.00 to

5. Remarks-

193_

Signature of Interviewer
330

APPENDIX G

REASONS WHY CONSUMERS BUY MOST OF THEIR

GROCERIES FROM CHAINS OR INDEPENDENTS, BY

RANK OF MENTION

Reason for preference

First
choice

Second
choice

Third
choice

Total

Reasons for buying from chains

Lower price

888

59 36

242

16.33

118

8 10

1,248

28 14

Delivery

1 14

2.83

3 29

104

2 34

Credit

1 40

1 08

\Vider selection of goods

5 21

424

28 62

330

22 65

832

18 76

Better quality

6 42

287

19 37

248

17 02

631

14 23

Convenient location . .

225

15 04

220

14 84

253

17 36

698

15 74

Advertising . .

2 87

5 06

113

7.76

231

5 21

Pleasing personality

5 48

6.21

146

10 02

320

7 22

Good store appearance

1 35

3 16

1 51

0.47

2 83

103

7.07

152

3 43

Other reasons . . t

2 54

1.82

2.68

104

2 34

Total

1,496

100 00

1,482

100.00

1,457

100 00

4 435

100 00

Reasons for buying from independents

Lower price

210

18.20

115

10.46

8.24

416

12 39

Delivery

3 55

109

9 92

7 70

235

7 00

Credit

240

20 80

118

10 74

4 08

403

12 00

Wider selection of goods .
Better Quality

39
110

3 38
9 53

102
203

9.28
18 47

106
174

9 60
15 76

247
487

7.36
14 51

Convenient location

272

23 57

220

20.02

183

16.57

675

20 11

Advertising ...

2 81

1 52

Pleasing personality

122

10 57

142

12 92

254

23 01

518

15 43

Good store appearance
Sanitary and clean

3
11

0.26
95

16
34

1.46
3 09

18
72

1.63
6 52

37
117

1.10
3 49

Other reasons

8 32

2 73

4 08

171

5 09

Total

1,154

100 00

1 099

100 00

1 104

100 00

3 357

100 00

331

APPENDIX H

REASONS WHY CONSUMERS BUY MOST OF THEIR

WOMEN'S READY-TO-WEAR FROM CHAINS OR

INDEPENDENTS, BY RANK OF MENTION

Reason for preference

First
choice

Second
choice

Third
choice

Total

Reasons for buying from chains

Lower price

436

51 05

140

16.77

11.14

668

26.56

Delivery
Credit

5
39

59
4 57

4
6

0.48
0.72

3
9

36
1.09

12
54

0.48
2 15

Wider selection of goods . . .
Better quality

72
73

8 43
8.55

249
186

29.82
22.28

143
202

17.31
24.45

464
461

18.45
18 33

Convenient location

1 64

3.11

7.51

102

4 05

Advertising

5 62

5 87

8.84

170

6 76

Pleasing personality . ...
Good store appearance . .
Sanitary and clean

22
2
1

2 58
23
12

48
19
6

5.75
2.27
72

80
25

9 68
3 03
85

150
46
14

5 96
1.83
56

Style . . .

132

15 45

11 85

124

15 01

355

14 11

Other reasons

1 17

0.73

Total

854

100.00

835

100 00

826

100 00

2,515

100 00

Reasons for buying from independents

Lower price

290

18 92

179

12 01

135

9 22

604

13 46

Delivery . . .

1 04

2 35

2 60

1 98

Credit ... ...
Wider selection of goods
Better quality ....
Convenient location
Advertising

210
169
298
53
45

13 70
11 02
19.44
3.46
2 94

74
222
431
79
58

4 96
14.89
28.91
5.30
3 89

49
187
253
60
86

3 35

12.77
17.28
4.10
5 87

333
578
982
192
189

7 42
12 88
21 88
4.28
4 21

Pleasing personality
Good store appearance .
Sanitary and clean

107
11
3

6.98
72
19

131
19

8 78
1.27
47

288
64
13

19.67
4 37
89

526
94
23

11.72
2 09
51

Style

243

15.85

226

15 16

245

16 74

714

15 91

Other reasons

5 74

2 01

3.14

164

3 66

Total

1,533

100 00

1,491

100 00

1,464

100.00

4,488

100 00

332

APPENDIX I
CHAIN STORE TAX LAWS AS OF JULY 1, 1937

State

Date

Type

Provisions

Present status

Alabama

1935

GLT"

$1 for one store, to

Supersedes 1931 law

$112.50 per store over
20; and filing fee of 50 ji

which was upheld by a
State court. New law

per store.

effective Jan. 1, 1936.

Exempts stores selling

petroleum products

principally; and some

sales of ice.

Colorado

1934

GLT

$2 for one store, to

Approved by referendum

$300 per store over 24

vote in 1934. Effec-

Filing fee of 50^ per

tive Jan. 1, 1935.

store.

Applies also to whole-

sale stores.

Florida

1935

GLT

$10 for one store, to

Supersedes 1931 and

$400 per store over 15;

1933 laws. Effective

GRT

>6 per cent gross re-

July 1, 1935. Provided

ceipts applying to all
stores subject to the

for a graduated gross
receipts tax ranging up

act.

to 5 per cent. Provided

that if GGRT was in-

validated, GLT would

be doubled. State su-

preme court held GLT

constitutional but ruled

against GGRT. How-

ever, the ><j per cent

gross receipts tax to

apply to all retailers

subject to the act Ap-

pealed to the Supreme

Court of the United

States. Petition

denied. Exempts fill-

ing stations selling

petroleum products ex-

clusively.

Georgia

1937

GLT

$2 for one store, to $200

Effective July 1, 1937.

per store over 39.
Special tax of $2,000 to

Exempts filling stations.

$10,000 per store when

combining mail-order

business with over the

counter sales.

Idaho

1933

GLT

$5 for one store, to $500

Effective May 1, 1933.

per store over 19.

Exempts filling sta-

Filing fee of 50 i per

tions and voluntary

store. Fees progres-

chains. Upheld by

sive and retroactive.

Idaho Supreme Court.

Indiana

1929

GLT

$3 for one store, to $150

Amends 1929 law to in-

1933

per store over 20. Fil-
ing fee, 50^ per store.

crease maximum levy.
The 1929 act was up-

held by the Supreme

Court of the United

States.

333

334

THE CHAIN STORE PROBLEM

State

Date

Type

Provisions

Present status

Iowa .

1935

GLT

$5 each, 2 to 10 stores;

Effective July 1, 1935.

Kentucky

1934

GLT

up to $155 per store
over 50.

$2 for one store, to $300

Exemptions include
nonprofit cooperative
associations. A gradu-
ated gross receipts tax
section of the act was
declared unconstitu-
tional by state courts
and the Supreme Court
of the United States.

1936, amends 1934 law

Louisiana . . ...

1936
1934

GLT

per store over 50.
Provides classifications

by increasing maximum
levy. Effective July 1 ,
1936. Exempts filling
stations if 70 per cent
of business is in petro-
leum products.

Supersedes 1932 law

Maryland

1933

GLT

according to number of
stores operated every-
where. Louisiana
stores taxed at rate
applicable to classifica-
tions in which they fall.
$10 each, 1 to 10 stores,
up to $550 per store
over 500.

$5 each, 2 to 5 stores, to

Effective Jan. 1, 1935.
Some exemptions. Su-
preme Court of the
United States upheld
law May, 1937.

Effective June 1, 1933

Michigan

1933

GLT

$150 per store over 20.
$10 each, 2 to 3 stores,

Exempts filling stations
selling petroleum prod-
ucts principally.

Effective July 17 1933

Minnesota

1935
1933

GLT
GLT

up to $250 per store
over 25.

Applies to leased de-
partments, concessions,
etc. $10 each, 2 to 10
counters; to $25 per
counter over 25.

$5 each, 2 to 10 stores;

Exempts filling stations.
Upheld by state su-
preme court. Appeal
to Supreme Court of
the United States dis-
missed at request of
counsel.

In effect.
Effective July 1 1933

Mississippi

1936

GGRT
GLT

to $155 per store over
50.
Ho of 1 Per cent on gross
sales below $100,000
to 1 per cent on sales
over $1,000,000.

$3 each, 1 to 2 stores

Exemptions include fill-
ing stations and co-
operative associations.
Graduated gross receipts
provision held uncon-
stitutional in the fall of
1937.

Effective March 26

Montana

1933

GLT

to $300 per store over
40.

$2.50 each, 1 to 2 stores,

1936. Exempt filling
stations, also gas- arid
electric-appliance stores
operated by utilities.

Effective July 1, 1933.

North Carolina

1937
1935

GLT

to $30 per store over
10. Filing fee of 50f<
per store.
Rates increased: $5, to
$200 per store over 4.

$50 each 2 to 5 stores

Approved March, 1937.
Effective Jan. 1, 1938.

Amends 1933 law. Ef-

to $225 per store over
201.

fective June 1, 1935.
Exempts filling stations.

APPENDIX I

335

State

Date

Type

Provisions

Present status

Pennsylvania

1937

GLT

Graduated tax which

Enacted May, 1937.

amounts to $500 on

Litigation threatened

each store over 500.

under due process clause

of constitution.

South Carolina

1930

GLT

$5 for one store, to $150

1930 law reenacted in

1933

per store over 30.

1933. Exempts filling

stations and stores in

unincorporated places.

South Dakota . .

1937

GLT

$1, up to $250 per store

Replaces 1935 act held

over 40.

invalid by the state

supreme court. Effec-

tive 90 days after ad-

journment of 1937

legislative session.

1937

GLT

Stores in excess of one

Effective April 1, 1937

taxed at rate of $3 per

100 square feet of floor

space.

Texas

1935

GLT

$1 for one store to $750

Effective Jan. 13, 1936.

per store over 50. Fil-

Exemptions include

ing fee, 50 i per store.

some filling stations,

motor- vehicle service,

and dairy products

stores. Enforcement re-

strained by permanent

injunction granted by a

district court. Ap-

pealed to higher state

court.

West Virginia

1933

GLT

$2 for one store, to $250

Effective June 15, 1933.

per store over 75.

Upheld by Supreme

Filing fee of 50^ per

Court of the United

store. Applies to retail

States.

and wholesale stores.

Wisconsin

1935

GLT

$25 each, 2 to 5 stores,

Repeals 1933 law. Ex-

to $250 per store over
25.

pired July 1, 1937.
New law enacted since.

Exempts cooperative

associations.

Principal source: "Discriminatory Restrictions on Retailing," United States Chamber of
Commerce, March, 1937; many items obtained directly from the respective state tax
commissions.

Symbols:

GLT Graduated License Tax
GRT Gross Receipts Tax
GGRT Graduated Gross Receipts Tax

APPENDIX J

STATE CHAIN STORE TAXATION LAWS UPHELD IN
WHOLE OR IN PART BY COURTS

Alabama. A bill was passed by the Alabama state legislature in 1931
levying a tax on every person, etc., operating one or more stores, retail or
wholesale, except those selling principally petroleum products. The bill
provided for a graduated tax based on the number of stores, the rates rang-
ing from $1 on one store up to $75 on each store over 20. This law was
declared constitutional by the Circuit Court of Montgomery County. The
act was superseded in 1935 by a graduated license tax ranging from $1 for
one store, to $112.50 for each store over 20; and a filing fee of 50 cents per
store.

Florida. Florida enacted a tax measure in June, 1931. It provided that
any person, etc., operating one or more retail stores (except filling stations
selling exclusively gasoline and other petroleum products) should pay, with
no exemptions, a tax ranging from $5 for one store, up to $40 for each store
over 75 in any one county, and up to $50 per store in excess of 75 in different
counties; there was a $3 levy for each $1,000 of stock carried in each store.
A Florida Circuit Court ruled the statute constitutional on Nov. 11, 1931.
The Supreme Court of Florida affirmed the decision of the lower court and
an appeal was taken to the Supreme Court of the United States. The
Supreme Court of the United States upheld the right of the state legislature
to make the distinction between chain stores and other retail stores the
occasion of classification for purposes of taxation. It held, however, that
those provisions which increase the tax if the owner's stores are located in
more than one county are unreasonable and arbitrary, and violate the
guaranties of the Fourteenth Amendment of the Federal Constitution. The
Court said there was no more reason for adopting county lines as a measure
of the tax than there would be in taking for this purpose ward lines or lines
arbitrarily drawn through the state without regard to county boundaries.
With respect to a tax on the value of stock carried in each store or for sale in
such store, the Supreme Court held that in the case of chain warehouses, as
compared to wholesale houses, the difference in the nature of the business
conducted is sufficient to justify a different classification of the two sorts of
warehouses for taxation. It was held that with respect to filling stations,
their exemption from the tax allowed by the chain store act could not be
declared offensive to the guaranties of the Fourteenth Amendment. The
cause was remanded for further proceedings not inconsistent with the
Supreme Court's opinion.

A new law was passed in June, 1933. The measure of the tax was the
number of stores operated in the state, and the rate ranged from $5 for one
store, up to $100 each for stores in excess of 75. There was provided also a

336

APPENDIX J 337

tax of $3 for each $1,000 of floor stock. The state authorized municipalities
to tax chain stores at the equivalent of 50 per cent of the state tax, gradu-
ated in accordance with the number of stores in the municipality; it also
authorized a county tax of 50 per cent of the state tax, graduated according
to the number of stores in the county.

The 1931 and 1933 acts were superseded in 1935 by the enactment of a law
levying a graduated license tax ranging from $10 for one store, to $400 per
store over 15; and a graduated gross receipt tax ranging from % of 1 per cent
of gross receipts of one store, to 5 per cent for each store over 15. This
act has a "retroactive" clause. It provides that if the gross receipts tax
should be invalidated, the license tax would be doubled. Filling stations
are exempted. A Federal Court granted a temporary injunction on the
gross receipts tax feature. Lower state courts granted temporary injunc-
tions with respect to the entire act. It was provided that if the entire
act should be held invalid the 1933 law would remain in force.

The state supreme court held the graduated license tax to be constitu-
tional but ruled against the graduated gross receipts tax. The J^ of 1 per
cent gross receipts tax was to remain in effect, applying to all retailers
subject to the act. An appeal was taken to the Supreme Court of the
United States. The petition was denied.

Idaho. A law enacted in March, 1933, effective on May 1, 1933, taxes
chain stores on a graduated scale ranging from $5 for one store to $500 for
each store over 19. Gasoline filling stations and voluntary chains are
exempted. This law has been upheld by the Supreme Court of Idaho.
The rate of tax not only progresses with increases in the number of stores,
but, as additional stores are opened, the tax is increased on all existing stores.

Indiana. The Indiana state legislature passed a law in 1929 levying a
special tax on chain stores. The measure of the tax was the number of
stores being operated. The tax was progressive, ranging from $3 per year
for one store to $25 per year for each store in excess of 20. This law was
held to be constitutional by the Supreme Court of the United States in May,
1931. The Supreme Court divided five to four in upholding the Indiana
statute, which was the first of these chain store tax laws to be passed upon
by that body. The majority opinion emphasized the fundamental impor-
tance of the tax power, the wide discretion to be permitted to the states in
selecting the objects of taxation, and the principle that classification for
taxation is not to be deemed arbitrary if based upon a reasonable dis-
tinction. Such a distinction between chain and independent stores was
said to be present in the advantages which the former have in abundant
capital, efficient management, and capacity for mass distribution. This
law was amended in 1933, the maximum levy being increased from $25 to
$150 per store in excess of 20.

Iowa. The legislature of the state of Iowa enacted a law in 1935 levying
a graduated license tax on retail stores, ranging from $5 each on 2 to 10 stores,
up to $155 per store after 50; also a graduated gross receipts tax on chain
stores, the rates being: on each $10,000 or fraction to $50,000, a tax of $25
up to $1,000 on amounts over $9,000,000. Exemptions include nonprofit
cooperative associations. Temporary injunctions were granted by the

338 THE CHAIN STORE PROBLEM

Federal District Court and state circuit court. Later the state circuit
court upheld the act. An appeal was taken to the Iowa Supreme Court.
A three-judge Federal court upheld the license tax but ruled against the
gross receipts tax. The case was appealed to the Supreme Court of the
United States, which held unconstitutional the gross receipts section of
the law.

Kentucky. In the state of Kentucky a law was passed in 1930 levying on
retail stores a graduated tax on a percentage basis, increasing with the
volume of gross retail sales. The tax rate progressed from %o of 1 per cent
of gross sales on a volume of $400,000 or less, up to 1 per cent of excess of
gross sales over $1,000,000. This law was held to be constitutional by the
Kentucky Court of Appeals in 1931. An appeal was taken to the Supreme
Court of the United States. The cause was remanded to a district court of
three judges for hearing on the merits. This law was repealed when a 3
per cent gross sales tax law was passed in June, 1934. In July, 1934, Ken-
tucky levied a special tax on chain stores. The rate of tax ranged from $2
for one store, to $150 per store over 50. Filling stations were exempted if
70 per cent of the business was in petroleum products.

On May 11, 1936, the Governor approved an amendment increasing the
maximum tax to $300 per store over 50.

Louisiana. Louisiana enacted a law in July, 1932, levying a tax on those
operating two or more retail stores, with certain public utility and filling
station exemptions. The rate was $15 each on two stores, but not to exceed
five, and was graduated up to $200 on each store over 50. This was super-
seded in 1934 by a law levying a graduated license tax measured by the
total number of stores operated by a company anywhere in the United
States, but applying only to the stores operated within the State. The rate
is from $10 per store under 10, up to $550 per store over 500. For example,
if a company operates over 500 stores in the United States, but only 40 in
Louisiana, it will be taxed at the rate of $550 per store in Louisiana.

A Federal court granted temporary injunction. In 1936 a three-judge
Federal district court denied permanent injunction and dismissed the com-
plaint. Appealed to Supreme Court of the United States and the law was
held valid by a four to three decision, May 17, 1937.

Michigan. In July, 1933, the Michigan state legislature passed, over the
Governor's veto, a chain store tax bill. The measure of the tax is the
number of stores being operated in the state. The rate of tax ranges from
$10 each for 2 and 3 stores, up to $250 each for stores in excess of 25. Fill-
ing stations are exempted. This law was upheld by the Wayne County
Circuit Court in December, 1933. It was later upheld by the Michigan
Supreme Court. An appeal to the Supreme Court of the United States
was dismissed at request of counsel.

In 1935 a bill was passed levying a tax on leased departments, concessions,
etc. The rate of tax is $10 each on 2 to 10 counters, up to $25 per counter
over 25.

Mississippi. The legislature in Mississippi passed a law in 1930 levying
a tax on the operation of retail stores. The tax was based on the gross
income of all stores, the rate being % of 1 per cent. If more than 5 stores

APPENDIX J 339

were operated by one person an additional tax of y of 1 per cent was levied.
This law was declared constitutional by the Federal district court. How-
ever, this became obsolete because of the state's 1932 revenue act super-
seding it which levied a tax of 2 per cent on sales with no discrimination
between chains and other retail stores.

In 1936 a graduated license tax was enacted, the rates ranging from $3
each for 1 or 2 stores, up to $300 per store over 40. Exemptions were filling
stations and appliance stores operated by utilities.

North Carolina. In North Carolina, in 1929, a law was passed, levying a
tax on the operation of two or more retail stores, except automobile and
motorcycle dealers and service stations. The basis of the tax was the
number of stores in operation and the rate was $50 per year for each store in
excess of one. This tax law was held to be constitutional in 1930 by the
North Carolina Supreme Court, and this decision was affirmed by the
Supreme Court of the United States in October, 1931. This law was
replaced in 1933 by a graduated license tax law. The tax ranged from
$50 each for 2 to 5 stores up to $150 on each store over 51. The 1933 law
was amended in 1935 to increase the maximum levy to $225 per store over
201. Filling stations are exempt.

South Carolina. South Carolina passed a bill in 1930 levying a tax on
any individual, etc., operating one or more retail stores (except gasoline
filling stations) in incorporated cities or towns. The tax rate is graduated
from $5 for the first store, up to $150 for each store over 30. The constitu-
tionality of this law was sustained by a three-judge Federal Court and
later by the State Supreme Court. This law was reenacted in 1933.

South Dakota. In 1935 the legislature enacted a law providing for a
graduated license tax on retail stores, ranging from $1 for one store, to $10
per store over 10; also a graduated gross receipts tax ranging from J of 1
per cent on less than $50,000, to 1 per cent over $1,500,000. The act
provided for a tax of % of 1 per cent on all gross sales at wholesale. A
state lower court declared the license-tax section valid and gross receipts
tax unconstitutional. The law was declared invalid by the South Dakota
Supreme Court in November, 1936. In March, 1937, the Governor
approved a bill levying a tax ranging from $1 for one store to $250 per store
over 40.

Virginia. The Virginia state legislature passed a law levying a special
tax on any individual, etc., operating a distributing house to distribute
merchandise among his retail stores. This is a graduated tax based on the
amount of purchases. The rate on purchases of $1,000 or less is $10. When
purchases amount to more than $100,000 the rate is $20 on the first $2,000;
20 cents on $100 from $2,000 to $100,000; and 10 cents on $100 on all in
excess of $100,000. The United States District Court, Eastern District of
Virginia, in 1931, held this law to be constitutional, and the decision was
affirmed by the Supreme Court of the United States.

West Virginia. A law enacted in 1933 levies a graduated license tax
ranging from $2 for 1 store, to $250 per store over 75; plus a filing fee of 50
cents each. The law applies to retail and wholesale stores. It was upheld
by the Supreme Court of the United States in 1935.

APPENDIX K

SOME OF THE CITY ORDINANCES TAXING CHAIN
STORES AND OTHER FORMS OF RETAILING, AS OF

MARCH 15, 1937

Municipality

Type

Rates, status, etc.

Allentown, Pa.

GLT>

Merchants: $2 for first, $2,000 of sales, to
$100 on sales of $200,000 or more. Res-
taurants: $5 on sales of $2,000, to $25 on
sales of $5,000 or more. 1920 ordinance
amended in 1933.

Atlantic City, N. J.

LT
GLT

Variety stores: $150 a year. Department
stores: $200 a year. Restaurants: $15
to $120 a year, based on number of
tables. Enacted 1935.

Augusta, Ga.

GGRT'
GGST*

Merchants: On sales or receipts, $10 for
less than $5,000, to $110 for $100,000;
plus $5 for each additional $20,000.
Enacted 1935.

Bainbridge, Ga.

GGRT

No tax on receipts to $20,000; ^ of 1 per
cent on $20,001 to $30,000, up to 5 per
cent on receipts over $70,000. Effective
May 1, 1934.

Baton Rouge, La.

GGST

$5 for less than $5,000 gross sales, to $1,200
for $1,000,000, or more. Enacted 1935.

Bluefield, W. Va.

One-third of 1 per cent of gross sales, all
retailers. Adopted July 1, 1936.

Charleston, W. Va.

ST
CST*

One-tenth of 1 per cent on sales over
$10,000. Expired June 30, 1937. $2 for
one store, to $250 per store over 75.
Filing fee of 50 cents each. Effective July
1, 1935.

340

APPENDIX K

341

Municipality

Type

Rates, status, etc.

Clarksburg, W. Va.

GLT

$2 for one store, to $200 per store over 20.
Or sum equal to state tax. Effective
Sept. 1, 1935.

Columbia, S. C.

GGST

From $10 on sales up to $2,500, to $45 on
sales of $20,000; plus $1 per $1,000
excess. License ordinance 1935.

Durham, N. C.

GLT
LT

Applying to merchants not subject to chain
store tax: $5 on sales under $5,000, to
$40 on sales from $100,000 to $150,000;
plus 20 cents per $1,000 over $150,000.
Ordinance 1934-1935.
$50 per store in excess of one.

Easton, Pa.

GGST

$2.50 on sales under $5,000, to $100 on
sales of $300,000 or over. Enacted 1933.

Fredericksburg, Va.

CST

$250 for each store over one. Passed 1933.
Held invalid in lower Virginia court 1935,
but held valid by state supreme court,
March, 1937.

Georgetown, S. C.

GGST

$10 on sales up to $1,000, to $100 on sales
of $75,000 to $100,000; plus $1 per $1,000
excess. Ordinance 1935.

Huntington, W. Va.

GRT*

One-fourth of 1 per cent gross receipts tax.
A 1 per cent consumers' tax was invali-
dated by state supreme court, 1936. The
court upheld the gross receipts tax.

Kansas City, Mo.

GGRT

Exclusive fpod retailers: 50 cents per $1,000,
or fraction. Restaurants: $25 to $250
based on seating capacity. Other mer-
chants: $25 per year.

Los Angeles, Calif.

GGRT
GGST

$5 on less than $5,000, to $3,835 on
$30,000,000 or more, 1936. Variety, de-
partment, drug- and dry-goods stores:
$7.50 on first $15,000; plus 50 cents per
$1,000 or fraction in excess.
Restaurants, soda fountains, soft drinks:
$6 on sales under $12,000, to $62.60 on
$90,000 and over.

342

THE CHAIN STORE PROBLEM

Municipality

Type

Rates, status, etc.

Louisville, Ky.

A maximum tax of $75. Enacted 1933.

Lynchburg, Va.

GGST

Retailers: $15 on $1,000, to $1 per $1,000
on sales over $300,000. Restaurants and
fountains: $25 a year; plus $2.75 per
$1,000 of purchases of table and fountain
supplies.

Montgomery, Ala.

GGST

One per cent on first $10,000; 34 of 1 per
cent on first half of sales over $10,000;
34 of 1 per cent on second half of sales
over $10,000. 1936.

New Orleans, La.

GGST

Merchants: $5 on sales under $5,000, to
$6,000 on sales of $5,000,000 or more.
Fountains, soft drinks, ice cream: $5 on
less than $1,000, to $1,000 on $200,000 or
more. Ordinance 1934.

New York, N. Y.

Enacted 1934. Two per cent. Some
exemptions. Tax upheld in state su-
preme court.

Oakland, Calif.

GLT

Merchants not otherwise taxed on specific
goods: $6 on one employee, to $1 each on
11-310; and 50 cents each additional per-
son. Ordinance 1933.

Paducah, Ky.

GLT

Merchants: $10 on less than $1,000 stock,
to $150 on $60,000 or over. Restaurants:
$25 annually. Soda fountains: $25 an-
nually. Ordinance 1935.

Petersburg, Va.

GLT

Merchants: $20 on $4,000 purchases, to
10 cents per $100 on purchases over
$200,000. Restaurants: $25 plus 5 per
cent of annual rental over $100. Soda
fountains: $15 on $300 capital, to $50
where more than $1,000 is invested.

Phoenix, Ariz.

GLT

$10 on sales up to $5,000, to $150 on
$50,000 to $100,000; plus $1 for each
$50,000 or fraction over $100,000. Ordi-
nance 1935.

APPENDIX K

343

Municipality

Type

Rates, status, etc.

Portland, Ore.

GST

$6 for one store, to $50 per store over 20.
Effective 1932. Tax sustained by refer-
endum vote in 1932.

St. Louis, Mo.

$1 per $1,000 sales. Also ad valorem tax,
$17 per $1,000 of stock. Enacted 1934.

Santa Ana, Calif.

GGST

$3 per quarter-year on less than $5,000,
to $105 on $1,000,000.

Savannah, Ga.

Variety stores: $500 per store; plus $35 if
soda fountain operated; plus $25 if
lunches served; plus $25 if flowers, plants,
and shrubbery sold; plus $50 if auto-
mobile oil is sold; plus $75 if restaurant
operated. Reenacted in 1935.

Spartanburg, S. C.

GGRT

Six classifications of merchants. In each
classification a different schedule of taxes
is imposed. Effective 1933. Held valid
by state supreme court.

Wheeling, W. Va.

GLT

$2 for one store, to $300 on 21 to 30 stores.
Filing fee of 50 cents each. Effective
Dec. 1, 1933.

Principal source: "Discriminatory Restrictions on Retailing," United States Chamber
of Commerce, Washington, D. C., March, 1937. Many items were obtained directly from
the respective city attorneys.

a. Symbols:

LT License Tax (flat rate)

GLT Graduated License Tax

GGRT Graduated Gross Receipts Tax

GGST Graduated Gross Sales Tax

ST Sales Tax

CST Chain Store Tax

GRT Gross Receipts Tax

INDEX

Absentee ownership, chain store

effect, 213

American Institute of Public Opin-
ion, 70, 242
Antagonism toward chain stores,

70-71

Anti-Trust laws, 273-274
Arithmetic mean, 85
Atmosphere, impersonal, chain store

effect, 219-220
Averages in chain store price studies,

arithmetic mean, 85
geometric mean, 86
harmonic mean, 86
median, 85
mode, 86
weighting the averages, 89-90

Beard, Charles A., 211
Beckman, T. N., 78, 81-82, 159

and Engle, N. H., 144, 278
Bedell, Clyde, 45
Better business methods, chain store

advantage, 221
Bjorklund, E. J., and Palmer, J. L.,

94, 99

Buehler, Alfred G., 248, 269
Bureau of the Census, 3, 26, 29-40,

93-94, 139, 142, 148
Bureau of Labor Statistics, 89, 208
Business advantages of chains, 43-56
(See also Chain store, advan-
tages of)
Business effects of chains, better

business methods, 221
combination sales, 221
complete stores, 220-221

Business effects of chains, curtailed
services, 218-219

definition, 217

impersonal atmosphere, 219-220

loss leaders, 217-218

one-price policy, 219

package goods, 220
Buying, chain store advantage,

43-48
Buying habits, 223-224

California fair-trade law, 284
California referendum, 241-242
Cash-and-carry prices, 107, 124-126
Census of Business (see Bureau of

the Census)

Chain store, advantages of, 42-61
business advantages of, 43-56
benefits of standardization of,

buying, 43-48
low cost of doing business, 48-

53
secondary business advantages,

54-56
costs of, 47-53, 137-147

comparative costs, chain and

independent stores, 143-146
chain operating costs by line of

business, 142-143
defects in available data on,

138-141
definition, 137
effect of size of chain store

on costs, 146-147
disadvantages of, antagonistic

public opinion, 70-71
association with low price, 68-
69

345

346

THE CHAIN STORE PROBLEM

Chain store, disadvantages of, chain
merchandising not adaptable
to all types of goods, 62-63
growing competition, 71-72
inflexibility, 64-65
lack, of personal contact, 63-64

of service, 69-70
legislative handicaps, 72-74
personnel problems, 65-67
style goods, 67-68
economic advantages of, 58-60
decreasing costs, 57-60
risk distribution, 56-57
varying prices, 59-60
growth of, 19-28
history of, 14-18

prices of, articles for pricing, 81-82
averages in, 84-90
collecting data for, 83

Durham, N. C., study in, 82

editing data, 84

Federal Trade Commission

study, 83

schedules, preparation of, 83
studies, 78
drugstore prices, 115-127

comparative prices, by com-
modity groups, 119-121
by degree of service, 124-

126
by individual items, 121-

124

by size of town, 126-127
Federal Trade Commission

Drug study, 127
summary of findings, 116-119
grocery store prices, cash-and-
carry prices, 107, 124-126
Florida grocery price study,

92-113

trend of comparative chain
and independent grocery
store prices, 111-112
voluntary chain store prices,

113

prices of automobile parts and
accessories in chain and inde-
pendent stores, 133-136

Chain store, prices of, selling prices
of piece goods and furnish-
ings, 128-133
varying, 59-60
problem in, 11-13
profits, definition, 147-149

Federal Trade Commission

data on, 149-150
on invested capital, 150-152
per store, 152-155
tax laws, 333-335
taxation, 229-230, 246-272

(See also Taxation)
Chains, advantages of, 42-61

(See also Chain store, advan-
tages of)

business effects of, 203, 217
classes of, 6-11

consumer patronage of, 156-202
cooperative, 10-11
criticisms of, 234-240
definition, 2-6
disadvantages and limitations, 62-

(See also Chain store, disadvan-
tages of)

early history of, 14-18
economic effects of, 203-217
geographic distribution of, 36-38
growth of, 19-28
number of, 29-31
political effects of, 228-232
present status of, 29-41
public attitude toward, 232-245
recent legislation on, 273-289
retail, 7-9
salaries and wages in, 50-51 (see

Wages)

social effects of, 223-228
taxation on, 246-272
urban character of, 38-39
volume of sales of, 24-25, 31-36
voluntary, 10-11
wholesale, 9-10
wholesale-retail, 9

Channels of distribution, effect of
chains on, 209-210

INDEX

347

City chain store taxes, 261-262, 340-

343

Clark, Fred E., 66
Classes of chains, retail, with ware-
houses, 7-9
without warehouses, 7
voluntary, 10-11
wholesale, 9-10
wholesale-retail, 9
Clayton Act, 275-276, 278-281
Colorado referendum, 241
Consumer buying preference sched-
ule, 330

surveys of, 156-202
Consumer patronage, 156-202, 331,

332

first reasons for buying, groceries
from chain and independent
stores, 173-183

women's ready-to-wear from
chain and independent stores,
190-200

why consumers buy, groceries
from chain or independent
stores, 168-183, 331
shopping goods from chain and
independent stores, 184-202,
332

Converse, Paul D., 157
Cooperative chains, 10-11
Corbaley, Gordon C., 70
Costs of chain stores (see Chain store

costs)
Courts, attitude toward chains, 253-

261, 336-339
Criticisms of chains, avoid paying

taxes, 238-239

destroy small business man, 237
do not patronize local business,

238

standardize communities, 237-238
take money out of communities,
236

Definitions, business effects, 217
chain, 2-6

Definitions, chain store, 2-6

chain system, 2-6

cost, 137

economic effects, 203

expense, 137

political effects, 223

profit, 147-149

shopping goods, 184

social effects, 223
Deute, A. H., 47
Dipman, Carl W., 53, 146
Drugstore price quotations, 322-328
Drugstore price schedule, 316321
Dun & Bradstreet, Inc., 53
Durham, N. C., study, 82

Economic advantages, 56-60

(See also Chain store, advan-
tages of)
Economic effects, 203-217

absentee ownership and control,

213

assortment of goods, 212-213
channels of distribution, shorter,

209-210

consumer price-consciousness, 204
definition, 203
distribution progress, 215
distribution waste, reduced, 213-

215

effect on employment, 208-209
lower prices, 215
lower wage standards, 204-208
monopolistic tendencies, 216-217
stabilizing effect on business, 211-

212

voluntary chains, 210-211
Employment, effect of chains on,

208-209

Engle, N. H., 48
Ernst, E. G., 206

Fair-trade laws, administration, 287
benefits of, 286

348

THE CHAIN STORE PROBLEM

Fair-trade laws, California, 284
effects of, 287-289
Federal resale-price maintenance,

285-286

Miller-Tydmgs, 285-286
Federal Trade Commission, 83, 99-
100, 127, 14&-150, 157, 174,
205, 216, 274

Florida grocery price study, com-
parative grocery store prices,
by size of town, 108-111
distribution of sample, 94-95
grocery store price comparison by

individual items, 102-104
grocery store price ratios by com-
modity groups, 100-102
selling prices of groceries, by
degree of service, 105-108,
112-113

size of sample, 93-94
summary of findings, 95-100
Flynn, John T., 251
Foster, Hugh M., 152
Fouch, George E., 157, 173, 243

Geographic distribution of chains,
36-38

Geometric mean, 86

Georgia chain tax, 300-301

Government investigations, 230

(See also Federal Trade Com-
mission; Patman investiga-
tion)

Graduated sales taxes, 260-261

Grocery store price quotations, SOS-
SIS

Grocery store price schedule, 303-
307

Guernsey, John, 67

Harmonic mean, 86

Harvard University, Bureau of

Business Research, 140-141
Henderson, W. K, 231

Invested capital, profit on, 150-152

Jones, F. M., 16

Laissez-faire policy, 294
Legislation affecting chains, recent,
fair-trade laws, 283-289

purpose of, 274-275

Robinson-Patman Act, 275-283

taxation, 251-262
Long, Iluey, 228
Loss leader, 217-218, 288
Louisiana decision, 256260
Lower prices, chain store effect, 215
Lyons, R. W., 201

McGarry, Edmund D., 174

McNair, M. P., 53

Median, 85

Michigan chain store tax law, 252

Miller-Tydings Act, 285-286

Mode, 86

Monopolistic tendencies of chains,

216-217
Moride, P., 249
Morrill, A. H., 47

National Cash Register Company,

141

Net worth, profit on, 151
Nichols, John P., 24, 247, 262
Nystrom, Paul H., 14-16, 51, 64

One-price policy, chain store effect,
219

INDEX

349

Package goods, chain store effect,

220

Palmer, J. L., 16, 24, 237
Patman investigation, 230, 274
Patronage (see Consumer patronage)
Penney, J. C., 207
Pennsylvania chain store tax law,

270

Personnel problems, chain store dis-
advantage, 65-67
Phillips, C. F., 112, 113, 246, 249
Political effects, government investi-
gations, 230

new regulatory legislation, 229
politicians, 228-229
pressure groups, 231
referendums, 230-231
taxation, 229-230

Portland, Ore., referendum, 240-241
Pressure groups, chain store effect,

231

Price discrimination, 278-281
Price quotations, 308-315, 322-328
Price-consciousness, an effect of

chains, 204

Prices (see Chain store, prices of)
Procon, 283

Progressive Grocer, The, 146
Public attitude toward chains, chain
efforts to meet indictments,
239-240

criticisms, 234-240
public attitude studies, 242-244
referendums, 240-242
Springfield, Ohio, study, 243-244

Referendum, California, 241-242
Colorado, 241
Portland, Ore., 240-241
Regulation of chains, 297-298
Resale-price maintenance (see Fair-
trade laws)
Restrictive legislation, 290-302

(See also Legislation affecting
chains)

Retail chains, 7-9

Retail distribution, census of (see

Bureau of the Census)
Risk distribution, chain store advan-
tage, 56-57
Robinson-Patrnan Act, effect on

chains, 281-283

principal differences of, from Clay-
ton Acts, 278-281
provisions of, 276-278
reasons for enactment of, 275-276

Safeway Store, 220

Sales of chain stores, 24-25, 31-36

Schmalz, Carl N., 49

Service, lack of, chain store disad-
vantage, 69-70, 218-219

Sherman Anti-Trust law, 285

Shopping goods, consumer attitude
toward chains in purchase, 184-
202

Social effects of chains, class dis-
tinction, 224

consumer buying habits, 223-224
individual opportunity, 224-227
store as a social center, 227-228

Special discounts and allowances,
45-48

Springfield, Ohio, study, 157, 173,
243

Standardization, chain store disad-
vantage, 53

Style goods, chains in, 67-68

Taxation of chains, attitude of

courts, 253-261

city chain store taxes, 261-262
city ordinances, 340-343
early attempts to curb chain

growth, 246-247
effect of, 265-268, 270-272
fairness of, 268-270
graduated sales taxes, 260-261
growth of, 249-251
incidence, 263-265

350

THE CHAIN STORE PROBLEM

Varying prices, chain store advan-
tage, 59-60

Voluntary chains, 10-11, 113, 210-
211

Taxation of chains, laws, 333-335
legal precedents, 248-249, 336-

339

Louisiana decision, 256-260
Michigan law, 252
Pennsylvania law, 270
reasons for, 247-248
types of, 251-253
Taylor, Malcolm D., 82
Trading areas, effect of chains on, Wage standards, effect of chains on,

212 204-208

Twentieth Century Fund, Inc., 300 Wages paid by chains, 50-51, 204-

208
U Weighting averages, 89-90

Wholesale chains, 9-10
Urban character of chains, 38-39 Wholesale-retail chains, 9

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