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da Session I 
















Printed for the use of the 
Temporary National Economic Committee 





(Created pursuant to Public Res. 113, 76th Cong.) 

JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman 

HATTON W. SUMNERS, Representative from Texas, Vice Chairman 

WILLIAM H. KINO, Senator from Utah 

WALLACE H. WHITE, Jr., Senator from Maine 

CLYDE WILLIAMS, Representative from Missouri 

B. CARROLL REECE, Representative from Tennessee 

THURMAN W. ARNOLD, Assistant Attorney General 

•WENDELL BEROE, Special Assistant to the Attorney General 

Representing the Department of Justice 

JEROME N. FRANK, Chairman 
•SUMNER T. PIKE, Commissioner 
Representing the Securities and Exchange Commission 
GARLAND S. FERGUSON, Commissioner 

•EWIN L. DAVIS, Chairman 

Representing the Federal Trade Commission 

ISADOR LUBIN, Commissioner of Labor Statistics 

•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics 

Representing the Department of Labor 

JOSEPH J. O'CONNELL, Jr. Special Assistant to the General Counsel 

♦CHARLES L. KADES, Special Assistant to the General Counsel 

Representing the Department of the Treasury 


Representing the Department of Commerce 

• • * 

LEON HENDERSON, Economic Coordinator 

DEWEY ANDERSON, Executive Secretary 

THEODORE J. KREPS, Economic Adviser 


Monograph No. 36 



This monograph was written by 


Principal Agricultural Economist 

Bureau oj Agricultural Economics 

Department oj Agriculture 

The Temporary National Economic Committee is greatly indebted 
to this author for his contribution to the literature of the subject under 

The status of the materials in this volume is precisely the same as that 
of other carefully pi epared testimony when given by individual witnesses; 
it is information submitted for Committee deliberation. No matter what 
the official capacity of the witness or author may be, the publication of 
his testimony, report, or monograph by the Committee in no way signifies 
nor implies assent to, or approval of, any of the facts, opinions, or recom- 
mendations, nor acceptance thereof in whole or in part by the members of 
the Temporary National Economic Committee, individually or collectively. 
Sole and undivided responsibility for every statement in such testimony, 
reports, or monographs rests entirely upon the respective authors. 

(Signed) Joseph C. O'Mahoney, 
Chairman, Temporary National Economic Committee. 



Letter of transmittal xi 


Introduction: The technological basis of big business 1 

In the food industries , __ 2 

The central thesis 3 


Mass retailing of food products 5 

The corporate chains 5 

Cooperative and voluntary chains of independent retailers 9 

The supermarket 10 

Vertical integration by the grocery chains 11 


Large-scale organization in the meat-packing industry 15 

The "Big Four" packers 15 

Vertical integration by the meat packers 19 

Mergers and pools in the packing industry 20 


Large-scale organization in the dairy industry 25 

The specialized dairy corporations 25 

The meat packers and grocery chains in relation to the dairy industry. 29 

The growth of large-scale producer cooperatives. : 30 

Proportion of dairy products handled by leading corporations 34 


Combination in the flour-milling and bread-baking industries 37 

Flour milling 37 

The development of modern milling methods 37 

The growth of the big flour-milling concerns 39 

Mergers and consolidations in flour mflling . 42 

Efi"orts to restrict competition in flour milling 43 

The baking industry 44 

The development of corporate mergers and consolidations in 

bread baking 45 

Chain-store baking 47 

Proportion of bread baked by large concerns 48 

The biscuit companies 49 


Other large-scale food concerns 51 

Fruit and vegetable canning 51 

The handling of fresh fruits and vegetables 53 

Miscellaneous food corporations 54 

General Foods and Standard Brands 54 

Other food corporations , 57 





Mass distribution and marketing efficiency — 59 

Efficiency in retailing : Chains versus independents 60 

Prices in chain and independent stores 60 

Margins and operating expenses of chains and independents 62 

Wages paid by chains and independents 63 

Management as a factor in retailing efficiency 65 

The integration of grocery wholesaling and retailing 66 

Labor efficiency of chains versus that of the regular channels 67 

Economies in the integration of processing and distribution 69 

Number of products handled 69 

Freight and cartage costs. 70 

Responsiveness of prices to changing market conditions 70 

Advantages of grocery chains over other types of large-scale handlers. 71 

Economies at the producer end 72 

The duplication of marketing services and facilities 74 


Monopoly in food distribution : Concepts and criteria 77 

The incidence of food monopoly 77 

Competition, imperfect competition, and monopoly 79 

The relation of monopolistic control to output 80 

The dominant firm 81 

Bilateral or successive monopoly 84 

Measuring the effects of monopoly : Criteria . .' 85 

Lerner's measure 1 87 

Quantitative and legal criteria 87 


Concentration of control 89 

The food industries compared with other industries 89 

Legal aspects _i. 90 


Profits and financial tendencies of the leading food corporations 93 

• The nature of the data 93 

'Food profits compared with those of other industries 94 

Rates of return for specific types of large food concerns 95 

Chq,inrstore profits 95 

Profits in other food lines 98 

The profits of the big meat packers 98 

Profits as a contributing factor to marketing costs 99 


Buying and selling policies of mass food distributors 101 

Selling-price policies of the food chains 101 

Buying policies of the food chains: Quantity discounts and allowances. 103 

Quantity discounts and trade allowances 104 

The charges against the meat packers 107 


Large-scale organization and price flexibility 113 

The relative flexibility of food prices 113 

The flexibility of food margins 114 

Stability of output 116 




Patent control in the food industries 121 

Patents affecting the dairy industry 121 

Patents relatively unimportant for butter, natural cheese, and 

ice cream 122 

Fluid milk and cream 122 

Processed and packaged cheese 123 

Condensed milk and evaporated milk 125 

Dried milk and milk powder 126 

Casein and casein products 127 

Irradiation with ultra-violet light 128 

The quick freezing of food products 128 

Early history of quick freezing 129 

Freezing by direct and indirect contact with refrigerant 129 

The Birdseye process 130 

Other methods of quick freezing 131 

Summation of patent situation for quick freezing 131 

Patent control for breakfast cereals 132 

Shredded cereal biscuit 133 

PuflFed cereals 133 

Cereal flakes 134 

Summation of the situation with respect to cereal patents 135 

Flour milling patents 135 

The air purifier.' 136 

Patent control in other food lines 138 

Meat packing 138 

The preservation of food in metal containers , 139 

Patents owned by General Foods and Standard Brands 139 

Conclusions : Revision of patent law and procedure 140 


Legislative and judicial policy 145 

The broad outlines of public policy toward big business 145 

Judicial interpretation of antitrust legislation 146 

Legislation to control rather than dissolve big business 147 

The Robinson-Patman Act 148 

Provisions of the Robinson-Patman Act 149 

Present administrative interpretation - 150 

Resale price maintenance 152 

Equalizing prices in different types of retail outlets 153 

Chain-store tax laws 154 

Judicial review of chain-store tax laws 155 


Conclusion: Toward a new public policy 157 


Some aspects of the theory of bilateral or successive monopoly 161 

Three or more successive monopolists 164 

A modification of the assumptions 164 

Theory of successive monopoly contrasted to that of oligopoly 165 

Bibliography 166 




1. Number of retail units operated by the five leading grocery chains, 

1920-36 6 

2. Sales of five leading grocery chains compared with estimated total food 

sales of all grocery and combination stores, 1919-37 8 

3. Number of voluntary and cooperative chains in the United States, 

1936 9 

4. Plant facilities owned and operated by the five leading grocery chain 

systems in the United States, 1936 12 

5. Proportion of meat animals slaughtered by the five leading packers, 

1908-35 16 

6. Sales of four leading meat packers compared with total value (to manu- 

facturer) of meat and all byproducts of meat packing, 1919-37 17 

7. Sources of livestock supplies of 11 meat-packing companies, 1935 19 

8. Sales outlets for meats used by eight leading meat-packing companies, 

1935 20 

9. Sales of four leading dairy companies compared with estimated total 

sales value of dairy products, 1919-37 27 

10. Dollar sales of five leading dairy producers' cooperative marketing 

associations, 1921-36 30 

11. Volume of milk receipts, class 1 sales, and volume of dairy products 

manufactured by Dairymen's League Cooperative Association, Inc., 
1921-36 32 

12. Volume of dairv and poultry products handled by Land O' Lakes 

Creameries, Inc., 1924-36 33 

13. Percentages of total United States production of dairy products sold by 

leading dairy companies and meat packers, 1934 35 

14. Number of merchant flour mills in the United States, total volume of 

flour milled, and average volume per miU, 1899-1935 39 

15. Sales of three leading flour-milling corporations compared with total 

value (to manufacturer) of flour and other grain-mill products, 
1919-37 41 

16. Percentages of total United States production of wheat represented by 

purchases and handling of 13 leading flour-milling companies, 1934_ 41 

17. Number and size of bread-baking establishments in the United States, 

1849-1935 44 

18. Dollar sales of the three leading bakery concerns expressed as percent- 

ages of the total value of bread and other yeast-raised bakery prod- 
ucts, 1935 - 48 

19. Sales of three leading fruit and vegetable canners compared with total 

value of canned and dried fruits, vegetables, jellies, etc., 1919-37 63 

20. Sales of General Foods Corporation and Standard Brands, Inc., 

1919-37 55 

21. Comparison of retail prices for identical items in chain and independent 

stores in four cities, 1929 61 

22. Weighted average prices of groceries in various types c ' stores in 

Champaign-Urbana, 111., in March 1937 61 

23. Comparison of operations between chain and independent grocery 

stores in Louisville, Ky., and Cincinnati, Ohio, 1929 63 

24. Sales, pay rolls, and wage rates in chain and independent stores in the 

United States, 1935 -- - 64 

25. Labor efficiency of a national chain-store system compared with that 

of the regular marketing channels in handling fruits and vegetables up 

to the retail store, Philadelphia, 1936 68 

26. Approximate number of retail grocery stores in the United States in 

relation to population, 1850-1935 75 




27. Concentration of control: Percentages of total business done in their 

respective lines by leading food corporations compared with per- 
centages done by leading firms in other selected industries 90 

28. Percentage of profit to total capital for 2,046 manufacturing corpora- 

tions, 1924-28 95 

29. Rates of returns on total invested capital for leading food corporations, 

as found by the Federal Trade Commission, 1929-35 95 

30. Earnings of leading food and tobacco corporations expressed as per- 

centages of their capitalization, 1925-37 . 96 

31. Profit margins of leading grocery chains, dairy companies, and meat 

packers, 1925-36 100 

32. Comparison of selling prices, cost prices, and gross margins of chain 

and independent grocery stores for identical food items, as found by 

the Federal Trade Commission 102 

33. Total sales and allowances made by 457 food processors to different 

tvpes of buyers, as found by the Federal Trade Commission, 1929 

and 1930 . 105 

34. Average amplitude of price change for 10 groups of commodities by 

8-year periods, 1890-1936 114 

35. Estimated farm and retail value of 58 food products, 1913-38 115 

36. Average annual wholesale prices of three food products subject to 

different types of supply control: Pork, canned tomatoes, and corn 
flakes, 1926-37 - 1 18 

37. Output of three tj'pes of food processors: Four leading meat packers, 

2,000 vegetable canners, and several corn-cereal manufacturers, 
1926-37 118 

38. Volume of quick-frozen foods and number of companies engaged in 

their production, 1936-38 129 

39. Income from royalties for Standard Brands, Inc., 1935-37 139 

40. Chain-store tax laws : States having such laws and types of tax in each 

State, as of December 31, 1937 154 


1. Sales of five leading grocery chains compared with estimated total 

sales of all grocery stores 7 

2. Flow of fruits and vegetables. New York metropolitan area markets, 

1936 13 

3. Sales of four leading packers compared with total value of meat 

products 18 

4. Sales of four leading dairy companies compared with estimated total 

sales value of dairy products 26 

5. Dollar sales of four leading dairy producers' cooperative marketing 

associations, 1 92 1-37 31 

6. Dairy products: Percentage of total production sold by dairies, meat 

packers, and others 35 

7. Sales of three leading flour-milling corporations compared with total 

value of flour and other grain-mill products . 40 

8. Sales of three leading fruit and vegetable canners and value of canned 

and dried fruits, vegetables, jellies, etc., 1919-37 52 

9. Sales of General Foods Corporation and Standard Brands, Inc., 1919- 

37 56 

10. Imperfect competition: The case of a dominant firm 82 

11. Earnings of leading food and tobacco corporations expressed as per- 

centages of their capitalization, 1925-36 97 

12. Profit margins of leading grocery chains, dairy companies, and meat 

packers, 1 925-36 1 99 

13. Margins of 58 foods combined and hourly earnings of wage workers 116 

14. Prices and outputs of three food' products subject to different types of 

supply control, 1926-37 117 

15. Diagrams illustrating the effect of successive monopoly (one monopolist 

above the other) _. 162 


Hon. Joseph C. O'Mahoney, 

Chairman, Temporary National Economic Committee, 

Washington, D. C. 

My dear Senator: The growth of large-scale food Gorporations is 
one of the most important marketing developments of recent years. 
It has affected the marketing structure, the competitive relationships — 
even the actual mechanics of processing and distributing food products. 
The Bureau of Agricultural Economics naturally has had considerable 
interest in this development, and for several years has been carrying on 
research intended to show how farmers were affected by it and how it is 
related to their marketing problems. 

This monograph was written by a member of the Bureau's staff. 
It is based partly on his research for the Bureau, and partly on work 
which he did independently in connection with his doctoral thesis. 
It is being made available for publication by the Temporary National 
Economic Committee because it represents one of the first attempts to 
bring together the salient facts regarding large-scale food distribution. 
We believe it contributes to a better understanding of this develop- 
ment and its implications for farmers and consumers. The conclu- 
sions, however, are solely those of the author, and his connection with 
the Bureau of Agricultural Economics does not necessarily imply its 
endorsement of them. 


Chief, Bureau of Agricultural Economics-. 

Department oj Agriculture. 
October 7, 1940, 




The outstanding characteristic of modem business enterprise is the 
tendency toward large-scale organization. To some extent at least, 
it is to be found in practically all parts of the economy, even in those 
heretofore regarded as the special province of the small business firm. 
Among the last to show it were the food industries, where it has come 
only witl^in the last several decades. 

It is not uncommon to regard big business as something new and 
belonging only to the last century. As a matter of fact, it runs back 
as far as the recorded history of mankind. Since commerce began, 
commercial organization has alternated between specialization by 
function and .the integration of trade activities. The small, specialized 
business unit has dominated the trade of one era; the vast, far-flung 
corporation, the trade of another. 

Gras tells us that the framework of modern big business has been 
sketched no less than three times during the past 2,000 years. ^ Among 
its earliest prototypes were the enterprises carried on during the times 
of the Roman Empire by a group of tradesmen known as the "Negoti- 
ators." Through their banking and money-lending activities, these 
enterprisers came into control of substantial segments of the commerce 
of their times and were not without resemblance in this respect to some 
of our modern capitalists. 

Following the dissolution of the Roman Empire, trade was carried 
on for centuries by small peddlers and individual craftsmen of one 
kind or another. Neither the social nor the economic conditions of 
the earlier Middle Ages were conducive to large-scale business. 

During the later Middle Ages, however, there arose a second pre- 
cursor of big business — the sedentary merchant. Some of these mer- 
chants attained great financial power and conducted enterprises which 
were sizable even by modern standards. Among the better known of 
chem were the Fuggers, the Baumgartners, the Medici, and the Welsers 
who operated in continental Europe during the fifteenth and sixteenth 
centuries. Beginning usually as merchants of one kind or another, 
they were led naturally into the fabrication, transportation, and financ- 
ing of the goods which they handled, just as are many of our modern 

Equally significant as early examples of big business were the joint- 
stock companies organized in England during the several centuries 
just preceding the industrial revolution. Illustrative of these were 
the Russia Co., the East India Co., and Hudson's Bay Co., all of 

' This manuscript was written during 1938. Revisions have not been made to include subsequent datH 
and developments. 

> N. S. B. Gras, "The Rise of Big Business," Journal of Economic and Business History, May 1032. 
Much of the earlier historical material used here has been obtained from the writings of Mr. Uras, allhouich 
the implications and conclusions drawn from the material are largely the writer's. 


which were engaged in trading, shipping, and m.anufacturing enter- 
prises on a large scale. As was the case with the merchant-financiers 
already described, these companies represented an institutional ad- 
justment to a new set of basic conditioning factors.^ Greater trade 
intercourse was developing as a result of the exploitation of resources 
in hitherto unknown parts of the world. As m.arkets became wider 
and commercial relationships more com.plex, the opportunity — even 
the necessity — grew for men to pool their resources in order to carry 
on commercial enterprises on a correspondingly larger scale. 

WTien the industrial revolution was ushered in with the nineteenth 
century, the existing institutional patterns were again universally and 
almost completely shattered. The application of power and the use 
of machinery opened up new vistas in virtually every field of economic 
endeavor. New modes of production brought with them new types 
of com.mercial organization. Large amounts of capital were neces- 
sary to finance factory production, and a kind and degree of skill 
unknown to the sedentary ro.erchant was required for the conducting 
of business enterprise. Accordingly, says Gras,* "* * * it became 
necessary for the diversified business of the sedentary merchant to be 
unscrambled. The new type of businessman was a specialist who 
could command capital in new enterprises and obtain technological 
knowledge in fresh endeavors." 

Since that time, however, the swing once more has been away from 
specialization and toward diversification and integration of business 
activities. The size of business organization has been vastly increased, 
both by the horizontal combination of Mke enterprises and by the 
vertical integration of functionally different ones. In some industries 
the tendency has been rapid, in others it has lagged. Usually it has 
come first in those industries in which the technological forces back 
of it have been especially impelling and in which com.petition and un- 
coordinated action have led to increasingly chaotic conditions. Con- 
versely it has lagged in industries where processing operations have 
been comparatively simple and in which competition has not been so 


The food industries are among the last fields of enterprise to which 
corporate m.ass methods have been applied. There are several reasons 
for this, chief of which is the fact that the technological processes 
necessary for the preparation and m.arketing of food products have 
been until recently com.paratively simple. With few exceptions these 
processes did not lend themselves to, or at least did not particularly 
invite, the application of large-scale methods. 

Within the past 25 years, however, new processes and new tech- 
niques have been perfected which do so lend them.selves. For instance, 

3 Adam Smit^ appears to have misunderstood the historic role of the early stock companies in the evo- 
lution of commercial organization. Of them hd says (Wealth of Nations, book V, ch. 10), "Except for the 
four trades above mentioned (banking, insurance, the making and maintaining of canals, and the providing 
of a supply of water for municipalities) I have not been able to recollect any other in which ali the threo 
circumstances requisite for rendering reasonable the establfshment of a joint-stock company concur." 
That the amounts of capital required even in his time for certain manufacturing enterprises and for the 
carrying on of overseas trade were beyond what commonly could be raised by individuals and private 
companies seems not to have impressed Smith. In support of his claims against the joint-stock companies 
he cites the number of financial failures among them, the negligence of their managements, and their gen- 
eral inefficiency. For a refutation of some of these claims, and for what seems to the writer a better under- 
standing of the reasons for, and the economic significance of, these joint-stock companies, see W. R. Scott, 
Joint Stock Companies to 1720, vol. I, especinlly ch. 22. 

* Qras, op. cit., p. 401. 


the canning and preserving of fruits and vegetables, once a household 
function, is now done mainly ift factories on a corporate scale. New 
methods and new types of machinery for milling wheat, baking bread, 
manufacturing milk products, and handling fresh fruits and vegetables, 
have tended to increase the size of the business units in these fields. 
Often these newer processing techniques have been developed by big 
corporations, so that it may appear at first glance that the line of 
causation runs from the size of the business enterprise to the mode 
of manufacture. In a more fundamental sense, however, these tech- 
niques are evolved from the existing social fund of knowledge and 
scientific discovery, the use and application of which can be made 
more easily by large enterprises than by small ones. 

Technological innovation also has been an important factor in the 
changes which have taken place in the distribution and retailing of 
food products. The automobile, for example, has extended the 
shopping radius of consumers and lessened their need for credit and 
delivery service, thereby contributing to the growth of cash and carry 
chain-store systems. Even more important has been the greater ease 
and facility of communication, which has made it possible to extend 
the supervision of business enterprise over a wider scope and range 
of activities. 

Largely as a result of this latter factor, the whole concept of business 
management is being revised from that laid down by most of the 
older economists. They recognized the principle of the division of 
labor as applied to the mechanical processes of production, but they 
did not always see that this principle can be made to apply to the 
function of management as well.^ One of the most interesting and 
important aspects of modern big business is its subdivision of duties 
associated with the managerial function. It is this specialization of 
tasks in coordinating and controlling business enterprises which has 
permitted them to grow beyond what Marshall described as the 
biological limits to their size.® 

The greater range of activities over which efficient management 
can now be extended in the field of niarketing is due in no small part 
to the instruments and conveniences provided by modern science and 
invention. Without the telephone and the telegraph it would obvi- 
ously be impossible to conduct enterprises as ramified and fast moving 
as a large chain-store system. Less obvious in their influence but 
not less important have been the numerous devices — the typewriter, 
the cash register, the computing machine, etc. — for standardizing and 
mechanizing the tasks of business management: Without seeking 
to exaggerate the role of these mechanical aids, it should be empha- 
sized that without them the division of labor and delegation of 
responsibility which arc necessary for the management and control 
of large-scale enterprise would be difficult, if not impossible. 


This brief review of commercial history and of the forces back of 
it leads to the thesis that business patterns are largely determined 
by material factors such as the prevailing mode of production, the 

>CT. M. J. Copeland, The Managerial Factor in Marketing, Facts and Factors in Econoniic History, 
Harvard University Press. CambridKe, 1932. pp. ."lOft-eiQ. 

•Alfred Marshall, Principles of Economics, eiehth edition, Macmillan & Ca., Ltd., London, 1920, 
box IV, ch. Xin. 


facilities for transportation and communication, and the size of th6 
trade area (itself largely resultive). If this is true, there is at least 
a strong presumption that recent corporate developments in the food 
industries as well as elsewhere represent the natural and inevitable 
adjustment of economic institutions to the basic factors which condi- 
tion them. It would be an oversimplification to insist that tech- 
nological forces are all that is involved. In some instances corporate 
mergers and combinations have been engineered for purposes of 
financial manipulation and extortive gain and have had no real basis 
in operating advantages or economic efficiency. The greater error, 
however, is not to recognize that large-scale organization may have 
a more fundamental impulse than is sometimes thought to be the case. 


The growth of the groceiy chain is the most interesting and in 
many ways the most significant large-scale development in the food 
industries. From a place of comparative insignificance before the 
World War, corporate grocery chains have grown to the point where 
they are retailing today approximately 40 percent of all food products 
sold through retail outlets. Several of these systems operate on a 
national basis, and one of them does an annual business of nearly 
$1,000,000,000. It is noteworthy that this development has come in 
a field of enterprise thought to be particularly unadaptable to corpo- 
rate mass methods. 

Large-scale retailing has taken several forms. Most important are, 
of course, the corporate grocery chains. Among independent retailers, 
however, a similar tendency is to be noted in the formation of 
voluntary chains for the cooperative purchase of supplies. Such 
chains employ much of the mass technique used by the corporate 
chains, but with important difl'erences subsequently to be noted. 
Another recent form of mass retailing is the so-called supermarket, 
which might be described simplj' as a gigantic retail unit in comparison 
with former standards. The extent and character of each of these 
developments in mass retailing will form the subject matter of the 
present chapter. 


In the course of its development, the corporate grocery chain has 
passed through three distinct periods. The first phase, covering the 
years prior to 1900, might be described as one of pioneering. In this 
early period a few small systems were experimenting with multiple- 
unit retailing and were perfecting the principles of management and 
operation which were later to serve as the basis of mass distribution. 

First in the field was the Great Atlantic & Pacific Tea Co., which 
dates its origin from 1859. Beginning with a single store in that 
year, the founders of the sj^stem built it into a chain of 25 stores by 
1865. Next to be started was the Jones Brothers Tea Co. (now the 
Grand Union Co.) in 1872. Most of the other well-known grocery 
chains date their existence from the latter part of the nineteenth 
century, but in no instance were any of them sizable organizations 
according to present-day standards. 

Even in these early days the grocery chains emphasized rapid 
turn-over, low overhead, and cash sales. For the most part, new stores 
were added out of the profits of the enterprise. The scale of their 
operations was not such as to permit the newly formed chains to 
integrate the function of wholesaling, nor to institute many of the 
methods of mass distribution which were to come later. 


267003 — 41— No. 35 2 



The second period, dating roughly 1900 to the outbreak of 
the World War, was one of development. In these years the existing 
chain systems broadened their base of operation while new systems, 
attracted by the success of the older ones, were formed. Many of 
the smaller systems started in this pre-war period were subsequently 
absorbed by the larger systems in their program of expansion. Almost 
without exception these early twentieth century chain-store develop- 
ments were slow and conservative, being financed for the most part 
out of profits accruing from the business. 

The third stage began with the close of the World War. It was 
characterized hot only by a rapid increase in both the number and 
size of chain systems, but also by vertical integration. All the large 
chains and many of the smaller ones now carried on their own whole- 
saling operations, and a few of them went actively into the field of 
processing food products for their stores. The Great Atlantic & 
Pacific Tea Co., for instance, established its own bakeries, built 
several milk plants, organized a subsidiary for procuring fresh fruits 
and vegetables, and arranged for the manufacture of food products 
under its own brand. Earnings were no longer sufficient to finance 
the new scale of operations and most of the larger companies secured 
additional capital by the sale of securities. In general, however, these 
securities were closely held and did not figure prominently in financial 
and stock-market transactions. 

The five leading grocery chains at the present time are the Great 
Atlantic & Pacific Tea Co., Safeway Stores, Inc., The Kroger Grocery 
& Baking Co., First National Stores, Inc., and the American Stores 
Co. Table 1 shows the number of retail units operated by each of 
these companies for the period since 1920. The Atlantic & Pacific 
Tea Co. is, of course, the largest of the chains with more than 15,000 
stores located in all parts of the United States. This company 
operates more retail units than the other four leading systems com- 

Table 1. — Number of retail units operated by the 6 leading grocery chains, 1920-S6 


The Great 

Atlantic & 

Pacific Tea 


The Kroger 
Grocery & 
Baking Co. 

Stores Co. 

Stores, Inc. 



Stores, Inc. 




1, 243 
2, 133 
2, 859 




,5, 217 
9, 303 

14, 034 
1.=;, 671 
15, 177 

15. 670 
15, 427 

1922 ..- 

2 127 
2! 856 
5, 575 
5, 165 

1923 . 


2, 066 

3, ,527 

1924... - 






1928 - 



2. 549 

1930 - --. 

2, ,548 


2, ,546 



1933 • . .... 




1935 .. 

2, 556 


Over 15, 000 

Compiled from the company statements as reported in Moody's Manual of Investments: Industrials. 


Despite the rapid growth of these companies, they operate only a 
small percentage of the total number of retail grocery outlets. The 
United States Census of Distribution reported a total of 307,425 

Chart I 

Sales of five leading grocery chains compared with 
estimated total sales of all grocery stores 

■— TSzT'" 



Data from Table 2. 






1933 1935 1937 


grocery and combination stores ^ in 1929, and 354,971 in 1935.'^ 
The total number of stores operated by the 5 leading grocery chains 

1 Bureau of the Census, Fifteenth Census of the United States, 1030, Distribution, vol. I, Retail Distribu- 
tion, pt. 1, table 6. 
• Bureau of the Census, Census of Business, 1935, Retail Distribution, vol. IV, p. 13. 



in these years was about 28,250 and 28,100, respectively. The 5 
big chains thus had about 9 percent of all retail grocery units in 1929 
as compared with less than 8 percent in 1935. The proportion of the 
total grocery business which they did, however, has not declined siruje 
1929 because they have followed a poUcy of increasing the volume of 
business per store rather than increasing the number of stores. 

Dollar sales of the same five systems since 1919 are shown in chart I. 
The chart also shows an estimate of the total sales of all grocery and 
combination stores, based on the United States Census of Distribution. 

All five systems showed a tremendous growth in volume of business 
during the-1920's, most of them having increeised it at least fivefold. 
Their combined sales were about $409,520,000 in 1922 as compared 
with $1,805,000,000 in 1929. The increase in, their proportion of total 
grocery sales was from 7 percent in 1922 to 25 percent in 1929.^ The 
Atlantic & Pacific Tea Co., largest of the chains, had about 14 percent 
of the total grocery business in 1935. 

Since 1930 the sales of the big chains have moved up and down from 
year to year in accordance with changes in the supplies and retail 
prices of food products. The proportion of the total business done 
by them has remained about constant since the beginning of the 

Table 2. — Sales of 5 leading grocery chains compared with estimated total food 
sales of all grocery and combination stores, 1919-37 

E.sti mated 

total food 

sales, all 

stores I 

Sales Of—' 


The Great 

Atlantic & 

Pacific Tea 


The Kroger 
Grocery & 
Baking Co. 

The Ameri- 
Stores Co. 

Stores, Inc. 



Stores, Inc. 


$6, 470, 456, 000 
7, 132, 207, 000 

5, 441, 065, 000 

6, 735, 177, 000 
6, 249, 872, 000 
6, 249, 872, 000 

6, 543, 984, 000 
6, 985, 151, 000 

7, 352, 791, 000 
6, 543, 984, 000 
5, 294, 010, 000 

$194, 647, 000 
235, 303, 000 
202, 434, 000 
246, 941, 000 
302, 383, 000 
440, 023. 000 
674, 087, 000 
761, 403, 000 
972, 799, 000 
1, 005, 807, 000 
1, 008, 325, 000 
864, 048, 000 
842, 016, 000 
872, 244, 000 
881, 703, 000 

$76, 402, 000 
103, 059, 000 
86, 068, 000 
85, 866, 000 
94, 580, 000 
98, 179, 000 

108, 886, 000 
120, 665, 000 
137, 312, 000 
143, 340, 000 
142, 770, 000 
135, 226, 000 

109, 387, 000 


$50, 706, 000 


53, 754, 000 

74, 339, 000 

90, 125, 000 


146, 009, 000 


207, 373, 000 


267, 094, two 


213, 160, 000 

205, 692. 000 


229, 908, OtK) 

242, 273, 000 

248, 444, 000 

$9, 873, 000 


9, 625, 000 


$12, 468, 000 

19, 947, 000 

28, 532. 000 

38, 692, 000 

50, 537. 000 

69, 574, 000 

103, 304, 000 

213, 496, 000 

219, 285, 000 

246. 784, 000 



242. 966, 000 

294, 698. 000 


381, 868, 000 

10, 491, 000 

1923 . 



12, 499, 000 



1927 - 

48, 977, 000 
59, 082, 000 
64, 446. 000 




75. 885, 000 

107, 635. 000 

108, 197, 000 




107, 634, 000 
100. 893, 000 
105, 813, 000 



1935 -.- 

6, 352, 420, 000 



120, 083, 000 


124, 295, 000 

' Total net sales of food in frrocery and combination stores for the years 1929 and 1935 were compiled from 
the U. S. Census of Distribution for those years. For other years sales in such stores were estimated by 
means of an index number based on estimated consumers' expenditures for food. (Robt. R. Doane, The 
Measurement of American Wealth. Table XXIII.) 

» Moody's Manual of Investments: Industrials. 1936 data for The Great Atlantic & Pacific Tea Co. and 
First National Stores, Inc., compiled from reports published in Commercial and Financial Chronicle. 

In. addition to the five largest chains m.entioned above, there are 
num.erous other sectional and local systom.s which taken together are 
a factor of considerable importance in the grocery trade. The 1929 

« Does not include sales of fruit markets, delicatessen stores, meat shops, and miscellaneous food retailers. 


Census of Distribution showed that those chains, classified as ixational 
systems, had about 21 percent of the total grocery business; the 
sectional chains, 8 percent; and the local chains, 10 percent. 

On the whole the small grocery chain is less important today than 
it was 10 or 12 years ago. Much of the expansion of the big systems 
was accomplished through the acquisition of smaller chains with units 
in a particular city or territory which the former wished to enter. It 
is the opinion of the writer that, barring higher chain-store taxes and 
other legal impediments to their development, the trend will be in the 
direction of fewer and larger chains rather than toward an increase 
in the number of small ones. 


Another phase of large-scale retailing has been the organization of 
voluntary and cooperative chains of independent retailers. Such 
chains are of two types: (1) The wholesaler-sponsored chain in which 
the wholesaler takes the initiative in bringing about a closer mer- 
chandising affiliation with a group of independent retailers; and (2) the 
cooperative chain wherein the independent retailers own and operate 
a wholesaling enterprise on a cooperative basis. In both types the 
objective is fundamentally the same, namely, to integrate the whole- 
saling and retailing functions more closely and to provide the inde- 
pendent enterpriser in the grocery field with whatever advantages 
there may be in large-scale buying and wholesaling operations. 

Voluntary and cooperative chains differ greatly in the character of 
their operations and the services wliich they render to their member 
stores. Some of them are closely-knit, coordinated organizations 
which provide the retailer with nearly all his grocery stocks and assist 
him actively in the management and operation of his store. In 
organizations of this sort the methods of wholesaling and retailing 
take on many of the characteristics of the corporate chains. At the 
other extreme are the loose associations which provide their members 
with little else than a common name and whose methods of operation 
are essentially the same as those of the completely unorganized 

The extent to which independent retailers have imited themselves 
into some sort of voluntary or cooperative organization is indicated by 
table 3. According to the figures compiled by the American Institute 
of Food Distribution, there were 508 wholesaler-sponsored groups and 
164 retailer-owned chains in the United States in 1936. These organ- 
izations had a combined membership of more than 100,000 independent 
retail stores. The 1935 Census of Business shows a total of around 
304,000 independent grocery and combination stores for the country 
as a whole. Thus approximately one-third of this total number are 
affihated with voluntary or cooperative groups. 

Table 3. — Number of voluntary and cooperative chains in the United States, 19S6 

Type of organization 

Number of 


or groups 

Number of 


1. Wholesaler-sponsored, or voluntary chains. 

2. Retailer-owned, or cooperative chains 

Total, both types 




American Institute of Food Distribution, Inc., Group Selling by 100,000 Retailers. Compiled from 
table 1, p. 52. 


It would be incorrect to infer from these figures. that mass retaihng 
methods similar to those of the corporate chains are being applied by 
one-third of all independent retailers. It is probably correct to say 
that up to the present 'time most of these cooperative groups have done 
comparatively little to standardize retail store operations and to 
provide their members with those merchandising aids and services- 
which are the basis of mass retailing. 

So long as the ownership and management of the retail unit is vested 
in the hands of an independent operator, the complete integration of 
the functions of wholesaling and retailing and the standardization of 
retail practices characteristic of the corporate chains will be difficult to 
obtain. The voluntary chains have made great progress in this direc- 
tion and the future holds the promise of much more. But the complete 
application of standardized large-scale methods — whatever their 
advantages and disadvantages — will probably never be made by the 
great majority of independent retailers regardless of their organiza- 
tional and cooperative efforts. 


A very recent and highly significant development in the field of 
grocery retailing is the supermarket. It is difficult to lay down any 
exact definition of a supermarket or to classify any particular retail 
establishment as being in this category. As the terra is currently 
used, it applies to a retail unit which aims tov/ard a reduction of re- 
tailing costs by means of a large volume of business and a minimum of 
service to consumers. Alost supermarkets are operated on a self- 
serve basis, oft'er no credit and delivery service, and are located in 
city districts where rents are comparativelj^ low. Measured by the 
standards of the average grocery store, their volume of business is 
tremendous. Their sales commonly run up to three or four hundred 
thousand dollars per year. The appeal which such stores seek to make 
to the consumer is one of lower prices for those who demand a minimum 
of retail services. 

The increase in the importance of the supermarket during the last 
few years has been no less than phenomenal. Within 2 or 3 3'^ears 
several thousands of them have been established in all parts of the 
country and it is estimated that in 1937 they were doing about 7 
percent of the total retail grocery business.* 

The first retail markets of this sort were established by newly 
formed companies operating only one, or perhaps a small chain of 
them. While none of the supermarket companies as yet has a business 
comparable with that of the leading grocery chains, they are expanding 
rapidly and have begun the process of vertical integration which 
characterized the growth of the older chains. 

The chains themselves have begun to emulate the supermarket by 
establishing similar retail stores of their own. This they have been 
led to do for two reasons: (1) To meet the competition of the new 
supermarket companies, and (2) to reduce the burden of State chain 
store taxes based on number of retail units. All of the big grocery 
chains are experimenting with big store units of this type and are 
installing them as rapidly as possible. The time is probably not far 

* Hector Lazo. The Future of Food Distribution, Washington, 1937, p. 35. (Pamphlet.) 


off when a large percentage — perhaps the major part — of their sales 
wall be made in the supermarket type of store. 

There are two phases to mass retailing. One is integration of 
wholesaling and other distributing functions with that of retailing, 
which will be discussed in the next section. The second is the oper- 
ation of the retail store itself. The tendency of the corporate chains, 
and more recently of the supermarket companies, has been rapidly 
and unmistakably in the direction of larger retail units, perhaps of a 
size and type that today scarcely can be envisaged. 

The contrast between the mass distributor and the traditional 
independent grocer so far as the size of the store unit is concerned is 
illustrated by the following comparison: To do 1 percent of the total 
retail grocery business of the United States it takes on the average 
429 stores of the supermarket type, 1,170 corporate chain-store units, 
4,000 voluntary chain units, and more than 10,000 unaffiliated inde- 
pendent stores. In other words, the average supermarket has a 
volume of business nearly 25 times as large as that of the average 
independent, while the average corporate chain unit is 9 times as 
large. The significance of this from the standpoint of retail methods 
and efficiency will be discussed later. 


The grocery chains are commonly thought of only in connection 
with the retailmg of food products. Their enterprises, however, reach 
back into all phases of food processing and distribution, and in many 
cases, they bridge the entire span between producer and consumer. 
More than any other type of large-scale food concern, they furnish 
examples of vertically integrated and diversified enterprises. 

Some idea of the diversity of operations carried . on by the big 
grocery chains may be obtained from table 4. This table shows the 
plant facilities owned and operated by the five leading firms. 

The first thing to be noted is that all these systems operate their 
own warehouses for servicing their retail units with stocks of goods. 
The Atlantic & Pacific Tea Co. has more than 100 warehouses of this 
kind in all the larger cities of the country. The function performed 
by these warehouses is essentially the same as that which the special- 
ized wholesaler performs for the independent retailer. Consequently 
the corporate chains purchase almost nothing from, and virtually 
have no dealings with, the specialized grocery wholesaler. 

The baking of bread by the larger chains already has been men- 
tioned. The Atlantic & Pacific Tea Co. operates 40 bakeries; the 
Safeway Co. 21 ; and the Kroger Co., 12. (Table 4.) 

Two of the chains (Kroger and First National) have gone into the 
meat-packing business and operate packing plants. In the case of 
the latter company no slaughtering of live animals is carried on, the 
operations being confined to the curing and processing of meats. 
The Atlantic <fc Pacific Tea Co. operates 12 meat warehouses for 
supplying its retail units with meat products, but it engages in no 
meat-packing operations. 

The entrance of the grocery chains into the field of dairy manu- 
facturing and distribution is especially noteworthy. All of the four 
largest grocery chains operate condensery plants in producing areas 
in which milk is canned for sale under their own brands. The 



Whitehouse Milk Qo., subsidiary of the Atlantic & Pacific Tea Co., 
is the third largest firm in the canned mUk industry. Several of the 
chains also operate butter and cheese warehouses in or near the 
areas of heavy milk production where these products are assembled 
from local manufacturing plants for shipment direct to the branch 
warehouses of the chains. 

Table 4. — Plant facilities owned and operated hy the 5 leading grocery chain systems 
in the United States, 1936 

Type of facOity 




& Pacific 

Tea Co. 

& Baking 
Co. - 










Retail stores 

15, 427 





Warehouses, total 






General ' 






Produce.- - 










Meat packing plants 


Milk plants 3 .. .'. .. . 






Coffee-roasting plants 

Canning plants 


■General factories ... . 





Printing plants 


I Indicates facilities are operated, but number unknown. 
' For serving retaO units with a general line of groceries. 
' Includes condenseries, creameries, cheese, and miscellaneous dairy plf"'- 

* Salmon canning. Also operates fishing fleet. 

Compiled from annual reports of the companies as given in Moody's Manual of Investments: Industrials. 

Other processing operations carried on by the chains include coffee 
roasting, salmon canning, and the making of a great number of 
special products such as mayonnaise, spices, jellies and beverages. 

The chains have also gone a long way toward the displacement of 
the various middlemen engaged in the handling of fresh fruits and 
vegetables. The larger systems have set up their own subsidiaries 
for handling these commodities, and wherever possible buy direct 
from growers and shippers rather than from the regular terminal 
wholesale markets. 

The position of the grocery chains in the distribution of fresh fruits 
and vegetables in New York City is shown in chart II. Out of a 
total of 73,000 cars of produce handled by the chains in this city in 
1936, they purchased only 36,000 cars from the wholesale markets 
within the city. The remainder they received direct at their ware- 
house doors, either from growers or local shippers. The situation in 
New York City is typical of that to be found in other large urban 
centers. The proportion of direct receipts of fruits and vegetables 
by the chains in Boston is about 55 percent; and in Philadelphia, 
57 percent.* As a rule the larger chains use the terminal markets as a 
source of supplies less than do the smaller systems. The Atlantic & 
Pacific Tea Co. buys almost nothing from the terminal produce 
wholesaler in many cities. 

• A. C. Hoffman and L. A. Be van. Chain Store Distribution of Fruits and Vegetables in the Northeastern 
States. Bureau of Agricultural Economics, 1937, pp. 16-18. (Mimeographed.) 









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It may bo set down as a general rule that the bigger the chain the 
more distributive functions it tends to integrate. Table 4 showed 
that the Atlantic & Pacific Tea Co. carries on a wider variety of enter- 
prises than the other big chains, and these in turn are far more 
diversified tlian the local chain systems. 

That this is true is not due to policy whims on the part of the 
management of the big grocery chains. For reasons to be discussed 
more fully in chapter VII, the big chains have been led naturally, 
and for reasons associated with more efficient operation, into many 
enterprises other than retailing. 

The desire to undertake certain processing and distributive func- 
tions in addition to retailing has been one of the main reasons why 
the larger chain systems have added to the number of their retail 
units. Obviously it v/ill not pay a small chain of four or five hundred 
stores to operate a coffee-roasting plant. No system having less than 
one thousand units would be in position to use the output of a modern 
plant for canning milk. The question of whether or not it pays the 
larger systems to go into fields other than retailing is one to which 
we shall return later. The point to be emphasized here is that the 
bigger chains actually have done so, and that their desire to syn- 
chronize their retailing and manufacturing operations has been one 
of the main reasons why they have added to the number of their 
retail stores. 




The first of the food industries to witness the development of large- 
scale organization was meat packing. The application of mass 
methods to the processing and distribution of meats was made soon 
after the Civil War. By the latter part of the nineteenth century 
the industry was largely centralized in the hands of four or five leading 
firms. At no time in the past 50 years has the small enterpriser been 
an important factor in meat processing and distribution. 

Meat packmg probably illustrates better than any other food indus- 
try the eft'ect of technological developments on the size of the business 
unit. The keystone of modern meat packing is artificial refrigeration. 
This process was introduced in the late 1870's. Before that time, 
meat animals had to be slaughtered close to the point of ultimate con- 
sumption because of the impossibility of sliipping fresh meat for any 
considerable distance. Under these conditions, centralization of the 
packing industry was clearly out of question. The slaughter of live- 
stock and the processing of meats quite natiirally was done by indi- 
vidual butchers and small companies operating on a local basis. 

The introduction of artificial refrigeration about 1875 literally 
revolutionized the packing industry. It now became possible to cen- 
tralize livestock slaughter in midwestern cities like Chicago where the 
economies of transportation dictated that it should be located. With 
geographical centralization came the opportunity to establish large 
plants and to apply methods of mass production to the slaughtering 
process itself. Large-scale plant operations not only made possible 
the greater mechanization and division of labor which are the bases 
of mass production, i,>ut also permitted the development of animal 
byproducts which today are of considerable importance in the indus- 
try. The modern technology of meat packing is too well known to 
require description here. ^Suffice it to say that the process is such that 
it never can be decentralized and carried on by small enterprises 
comparable in size to a local creamery or cheese factory. 

THE "big four" packers 

The four leading companies of the present time are Swift & Co., 
Armour & Co. (which in 1923 acquired Morris & Co.), Wilson & Co., 
and the Cudahy Packing Co. All these companies began as small 
individual businesses and can trace their origins back for many years. 
Gustavius Swift, P. D. Armour, and Nelson Morris, founders of three 
of the large companies which bear their names, entered the meat 
business before the Civil War in the capacity of small pork packers. 
They were also dealers in cattle, in a business which at that time con- 
sisted of shipping live cattle from Chicago to eastern points for 
slaughter or export. The profits made by these pioneers in tlic 




industry were large and furnished most of tlie capital for their early 

After these companies entered the dressed-beef business about 1880^ 
their growth was phenomenal. By 1897 the ftve leading packers were 
operating a total of 20 large packing plants; by 1907, 57 plants; and 
by 1917, 91 plants.^ Their facilities for meat distribution were ex- 
panded with equal rapidity. In 1884 they had only two branch ware- 
houses for the wholesale distribution of meat. By 1912 the number 
had increased to 591 and by 1917 to 1,120, nearly half of which were 
owned by Swift and Armour. 

At the turn of the century the five largest packers were purchasing 
nearly half of all animals sold for slaughter in the United States. 
Their expansion contmued up to the beginning of the World War, at 
which time they were slaughtering 82 percent of all cattle, 86 percent 
of all sheep, and 61 percent of all hogs (table 5). The dominant 
position of the big packer in the meat industry is clearly indicated by 
these figures. 

Table 5.- 

-Proportion of meat animals slaughtered by the 5 leading packers, 
1908-35 1 




Sheep and 



All animals 

1908 - 





.59. 7 

1916 - 


1919 . -- 






1935 . 


1 Swift & Co.; Armour & Co.; Morris & Co.; the Cudahy Packing Co.; and Wilson & Co., Inc. and its 
predt'cessors. Morris & Co. was acquired by Armour in 1923. 

Federal Trade Commission, Agricultural Income Inquiry, pt. 1— Principal Farm Products, 1937, p. 198.. 

The operations of the packers were by no means limited to m.eats. 
They were also engaged in the handling of many other products, most 
of which were related in some way to the processing or distribution of 
meats. In 1917 the five big packers produced about one-fifth of the 
domestic fertilizer, three-fourths of the hides, and nearly one-third of 
the cottonseed oil.^ They were important factors in the distribution 
of butter and eggs, and handled at least half of interstate commerce 
in cheese. Several of them were also engaged through their subsid- 
iaries in the canning of fruits arid vegetables, and most of them dis- 
tributed a general line of groceries to the retailer along with meats. 
A few were even operating retail meat markets and grocery stores. 
All the larger packers held stock in banks and cattle-loan companies, 
controlled stockyard facilities, and owned lar^c numbers of refrigerator 
cars. Indeed, their business enterprises at the time of the World War 
were the largest and most ramified ever develoned in the food indus- 
tries, before or since. 

During and immediately following the World War a new develop- 
ment occuix'ed in the packing industry, namely, the growth of small 

1 The Packers' Consent Decree. S, Doc. No. 234, 71st Cong., 3d sess., p. 3. 

• Federal Trade Commission, Report on the Meat Packing Industry, 1919, pt. I, pp. 35-41. 


interior packers with plants located in cities throughout the Corn Belt. 
Just as technological factors had been responsible 30 or 40 years earlier 
for centralizing the industry in Chicago and other large western cities, 
so they were now responsible for some tendency tow'ard decentraliza- 
tion. The chief reason for the growth of the interior plants was the 
motortruck which made it possible to slaughter hogs nearer to the 
point of production and thus effect savings in transportation costs. 
Another source of saving to the interior packer lay in the avoidance 
of marketing and yardage costs incurred on livestock shipped to the 
large markets such as Chicago and St. Louis. 

Usually these interior packing plants were started by small, newly 
formed companies. The effect which they had in reducing the volume 
of business done by the big packers can be seen from table 5. In 1916 
the "big four" were slaughtering 71 percent of all animals killed under 
Federal inspection. In 1929 their percentage had fallen to 59 percent. 
The decrease in their business was especially marked in the case of 
hogs and beef cattle. 

Noting the success of the interior packers, the "big four" began 
8 .or 10 years ago to buy up some of them and to build new plants 
of their own near the sources of livestock production. Their policy 
in this respect is clearly reflected by an increase in the. percentage of 
hogs slaughtered by the "big four" since 1929 (table 5). 

Some idea of the size of the four leading packers and their position 
both in relation to one another and to the industry as a whole may be 
obtained from chart III. The chart shows the dollar sales of each of 
the companies for the period 1919-37. At the top of the chart is a 
line representing the total value of all meat products as obtained by 
the United States Census of Manufactures. 

Table 6. — Sales of 4 leading meat packers compared with total value (to manu- 
facturer) of meat and all byproducts of meat packing, 1919-37 ^ 

Total value of 

meat and meat 

products ' 

Sales of— ' 


Swift & Co. 

Wilson & Co. 

Packing Co. 

Armour & Co. 



800, 000, 000 
650, 000, 000 
7.50, 000, 000 
775, 000, 000 
875, 000, 000 
950, 000, 000 
925, 000. 000 
970, 000, 000 
539, 000, OOQ 
500, 000, 000 
7fi7, 227. 000 
885, 837, 000 

288, 802, 000 
173, 695, 000 
233, 325, 000 
251, 156,000 
180, 218, 000 


$900,000 000 







2, 585, 804, 000 

800, 000, 000 


800. 000, 000 


3, 050, 286, 000 


1926 .... 

« $195, 666, 666 

2.3,''). (XK). 000 
270, 000, 000 
223, 018, 000 
253, 226, 000 

» 9f)0, 000 000 



900. 000, 000 





900, 000, 000 




2, 180, 823. 000 

668, 000, 000 


468, 000, 000 



452. 000, 000 


564, 000, 000 


2, 362, 369, 000 

683, 000, 000 

1936 ^ 

748, 935, 000 



282, 746, 000 222, 222, 000 


' Sales of moat packers Include other products than meat and meat products, and are therefore not strictly 
comparable with the fitniros shown in column 1. 
« U. S. Biennial d-nsus of Manufactures. 

* Moody's Manual of Investments: Industrials. 
< Eieht-month period. 

• Adjusted for a 12-month period. 



Swift and Armour, of course, are the two largest firms in the pack- 
ing industry at the present time. Each did a business of approxi- 
mately $1,000,000,000 in 1929, as compared with $310,000,000 for 
Wilson and $268,00a,000 for Cudahy. 

Chart III 

Sales of four leading Packers compared with 




1919 1921 1923 1925 1927 1929 1931 1933 1935 1937 

U S DtrtkHTWCNT or *C«ICbLTU«e tWMAU ot ACRKULTuRM. ccomouki 

Data from Table 6. 



As already pointed out, the period of corporate expansion in meat 
packing occurred before the World War. The last 15 or 20 years 
therefore have not witnessed the changes in meat packing which took 
place in most other food industries. This is evidenced by the fact 
that the dollar sales of the four big packers have fluctuated just about 
in proportion to changes in the total value of all meat products since 

The combined sales of Swift and Armour were 64 percent of the 
total value of all meats in 1921, 55 percent in 1929, and 61 percent in 
1935.^ The decrease in their percentage from 1921 to 1929 is to be 
explained by the growth of the interior packers described above. The 
subsequent increase in their percentage of sales reflects the acquisition 
of some of these interior plants. 


In the preceding chapter on grocery chains, we have seen how they 
integrated in the direction of the farmer by performing for themselves 
many of the services of wholesaling and processing for their, member 
stores. The big processor, of which the meat packers are perhaps the 
best example, has integrated both toward the farmer and toward the 
retailer. For many years the big packers have operated their own 
branch houses for distributing meat direct to the independent retail 
store. In other words, they have assumed the function of whole- 
saling, which in the case of most other food products is performed 
mainly by specialized middlemen. More recently they also have 
begun to buy more and more of their livestock direct from farmers, 
which has meant that they have tended to displace the speciahzed 
middlemen at that end of the marketing system. 

The position of the big meat packers and their relation to other 
handlers of meat products at all stages in the marketing process may 
be ascertained from a careful examination of tables 7 and 8. Table 
7 shows the som-ces from which the packers obtain their livestock 
suppHes, and table 8, the sales outlets to which they sell their meats. 

Table 7. — Sources of livestock supplies of 11 meat-packing companies, 19S5 

Sources of supply 

Livestock purchases in terms of 
percentage of total 




On public stockyards: 









Federal Trade Corhmission, Agricultural Income Inquiry. 

Pt. 1— Principal Farm Products, 1037, p. 

' The proportion of meat products hamilod by these two firms is not so large as these percentaiics would 
indicate because their dollar sales include many products other than meats. 


Table 8. — Sales outlets for meats used by 8 leading meat-packing compani^, 1935 

Sales outlets 

Sales as percentage of total 




Independent meat markets and grocery stores 

Corporate grocery, chains 

C!ooperative and voluntary chains 

Wholesale meat dealers and jobbers 

Other outlets - 




Federal Trade Commission, Agricultural Income Inquiry. Pt. I— Principal Farm Products, 1937, p. 

In the case of cattle and calves, the packers purchase the bulk of 
their supplies through. the commission firms on the larger terminal 
livestock markets. Eighty-six percent of the cattle and 75 percent of 
the calves are procured through such commission firms (table 7). 
The bulk of the hog supplies, however, is no longer obtained in this 
way. At the present time the big packers are buying more than 
half their hogs direct from growers and shippers at country points. 
Direct buying of livestock by the packers represents the integration 
of the assembling function formerly performed by the terminal com- 
mission firms. It is but one phase of the general trend toward the 
elimination of middlemen which has accompanied large-scale organi- 
zation for nearly all agricultural products. 

There are even fewer intermediaries between the packer and the 
retailer than between the packer and the farmer. Of the total meat 
sales made by eight leading packing companies, approximately three- 
fourths are made direct to independent meat markets and grocery 
stores (table 8). From 7 to 10 percent of these sales are made to 
grocery chains, and only 6 to 8 percent to wholesale meat dealers and 

The small part played by specialized wholesalers and jobbers in 
meat distribution is due partly to the perishable character of most 
meat products, but mainly to the fact that this industry developed 
years ago under conditions of large-scale organization. 

An interesting sidelight relative to meat distribution at the present 
time is the friction which has developed between the big packers and 
the grocery chains over the question of how the retail units of the 
chains shall be serviced with meats. Since the big packers have 
their own branch warehouses for tliis purpose, they have sought to 
handle chain-store meats through these warehouses. But the chains 
have wholesale warehouses of their own, and they have insisted that 
the packers ship meats direct to these warehouses from the central 
packing plants. In buying their meats in this way, the chains of 
course insist that the packers give them price discounts in line with 
the lower cost of making direct meat shipment. The larger chains 
have held rigidly to the policy of handling meat through their own 
warehouses, but the smaller systems still permit the packers to per- 
form this service for them. 


For the past 50 years there has been an almost constant drive by 
the big packers toward greater centralization of control. Before 1900, 
this took the form of pools and similar agreements aimed toward a 


lessening' of competition and a better coordination of processing 
facilities and sales efforts. From 1900 to the outbreak of the World 
War, the same tendency was expressed through holding companies 
and the outright purchase by the big packers of many of the smaller 
ones. The situation for the past 15 years has been fau"ly static under 
the terms of the packers' consent decree to be described later. 

The first pool of which there is record was the "Allerton pool" 
formed in 1888 by Swift, Armour, Morris, and Hammond. The 
object of the pool was to control the quantity of meat shipped by 
each member, but it was never very effective in doing this.* An 
investigation by a committee of the United States Senate in 1890 
charged these firms with collusion for purposes of fixing meat prices, 
division of sales territories and the purchase of livestock. These 
charges against the big packers were partly responsible for the passage 
of the Sherman Antitrust Act in 1890. 

Despite the antitrust legislation, the same group of packers and 
several additional ones formed a new pool in 1893. It was known as 
the "Veeder pool" and operated for 3 years. The main objective of 
the arrangement was to divide sales territories and apportion the 
sales among members on a definite quota basis. Fines were assessed 
against any members of the pool who exceeded their quotas. 

In 1898 still another pool was formed, differing but little from the 
Veeder pool. The Federal Government then asked for, and received, 
an injunction against such pools in 1903. 

Meanwhile, Swift, Armour, and Morris began to acquire a number 
of smaller companies with the idea of forming a huge merger to cover 
most of the packing industry. Plans for the merger were upset by 
the panic of 1903. Thereupon they immediately formed a holding 
corporation called the National Packing Co. which enabled them to 
continue many of the practices of the old Veeder pool. The National 
Packing Co. was dissolved in 1912 by the threat of court action by 
the Federal Government. 

Even this did not end the efforts of the packers to enter into various 
pooling arrangements. Just before the World War, the "big four" 
organized another pool which lasted until 1918. It took the form of 
an arrangement whereby livestock purchases at each market and for 
the country as a whole were to be divided among them on a definite 
percentage basis, subject to revision from time to time. The same 
firms also organized an international pool to regulate and divide beef 
shipments from South American countries in which they had plants. 

The packers supplemented their various pools and agreements by a 
long series of mergers and combinations. During the whole period 
since 1900, they have added to their holdings by the acquisition of 
scores of competing companies. The first big merger was the ac- 
quisition by Armour in 1902 of the G. H. Hammond Co., one of the 
largest packers of the time. An even more important merger was the 
consolidation of Armour with the Morris Co. in 1923. Before the 
merger these two companies ranked second and third, respectively, ii: 
the industry. Their consolidation gave Armour a volume of business 
about equal to that of Swift & Co. This tendency toward the pur- 
chase of smaller companies continues up to the present time. Even 
during the depression, several of the big packers continued to buy 

* Federal Trade Commission, Report on the Meat Packing Industry, 1918, pt. II, p. 13. 
267003 — 41— No. 35 3 


the properties of some of the interior packers which had grown up in 
recent years. 

With the exception of the Armour-Morris merger, however, there 
have been few important developments in the packing industry since 
the big companies entered into what is known as the Packers' Consent 
Decree in 1920. In 1919, the Federal Government had proceeded 
once more against the big packers in an effort to indict them for 
violation of the antitrust laws. The charges against them were not 
only that they were operating pools and other illegal arrangements in 
restraint of trade, but that their other operations such as the canning, 
warehousing, and wholesaling of unrelated food products were 
threatening to disrupt the entire distributive system for food products. 
In an effort to avoid possible indictment, the five big packers (includ- 
ing Morris) voluntarily agreed in 1920 to a set of propositions known 
as the Packers' Consent Decree. 

Under the terms of this decree, the above companies agreed to dis- 
pose of their holdings. in (1) public stockyards, (2) railroad terminals, 
(3) market newspapers, and (4) public cold-storage warehouses for 
products other than meats. They also agreed to discontinue their 
retail meat stores, and to quit the wholesale distribution of products 
unrelated to meats, notably groceries. They were allowed to retain 
their distributive facilities for meats, which included refrigerator cars, 
cold-storage plants, and branch warehouses. They also were per- 
mitted to continue the handling of dairy and poultry products, 
cottonseed oil, and oleomargarine. 

The Federal Trade Commission has since charged that the packers 
have been dilatory in complying with some of these provisions. The 
decree does appear, however, to have had the effect of restraining for 
the time at least their efforts to expand their operations beyond the 
slaughter and distribution of meat products. 

It is important to understand some of the real reasons which lay 
back of these persistent and seemingly provocative efforts of the big 
packers to merge and to enter into what the Federal Trade Com- 
mission felt were illegal pooling arrangements.^ The Commission 
charged the packers with making and receiving secret and unfair 
rebates, with improper methods of eliminating competition, with the 
fixing of prices, and with the extortion of excessive profits in some of 
their enterprises. There was undoubtedly considerable foundation 
for some of these charges, but the cause of the violations ran deeper 
than the Commission points out. 

In the first place, the element of competition in meat packing led 
to a considerable overexpansion in the slaughtering as well as in the 
distributive facilities for meat products. This in turn gave rise to 
price cutting and to abuses not unlike those which existed in the 
railroad industry before tlie roads were brought under J'ederal regu- 
lation. The organization of the packer pools, the division of terri- 
tories, and the apportionment of sales quotas can be explained at 
least partially on the grounds that they were necessary to rationalize 
the industry and to prevent inordinate competitive practices. It is 
now universally recognized that competition in the railroad industry 
leads to intolerable waste and duplication of railroad facilities, and 
this in turn, to ruinous rate competition and discriminatory practices. 

' Of. Federal Trade Commission, Agricultural Income Inquiry, 1937, pt. I, ch. IV, sec. 3, pp. 196-211. 


But it is not generally understood — or at least it is not admitted — 
that the same holds true for the meat-packing industry. 

Many of the mergers and consolidations made by the packers were 
clearly for the purpose of reducing costs of slaughter and distribution. 
Without such consolidations the unnecessary duplication of packing- 
house facilities unquestionably would have been much greater than it 
was, with higher plant costs as the inevitable consequence. An even 
greater incentive to mergers lay in the reduction of selling and dis- 
tribution costs. The wholesale distribution of meats requires the 
operation of district cold-storage warehouses from which deliveries of 
meat can be made to nearby retail stores. Each packer distributing 
in any particular city must operate such a district branch and maintain 
a staff of salesmen to canvass among the retail outlets of the vicinity. 
It is evident that the consolidation of such branch facilities would result 
in substantially lower costs for distributing meats. In many in- 
stances, if not in most, it was the prospect of such savings rather than 
the desire for monopoly gains that led the packers into their consolida- 
tion programs. 

Many observers have never understood why the packers handle 
products other than meats and have tried persistently to extend their 
operations into fields seemingly unrelated to meat packing. The 
common notion is that they hoped in this way to gain certam com- 
petitive advantages based on unfair and extortive trade practices. 
Undoubtedly this was a factor, but not the only one. 

The costs of operating branch warehouses and selling meats to the 
retailer represent a considerable part of the packers' gross margin. 
These costs are mainly in the nature of an overhead which can be re>- 
duced by the handling of additional products. Dairy and poultry 
products require refrigeration and must be handled in much the same 
way as meats. Since little extra expense was involved, the packers 
naturally began to distribute dairy products through their branch 
warehouses in an effort to reduce the warehouse overhead. 

The desire to reduce overhead costs also led them to extend their 
business in other ways. It is obvious that the costs of selling meats 
to the small retailer will be substantially reduced if the packer sales- 
man is in position to sell the retailer additional lines of goods. It was 
primarily to get such lines that the packers began the handling of dairy 
products, canned goods, coffee, and eventually a large variety of 
grocery items. To carry this another step — as the packers tried to 
do through the operation of retail markets — such selling costs might 
be still further reduced if the functions of retailing and wholesaling 
were integrated in such a way that sales solicitation of the retail outlet 
were no longer necessary. 

All of this is not to imply that there may not have been a consider- 
able element of financial manipulation and extortive gain involved in 
the development of large-scale organization in the packing industry. 
It would be a mistake, however, to look at this development only from 
this standpoint. Many of the principles of mass distribution and 
functional integration which the packers were criticized for trying to 
effectuate 30 or 40 years ago are now being applied by the corporate 
grocery chains and are generally accepted as being in the interest of 
more efficient food distribution. 


The growth of large-scale organization in the dairy industry is a 
comparatively recent development. Prior to the World War the 
manufacturing of dairy products was carried on almost entirely in 
small, local plants owned either independently or by producer coopera- 
tives. With the exception of the meat packers, which have been 
important factors in the distribution of butter and cheese for many 
years, there w*ere no corporations handling dairy products on a na- 
tional basis. It is probably correct to say that untU very- recently the 
dairy industry was more decentralized and less characterized by large- 
scale organization than any of the food industries, with the exception 
of grocery retailing. 

The last 15 years, howevser, have witnessed the organization and 
growth of large corporations in all branches of dairy marketing and 
manufacture. The most outstanding examples of this are the dairy 
companies such as the National Diary Products Corporation and the 
Borden Co.; the national chain-store systems, several of which have 
gone into the manufacturing as well as the retailing of dairy products; 
and the meat packers. The organization of several producer coopera- 
tives marketing dairy products on a national scale is another example 
of the general trend toward large-scale organization in this industry, 
although on the whole such developments under the cooperative form 
of business enterprise have not kept pace with those under the cor- 
porate form. 


There are at the present time sLx dairy corporations operating on 
what might be termed a "national basis." The two largest of these 
are the National Daiiy Products Corporation and the Borden Co. 
Both these organizations have extensive facilities for manufacturing 
dairy products and for distributing them in most parts of the country. 
Next in size are the Beatrice Creamery Co. and the Fairmont Cream- 
ery Co. which do a business similar in character to that of the first two, 
but on a smaller scale. There are also the Carnation Co. and the Pet 
MUk Co., both engaged prhnarilv in the manufacture and distribution 
of condensed and evaporated milk. Several of the big meat packers 
and chain-store systems handle a larger volume of dairy products than 
some of the specialized dairy corporations listed above, but for the 
moment discussion will be confined to the dairy companies. 

Dollar sales of the four leading dairy corporations for the period 
1919-.37 are shown in chart lY. All these companies, and particu- 
larly the two largest, showed a tremendous growth during the decade 
of the twenties. In the interval from 1925 to 1929, the sales of the 
National Dairy Products Corporation increased from about $105,000,- 
000 to $300,000,000; sales of the Borden Co., from $123,000,000 to 




$328,000,000; and of the four reporting companies combined, from 
$299 455,000 to $7£0,000,000. During this same penod the estimated 
total sales value of all dairy products mcreased from about $1,965,- 
000 000 to $2,200,000,000. DoUar sales of the four leadmg dairy 
companies thus more than doubled during a 5-year penod m which the 
total sales value of dairy products increased only about 12 percent. 

Chabt IV 



1919 1921 

^ i Mmk«<uCHi or ASOicuiTuiK 




Data from Table 9. 



The period of rapid expansion on the part of the dairy companies 
ended at least temporarily with the beginning of the depression. 
Their dollar sales since that time have fluctuated about in accordance 
with changes in the production and price of dairy products (chart IV). 

Table 9. — Sales of 4 leading dairy companies cornpared with estimated total sales 
value of dairy products, 1919-37 

Estimated total 
sales value of 
all dairy prod- 
ucts ' 

Sales of »— 


Dairy Prod- 
ucts Cor- 




The Borden 

Co. (Dela- 


$122, 284, 000 
92, 059, 000 
100, 245, 000 
109, 667, 000 
123, 353, 000 
124, 912, 000 
132, 047, 000 
180, 850, 000 
328, 467, 000 
345, 423, 000 
284, 587, 000 
212, 349, 000 
186, 301, 000 
215, 724, 000 
238, 845, 000 
237, 562, 000 



$1, 605, 345, 000 

$26, 899, 000 


28, 565, 000 

1923... - 


20, 181, 000 
105, 377, 000 
134, 550, 000 
145, 330, 000 
212, 632, 000 
374, 558, 000 
320, 788, 000 
252, 654. 000 
231, 197, 000 
267. 415, 000 
329, 172, 000 
351, 016, 000 

33, 521, 000 


33, 027, 000 



$35, 051, 000 
33, 974, 000 

52, 744, 000 

53, 307, 000 
83, 682, 000 
64, 059, 000 
46, 264, 000 
44, 868, 000 
54, 883, 000 
57, 117, 000 
59, 667, 000 
64, 224, 000 

35, 674, 000 

1926. -■ 

37, 504, 000 


2, 105, 292, 000 

39, 823, 000 




1 198, 575, 000 

47, 747, 000 


• 51, 586, 000 


1, 624, 008, 000 

36, 295, 000 


29, 031, 000 



33, 617, 000 


40, 371, 000 



42, 995, 000 


46, 005, 000 


46, 884, 000 

' The value of fluid milk and cream eales in 1929 has been obtained from the 1930 Census of Distribution 
which shows sales by retail and wholesale distributors. For years other than 1929, sales have been estimated 
on the basis of the United States retail price of fluid milk as compiled by the Bureau of Labor Statistics and 
the estimated consumption of fluid milk and cream as reported by the Bureau of AgricultU' al Economics. 
These estimates of the value of'fluld milk and cream sales are intended only to show the trend from year to 

• Moody's Manual of Investments: Industrials. 

' Before 1929 was known as Fairmont Creamery Co. (Nebraska). 

• Not available. 

• 14-montb period. 

The National Dairy Products Corporation, largest of the dairy 
companies, was incorporated in 1923. The corporation immediately 
began a program of expansion, usually by acquiring the stock or 
assets of established dairy companies. Among its first acquisitions 
was Sheffield Farms, Inc., which is the largest fluid-milk distributor in 
the New York metropolitan area. In rapid succession, National 
Dairies acquired fluid-milk and ice-cream facilities in most of the large" 
cities of central and eastern United States. Its largest single acquisi- 
tion was the purchase of the property and assets of the Kraft-Pheiiix 
Cheese - Corporation. The latter corporation itself previously had 
acquired control of no less than 50 separate dairy companies, including 
Southern Dairies, Inc., wliich had extensive facilities throughout the 
southern and southeastern States. 

By the end of 1930 the National Dairy Products Corporation was 
doing business in most parts of the country east of the Mississippi 
and in several foreign countries. During the 10-year period, 1923-32, 
it acquired control of 331 separate dauy companies, 194 of them 
directly and the remainder as subsidiaries of acquired companies.^ 
The corporation made its most rapid exp.nnsion in the years 1928, 1929, 
and 1930, and since that time has grown comparatively littl 

1 Federal Trade Commission, Agricultural Income Inquiry, 1937, vol. II, p. 448. 


The National Dairy Products Corporation handled 7,177,041,000 
pounds of fluid milk and milk equivalent in 1934, which was 9.4 
percent of the total volume of milk moving into commercial channels 
in the United States that year.^ For certain products and in some 
market areas, however, the corporation is much more important than 
this percentage would indicate. It is estimated that for the United 
States as a whole, it is handling more than 21 percent of the total vol- 
ume of ice cream consumed, this percentage in some States running 
as high as 40-50 percent.^ Through the Kraft-Phenix Cheese Co., 
it manufactures and sells approximately one-third of the total supply 
of cheese m the United States. In the case of fluid milk, the corpora- 
tion is estimated to be distributing about 10 percent of the total volume 
for the country as a whole, with the percentage running up to 30-50 
percent in most cities in which it has distributive facilities.'' Most 
of the corporation's business is in fluid milk, ice cream, and cheese. 
It is comparatively unimportant in the handling of butter and con- 
densed milk. 

The Borden Co. is similar in size and in the general character of its 
operations to the National Dairy Products Corporation. It was 
incorporated in 1899, succeeding a business originally established in 
1857 to manufacture condensed milk. Its growth was steady but 
comparatively slow until 1928. In that year it began a program of 
rapid expansion,^ which carrfed its sales from $132,000,000 in 1927 to 
$345,000,000 in'l930. The expansion program ended with the be- 
ginning of the depression and has not been resumed thus far. 

In the 5-year period from 1928 to 1932 the Borden Co. acquired 207 
separate dairy enterprises located in 18 different States.^ As in the 
case of the National Dairy Products Corporation, the Borden Co. 
achieved its expansion chiefly through the purchase of the stock or 
assets of established dairy companies, some of them already sizable 
enterprises in themselves. 

As of lOS-^'j the milk and milk products handled by the Borden 
Co. were equivalent to about 6.8 percent of the total production of 
milk for commercial use. It will be recalled that the comparable 
percentage for the National Dairy Products Corporation was 9.4 
percent. The Borden Co. handles all dairy products, although the 
major part of its business is in fluid-milk distribution. It ranks above 
the National Dairy Products Corporation in volume of condensed milk 
manufactured, but below it in volume of cheese and butter. 

Third in imporj.ance among the dairy corporations is the Beatrice 
Creamery Co., successor to a produce enterprise started in Nebraska 
in 1891. The company had a slow but steady growth until 1925, at 
which time it began a program of expansion which more than doubled 
its sales within the short span of a few years. The main emphasis of 
the Beatrice Creamery Co. always has been on butter. It ranks 
as the third largest handler of this commodity, its volume being ex- 
ceeded only by that of the two big meat packers. In addition to 
butter, the company manufactures and distributes substantial quan- 
tities of ice cream and cheese, and has a fluid-milk business in a number 
' of midwestern cities. It is not a factor in the manufacture and dis- 

> Federal Trade Commi.ssion, Sales and Distribution of Milk and Milk Products in the New York Sales 
Area, 1937, H. Doc. No. 95, 75th Cong., 1st sess., p. 81. 
« Ibid., p. 89. 

* Ibid., pp. 87-88. 

• Federal Trade Commissior, Sales and Distribution of Milk and Milk Products in the New York Sales 
Area, table 3, appendix. 


tribiition of conjiensed and evaporated milk. At the present time the 
company operates dairy manufacturing and storage facilities in 17 

Like the other large dairy companies, the Beatrice Creamery Co. 
has integrated the distributive functions up to the retailer. It has 
branch houses in many of the larger cities of the country for making 
sales of dairy products direct to grocers, hotels, and in some cases to 
consumers. One of the reasons back of its expansion program has 
been the need for developing a "family" of dairy and poultry products 
to help carry the overhead costs of a vertically integrated marketing 

Dollar sales of the Fairmont Creamery Co. rank fourth among those 
of the dairy corporations (chart IV). It conducts a business similar in 
character to that of the Beatrice Creamery Co. just described, but on a 
somewhat smaller scale. Wliile this company doubled its sales during 
the decade of the twenties, by the acquisition of many smaller compan- 
ies, its growth did not keep pace with that of the other large dairy 

The Carnation Co, and the Pet Milk Co. are the leaduig factors in 
the manufacture and distribution of condensed and evaporated milk. 
The two of them together handle about one-third of the total volume 
of these products produced, practically all of which they manufacture 
in their Own plants. 

The Carnation Co. was organized shortly after the World War foi 
the manufacture and sale of canned milk. Most of the company's 
business is still with this product, although it subsequently acquired 
facilities for distributing fluid milk in a number of western cities. The 
Pet Milk Co. is also interested mainly in condensed and evaporated 
milk, for the manufacture of which it operates 30 plants in various 
parts of the United States. 


In addition to the specialized dairy companies just described, the 
two other types of large-scale corporate handlers of dairy products 
are the meat packers and the grocery chains. The meat packers have 
been important factors in the distribution of butter and cheese for 
many years, but the entrance of the grocery chains into the dairy 
field is a comparatively recent thing. 

The meat packers distribute dairy products to their route customers 
(i. e., retailers and institutions) along with meats. In point of volume 
handled, they outrank even some of the big dairy companies. Thus 
far they have not gone extensively into the manufacture and distri- 
bution of condensed and evaporated milk, and, of course, they do not 
distribute fluid milk. 

The significance of the grocery chains for dairy marketing extends 
far beyond the function of retailing. To an increasing extent the 
larger "^chains are buying their butter and cheese direct from cream- 
eries and cheese factories, or from marketing cooperatives which serve 
as an intermediary between the two. The chains have not yet gone 
much into the manufacture of butter and cheese, although some of 
them have facilities for assembling butter and for the warehousing 
of cheese. The dairy-manufacturing activities of the chains are 



confined mainly to condensed and evaporated milk, in which field 
they are very important factors. 


The producers' cooperative movement in the dairy industry began 
many years ago, but not until recently did it develop what might be 
termed "large-scale marketing organizations." Cooperative market- 
ing in this industry first took the form of producer-owned creameries 
and cheese factories whose handling of the product did not extend 
beyond the point of local manufacturing and sale to the private 
wholesale assembler. This development, however, furnished the 
basis for the subsequent organization of cooperative sales agencies, 
several of which now distribute dairy products on a regional and even 
a national basis. 

Dollar sales of the five largest dairy cooperatives are shown in 
chart V. Most of these organizations showed a substantial increase 
in volume of business prior to 1930, although on a much smaller scale 
than the private corporations already described. Sales of the Dairy- 
men's League, Inc., largest of the dairv cooperatives, increased from 
about $62,000,000 in 1921 to $89,000,000 in 1929. Land O' Lakes,, a 
cooperative selling organization for creameries located in the Great 
Lakes Dairy States, increased its sales from about $39,000,000 in 1925 
(its first full year of business) to over $52,500,000 in 1929. The three 
smaller cooperatives shown in chart V more than trebled their business 
from 1921 to 1930, although the actual increase was less than that 
of the two largest organizations. 

Table 10. — Dollar sales of 6 leading dairy producers' cooperative marketing 

associations, 1921-36 



Association ' 

Land ' 
0' Lakes 
Creameries ' 

Iowa State 




Cream and 

Association ' 




Federation • 


82, 130, 902 
75, 132, 468 
65, 048, 895 
82, 501, 310 
85, 624, 190 
80, 165, 184 
70, 158, 911 
55, 140, 147 
65, 454, 823 
67, 275. 775 

« 61, 708, 945 

$3, 658, 176 
7, 735, 719 
13, 601-, 678 
10, 408, 810 
10, 565, 576 
15, 874, 383 
16, 572, 694 

$2, 794, 964 


3,764 852 


6, 657, 180 


39, 851, 656 
47, 221, 543 
35, 734, 976 
27, 009, 308 

6, 476, 677 

1925...-. - 

6, 521, 921 


7, 037, 787 


8, 563, 483 

1928 ■ 

2, 370, 711 
2, 209, 295 
2, 715, 337 
2, 625, 080 
3, 276, 459 
4, 649, 700 
6, 084, 208 

9, 033, 350 

1929 ,.... 

9, 804, 291 




7, 650, 788 


3, 856, 314 

1933 . 

1, 552, 433 


32, 841, 410 
35, 666, 291 
38, 316, 641 


1, 441, 752 


I From annual report of Dairymen's League Cooperative Association, Inc. 

' Courtesy of R. H. EJllsworth, Farm Credit Administration, Wasiiington, D. C. 

« Net sales (less deductions for freight and allowance). Other years on a gross-sales basis. 

The Dairymen's League was organized in 1907 by fluid-milk pro- 
ducers located in New York and surrounding States. It was — and 
still is — primarily a bargaining organization for sellmg fluid milk to 
private distributors. At the present time its volume of business is 
larger than that of any other dairy cooperative, its sales amounting 
in 1936 to more than $60,000,000. This exceeded the sales of all the 

Chabt V 







L&nd O Lakes 

Dairymen's League 
Cooperative Ass'n. 

Challenge Cream <& 
Butter Ass'n. 










U J OI»»»'"tNT or »S»iCUl.Tu«t 


Data, courtesy of R. H. Ellsworth, Farm Credit Administration, Washington, D. C; and from annoat 
report of Dairymen's League Cooperative Association, Inc. 

private dairy companies, with the exception of the National Dairy 
Products Corporation and the Borden Co. During the fiscal year 
ending March 31, 1937, the league handlisd 2,562,713,350 pounds of 
milk for 35,155 dairy farmers.* 

• Dairymen's League Cooperative Association, Inc., Story of the Year, 1936-37, p. 7. 



The operations of the league, while directed mainly toward the 
sale of fluid milk to distributors, are very diverse and cover a wide 
range of manufacturing and marketing activities. In addition to its 
sales to private distributors, the league itself distributes some milk 
at wholesale and retail through its own branches and subsidiaries. 
As of 1936 the volume of milk so distributed amounted to about 15 
percent of its total milk receipts. 

The league also manufactures a considerable part of its milk into 
products such as cheese, milk powder, and condensed milk. The 
volume of such products for the past 15-year period is shown in table 
11. At one time the organization operated as many as 250 country 
plants throughout the New York milkshed although at the present 
time this number has been reduced through consolidations and 

Table 11. — Volume of milk receipts, class I sales, and volume of dairy products 
manufactured by Dairymen's League Cooperative Association, Inc., 1921-36 

Total milk 

Class I sales 
(fluid milk) 

Volume of manufactured products 




Milk powder 


and con- 
densed milk 


2, 774, 6:^2, 000 
2, 447, 878, 000 
2, 272, 666, 000 
2, 216, 328, 000 
2, 495, 537, 000 
2, 578, 346, 000 
2, 732, 728, 000 
2, 559, 587, 000 
2, 385, 992, 000 







2, 086, 000 
1, 639, 000 
3, 078, 000 
33, 723, 000 
36, 809, 000 
31, 373, 000 


1, 269, 452, 000 
1, 256, 783, 000 






4, 183, 000 



875, 000 


29, 000 






1931 - 





1, 214, 509, 000 
1, 310, 688, 000 


1934 .. 



9, 196, 000 


Total milk handled and class I sales from annual reports of the Dairymen's League Cooperative 
Association; volume of manufactured products provided through the courtesy of R. H. Ellsworth, Farm 
Credit Administration. 

The league was led into these manufacturing activities mainly in 
order to dispose of the surplus above fluid-milk needs in the New 
York City- milkshed. Receiving stations and manufacturing plants 
were acquired by the league not so much for the purpose of building 
an integrated distributive system as to hold control over the milk 
produced in the area.^ The objectives and the forces back of the 
league's growth were therefore somewhat different from those of 
cooperatives such as Land O' Lakes and the Challenge Cream and 
Butter Association whose function is mainly to serve as a wholesale 
assemXling and distributing agency for local creameries and cheese 

Land O' Lsikes Creameries, Inc., was organized in 1924 to serve as 
the sales agent for a group of cooperative creameries in Minnesota 
and Wisconsin It was the outgrowth of an organization of Minnesota 
creamcrit's begun several years earlier. Prior to this effort to build 

' Federal 1 ruJe Cuin-nission, Sales and Distribution of Milk and Milk Products in the New York Sales 
A fa, January 5, iv/;", pp. ^i-Jo. 



a cooperative distributive agency, the creameries in these States sold 
their products mainly to private wholesale assemblers on an individual 

Land O'Lakes originally built its business around butter, but in 
recent years has handled increasing quantities of other dairy and 
poultry products. (See table 12.) Its volume of butter declined 
substantially since 1930, but there has been an increase in several 
other lines of its business, notably cheese. In 1934 it entered into 
an arrangement with the National Cheese Producers' Federation (a 
cooperative handling cheese for Wisconsin factories) to sell and 
distribute part of the cheese assembled by the latter agency. The 
sharp increase in Land O'Lakes cheese sales during the last few years 
is due mainly to this arrangement. 

Table 12. — Vohime of dairy and poultry products handled by Land O'Lakes 

Creameries, Inc., 1924-26 









32, 842, 000 
79, 667, 000 
98, 215, 000 
98, 138, 000 
78, 868. 000 
71, 200, 000 









19, 150, 000 
9, 064, 000 




3, 272, 000 

1929 ..... 



2, 927, 000 





24, 074, 000 







1924-34, from Farm Credit Administration, Cooperative Division, Bull. No. 3, Cooperative 
Marketing of Agricultural Products, p. 26; 1935-36, courtesy of R. H. Ellsworth, Farm Credit Administra- 

Land O'Lakes operates no manufacturing facilities of its own, its 
main function being to act as sales agent for its member creameries. 
At the present time about 40 cream.eries and dairy-manufacturing 
plants sell their products through this organization. In addition to 
this selling service it employs a staff of field agents to help its members 
with plant problems and quality im.provement, and also furnishes 
them with manufacturing supplies and equipment at cost^ 

Land O'Lakes is a vertically integrated marketing organization 
which has sought to carry the product as far toward the consumer 
as possible. The distributive functions which it performs are whole- 
sale assembling, grading, and branding and selling to the trade in 
wholesale and job lots. Most of the products which it handles are 
shipped to its plant at ^■linneapolis where they are graded and 
repacked under the trade-mark of the cooperative. Emphasis has 
been placed on quality, and the organization has sought to make its 
product known to the consumer through brand advertising. It 
operates branch jobbing houses in a number of the larger cities where 
sales are made direct to retailers, hotels, and local institutions. 
Sales are also made to corporate and cooperative chains, which dis- 
tribute the product under Land O'Lakes brand. Recently the 
organization has made an arraiigenient with Armour to distribute 
its product in territories where it has no jobbing facilities of its own. 


The Challenge Cream & Butter Association is a cooperative very 
similar to Land O'Lakes in type and method of operation. Its 
business, whose volume is about half that of Land O'Lakes, is con- 
fined mainly to the Pacific coast. Although its main product is 
butter, it handles a complete line of dairy products. 

The association acts as the sales agent for handling the products 
manufactured by its member creameries. One of its principal 
functions has been to develop wider market outlets for these products 
than the creameries could do individually. Like Land O'Lakes, it 
merchandises its product under its own brand and has sought to 
integrate as far toward the retailer as possible by establishing sales 
ofl&ces and jobbing branches in the larger cities of its territory. 

The National Cheese Producers' Federation is a cooperative sales 
agency for handling cheese manufactured by factories located mainly 
in Wisconsin. The largest volume of cheese ever handled by the 
federation was a little over 42,000,000 pounds in 1930, which was 
about 10 percent of the total United States production in that year. 
During the depression many of its member factories withdrew from 
the federation, its. volume falling in 1935 to a little under 12,000,000 
pounds. As already stated, the federation now has an arrangement 
to sell most of its cheese through Land O'Lakes. 

The National Cheese Producers' Federation never integrated so 
many marketing functions and never went so far in the direction of 
merchandising cheese as did Land O'Lakes with its products. While 
it was operating independently of Land O'Lakes, the federation's 
function was mainly that of a wholesale assembler. It operated a 
number of warehouses throughout Wisconsin, where cheese was 
received from local factories and stored prior to sale by the federation. 
Sales were made to cheese processors, meat packers, chain stores, 
and wholesale distributors. The federation operated no branch 
jobbing houses and did not attempt wholesale and jobbing distribution 
of its product in consuming centers. 

Iowa State Brand Creameries, Inc., was organized in 1926 to handle 
the sales of butter for a small group of Iowa creameries. By 1936 it 
had increased its membership to 72 creameries and was handling more 
than 16,000,000 pounds of butter. Its butter volume was thus a little 
less than one-fourth that of Land O'Lakes. 

The Iowa Cooperative concentrates butter from its member cream- 
eries at its plant in Mason City, Iowa. The product is marketed 
under the trade name of the organization. It operates no branch 
jobbing houses, and .has not yet tried to integrate the function of 
wholesale distribution. In this respect it differs from Land O'Lakes 
and the Challenge Cream & Butter Association of the Pacific coast. 


The importance of large corporations in the handling of dairy prod- 
ucts is indicated by table 13 and chart VI. The table gives the per- 
centage of the total production of specified dairy products sold by 1 1 
dairy companies and 10 meat packers, with the percentages of the 3 
largest sellers of each product shown separately. The data were 
compiled from the agricultural income inquiry recently- conducted by 
the Federal Trade Commission. 



In the case of fluid milk and cream, 1 1 dairy companies distribute 
about 18 percent of the estimated total volume of these products con- 
sumed in all cities and villages of the United States. The three largest 
companies handle the major part of this, or about 16 percent of the 
total for the country. The meat packers are a negligible factor in 
fluid-milk distribution. 

Chabt VI 















Data from Table 13. 


Table 13. — Percentages of total United States production of dairy products sold by 
leading dairy companies and meat packers, 1934 


Total United 
States pro- 

Sales as percentage of total 

11 dairy 

10 meat 

3 largest 

Fluid milk 


30, 499, 000, 000 

1, 696, 256, 000 

579, 122, 000 

1, 773. 918, 000 







1 15.6 



Cheese _ 


Condensed and evajwrated milk 

<44. 3 

'■Includes the Borden Co., National" Dairy Products Corporation, and Beatrice Creamery Co. 

' Includes Swift & Co., Armour & Co., and Beatrice Creamery Co. 

' iLoludes National Dairy Products Corporation, Armour & Co., and Swift & Co. 

< Includes the Carnation Co., the Pet Milk Co., and the Great Atlantic & Pacific Tea Co. 

Federal Trade Commission, Agricultural Income Inquiry, Ft. I— Principal Farm Products, 1937, pp. 228, 
247, and 250. 

Fluid-milk distribution in most city markets is much more cen- 
tralized than is indicated by the above figures for the country as a 
whole. The percentages of total class 1 sales made by the three 
largest handlers in four cities for which data were available are as 
follows: Boston, 63 percent; St. Louis, 69 percent; Phoenix, Ariz., 84 


percent; and San Diego, Calif., 90 percent.^ These percentages are. 
typical of those in most other large markets. 

The distribution of butter is less concentrated than that of any 
other dairy product. Despite the importance of the big packers and 
dairy companies in the handling of this commodity, none of them con- 
trols any very large part of the total supply ; 1 1 dairy companies and 
10 me|i^ packers are handling about 25 and 19 percent, respectively, 
of this total (table 13). The 3 largest distributors are Swift & Co., 
Armour & Co., and the Beatrice Creamery Co. Together these 3 
companies distribute around 20 percent of all butter produced. The 
largest single company has about 8 percent of this total supply. 

Cheese is manufactured mainly in small factories operated either 
as producer cooperatives or by independent operators. Its distribu- 
tion, however, is largely in the hands of a half dozen firms. 

Cheese sales of 11 dairy companies amounted in 1934 to about 44 
percent of all cheese produced, and sales of 10 meat packers to another 
46 percent (table 13). Three of these companies (National Dairy 
Prodiicts Corporation, Armour & Co., and Swift & Co.) handled 63 
percent of the total supply and the first of these had nearly one-third 
of it. There is some duplication in these figures because of inter- 
company sales, but the error due to this is not large enough to affect 
the percentages materially. 

Considerable centralization also exists in the manufacture and dis- 
tribution of condensed and evaporated milk. The leading firms in 
this branch of the industry are a somewhat different group fronv those 
which lead in the handling of other dairy products. The three largest 
manufacturers of condensed milk are the Carnation Co., the Pet Milk 
Co., and the White House Milk Co. (subsidiary of the Great Atlantic 
& Pacific Tea Co.). These three companies manufacture nearly half 
the total output (table 13). Next in importance are the Borden Co. 
and the National Dairy Products Corporation. As a group, the meat 
packers are not an important factor in the canned-milk industry. 

' E. W. Oaumnitz and O. M. Reed, Some Problems Involved in Establishing Milk Prices, Agricultural 
Adjustment Administration, Dairy Section, 1937, table 14, p. 41. 




Prior to the twentieth century, the milling of flour and the baking 
of broad were carried on mamly by small, local enterprisers. During 
the past 25 years, however, striking corporate developments have 
taken place in both these fields. Thus far, there has been no tendency 
either for the large flour millers to integrate the function of baking, or 
for the bakers to integrate the function of milling their flour. Because 
of their close product relationship, however, both industries will be 
considered together in the present chapter. 


The development of modern milling methods. 

The technique of flour milling has progressed during the past 100 
years from the simple friction process of the old grist mill to the 
highly mechanized methods of the m(^dern rolling mill. As in meat 
packing, innovations in the processing technique led directly and 
inevitably to an increase in the size of the business unit and ultimately 
to large-scale corporate organization in this industry. 

The mechanics of flour milling changed comparatively little from 
the time of the Greeks to the beginning of the nmeteenth century. 
The method used during the whole of this period was to crush the 
grain between two stones by means of a revolving motion of the upper 
one. Separation of the flour from the bran was done by means of 
crude sieves. During the course of the centuries, the capacity of 
flour mills was increased by enlarging the grinding discs and by the 
use of water power, but the basic principles remained the same. 

Early m the nineteenth century, a number of improvements were 
introduced by miflers in the United States. The old sifting process 
for separating the flour from the bran (i. e., the outer skin) was re- 
placed by reel separators in which silk was used for bolting. Ele- 
vators and conveyors for handling grain and meal in the mill were 
developed, all of which were comparatively simple from a techno- 
logical standpoint but represented great progress considering the 

Even with these innovations, however, milling was not a highly 
mechanized process and did not require a large capital investment. 
Up to the time of the Civil War the most common plant unit was the 
grist mill where wheat grown in the local neighborhood was brought 
for grinding. A number of cities such as Rochester, St. Louis, and 
Richmond, Va., were doing a considerable volume of commercial 
mining, but the scale of business enterprise was not large even by 
the standards of the times. 


267003 — 41— No. 35 4 


Two new processes literally revolutionized the milling industry in 
the United States and changed it from what might be termed "the 
grist-mUl era" to one of mass production. The first of these was a 
method for separating flour from bran by means of an air current 
rather than by sieves. The successful application of this method 
required power and complicated machinery and obviously could not 
be made use of in the old grist mill. 

Not only did this discovery help to change the type of the mOling 
unit, but it also had a great influence on the localization of grain 
growing and of flour milling. Spring wheat had theretofore been in 
disrepute because it had not been possible to make an acceptable 
flour from it. The new separation process, however, yielded as good 
a product from spring wheat as from winter wheat, with the result 
that grain production expanded rapidly in the spring wheat territory. 
Minneapolis, which was in the center of the spring wheat area, be- 
came almost overnight the leading flour milling center of the United 
States. Thus the geographical centralization of the milling industry, 
which was conducive to economic centralization, had received great 
impetus from a seemingly unrelated change in milling technique. 

The second important milling innovation was the use of roUs rather 
than fitted disks for grinding purposes. With sufficient power (which 
was now available) the capacity of a rolling mill was many times that 
of the old grinder-type unit. Concurrent with these two develop- 
ments was much progress in the mechanization of various other milling 
operations, such as cleaning the grain, elevating the meal, conveying, 
weighing, and packaging. No less important were developments in 
the chemistry of milling and the improvement of flour quality. 

By 1880 the technological basis of modern milling — i. e., power, air 
separation, roll grinders, and miUing chero.istiy — had been laid. 
Because none of these developments could be fully utilized in small 
plant units, the doorn of the local mUl was quickly sealed. By the 
early part of the twentieth century the milling industry was largely 
centralized in 10 or 12 cities in or near the areas of specialized wheat 

At this time (1900) the plant unit, while highly mechanized and 
with a much greater capacity than earlier types of mills, was not large 
in comparison with present-day plants. Plant consolidation and the 
complete application of mass-production methods in milling have come 
since 1920. 

The number of merchant mills in the United States reached its 
maximum in 1909 when the United States Census of Manufactures 
reported 11,691 plants with an average annual output per mill of 
9,046 barrels of flour (table 14). The number and capacity of mills 
remained fairly constant until the close of the World War. Immedi- 
ately thereafter began a series of mergers and consolidations among 
the nilling companies which resulted in the closing of many of the 
smaller plant units and the concentration of production into the 
gigantic flour mills of today. By 1935 the number of mills had been 
reduced to 2,193, as com.pared with 10,708 in 1919. The average 
annual output per mill had been stepped up proportionately and is in 
the vicinity of 50,000 barrels at the present time. 



Table 14. — Number of merchant flour mills in the United States, total volume of 
flour milled, and average volume per mill, 1899-1935 


Number of 



Total vol- 
ume of flour 

volume per 



Number of 



Total vol- 
ume of flour 

volume per 







10, 051 

99, 763, 777 

104, 013, 278 

105, 756, 645 
132, 465, 604 
110, 846, 277 

10, 349 
12, 371 








120, 094, 451 

29, 859 
47, 852 



102, 327, 237 

46, 661 

Data compiled from U. S. Census of Manufactures. 

The growth of the big flour-milling concerns. 

During the decade of the twenties, the flour-milhng industry went 
through a period of corporate consohdation and expansion analogous 
to that of the meat-packing industry 20 or 30 years before. At the 
close of the World War there were a dozen or more large flour-m.illing 
corporations, but the bulk of the m.illing facilities was still in the hands 
of small independent companies. The process of consolidation resulted 
in the acquisition of many of these small companies by the big cor- 
porations and, what was more important, in mergers am,ong the big 
companies themselves. 

It is estimated that in 1921, by which time considerable corporate 
consolidation had already taken place, five large companies were 
milling about 23 percent of the country's total output of flour. ^ 
Eight companies had 27 percent. These figures may be compared 
with those of 1935, when three companies milled 29 percent of the 
total production, of which the largest single company had more than 

The three largest flour-m.Llling companies are General Mills, Inc., 
the Pillsbury Flour Mills Co., and the Commander-Larabee Corpora- 
tion, control of which passed to the Archer-Daniels-Midland Co. in 
1930. The dollar sales of these three companies compared with the 
total value of all flour-mill products are shown in chart VII. The 
sales as given in this chart do not reflect in all cases the increasing 
concentration of corporate control because the sales of component 
companies are included in the years prior to merging. For instance, 
the sales shown for General Mills in the years 1923-27 are those of 
five separate companies which merged m 1928 to form the single com- 
pany now known as General Mills, Inc. 

In 1929 the total business of General Mills amounted to about 
.$163,000,000 (table 15). These sales represented around 16 percent 
of the total value of flour-m.iU products as given by the United States 
Census of Manufactures for that year. Sales of the Pillsbury Mills 
were considerably less than those of General Mills. As a matter of 
fact, the sales of General Mills were slightly larger than those- of the 
Pillsbury Mills and the Com.mander-Larabee Corporation combined. 
Financial difficulties of the latter company in the early vears of the 
depression contributed to the sharp decrease in its sales following 1930. 

• Federal Trade Commission, Agricultural Income Inquiry, 1937, pt. I, ch. IV, sec. 11, pp. 288-289. 



Chart VII 

Sales of three leading flour milling corporations compared 



1921 1923 

929 1931 

1935 1937 



Data from Table 15. 



Table 15. — Sales of three leading flour milling corporations compared with total 
value (to maiiufactiirer) of flour and other grain-mill products, 1919-37 

Total value 
of flour-mill 
products ' 

Sales of— ' 


General Mills, 


MUIs Co. 




$2, 052, 434, 000 

$90, 369, 000 
64, 2S7, 000 
48, 402, 000 

< 44. 450, 000 
53, 420, 000 
70, 701, 000 
83, 256, 000 
79, 954, 000 

1920, - 





1. 048, 577, 000 

$88, 680, 656 
128, 469, 000 
163, 072, 000 
: 23, 746,000 
87, 166, 000 
83, 880, 000 
118, 092, 000 
143, 074, 000 
147, 380, 000 
159, 980, 000 
152, 673, 000 


1925 ■. 

1, 298, 015, 000 


1927 -. 

1, 148, 760, 000 



41, 549, 000 


1, 060, 269, 000 

42, 647 000 


39, 639 000 


598, 041, 000 

20. 472, 000 


1 7 473, 000 

1933 . .. . 

574, 210, 000 

10, 737, 000 


66," 847, "666" 
69, 130, 000 
63, 441, 000 



853, 219, 000 



856, 644, 000 

' U. S. Biennial Census of Manufactures. 

i Moofiv's Mannnl of Investments: Industrials. 

3 Fiiiuns friiiii 1923 to 1927 are for Koyal Milling Co., Washburn Crosby Co., Red Star Milling Co., 
Rocky Mountain Elevator Co., and Kalispell Flour Mill Co. 

' 10-moiith period. 

' Control passed to Archer-Daniels-Mfdland Co. Sales of Commander-Larabee Corporation no longer 
publislied separatelv . 

The extent to which flour milling is concentrated in the hands of 
the leading companies in this field is indicated by table 16. This 
*tablQ gives the percentages of the total and commercial production of 
wheat represented by the handlings of 13 of the largest milling com- 
panies in 1934. General Mills, the largest single company, handled 
about 23 percent of the total volume of wheat produced for com- 
mercial uses in that year. This was more than twice the volume of 
the Pillsbury Co. and nearly as much as the volume of the four next 
largest companies combined. 

T.\BLE 16. — Percentages of total United States production of wheat represented hy 
purchases and handlings of 13 leading flour-milling companies, 1934 

Percentage of 

Percentage of 

total United 

United States 

States pro- 


Name of company 

duction of 

production of 



bushels in 





Wheat flour millers: 

General Mills. Inc 



Pillsburv Flour Mills Co . .. 



Colorado Milling & Klevator Co 

5. 3! 

Commander-I.nrabeo Corporation 


Russell Millor Millin? Co . . ...- 


3. 82 

International .Milline Co 


Tex-0-Kan Flour Mills Co 


Centennial Flouring Mills Co . 


Standard Milling Co 


Flour Mills of America, Inc . 


Fisher Flouring Mills Co 


King Midas Mill Co . 


Globe Grain & Milling Co 


' Includes only wheat "sold or for sale." 

Federal Trade CommissioD, Agricultural Income Inquiry. 

Pt. I— Principal Farm Products, 1937, p. 


Of the total amount of wheat flour produced in 1934, the 13 com- 
panies listed in table 16 milled 47 percent; and the 3 largest com- 
panies, 29 percent.^ The big companies' proportion of the total 
business of the milling industry is slightly smaller in terms of flour 
than in terms of wheat because they use proportionately more of 
their grain for purposes such as the making of cereals. 

Mergers and consolidations in flour milling 

The most notable merger in the flour-milling industry was the 
organization of General Alills, Inc., in 1928. This company was 
formed for the purpose of acquiring the business and property of 
five theretofore separate milling companies, all of which were sizable 
enterprises before the merger. The five companies were the Wash- 
burn-Crosby Co., Rod Star Milling Co., Royal Milling Co., Kalispell 
Flour Mills Co., and Rocky iMountain Elevator Co. 

The Washburn-Crosby Co., largest of the 5, had been formed in 
1889. At the time of the merger in 1928, this company itself owned 
the entire stock of 10 subsidiary milling companies and partially 
controUed several others. The other 4 companies involved in the 
merger were also among the 10 or 12 largest milling concerns at the 

FoUowing its incorporation in 1928, General Mills continued its 
expansion program. Early -in 1929 it acquired a niunber of small 
companies with mills in Oklahoma and Texas, and later in the year 
it bought the Sperry Flour Co., one of the largest milhng companies 
on the Pacific Coast. Other companies were added from time to 
time, including the Farm Service Stores, an organization for dis- 
tributing mill feeds and sundry farm supplies. 

By 1936 Gener'al Mills had acquired the entire capital stock of 25 
operating subsidiaries.^ These subsidiary companies were manufac- 
turers and distributors of flour, cereal products, and commercial live- 
stock feeds. The corporation maintains distributive offices for its 
products in 72 cities in the United States and foreign countries. It 
operates mills and storage elevators in 22 cities. The combined capac- 
ity of all its mills is more than 80,000 barrels of flour per day, which 
is about one-fourth of the total capacity of all commercial flour mills 
in the country. 

The Pillsbury Flour Mills Co. (Delaware), second in size to General 
Mills, was incorporated in 1935 to acquire the assets of Pillsburj^ Flour 
Mills, Inc. (Delaware), Pillsbury Flour Mills Co. (Minnesota), and 
several other companies, all of which had been operating under central 
management for a number of years. The present company traces its 
origin back to 1889, when it was first organized in Minneapolis, Minn. 
It has had a fairly steady growth since that time, during the course 
of which it acquired, as did General Mills, the assets of many smaller 

The Pillsbury Co. conducts its business on a Nation-wide scale and 
has milling and distributive facilities in all parts of the country. In 
addition to the manufacture and sale of fiour, it handles feed and other 
mill products and manufactures the rope, paper, and paper bags used 
for packaging its products. As of 1936, the daily capacity of all its 
mills was about 39,000 barrels, or about half that of General Mills. 

During a period of financial difficulties, control of the Commander- 
Larabee Corporation, third largest milling company, passed to the 

» Federal Trade Comir.iss'on, op cit. pp 55?K-560. 
3 Moody's Manual of Investments: industrials, 1937. 


Arcber-Daniels-Midland Co. in 1930. The latter is a holding com- 
pany which controls the stocks of many companies engaged in a wide 
variety of enterprises. The Commander-Larabee Corporation is the 
only one of its subsidiaries engaged in flour milling. 

The Commander-Larabee Co. was organized in 1926, acquiring at 
that time the Commander Milling Co. and its subsidiaries, the Lara- 
bee Flour Mills Co. and several smaller concerns. Subsequently the 
.company purchased a number of other milling companies, none of 
them sizable. Next to the organization of General Mills, Inc., the 
consolidation of the Commander and Larabee companies in 1926 was 
the biggest flour-milling merger of the decade. 

Efforts to restrict competition in flour milling. 

The Federal Trade Commission has charged the flour millers on a 
number of occasions with efforts to restrict competition in the milling 
industry.* These efforts took various forms, including curtailment of 
flour production, blacklists, the exchange of price information, and 
attempts to fix uniform margins and differentials on flour. 

Curtailment of flour production by the millers does not appear to 
have gone beyond the discussion stage. The subject was first broached 
at various millers' meetings in 1923, when it was pointed out by their 
trade association that the milling capacity of the country was greatly 
in excess of domestic needs. Many of the millers believed that this 
led to unsatisfactory conditions in their industry, and suggested the 
need for closing do^\^l some of the mills in order to limit the flour out- 
put. The proposals did not take concrete form, however, and there 
was never any open attempt by the industry to control flour pro- 

There was also much discussion by the millers at this time relative 
to the need for maintaining a fixed margin for flour above the cost of 
wheat so as to obtain what they termed a reasonable profit. Through 
their various trade organizations they urged each other not to scU flour 
at prices which did not return the cost of milling. Information on 
selling prices of flour was exchanged among the miUers in an effort to 
prevent price-cutting. 

About 1924 there was organized what was known as the Livingston 
Economic Service by a group of millers in the Northwest. Its func- 
tion was to ascertain what the costs of milUng were and to publicize 
these data among millers in an effort to get them to maintain their 
flour prices in line with milling costs. There was, however, no attempt 
to compel the members to sell at any fixed price, nor to set up a formal 
price-fixing agreement. 

As a matter of fact, practicallj^ all the effort of the milling industry 
to prevent what it termed undue competition took the form of volun- 
tary cooperation. The industry did not adopt any rigid plans for 
allocating sales or for fixing prices similar to those described for the 
meat-packing industry, probably for the reason that the number of 
competing millers was too large. 

It is hard to say what, if any, effect these efforts of the millers had 
in restricting competition and in maintaining margins and profits. 
Their exchange of information with respect to costs and prices of flour 
Was no more than is done commonly by most trade associations in other 
lines of industry. From the standpoint of competition, the outright 
consolidation and merging of some of the leading companies during 

* Federal Trade Commission, op. cit., pp. 291-294. 



the decade of the twenties seems far more significant than the various 
agreements and understandings which the millers tried to work out on 
a basis of voluntary cooperation. 


Until comparatively recent times, the baking of bread and related 
products was carried on almost entirely within the home. But like 
so many other household tasks, even baking has now passed into an 
era of commercial, manufacture. Large-scale organization was de- 
layed iri the baking industry for a long time because of the necessary 
decentralization of plant facilities. But within the last generation, 
baking corporations operating on a national scale and comparable in 
size to the leading firms in other industries have finally made their 

The perishability of fresh bakery products and the costs of trans- 
portation are such that baking has not been centralized geographically 
as have meat packing and flour milling. Even with the motortruck, 
it is not usually feasible to deliver fresh bread more than 75 or 100 
miles from the point of manufacture. Under these circumstances, 
baking is a widely distributed industry comprised of comparatively 
small plant units. 

The scale of production which has characterized the baking in- 
dustry in America is shown in table 17. The Census of 1849 listed 
2,027 commercial baking establishments with total products valued at 
$13,290,000. Fifty years later (1899) there were 14,836 establish- 
ments whose products were valued at $175,369,000. The number of 
bakeries subsequejitly increased to a maximum of nearly 26,000 in 1914, 
but since that time the plant units have become larger and have de- 
creased in number. As of 1935, there were approximately 19,000 
baking establishments in the United States with products valued at 
more than $1,235,000,000. 

Table 17. — Number and size of bread-baking establishments 


in the United States, 





per estab- 

Value of 

value of 
per estab- 


10, 484 
14, 836 
18, 226 
23, 926 
25, 963 
25, 095 
20, 173 
18, 739 
17, 684 
18, 129 
20, 785 
17, 718 
14, 830 

14, 126 
60, 192 
81. 278 
100. 216 
148, 500 
200, 841 
183, 161 
182, 382 
218, 423 





$13, 290. 000 

16, 980, 000 

29, 530, 000 


128, 420, 000 


269, 583, 000 

396, 865, 000 


1, 151, 896, 000 




1, 394, 700, 000 


1, 190, 048, 000 


1, 235, 073, 000 


1859 -. 






1889 _ 




1904 . - 




1914 .- . 











77, 000 


73, 000 


67, 000 

1933 . - 


1935 - - 


Data for years 1849-89 from Kyrk & Davis, the American Baking Industry, appendix table VI, p. 82. 
Data for subsequent years from U. S. Census of Manufactures. 


As compared with most other industries, the scale of plant opera- 
tion in baking is very small, even today. The average establishment 
in 1935 employed only 11 wage earners, and did an annual business 
of only $65,000 (table 17). While these averages are four or five times 
larger than those of 1899, they indicate that bread baking is essentially 
an industry of small plant units. These averages of course do con- 
ceal the fact that many of the plants operated by the big baking cor- 
porations are equipped for mass production and have an output many 
times that of the average bakery. 

The development of corporate mergers and consolidations in bread baking. 

The fact that bread baking is necessarily decentralized as to plant 
operation did not preclude the growth of large-scale corporate enter- 
prise in this field. Early in the twentieth century some companies 
operating strings of bakeries in widely separated communities began 
to emerge from what had theretofore been an. industry of strictly 
individual enterprisers. 

Even before 1900 a number of fairly large concerns had come into 
existence. Among them were the Ward Baking Co. of New York 
(parent of the present company of that name), the Kolb and Freihofer 
concerns of Philadelphia, and the Corby Baking Co. of Washington, 
D. C. Gater absorbed by the Continental Baking Co.). 

These earlier companies grew largely by new plant construction 
and by the purchase of plants in new territories which they desired to 
enter. They are important to the subject. at hand not because they 
were large enterprises in themselves, but because they furnished the 
nuclei for subsequent developments. The merging of large companies 
either through the holding company device or by the outright purchase 
of assets was to come later. 

The first consolidations to be made in the baking industry were 
purely local in character and were made mainly for the purpose of 
eUminating cutthroat competition in the local trade area.* Con- 
solidations of this sort were sometimes voluntary but more often 
than not they were forced by the creditors of local bakers who thought 
such action necessary to prevent their financial ruination. These 
earlier consolidations sometimes led to the closing of plants and the 
installation of more modern baking equipment, but this does not 
appear to have been their main purpose. Among the more important 
of such early consolidations was the merging in 1907 of seven local 
companies in St. Louis into the American Baking Co. In 1909 six 
bakeries in Kansas City consolidated to form the Consumers Bread 
Co., and a year later six companies in the New York metropolitan 
area combined to become the Schults Bread Co. 

Meanwhile, a new type of combination appeared — namely the 
bringing together of plants in widely scattered areas. Since competi- 
tion in the bread-baking industry is local in character, the purpose of 
such combination was not to ease the pressure of competition but to 
obtain greater operating efficieijcy. It was about this time (1910-20) 
that new types of bread-baking equipment began to be introduced. 
While such equipment was relatively inexpensive as compared with the 
tooling and machinery required in most industries, the small bakers 
as a class were not as quick to install the newer devices as the larger 

' Cf. Carl L. Alsberg, Combination in the American Bread Baking Industry, Stanford University Press. 
19C6, p. 10. 


companies. The result was that the latter, through centralization 
of management and standardization of plant methods, obtained some 
advantages from the standpoint of efficiency. This provided them 
with better than average profits and induced them to expand the 
scale of their operations. 

Immediately following the World War the baking industry began 
to show developments of a more striking character. In 1922 the first 
holding company, the United Bakeries Corporation, was formed. 
The United was built around the Campbell Baking Co. of Kansas 
City and the Schults Co. of New York. Prominent amon^ its initia- 
tors were members of the Ward family, who at the same time owned 
the controlling interest in the Ward Baking Co., a nominally separate 
organization. By the end of 1923, the United Bakeries Corporation 
controlled subsidiaries with more than 40 bakeries in 35 cities, and was 
still expanding. ** 

The most prominent name among the big bakers is that of Ward. 
Members of this family have been in the baking business for four 
generations and have taken the leading role in forming most of the 
mergers and consolidations which have taken place in the industry 
during the last 20 ye^'rs. 

The Ward baking organization had its origin in 1849. The program 
of active expansion, however, did not begin until the close of the 
nineteenth century. At this time, it began to build new plants and 
to expand into new territories. These newer concerns were consoli- 
dated by the incorporation of the Ward Baking Co. in 1912. At this 
time the company had an annual gross business of about $8,000,000 
and was operating 12 plants in various of the larger cities east of the 
Mississippi.^ It continued its expansion program up to 1923, at 
which time it was reincorporated as the Ward Baking Corporation. In 
1935, the latter corporation had 21 bakeries and did a business of 
nearly $36,000,000.^ 

W. B. Ward, president of the Ward Baking Co., also had a part in 
the organization of several other leading baking concerns. He had 
helped in 1922 to organize the United Bakeries Corporation already 
described, although he resigned his connection with the latter when 
the Ward Baking Corporation was formed in 1923. 

By the end of the World War several other baking concerns had 
grown to the point where they were almost as large as the Ward 
Baking Corporation. Among the more important of these was the 
General Baking Co. which had been formed in 1911 to consolidate 20 
smaU companies with plants throughout the Northeast. This com- 
pany, more than any of the others, pioneered in the application of 
large-scale methods to bread manufacture and distribution. It laid 
great emphasis upon plant efficiency and was among the first to adopt 
new baking techniques. It appears also to have been the first com- 
pany to use national advertising — its brand is "Bond" — for bread 

In 1925 the stock of the General Baking Co. was taken over by the 
General Baking Corporation, along with that of several other baking 
companies. W. B. Ward, of whom mention has already been made in 
connection with several other concerns, also had a part in the organi- 
zation of the General Baking Corporation. 

' Alsberg, op. cit., p. 12. 

' Alsberg, op. cit., p. 126. 

' Moody's Manual of Investments: Industrials. 


The third largest baking firm is the Continental Baking Corporation. 
This organization was formed in 1924, taking over at that time the 
control of the United Bakeries Corporation. The Continental Baking 
Corporation is essentially a holding company. Following its organi*- 
zation in 1924, it acquired control of many smaller companies in all 
parts of the United States. At the present time it operates baking 
facilities in 68 widely scattered cities. 

Fourth largest of the baking corporations is Purity Bakeries with 
53 plants. It, too, was organized as a holding company to consolidate 
the operations of a number of sizable baking concerns. This is the 
only one of the Big Four in the baking industry with which some 
member of the Ward family had no connection. 

In 1926, W. B. Ward moved toward a final consolidation of three of 
the Big Four companies through the organization of the Ward Food 
Products Co.^ This company's charter enabled it to act as a holding 
company for the stocks of the Ward, Continental, and General Baking 
corporations. Its objective appeared to be a more effectual coor- 
dination of the enterprises of these three companies than had existed 

The Federal Trade Commission immediately filed a petition charg- 
ing that the newly formed holding company was an instrument for the 
unreasonable restraint of trade and commerce. The petition asked, 
in brief, that the companies involved be enjoined from acquiring each 
other's assets or securities, and that no one of them should be per- 
mitted to have any director, officer, or employee in common with any 
other one. Moreover, they were to be forbidden to enter into any 
contracts, agreements, or understandings with one another relative to 
any phase of the baking business. 

A consent decree involving substantially these terms was entered 
into by the defendants in 1926. The Ward Food Products Corpora- 
tion was dissolved soon after, leaving the tlu-ee companies (Ward, 
Continental, and General) nominally independent in their operations. 
So far as is known, this situation prevails at the present time. 

Chain-store baking. 

Another phase of large-scale organization in the baking industry is 
that represented by the groceiy chains. All of the larger systems and 
many of the smaller ones operate their own bakeries for providing their 
retail units with fresh bakery products. There are no data available 
as to the volume of chain-store baking, but in the aggregate it is 
probably almost as large as that of the four baking corporations 
listed al)ov(>. 

In the early stages of their development, the grocery chains acted 
purely as retailors of bakery ])roducts. They bought their bread 
stocks from local wholesale bakers, just as the independent retailers. 

A number of factors, however, \od them to establish their own 
bakeries. Because the chains were quantity customers of the whole- 
sale baker, they demanded (jua^itit^y "price discounts. This the bakers 
were not always disposed to give them because they (the bakers) 
fear(>(l that this practice would earn them the ill will of their nonchain 
customers. Moreover, (he chains often used bread as a "price- 
leader." Wholesale bakei-s objected to this on the grounds that it 
would weaken the wholesale price for bread, and for this reason often 
refused to sell to chains who followed this practice. 

• Federal Trade Commission, Apriciiltural Income Inquiry, pp. 296-298. 


The result was that the chains went into the baking business on 
their own account. This appears to have had several advantages for 
them. In the first place, their volume of retail business in most 
communities was such as to support a modern baking plant in which 
costs of operation could be reduced to a minimum. B}^ operating 
their own bakeries the chains, of course, eliminated most of the selling 
and advertising costs incurred by the wholesale baker in selling to in- 
dependent customers. Moreover, the operation of their own bakeries 
permitted the chains to make a closer adjustment of supply to their 
needs, and to get the bread into their store units in fresher condition. 
The chains, of course, continued to handle the products of bakeries 
other than their own, but the volume of such products represents a 
diminishing percentage of their total bread sales. 

Proportion oj bread baked by large concerns. 

Despite • the astonishing character of large-scale development in 
the baking industry, the bulk of the fresh bread products still is baked 
by the independent wholesale baker. The Federal Trade Com- 
mission estimated in 1928 that the Big Four in the industry (Ward, 
Continental, General, and Purity) were baking about 20 percent of the 
total commercial supply of bread. ^"^ The four or five leading grocery 
chains probably bake another 10 or 15 percent, which leaves consider- 
ably more than half in the hands of the Independent bakeries and 
smaller companies. 

These figures for the country as a whole arCj not typical of those for 
individual cities and local trade areas. As a general thing, the big 
bakers have concentrated theh business in the larger urban centers. 
Although their bread trucks run out from such centers to the surround- 
ing towns, the independent baker is still the predominant factor in the 
smaller towns and villages. 

The present position of the leading baking concerns in relation to 
each other and to the industry as a whole is indicated by table 18. 
Dollar sales of the three leading companies in 1935 varied from $32,- 
585,000 for the Ward Baking Corporation to $50,961,000 for the 
Continental Baking Co. The total value of bread and other yeast- 
raised products in that year as given by the United States Census of 
Manufactures was $706,897,740. The combined sales of the three 
largest concerns thus amounted to about 17 percent of the total 
business of the industry, and those of the largest single firm to around 
7 percent of the total. 

Table 18. — Dollar sales of the S leading bakery concerns expressed as percentages of 
the total value of bread and other yeast-raised bakery products, 1985 


Continental Baking Corporation . 

General Baking Co ,... 

Ward Baking Corporation 


Total dollar 
sales 1 

39, 171, 879 
32, 584, 767 

122, 717, 670 

Sales as a per- 
centage of the 
total value of 
bread and yeast- 
raised products' 




• Frojti Moody's Manual of Investments: Industrials. 

' Ths tStzX value of commercial bread and yoast-raised products in 1935 was given by the U. S. Census of 

Mu-.nfactiires .as $706,S97,740. 

Federal Trr de Commission. Competition and Profit,-! in Bread and Flour, S. Doc. No. 98 (70th Cong.), 
1928, p. 1». 



The biscuit companies. 

In connoction with large-scale organization in the baking industry, 
mention also should be made of the biscuit companies. The cracker 
and biscuit business is so different from the fresh bread business that 
the two might almost be said to constitute separate industries. N'one 
of the leading bread bakers manufactures any biscuit products, nor do 
the biscuit companies handle any fresh bakery products. Biscuit 
manufacture, however, comes within the general category of baking 
and therefore will be discussed at this point. 

Unlike the bread-baking branch of the industry in which the small 
enterpriser still has an important place, the manufacture of crackers 
and biscuits is largely centralized in the hands of a few large concerns. 
The chief reason for this lies in the nature of the product itself. 
Crackers and biscuits are nonperishable. Their manufacture there- 
fore can be taken out of the small bakeshop and centralized into large 
plants where highly mechanized methods can be applied. Large-scale 
manufacture in turn leads to the integration of certain marketing and 
distributive functions, which hampers Still further the small operator 
desiring to enter this field. The only development likely to jeopardize 
the predominance of the leading biscuit companies would be the 
entrance of the chain grocery companies into this field. Up to the 
present, however, the chains have confined their baking operations to 
fresh bakery products and have not attempted biscuit and cracker 

The three leading biscuit companies are the National Biscuit Co., 
the Loose-Wiles Biscuit Co., and the United Biscuit Co. The first- 
named company is by far the largest of the three and has a larger busi- 
ness than the other two combined. As of 1921 (the last year for which 
information can be obtained), the National Biscuit Co. had about 55 
percent of the cracker and biscuit business of the United States, and 
the three leading companies together had well over three-fourths of it." 

The National Biscuit Co. was incorporated in 1898 as a consolida- 
tion of 3 separate firms. Its growth since that time has been 
partly by the building of new plants and partly by the acquisition of 
competing firms. At the present time, it has manufacturing plants 
in 32 cities and 21 States, the products of which it distributes through 
257 of its own selling branches. It also operates a printing plant, a 
carton mill, a molasses plant, and a flour mill. Loose- Wiles is similar 
to the National Biscuit Co. in its operations and organizational set-up. 

The Federal Trade Commission cited several of the big biscuit com- 
panies in 1924 for the giving of what it termed undue price discounts 
to large customers, notably the grocery chains. The Commission 
produced evidence to show that the big biscuit companies were giving 
the grocery chains unwarranted price discounts in certain parts of the 
country. The more important question of whether or not there may 
have been collusion among the biscuit companies with regard to the 
level of the prices for their products was not raised by the commission. 

1' Federal Trade Commission DeoLsions, vol. VII. pp. 206-?28. 


In the preceding chapters, we have discussed large-scale organiza- 
tion for some of the principal food products. The tendency in this 
direction, however, has been by no means confined to the corporations 
already described. There is scarcely one of the food industries in 
which there are not to be found at least three or four organizations 
operating on a national scale and controlling a substantial part of the 
business in which they are engaged. 

To describe large-scale developments in all the food industries with 
the completeness of the preceding chapters would be somewhat repeti- 
tious and tiresome to the reader. We shall attempt therefore only to 
summarize the situation for some of the other major food groups. 


The canning of fruits and vegetables is an industry composed of 
many individual firms. ^ There are in the industry at least a dozen big 
corporations operating chains of canneries and the tendency during 
the last 20 years has been definitely toward the growth and expansion 
of such firms. On the Pacific coast, concentration of corporate control 
has reached the point where two or three organizations pack over half 
the total supply of the canning crops produced in that region. But in 
most other parts of the country the industry is still characterized by 
relatively large numbers of independent canning firms. 

The t\vo outstanding corporations in the caiming industry are tlie 
California Packing Corporation and Libby, McNeill & Libby. Dollar 
sales of the California Packing Corporation amounted in 1937 to over 
§61,0(0,000, those of Libby to well over $74,000,000 (chart VIII). 
No otler canning firm has anything like tlie volume of business done 
by these two organizations. 

The California Packing Corporation was incorporated in 1916 to 
consolidate the interests of four firms operating in California and other 
Pacific Coast Stales. These four firms themselves previously had 
bought or otherwise acquired a number of smaller canning companies. 
Following its organization, the California Packing Cor[)oration ex- 
panded its operations to other sections of the country, notably by the 
acquisition of the Midwest Canning Corporation with plant facilities 
in Wisconsin, Mhinesota, Illinois, and other Midwestern States. In 
addition to its operations within the United States, the company is a 
larre factor in the growing and cannin<i; of Ilawaiia.n pineapple. It 
also engages in salmon packing, fruit drying, and co/Fee manufacturing. 
Some of the produce which it packs is grown on its own ranches and 
land holdings. Like most other big food prccessors, the corporation 
has built up its own sales orgiinization for distiibuting its products 
and does not use jobbers and brokers as do the smaller canners. 

> The National Canners' Assccintion reports 1,400 tomato canners, 364 pea canners, and 350 corn canners 
as of 1938. 




Chart VIII 















Total value, canned 

and dried ^ 


ruits, veg 

etables, j 

el lies, eU 



Libby, McNeill, 



a.nd i ■*'''" 


"\ 1 1 


\ California 


ZKing oo. 


lesota Va 


Canning Co. s^ 








\_ y 



^•* / 













1 r 1 






' 1919 1921 1923 -1925 1927 1929 1931 1933 1935 1937 

u. 1 oiMRTatMT or AemcuLTunt iu»t»o or »e«ieuiTu«Ai icoNomcs 

Data from Table 19. 



Table 19. — Sales of 3 leading fruit and vegetable canners compared with total value 
of canned and dried fruits, vegetables, jellies, etc., 1919-37 

Total value, 
canned and 
dried fruits, 
jellies, etc.i 

Sales of— « 

. Year 





McNeill & 


Valley Can- 
ning Co. 



$69, 221, 000 
47, 516, 000 
57, 775, 000 
64, 420, 000 
69, 776, 000 





789, 000 
1, 100, 000 
1,591 000 


515, 316, 000 






572. 346, 000 


2, 352, 000 
2, 166, 000 


750, 342, 000 



613, 001, 000 


47, 459, 000 
56, 142, 000 
59, 876, 000 
74, 392, 000 
74, 716, 000 




54, 336, 000 
58, 188, 000 


649, 644, 000 



788, 927, 000 

' United States Biennial Census of Manufactures. 

' Moody's Manual of Investments: Industrials; also Poor's Industrials. 

Libby, McNeill & Libby was developed as a subsidiary of the meat- 
packing firm of Swift & Co. As previously described, the meat packers 
agreed under the consent decree of 1920 to give up their interests in 
the canning of fruits and vegetables, and since that time Libby, Mc- 
Neill & Libby has operated as a nominally independent concern. It 
had been brought to the status of a large organization while still under 
the control of Swift, and has grown comparatively little during the 
last 10 or 15 years. 

In set-up and method of operation, Libby, McNeill & Libby is sim- 
ilar to the California Packing Corporation. It, too, is engaged in the 
canning business on a national scale and carries on m.any related enter- 
prises. In addition to the canning of fruits and vegetables, it packs 
salmon, meat, pineapple, and other tropical fruits. 

There are at least a dozen other canning companies which operate 
sizable chains of canneries, have their own brands and sales organiza- 
tions, and conduct their businesses along the lines already described 
for Libby, McNeill & Libby and California Packing Corporation. 
Most of these companies have developed since the World War and 
represent a definite change in an industry formerly comprised almost 
entirely of small firms. 


The handling of fresh fruits and vegetables is so diversified both 
geographically and as to type of operation that no single firm or small 
group of firms handles any very large part of the total supply. For 
certain products and in some particular markets and production areas, 
however, significant proportions of the supply are in the hands of a 
few organizations. 

The outstanding example of large-scale handling of fresh fruits and 
vegetables is that furnished by the larger grocery chains. Each of the 

267003— 41— No. 35 5 


three largest chains — the Great Atlantic & Pacific Tea Co., the Kroger 
Grocery & Baking Co., and Safeway Stores — has set up a subsidiary 
company for procuring fresn fruits and vegetables for its retail units. 
The names of these subsidiaries are the Atlantic Commission Co., 
Wesco Foods Co., and the Tri-Way Produce Co., respectively. 

The function performed by these chain subsidiaries is essentially 
that of a fruit and vegetable wholesaler. Wherever possible they buy 
produce direct from the grower or shipper, and for this purpose they 
have their own buying facilities and representatives in most of the 
important producing areas. It goes wnthout saying that none of these 
chain subsidiaries handles any very large part of the national supply 
c»f any perishable product. The Federal Trade Commission reports ^ 
that the Atlantic Commission Co., largest of the chain produce com- 
panies, handled quantities in 1938 which ranged from 3 percent of the 
peach crop to 7.5 percent of the onion crop. In certain areas its pro- 
portion of total purchases, of course, runs somewhat higher than this. 

The largest corporation engaged exclusi^ ely in the handling of fresh 
fruits and vegetables is the American Fruit Growers, Inc. This 
organization was incorporated in 1919 to consolidate the operations of 
seven separate companies with facilities in most parts of the United 
States. Its business consists of the packing, shipping, and terminal 
handling of friuts and vegetables. It also engages in some growing 
operations. Its dollar sales during tlie last 10 ^^ears have ranged from 
about $30,000,000 to $45,000,000 annually and its shipments of fruits 
and vegetables in some years have run as high as 45,000 cars.^ The 
Federal Trade Commission reports tltat in 1935 this organization 
handled more than 8 percent of the total grapefruit crop.* The Amer- 
ican Fruit Growers, Inc., is somewhat unique in that it represented the 
first effort to apply corporate mass methods in the handling of di- 
versified and fast-moving products like fresh fruits and vegetables. 

The producers' cooperative m.arketing movement also has assumed 
the status of large-scale distribution in some areas and for certain 
crops. The outstanding example among the cooperatives is the 
California Fruit Growers' Exchange which handles about 75 percent 
of the California orange crop and over 90 percent of the lem.ons. 
The Exchange acts as the sales agency for local cooperative fruit-pack- 
ing plants. It maintains its own representatives in most of the larger 
cities of the country for handling sales to the local trade. Producers' 
cooperatives also handle the major part of a number of other special 
crops grown on the Pacific coast, among them being walnuts, raisins, 
prunes, dates, and apricots. The production of fruits and vegetables 
in other parts of the country involves so many growers in widely 
scattered areas that it has been impossible thus far to organize them 
into any sort of national marketing set-up. 


General Foods and Standard Brands. 

Ohe of the most interesting developments which have taken place 
in the food industries during the last 25 years has been the discovery 
of new processes and techniques for manufacturing food products. 

' Summary of the Commission's report on its investigation of fruits and vegetables made pursuant to 
Public Res. 61, 74th Cons. Press, Ju^.e 10, 1937 
» Moody's Manual of Investments: Industrials. 
* Federal Trade Commission, op. cit , p. 2. 



lllustrntive of the products resulting from such techniques are the 
breakfast cereals, Jello, Postum, mayonnaise, chocolate products, 
and a whole list of similar items, many of wliich were almost unknow^l 
to earlier generations of consumers. Even more recent has been the 
introduction of quick freezing as a means of preserving perishable 

Tlie circumstances surrounding the manufacture and distribution 
of such special products usually have been especiallj* favorable to the 
development of large corporations. Many of the processes involved 
are highly mechanized and require expensive plant facilities and 
equipment. Even more significant is the fact that most of these 
special processes were patented and their use thereby limited by the 
company holding the patent. Also, the products were often new and 
distinctive, which meant that they could be advertised nationall}'' 
if the firm were large enough to operate on such a scale. 

Two large food corporations dealing mainlj^ in these specialty food 
products have grown up since the World War. They are the General 
Foods Corporation and Standard Brands, Inc. The dollar sales of 
these tvro companies for the period 1919-37 are shown in table 20. 
The business of General Foods increased from about $18,000,000 in 
1922 to $133,000,000 in 1937 and that of Standard Brands, from 
$39,000,000 to over $122,000,000 during the same period. Neither 
company has expanded much since 1930, as their dollar sales indicate. 

Table 20. — Sales of General Foods Corporation,and Standard Brands, Inc., 1919-37 

1 1 
1 Sales of— J 


Sales of— 1 


1 General 
[ Foods 

1 tion 
















i 24.248 

I 27,387 

-.--. 46.896 

1 57.288 



31, 952 

32, 687 
37, 194 
38, m 
46, 443 
56.646 1 
62,952 1 

s-tees ! 

64,004 i 




128, 037 




89, 760 
88, 272 



83, 535 


1933 -- - - 











109, 161 
122, 462 
133. 126 

100, 449 
102, 040 

« Moody's Manual of Investments: Industrials. Sales not given for dates not shown. 

The General Foods Corporation was developed out of an enterprise 
incorporated in 1920 as the Postum Cereal Co. Tlie business of the 
Postum Cereal Co. at that time consisted of the manufacture of a line 
of breakfast foods. The Postum Co. immediately began a program 
of expansion, usually by the exchange of its own stock for that of the 
acquired enterprises. By 1930 the corporation, whose name mean- 
while had been changed to General Foods, had acquired no less than 
20 food enterprises. Most of them were engaged in the manufacture 
of special food products under processes which were patented. 

Among the many products manufactured and distributed by the 
General Foods Corporation are breakfast cereals, coffee, chocolate 
products, Jello, salt, tapioca, flour, and sirup. All its products are 
sold under advertised brand names. As a matter of fact, a large.share 



of the assets of the various corporations acquired by General Foods 
consisted of patents and good will resulting from advertismg. 

General Foods also controls some of the more important patents for 
the quick freezing of perishable products, Tliis process has not been 
used extensively up to the present time, but it promises eventually 
to become a very important factor in the food business. The cor- 
poration is actively engaged at the present time in building up its 
business in frozen foods. 

Chart IX , 







"Genera/ F 

oods Cor 






»• ••H 



— "Stan 

dard Brat 

ids, Inc.- 





















Data from Table 20. 


Standard Brands, Inc., is an organization very much like General 
Foods. It was incorporated in 1929 to hold the stocks of the Fleisch- 
mann Yeast Co., the Royal Baking Powder Co., and the E. W. 
Gillett Co, Later it acquired the Chase & Sanborn Coffee Co., the 
Widlar Food Products Co., and a number of others. It engages in 
the manufacture and distribution of such products as coffee, tea, 
baking powder, yeast products, and ginger ale. It services its 
customers through 750_ selling agencies located throughout the 
United States, Canada, and several Central American countries.^ 

• standard Corporation Records, 1936. 


The securities of both General Foods and Standard Brands figured 
prominently in stock market transactions during the latter part of 
the decade of the 1920's. It was commonly thought that some of 
the mergers and consolidations entered into b}^ these two holding 
companies were mainly for the purpose of financial manipulation and 
for gains other than those associated with the actual operations of 
the companies involved. The writer has had no facilities for examin- 
ing the truth of such charges and no Federal agency has made any 
formal investigation of them. 

On the face of it, however, there is a substantial economic basis for 
the mergers and combinations engineered by these two companies. 
So far as manufacturing is concerned, there is no reason why a salt 
company, for instance, should be affiliated with an enterprise mak- 
ing breakfast cereals. But from the standpoint of distribution there 
is a very good one. Most of the big food corporations have sought 
to distribute their own products rather than to send them through 
independent brokers and wholesalers. Neither salt nor breakfast 
food, if handled alone, can carry the cost of sales distribution. Many 
of the consolidations made by General Foods and Standard Brands 
seem clearly to have been for the purpose of giving them a "family" 
of products to be distributed jointly. Their reason for diversifying 
their line of goods appears to have been fundamentally the same as 
that wliich years before had led the meat packers into the handling 
of many food products seemingly unrelated to meats. The necessity 
for reducing the sales overhead in a large-scale, vertically integrated 
organization has been back of many, if not most, of the big food 
mergers of recent years. 

Other food corporations. 

Many food corporations other than those already mentioned in thia 
chapter might be listed. 

The sugar industry is one in which big corporations have been the 
dominant factor for many years. The American Sugar Co. refines 
from one-fourth to one-sixth of all sugar consumed in the United 
States and has an annual business of well over $100,000,000. Approxi- 
mately one-third of all the sugar beets grown domestically are processed 
by the Great Western Sugar Co. 

The making of com syrup and other corn products is largely in the 
hands of the Com Products Refining Co. This company and its 
affiliates have factories not only in the United States but in nearly 
all parts of the world. 

All lines of food manufacturing and distribution will show at least 
some evidence of the trend toward large-scale organization which has 
been described for the major food groups. As a matter of fact, it is 
undoubtedly correct to say that concentration of control has pro- 
ceeded much further in some of the minor food lines than in the major 
ones. This commonly escapes attention because the companies 
involved are not as large as some of those described in the course of 
this chapter. Their control over prices and margins in their particular 
line of enterprise, however, may be just as great and may warrant 
just as much attention from regulatory agencies as has been given 
to some of the major food corporations. 


No development of the present century has harl more significance 
from the standpoint of marketing efficiency than the introduction of 
mass distribution methods by large-scale food corporations. More 
than any other factor, this development has changed the entire 
keting structure as well as the actual mechanics of food distribution. 
There can be no doubt of its paramount importance in connection with 
the whole question of marketing efficiency. 

So much confusion of thought exists over the concept of marketing 
efficiency that it is necessary at the outset to state precisely what is 
meant and what is not meant by the term as here used. Efficiency 
usually is thought of a's the quantity of productive resources necessary 
for the performance of a given operation, as measured in terms of 
m.onetary costs. Preoccupation with monetary costs and with the 
efficiency of individual business units, however, has sometimes led to 
neglect of certain broader aspects of the problem. 

A clear distinction has not always been m.ade between those market- 
ing expenditures incurred for the purpose of satisfying demand and 
those made for the purpose of influencing it in favor of a particular 
seller.^ Most costs involved in the physical handling of the com.mod- 
ity — such as assembling, processing, transporting, and storing it — 
obviously are of the former sort. So also is -a part of those costs for 
selling and transferring ownership at various stages in the marketing 
process, insofar as these are necessaiy to give the commodity utility 
with respect to time and place. But it is evident also that many, 
though not all, the expenditures for advertising and com.petitive sell- 
ing serve no real use to consum.ers, however profitable such expendi- 
tures may be to the handlers who incur them. It is the mark of an 
efficient system of food distribution, not only that it shall use labor 
and capital efficiently in the performance of its distributive opera- 
tions, but that these operations shall serve a socially necessary and 
useful purpose. As the chapter develops, the application of this idea 
will be made to specific situations in food marketing. 

Another important distinction to be made relates to the way in which 
efficiency is m.easured. Analyses of m.arketing efficiency commonly 
are made in term.s of monetary costs. Although useful for some pur- 
poses, such analyses do not always distinguish between the am.ount of 
labor and capital used and the rate of compensation paid to these 
factors. The fact that m.any business enterprises sui'vive only because 
their proprietore and em.ployees are willing to work long hours or at 
low rates of pay is no real evidence of their efficiency. Most of the 
n\argin taken for distributing farm products is ultimately resolvable 
into wages to labor. This margin conceivably might be reduced either 

' Edward Chamberlin suggests this distinction (The Theory of Monopolistic Competition, Harvard 
University Press, 1933, pp. 123-125), but his concern was with its relationship to the theory of monopolistic 
competition rather than to economic eflBciency per se. 



by increasing the efficiency with which labor is used (i. e., by reducing 
the aro.ount required for performing a given distributive function) or 
by reducing the compensation paid to labor. Needless to say, the 
objective of a sound marketing policy ought to be to reduce marketing 
costs by the former m.ethod. 

There also should be mentioned the duplication of marketing 
services and facilities arising out of competition itself. Examples 
of this are to be found at all stages and in all parts of the distributive 
system, but particularly in the field of retailmg. Much of this dupli- 
cation is inherent under any system of competition. Its complete 
elimination, of course, would necessitate setting up a unified, non- 
competitive system by giving exclusive franchises to public or private 
agencies as is now done with public utilities. 

Efficiency in the broad sense thus involves a number of factors, 
some of which are related to the type of distributive system and some 
of which are not. Our concern here is mainly with those which are. 
It will be the objective of the present chapter to compare mass distribu- 
tion \vith the regular marketing system from the standpoint of eco- 
nomic efficiency, using the term in the sense described above. 

Anyone having occasion to investigate this question cannot but be 
struck with the paucity of usable data on it. Economic theory recog- 
nizes certain advantages and disadvantages of mass distribution but 
there have been few attempts at quantitative measurement. The 
writer has sought to bring together the results of what little research 
has been done along this line and to translate these results into some 
general conclusions. If these conclusions appear to lack verification 
and finality, it is because research workers have largely neglected 
what is probably, the most important problem in the entire field of 


From the standpoint of its effect on the efficiency of food distribu- 
tion, the introduction of mass retailing by the corporate grocery 
chains overshadows all other large-scale developments m the food 
industries. If the costs of marketing are to be reduced, the most 
likely places to effect significant savings are in the functions of whole- 
saling and retailing, and especially the latter. The retail margin is 
almost invariably the largest single element in the spread between 
producer and consumer and often it is larger than the margins of all 
other types of handlers combined. For this reason any innovations 
made in retailing — by the grocery chains or otherwise — are likely to 
be especially important so far as reducing food costs is concerned. 

Prices in chain and independent stores. 

Numerous comparisons of retail prices in chain and independent 
grocery stores have been made. Differences in such prices do not 
necessarily reflect differences in efficiency, since competing stores 
will have to sell at somewhere near the same prices if they are to stay 
in business. As a rule, however, lower prices for the same services 
may be taken as an indication of greater efficiency, although the 
difference in efficiency may not be in proportion to the difference in 
prices and margins. 

The most comprehensive comparison of food prices in chain and 
independent stores was that made by the Federal Trade Commission 



in connection with its chain-store inquiry.^ The Commission con- 
ducted its investigation in Wasliington, D. C, Memphis, Detroit, 
and Cincinnati. A summary of its findings in these four cities is 
shown in table 21. 

Table 21. — Cotnparison of retail prices for identical items in chain and independent 

stores in 4 cities, 1929 


Total average retail 
selling price 



Washington, D. C - 





Memphis .. ... 




Federal Trade Commission, Chain Store Inquiry, vol. IV. Compiled from figures given in table 4, docu- 
ment 62; table 4, docunient 88; table 5, document 69; and table 5, document 81. 

Table 21 indicates that prices of identical goods were substantially 
lower in chain stores than in independents. The Commission con- 
cludes that its study "tends to establish the fact that on the average, 
chain stores can and do sell at prices which are somewhat lower than 
the prices charged by independent retailers or even cooperative 
chains." ^ In Washington, D. C, a bill of goods costing an average 
of $58.03 in independent stores could have been purchased for $54.07 
in the chains. The ratio of chain prices to independent prices was 
approximately the same in the other three cities studied by the Com- 

The findings of the Federal Trade Commission relative to prices in 
chain and independent stores have been confirmed by a number of 
other studies. Table 22 shows the prices for different types of stores 
as found by Converse in Champaign-Urbana, 111.^ A bill of goods sold 
by the chains in that area for $115.36 was sold by the cash-and-carry 
independents for $122.10, by service indep'^ndents for $123.70, and 
by voluntary chains for $12i.59. 

T.\BLE 22. — Weighted average prices of groceries in various types of stores in 
C^hampaign-Urbana, III., in March 1937 

Types of stores 

Commodity class 



Volun- Cash- 
tary carry 


Poultry, fish, and cured meats 





























Dairy products and eggs 




Coffee, sugar, etc . 



Dry fruits and vegetables . 


Canned goods... - 


Soaps and cleansers 






> Federal Trade Commission, Chain Store Inquiry, S. Doc. Nos. 62, 69, 81, 88. 73d Cong., 1933. 

' Federal Trade Commission, Chain Store Inquiry, Final Report, S. Doc. No. 4, 74th Cong., 1st sess., 
1935. p. 28. , , T 

< Paul D. Converse, Prices and Services of Chain and Independent Stores. Journal of Marketing, January 
1938, pp. 193-200. 


Tayk»r ^ found the chain stores in Durham, N. C, selling at prices 
about 13 percent under those of competing independents. He further 
concluded that the costs of any extra services provided by the in- 
dependents would not approximate this difference in selling prices. 
In Lexington, Ky., Palmer ^ found chain-store prices 14 percent below 
those of independents. 

In a more comprehensive study involving over 300 independent 
stores and 4 chain systems in Chicago, Bjorklund and Palmer found 
the following : ^ 

Chain stores were underselling cash-and-carry independents * * * about 
9 percent. 

Chains were underselling service independents * * * about 12 percent. 

Cash-and-carry independents were underselling service independents * * * 
about 2.5 percent. 

They concluded that the savings effected for consumers by the chains 
were about 10 percent on the average. They pointed out, however, 
that this comparison conceals the very important fact that some 
independents are not undersold appreciably by the chains. 

Margins and operating expenses of chains and independents. 

Other indications of the relative efficiency of chains and independ- 
ents are to be found in their gross margins ^ and operating expenses. 
Comparisons of these for the two systems of distribution are not 
altogether satisfactory, but such studies as have been made show a 
clear advantage for the chains; 

Studies conducted by the Harvard Bureau of Business Research 
during the 1920's indicated that chain systems typically took a groSs 
margin equal to about 20 percent of their selling price.® Since the 
chains usually perform the wholesaling function for their stores, their 
margin must be compared with the combined margins of the average 
independent and the wholesaler. The Harvard studies showed these 
combmed margins to be 28.9 percent of the retail price, the independ- 
ent retaUer taking 19.8 percent, and the wholesaler, 9.1 percent. 
When the average margins taken by V e chains were expressed as a 
percentage of the higher prices at which the independents sold, they 
averaged only 18 percent, which indicated a still greater advantage 
for the chains. 

Part of the reduction in margins made by the chains is due to the 
fact that they do not render credit and delivery service. If it is 
assumed that the cost of these services is about 4.5 percent of sale,^° 
the advantage of the chains due to lower operating costs is still more 
than 6 percent of the retail price. 

Numerous factors account for the greater efficiency in retailing 
which the chains indubitably have. Probably the main one is that 
their retail units are much larger, which permits them to use labor more 

' Malcolm D. Taylor, Prices in Chain and Independent Stores in Durham, N. C. Harvard Business 
Review, July 1930, p. 413. 

« E. Z. Palmer, New York Journal of Commerce, July 19, 1930, p. 11. 

' Eii;er Bjorklund and James Palmer, A Study of the Prices of Chain and Independent Grocers in Chicago, 
University of Chicago Studies in Business Administration, vol. 1, no. 4, p. 14. 

* Gross margin is the difference between net sales and net cost of goods sold. It is equivalent to total 
operating expense plus net profit. 

» Carl N. Schmalz, Indep-jndent Store versus Chains in the Grocery Field, Hv.rvard Business Review, 
July, 1931, p. 438. 

i» Harvard Bureau of Business Research, Bulletin No. 52, Operating Expenses in Retail Grocery Stores 
in 1924, p. 67. 


The best measure of this is to be found in a special enumeration of 
chain and independent stores made by the United States Census 
Bureau in Louisville, }\~j., and Cincinnati, Ohio. The enumeration 
showed that the average cham unit had sales in excess of $60,000 per 
year, as compared with sales of about $27,000 for the average inde- 
pendent. Sales per employee were nearly $19,000 for the chains, and 
less than $12,000 for the independents (table 23). Obviously the 
chains were using their store labor to much better advantage than 
most independents. Their wage costs, expressed as a percentage of 
retail sales, were 8.14 percent as against 9.12 percent for the inde- 
pendents. It should be noted that the method used for computing 
the wages of the proprietors of independent stores (namely, assuming 
them to be equal to the average paid to full-time employees) tends to 
reduce wage costs in independents as compared with chains, whose 
wage costs include salaries of store managers. 

Table 23. — Comparison of operations between chain arid independent grocery stores 
in Louisville, Ky:, and Cincinnati, Ohio, 1929 

i I . ' 

! Chains Independents 

Number of stores..- 614 | 1,907 

Net sales $37.07S,343 ; $51,804,414 

Net sales per store 1 $60,388 i .$27,165 

Number of full-time employees i 1,965 j '4,394 

Sales per employee ; $18,869 $11,790 

Total wagecost 1 $3,018,801 ] >$4,726,373 

Wage cost as percent of sales (percent) 8.14 ! 9.12 

Total annual wage per employee : $1,536 i $1,076 

' Includes proprietors of independent stores. 

' Total wage cost includes a computed wage value of proprietors' services equivalent to the average wage 
of full-time employees. 

U.S. Census of Distribution, 1929. Retail Distribution (Trade Series) , Food iiciHiung. Compiled from 
table 25. 

Wages paid by chains and independents. 

Wage costs are determined not only by the amount of labor used 
but by the wage rate. Reduced labor costs achieved by means of 
lower wage rates are no indication of greater efficiency in the true 
sense of the term. For this reason, it is pertinent to compare wages 
paid by chain and independent grocery stores. 

Data for such a comparison are available from two sources: (1) The 
Federal Trade Commission's Chain Store Inquiry, and (2) the United 
States Census of Business. The figures from these sources are con- 
tradictory, the Federal Trade Commission's report indicating that 
independent grocers pay slightly higher wages than do chains, whereas 
the Census data show that independents pay lower wages. 

The Federal Trade Commission bases its conclusions on data from 
a sample of 226 independent grocery stores and 10,073 chain units." 
It found average weekly wages m 1931 to be $24.91 in the case of the 
226 independents and $20.40 for the chains. The Commission made 
these figures the basis for its conclusion that "The independents paid 
their store employees more than did the chains." ^^ 

" Federal Trade Commission, Chain Store Inquiry, S. Doc. No. 82, 73d Cong., table & 
" Ibid., p. 19. 



The writer doubts the validity of this conclusion. The sample of 
independents involved in the comparison not only is small, but is not 
typical of independent retailers generally. Dollar sales of the inde- 
pendents studied by the Commission were higher than those of the 
chain units, whereas the average for all independents is less than one- 
third that of the chains. Moreover, the independents were selected 
on the basis of a mailed questionnaire, which only the more progres- 
sive merchants would be likely to return. 

The wage figures obtainable from the 1935 Census of Business, which 
are based on a complete enumeration of all retail grocery stores, led 
to a conclusion opposite from that reached by the Federal Trade Com- 
mission. The average annual wage paid in 164,404 independent 
grocery stores in 1935 was $672, as compared with an average of $955 
m 22,632 chain units (table 24). In combination stores (i. e., groceries 
and meats), the average wage was $762 for the independents and $957 
for the chains. 

TAi»LB-24. — Sales, pay rolls, and wage rates in chain and independent stores in the 

United States, 1936 

Grocery stores (without meats) 

Combination st'i-es (groceries 
and meats) 

Independents i 

Chains » 

Independents ' 

Chains » 

Number stores 

164, 404 

$1, 339, 524, 000 


22, 632 

$842, 075, 000 
$37, 207 

139 994 

$2, 509, 867! 000 

$17, 928 


Total sales - 

$1, 624, 513, 000 

Average sales per store 

$63, 440 

Number employees 

3 81, 193 
168, 794 

< 72, 698 

3 206, 746 
147, 462 

* 151, 662 

Proprietors and' firm members 



24S, 987 

72, 822 

354, 208 

152, 009 

Sales per person in store... . . 

$5, 358 

« $54, 566, 000 



$69, 385, COO 


$7, 086 

« $157, 635, 000 


$10, 687 

Total pay roll 

$145, 130, 000 

Average wage per employee ' 


' Includes 2- and 3-store independents. 

2 All systems with 4 or more retail units. 

' Proprietors and firm members not included in count of employees. 

* Store managers included in count of employees. 

» Compensation to proprietors and firm members not included in pay roll. 

• In comparing this figure for chains and independents, 't should be noted that the average wage paid by 
chains includes the salarv of the store manager. 

U. S. Census of Business, 1935, Retail Distribution, vol. IV, p. 13. 

The figures for the chains include the store manager's salary, whereas 
proprietors of independent stores are excluded from the wage calcula- 
tion of- the independents. Since chain-store managers receive higher 
compensation than ordinary clerks, the inclusion of the managers' 
salaries tends to exaggerate the real difference in wages in the two 
types of stores. However, this would not account for all the difference 
shown in table 24. So far as the census figures go, the evidence is 
clear that wage rates in chain stores are above those of independents — 
exactly how much it is impossible to say. 

Not more than half the independent grocery stores in the United 
States have a volume of business sufficient to provide their proprietors 
and employees with a wage approximating that of the average chain- 
store employee. They are, as a matter oi fact, enabled to stay in 
business only because those who operate them are willing to work 
long hours and for low rates of pay. 


On this point the Census of Business shows some striking facts. 
Table 24 indicates that the volume of business done in the average 
chain-store unit is three or four times that of the average independent. 
Sales per person employed in chain stores were nearly twice as high. 

Even more astonishing is the fact that out of a total of about 305,000 
grocery and combination stores in the United States, more than 130,000 
have sales of less than $5,000 per year.^^ Many of these are operated 
with family labor and do not represent the entire source of family 
income. Also, they provide the families of the proprietors with food 
at wholesale prices. But it is nevertheless self-evident thati they can- 
not sell at reasonable prices to consumers and at the same time provide 
their proprietors and employees with what are usually thought of as 
reasonable wages. 

The field of grocery retailing is one of the few remaining sectors of 
the economy where the small enterpriser may still find a place. 
Having been crowded out of other fields, those with a reluctance to 
work for wages and a desire to operate their own business have 
turned to retailing. The result is that the number of retail stores has 
multiplied out of all proportion to the real needs of consumers. This 
can only mean either or both of two things: (1) That retail margins 
are inordinately high because too much labor and capital has entered 
the field; or (2) that many retailers must be satisfied with a low rate 
of return for their labor and capital. 

Grocery retailing, like farming, is offering little more than a sub- 
sistence level of living for many who engage in it. This implies 
neither condemnation nor approval of the situation. So long as the 
economic system works so badly that men cannot find other means 
of employment, this is inevitable. There is, after all, as much justi- 
fication for "subsistence retailing" as for "subsistence farming" — and 
the latter has received encouragement even by governmental action. 

It is important to distinguish between economic efficiency and 
economic tenacity. As we have defined the term, marketing efficiency 
relates to the amount of labor and capital necessary for distributing 
a given quantity of food products. Efficiency, therefore, is not 
synonymous with costs as measured in monetary terms, because the 
latter involves the compensation paid to labor and capital as well as 
their amount. The fact that many independent stores manage to 
stay in business and to sell at somewhere near the same prices and 
margins as the chains by "sweating" themselves, their families, or 
their employees is therefore no real evidence of their efficiency. 

Management as a factor in retailing efficiency. 

One of the anachronisms still prevailing in the minds of many 
people is the notion that the management of independent stores is 
likely to be superior to that of chains because the managers of chain 
units lack the incentive of ownership. The belief is traditional that 
to own an enterprise is to know best how to run it. Even economists 
have been loath to apply to the function of management the principle 
of specialization and division of labor. 

The main elements of successful management in retailing are skill 
in buying, advertising, and merchandising, together with careful 
attention to all cost factors. One of the characteristics of mass 
retailing is that all these elements are centrally planned and carried 

•» U. S. Census of Business, 1935, Retail Distribution, vol. VI, p. 156. 


out in the retail unit on a more or less standardized basis. The pur- 
chase of all goods is attended to by buyers located either at the chain 
headquarters or at the district warehouse. Window displays, adver- 
tising copy, store arrangements, etc., are designed by specialists in 
these matters, their ideas being transmitted to the store managers 
via the store superintendent. All the larger chains instruct their 
employees in selling techniques and give their store managers rigid 
training in store operation. Most important of all, the systems of 
records and cost accounts kept by the chains enable them to detect 
and rectify the sources of loss and inefficiency. 

Many independent retailers can and do match the chains in the 
skill with which they conduct their store enterprises. But it goes 
without saying that most of them do not. The business of the inde- 
pencient retailer is not large, and his earnings are necessarily small. 
He is nevertheless confronted with most of the problems of stock 
selection, merchandising, and expense control confronting the cor- 
porate chains. It is inconceivable that any very large percentage of 
the 300,000 independent grocers should have all the requisite qualities 
possessed by the chain experts for meeting these problems. 

The corporate chains are of course not without their own problems 
of management and personnel. Among these are lack of incentive 
on the part of employees, absentee ownership, and corporate bureauc- 
racy. Much progress has been made by the chains in alleviating 
some of these difficulties, although the causes lie in deep-rooted and 
inherent characteristics of large-scale organization. 

The development of cooperative and voluntary chains undoubtedly 
has had a great influence in improving the management practices of 
independent retailers. Many of these cooperatives have gone actively 
about it to assist their members with store displays, accounting 
practices, and merchandising methods. There is, however, nothing 
compulsory about the adoption of practices recommended by the 
cooperative chains. A member retailer is free to take or not to take 
these suggestions. An increasing number of retailers are taking 
them, but human inertia is such that many will not. 

There is, after all, a vast difference between a corporate chain which 
compels its employees to foUow certain retail methods and a coopera- 
tive chain which only suggests such methods. It may be that when 
all things are considered, the freedom of choice left to the independent 
enterpriser is preferable to the economic advantages resulting "from 
centraUzed management. The best features of the two systems of 
distribution, however, cannot be combined in either the one or the 
other. The capabilities of most persons are not such that they can be 
expected to show much proficiency even in the management of small 
enterprises. We must therefore either accept the ineptitude of the 
average person in order to preserve for him some measure of what is 
called economic individualism, or we must accept the change from 
enterpriser to employee stahis in order to achieve the advantages of 
centralized management. 


Another important aspect of mass distribution from the stand- 
point of marketing efficiency is, the fact that mass distributors have 
tended to integrate successive marketing functions within a single 
organization. The number of bargaining transactions and ownership 


transfers necessary to move goods from producer to consumer is thus 
greatly reduced as compared with the regular channels. 

The importance of this is commonly overlooked. No inconsiderable 
part of the total cost of distributing food products is incurred for the 
purpose of bringing about ownership transfers at various stages in the 
marketing process. Brokers' fees, wholesalers' commissions, sales- 
men's salaries, advertising expenditures — all are partially chargeable 
to the efforts of sellers and manufacturers to find retail outlets for 
their goods. Obviously the greater the number of such buyers and 
sellers and the more functionally specialized they are, the greater the 
number of ownership transfers necessary to move the commodity 
forward toward the consumer. 

The piu-pose served by these ownership transfers is that of appor- 
tioning the supply properly with respect to the ultimate demand. 
Clearly this is a function which must be performed by any type of 
distj^butive system, even a completely unified, noncompetitive one. 
The mechanics by which it is done, however, will be greatly different, 
depending on the number, size, and character of the marketing agen- 
cies. In the regular channels, comprised as they are of many small, 
specialized handlers, the product moves forward chiefly by means of 
numerous buying and selling transactions. In contrast, the mass dis- 
tributor moves it forward on an intracompany basis, with the orders 
and requirements of its various parts largely supplanting the bargain- 
ing transactions of the regular system. 

This is the key to much, if not most, of the advantage which the 
grocery chains have over the independent retailer-wholesaler system. 
When the function of wholesaling is integrated with that of retailing, 
it is no longer necessary to "sell" the retail store. The average in- 
dependent retailer is visited daily by at least a half-dozen salesmen, 
each trying to sell him a small bill of merchandise which he may or 
may not need. Those who seek the retailer's business cannot permit 
him simply to order his merchandise as he needs it; the competition 
between them is such that they constantly must persuade, cajole, and 
€oax him. 

The cost of this sort of thing in time and money is nothing short of 
stupendous. Yet it is seldom mentioned when methods for reducing 
the costs of food distribution are being considered because most people, 
includiiig a fair share of the economists, are more concerned with the 
preservation of competition under old institutional forms than with 
economic efficiency as we have defined the term. 

Labor efficiency of chains versus that of the regular channels. 

The advantages of combining wholesaling and retailing within the 
same firm are self-evident, but it is not easy to provide a precise meas- 
urement of them. One of the few studies made of this is one by the 
writer, relative to the distribution of fruits and vegetables in the city 
of Philadelphia.'* This study compares the labor efficiency of a large 
chain system of that city in putting fruits and vegetables into its retail 
stores with that of the regular jobbers and wholesalers who serve the 
independent retail trade. Admittedly the comparison is not an exact 
one, and it may not be illustrative of conditions generally, but it con- 
stitutes the only study of its kind which has come to the attention of 
the writer. 

" Cf. A. C. Hoffmau and L. .\. Bevan. Chain-Store Distribution of Fruits and Vegetables in the North- 
eastern States, Bureau of Agricultural Economics. Novomber 1937, pp. 41-48. 



The distribution of fresh fruits and vegetables in Philadelphia pro- 
vides a particularly good place to compare the ejfficiency of the two 
systems of distribution because in that city they are largely separate 
and distinct from each other. The Great Atlantic & Pacific Tea Co. 
(the chain used in the comparison) operates a produce warehouse which 
handles all fruits and vegetables sold through its 950 retail stores in 
the district. The operations performed at this warehouse correspond 
in a general'way to the functions of the produce wholesalers and job- 
bers in serving the independent grocer, except that the chain delivers 
all produce to the retail store, whereas the independent grocer usually 
visits the wholesale market in person and takes home his purchases in 
his own vehicle. 

The relative efficiency of the two systems of distribution so far as 
the use of labor is concerned is shown in table 25. With a total work- 
ing force of 223 people, the chain system bought, assembled, and deliv- 
ered 5,350 cars of fresh fruits and vegetables for its 950 retail units in 
1936. This is an average of, roughly, 24 cars per person per year. 
Compared with this, the regular channels handled about 40,755 cars 
of produce with the equivalent of 4,150 full-time employees, or an 
average of only 10 cars per person per year. The chain system thus 
required less than half as many labor hours to put a given volume of 
produce into its stores as were required in the regular cliannels. 

Table 25. — Labor efficiency of a national chain-store system compared with that of 
the regular marketing channels in handling fruits and vegetables up to the retail 
store, Philadelphia, 1936 

Dock and Callowhill St. markets (estimated 
volume handled, 40,755 cars) 


person ' 

National chain-store system (esti- 
mated volume handled, 5,350 cars) 


person ' 

1. Estimated number of proprietors of 

wholesale and jobbing stores 275 

2. Estimated nimiber of people em- 

ployed by above stores (not in- 
cluding proprietors) 2__ 1,375 

3. Estimated time spent by retailers 

and other buyers in procuring sup- 
plies, in terms of equivalent full- 
time people employed ^ 2,500 

4. Total number full-time people 

engaged in wholesaling and 
jobbing operations 4, 150 


1. Number of buyers for chain 

system 5 

2. Number of warehouse em- 

ployees for handling fruits 
and vegetables.-- . 106 

3. Number of men employed to 

truck produce from warehouse 
to retail units- 112 

4. Total number employed- 223 



' Computed by dividing the number of persons employed in each operation into the total volume handled. 

2 Assrming an average of 5 employees per firm, which is the average indicated by the 1930 census of 
busiress for fruit and vegetable wholesalers in Philadelphia. 

3 Based on interviews with 100 retailers. 

A. C. Hoffman and L. A. Bevan, Chain-Store Distribution of Fruits and Vegetables in the Northeastern 
States, Bureau of Agricultural Economics, 1937, p. 47. 

Closer examination of table 25 will indicate the source of the chain's 
advantage. In the first place, each of its 5 buyers bought an average 
of over 1,070 cars of produce per year, whereas the average wholesaler 
hanaied less than 150. Particularly striking is the tremendous amount 
of time spent by hidependent retailers in visiting the market to pro- 
cure their daily supplies as compared with the chain-store practice of 
delivering the produce to the store, thereby relieving its store managers 
of this, time-consuming task. (See item 3 of table 25.) Interviews 
with 100 independent groceis in Philadelphia revealed that most of 


them visited the produce market every business day of the year and 
spent an average of 3 hours per trip. 

The cHmination of this sort of thing through the integration of the 
wholesalmg and retaifing functions represents one of the chief ad- 
vantages possessed by the mass distributor. Conceivably, the in- 
dependents might achieve for themselves some of these advantages 
by means of cooperative organization, but as yet have not done so in 
the case of fruits and vegetables. 


Thus far our discussion of efl&ciency has been confined mainly to 
the innovations made by the grocery chains in the field of whole- 
salmg and retailing. On the whole, these have been the most im- 
portant of any introduced as a result of large-scale organization in 
the food industries, because the opportunities for reducing marketing 
costs are greatest in these functions. Other types of large-scale 
handlers, however, also have had an effect on processing and dis- 
tributing methods which is not without significance from the stand- 
point of efficiency. 

The tendency of large-scale processors, such as the meat packers 
and the dairy companies, to set up their own sales organizations for 
carrying the product through to the retailer already has been fully 
described. Essentially, what this amounts to is that the mass dis- 
tributors have taken over the functions of the specialized broker and 
wholesaler. This they have been impelled to do for several reasons. 
First of all, they e\ddently have found that the costs of their own sales 
organizations are less than the brokerage fees and commissions that 
their goods otherwise would have to cany; otherwise, they would use 
the regular distributive channels. The fact that they have not done 
so is at least prima facie evidence of some gain in efficiency through 
having integrated the function of distribution with that of processing. 

Mass distributors, of course, have had other reasons for setting up 
their own sales systems. The desire to broaden the market for their 
products has almost certainly been a factor, since the regular brokers 
and wholesalers cannot be expected to push any particular fine of 
goods as vigorously as the manufacturer's own sales force. However, 
unless sales prom^otion also contributes to reduced marketing costs, it 
does not represent a gain in efficiency in the proper meaning of that 

N'umher qf products handled. 

Another advantage of the mass distributor has been the lar^e 
number of products handled. As food corporations have grown in 
size, they have almost invariably added to the number and variety 
of their commodities. The big meat packers were led early in their 
development to undertake the distribution of dairy and poultry 
products along with meats. Corporations like General Foods and 
Standard Brands have literally scores of articles in their respective 
lines. The reason for this is, of course, to reduce the sales overhead. 

It is not possible for a food processor or a manufacturer to carry 
distribution very far toward the consumer on an efficient basis with 
only a few products. Recognition of this by the large food corpora- 
tions has given them a distinct edge over other types of handlers, and 

207003 — 41— No. 35 


particularly over some of the producer cooperatives, which attempt 
vertical integration with only one or two products. 

Freight and cartage costs. 

Savings in freight and transportation costs obtained as a result of 
large-scale marketing organization are probably not as great as is 
sometimes thought. There is some cross hauling of food products 
because of improper market distribution. Judgment as to the require- 
ments of particular markets can usually be made more accurately by a 
mass distributor than by large numbers of small shippers, many of 
whom lack the market information required for the proper routing of 
supplies. The mass distributor can also ship his products direct from 
his plant or factory to his various distributing units with some saving 
in transportation" costs. . On the whole, however, the economies 
obtained in this way are not important in the case of most food 

The most notable example of transportational waste and inefficiency 
in food distribution is to be found in the intracity cartage of perishable 
food products. The wholesale produce markets of most large cities 
are antiquated, decentralized, congested, and altogether inadequate 
for the proper handling of perishable produce. '* Buyers and sellers 
who use the markets are subject to costly delays and inconvenience. 
Many of the markets do not have direct rail connections, which adds 
to the cost of terminal cartage. The situation has been such as to 
provide an opportunity for associations of truck owners and drivers to 
impose costly regulations and restrictions upon the free movement of 
produce within large cities. 

The burden of this sort of thing is not precisely ascertainable, but it 
undoubtedly adds a considerable amount to the cost of certain food 
products. Intracity cartage costs in New York City amount on the 
average to 4 to 6 percent of the retail price of fresh fruits and vegetables. 
Conditions here are typical of those in other large cities. A con- 
siderable part of this could be saved by proper arrangement and 
location of the wholesale produce markets, so that it cannot be said 
that this source of inefficiency is necessarily inherent in the regular 
marketing system. Under present conditions, however, the larger 
grocery chains ha^'e gained a substantial advantage over other handlers 
by virtue of the fact that they have established their own produce 
warehouses and no longer rely on the terminal wholesale markets for 
their fruit and vegetable supplies. 

The integrated mass distributor is also likely to have some time 
advantage in the handling of perishable produce. For example, 
chain-store systems which receive fruits and vegetables direct at their 
warehouses almost invariably get the produce into their retail units 
from 12 to 24 hours sooner than do handlers in the regular channels. 
With a highly perishable commodity, these few hours may prevent a 
great deal of waste and spoilage. 

Responsiveness of prices to changing market conditions. 

There is one more respect in which vertical integration is likely to 
contribute to more efficient food distribution. It has to do with the 
responsiveness of prices to changing demand and supply conditions. 

" William C. Crow, Wholesale Markets for Fruits and Vegetables in 40 Cities,~U. S. Department of 
Agriculture Circular No. 463 , 1938, pp. 1-20. 


Prices in a marketing system comprised of a series of specialized han- 
dlers are almost certain to be less flexible and responsive to market 
conditions than in a system of integrated units. The reason is simply 
that the loose links in the former system do not permit a quick adjust- 
ment of prices at all points in the marketing process. 

Because of conditions peculiar to agricultural production, it is 
essential that food prices to consumers shall be flexible. Not infre- 
quently it happens that prices to growers are so low that it may not pay 
to harvest the crop. If such a situation develops suddenly, retail 
prices may show little or no response, and the crop, if it is perishable, 
is partially lost. 

It is generally recognized in trade circles that mass distributors take 
the initiative in instituting price changes. Sometimes this is used as a 
basis for asserting that they fix food prices, a charge frequently 
leveled against the grocery chains. A more likely view is that the 
scale of chain-store operations and their intimate contact both with 
supply conditions and with consumer demand permit them to detect 
changes in the general market situation and to adjust prices more 
quickly than other handlers are able to do. 

In some respects mass distribution may have contributed to less 
flexibility. This is likely to be the case where some degree of monopoly 
exists, even though the monopoly may be only with respect to the 
brand or trade-mark. Specialty food products, whose manufacture 
and distribution are usually in the hands of big firms, show on the 
whole less price flexibility than the food staples. 



Between the grocery chains and other types of large-scale food 
corporations there are some rather fundamental differences with 
regard to distributive methods and efficiency. These differences turn 
on the fact that the grocery chains do not have to "sell" their retail 
units and are, therefore, in a position to dispense with many of the 
marketing costs which other types of distributors m.ust incur in getting 
goods into consumption. The advantage which this gives the chains 
over the regular wholesaler-jobber system was described in an earlier 
section of this chapter. The chains have much the same sort of 
advantage over large-scale processors that have set up their own 
sales organizations for selling to the independent retailer. 

Like other mass processors and distributors, the larger chains have 
their own brands of food products. They are not, however, under 
compulsion to expend large sun^s of money to advertise these brands 
for the sim.ple reason that their em.ployees in the retail store are in 
direct contact with the consumer. A personal word or suggestion 
from, a salesman to a in favor of a particular artfcle usually 
will carry more influence than a dozen brightly colored advertisements 
and fancy posters. 

One of the aspects of modern food distribution which the writer 
finds m.uch to his dislike is the growing expenditure of m.oney for 
brand advertising of food products. the chief offenders are 
the big processors and distributors who do not have assured 
retail outlets and who use this method to stimulate sales of their 


products. The integration of retailing with other marketing func- 
tions obviates much of the need for advertising and selhng expenditure 
of this kind and thus contributes to the reduction of m.arketing spreads. 

Som.e m.easure of the saving made possible in this way is given by 
the Federal Trade Com.mission's comparison of prices of the private 
brands of chain stores with those of the standard brands on the chain- 
store shelf beside them. The Commission found the prices of groceries 
sold under the private brands of the chains to be about 12 percent 
lower than those of standard brands sold in the same store. ^® The 
quality of the goods represented by the different brands used in the 
comparison was approximately the same, so that this was not a 
factor in the com.parison. Moreover, the mark-up and the profits 
made by the grocery chains on their own brands were as great as 
those made on the other brands which they handled. The 12-percent 
price difference in favor of the private chain brands thus gives a 
rough measure of the saving m.ade possible by the elim.ination of 
advertising and sales costs usually incurred on nationally advertised 

The distributive economies made possible by the possession of 
assured retail outlets are such that a closer working relationship 
between the m.ass processor and the m.ass retailer is almost certain 
to develop. This may take several fonns. The first and m.ost 
obvious is for the m.ass retailer to undertake the processing of m.ore 
and m.ore of its goods. The tendency of the grocer;*/ chains to m.ove 
in this direction has already been described in some detail. The 
counterpart of this developm.ent is for the m.ass processor to obtain 
a chain of retail outlets. This the meat packers attempted to do 
years ago, but they agreed to discontinue it under the terms of the 
packers' consent decree. Indications are that the big packers are 
becoming restive under this provision of the decree. There also are 
trade rumors to the effect that other types of large-scale food distribu- 
tors are moving toward a closer tie-up with some of the grocery 
chains in order to reduce the cost of sales and distribution. The 
writer thinks it not improbable that considerations of this kind may 
lead ultimately to a series of mergers and combinations on a scale 
unprecedented in the food industries. 


The economies to be made in the distribution of farm products at 
the producer end of the m.arketing chain are far less im.portant than 
those at the consumer end. The chief significance of m.ass distribu- 
tion lies in the changes it has wrought in retailing and in those dis- 
tributive functions between the retailer and the prim.ary processor. 
It is with these changes that we have been concerned thus far in this 
chapter. Large-scale organization, however, has not been without 
effect on those marketing functions next to the farmer, and it is to 
these effects that we now turn. 

At the producer end of the regular marketing system are usually 
several middlemen who perform the functions of local assembling, 
shipping, and com.m.ission selling. The number of middlemen and 
the nature of their marketing serv'ices of course vary with the product. 
In the case of livestock, there is usually the local dealer who buys 

i» Federal Trade Commission, Chain Store Inquiry, 8. Doc. 142, 73d Cong., p. XIX. 


from the fanner and the terminal commission firm which sells to the 
packer. Between the grain producer and the flour m.iller are the 
local grain elevator and the terminal commission merchant. Fresh 
fruits and -Vegetables are commonly bought by a local dealer who 
assembles, packs, and ships them to a terminal commission merchant. 
With minor variations, this is the marketing pattern to be found for 
most agricultural products. Many of these local functions are per- 
formed by producer cooperatives, but where this is the case it repre- 
sents mainly a difference in the form of ownership control rather than 
in the number and character of handling operations involved. 

As food corporations have grown in size, they have integrated many 
of these local marketing functions. The result has been the develop- 
ment of what is commonly known as "direct marketing." Direct 
marketing means simply that the sale of produce is direct from the 
farmer to the processor or mass distributor without the intervention of 
any intermediary agent. 

The trend toward direct marketing is to be found with nearly all 
farm products. It is due primarily to two factors. The first has 
been the motortruck, which has made it possible for the farmer to 
deliver the produce direct from the farm to the processor or terminal 
handler. The second has been the growth of a more integrated system 
of food distribution in which the services of specialized middlemen 
were no longer needed. 

Direct buving of hogs by the meat packers probably provides the 
best example of direct marketing that can be cited. It had its beginning 
15 or 20 years ago when interior packing plants were being erected 
throughout the Com Belt. The big packers, who had most of their 
slaughtering facDities on the large public markets, found themselves 
at some disadvantage in competition with the interior firms. Not 
only did the interior packers obtain freight advantage by slaughtering 
nearer the point of production, but they also avoided the yardage and 
commission costs of selling livestock on the terminal markets. In an 
effort to overcome some of these handicaps, the big packers began the 
practice of buying hogs direct from farmers at country points. Later 
they started to receive hogs direct at their terminal plants instead of 
buying through the commission firms on the livestock exchange. 

These newer methods of buying unquestionably led to some reduc- 
tion in the costs of marketing hogs." Terminal and commission 
charges, which are eliminated when hogs are sold direct to packers, 
commonly amount to 20 to 25 cents per hundredweight. Some com- 
pensating cost is involved when packers send out buyers and estab- 
lish concentration points in producing areas, but these costs seldom 
exceed 10 cents per hundredweight. A number of factors other than 
marketing costs are involved in the direct buying of hogs. It Ls often 
charged that this method of buying makes for price manipulation and 
other undesirable practices.'' But whatever the merits or demerits of 
direct buying on that score, there is no doubt that it has contributed 
to some reduction in terminal marketing costs. 

Roughly analogous to the direct buying of hogs by the meat packers 
is the direct buying of fruits and vegetaVjles by the larger grocery 
chains. The terminal wholesale commission on fruits and vegetables 
is commonly 10 percent of the selling price. To this must often be 

'■ U. S. Pepartment of Agriculture, The Pirect Marketing of Hogs. Miscellaneous Publication No. 222, 
1935, especially pp. 10-12. 


added various cartage cliarges, amounting usually to another 3 or 4 
percent. Produce shipped or trucked to the chain warehouses direct 
from country points, of coiu-se, incurs none of these marketing costs. 
In an effort to retain part of tliis gain for themselves, the chains usually 
pay the grower or shipper a somewhat lower price to compensate for 
the fact that no marketing charges are deducted. Regardless of who 
gets the benefit, however, a saving in marketing costs has been effected. 

The tendency of the big handlers of dairy products to buy direct 
from local creameries and cheese factories has already been fully 
described. Here again the object is to avoid the commission charge. 
Within the last 4 or 5 years even the grain merchant, whose position 
seemed secure despite the growth of large milling corporations, is 
finding his business reduced by the eft'orts of processors and producers 
to deal directly with each other. 

The economies achieved by means of direct marketing at the pro- 
ducer end of the marketing chain are of the same general sort as those 
resulting from the combining of wliolesaling and retailing at the con- 
sumer end. In both cases the saving turns mainly on the elimination 
of the charges and commissions of middlemen whose services are no 
longer needed. This does not mean that a reduction in marketing 
costs equivalent to the margins formerly taken by these middlemen 
can be achieved, since the integrated distributor will have some com- 
pensating costs. One thing, however, is self-evident; namely, that 
many of the costs of the older system of food distribution arose out of 
the buying and selling operations M'hich took place at every stage in 
the marketing process. It is through the reduction in the number of 
such transactions that mass distribution has realized its greatest 


Thus far we have considered only the efficiency of different types of 
marketing agencies within the framework of a competitive system. 
No account has been taken of the needless duplication of marketing 
services and facilities arising out of competition itself. Mass dis- 
tribution has applied what might be termed engineering principles 
to food distribution within a single firm. But it has not resulted in 
the application of these principles so as greatly to reduce the total 
quantity of labor slnd -capital used in food distribution because the 
marketing system remains essentially competitive and places no 
limitation on the number of firms which may engage in it. 

It is impossible to approximate how much this adds to the cost of 
food distribution. But it can be asserted positively that the number 
of food handlers and services has multiplied out of all proportion to 
what would be required if food distribution were organized on a 
unified, noncompetitive basis. This applies at practically every step 
in the distributive process, but it is particularly true of retailing. 

The number of grocery stores in the United States has increased 
out of all proportion to the increase in the population. In 1850 there 
were approximately 25,€00 such stores; in 1900, 156,000; and in 1935, 
355,000 (table 26). Part of this increase in store numbers is due to 
the fact that a larger proportion of the population now lives in towns 
and cities, so that consumers require more in the way of retail services. 
But it also signifies an uneconomic use of labor and capital resources, 



the cost of wliich will be reflected either in wider marketing spreads 
than would otherwise be necessary or in a proportionately lower 
rate of recompense to those engaged or employed in distributive 

Table 26. — Approximate number of retail grocery stores in the United States in 
relation to population, 1850-19S5 


stores ' 


tion per 


stores ' 


tion por 

1850 .. .- 

24, 479 
40, 070 
101, 849 

38, 558, 371 
50, 155, 783 



156, 470 
239, 236 
313, 086 

2 354, 971 

75. 994, f.75 
91, 972, 266 
105, 710, 620 
122, 775, 046 













' United States census, occupation reports. The occupational classification made by the census shows 
the number of managers and superintendents of grocery stores, which is roughly synonymous with the 
number of grocery stores. The first complete census of distribution in 1929 showed 307,425 grocery and com- 
bination stores, which compares closely with the occupational data shown above. 

' From 1935 United States Census of Distribution, data include grocery and combination stores. 



Monopoly has always aroused public fear and resentment, the more 
so when it involves an industr}'^ so vital as food distribution. Until 
recent years it commonly w^as agreed that prices of most food products 
were made under conditions which were essentially competitive. The 
astonishing growth of food corporations during the past two decades, 
however, makes this assumption less generally accepted than it once 
was. One hears nearly as much today about the menace of chain 
stores and other types of large-scale food concerns as once was heard, 
for example, about the oil and steel trusts. Indeed one might almost 
say that the latter are being partially forgotten in the interest and 
controversy over newer forms of large-scale organization. 

To the popular mind, monopoly connotes two things which it is 
important to keep separate and distinct. Quite properly it is associated 
with control of supply in such a way as to limit the quantity of goods 
and services below that which would be provided under competitive 
conditions. To the extent that this is done, monopoly is distinctly 
antisocial in its implications, except under very special conditions 
subsequently to be discussed. 

. Interwoven»:with this aspect of the problem is also an antipathy in 
the minds of many people toward bigness itself. What they fear is,not 
the effect of monopolistic control on prices and supplies, but the dis- 
placement of small business enterprises by big ones. Their concern is 
for what they believe to be the social advantages of economic individ- 
ualism and competition as ends in themselves, apart from any con- 
sideration of the efficiency with which the factors of production are 
used in the ecorjomy. 

There can be no quarrel with an evaluation of large-scale enterprise 
from this standpoint. But considerations of this kind must not be 
confused with the problem of monopolistic control per se. In our 
concluding chapter we shall return to the social aspects of large-scale 
organization. But in this chapter and in those immediately following 
it our concern is wholly with the effect of monopoly on prices, margins, 
and supplies of food products. 


It is necessary to understand at the outset the type of control likely 
to be exercised by a food monopolist, and the way in which this control 
will affect prices to farmers and consumers. 

The essence of ordinary monopoly is direct control over the volume 
of supply. In the case of most food products, however, the supply is 
determined in the first instance not by the marketing system but by 
the aggregate volume of farm production. Thus the meat supply 



depends not on how many head of hvestock the packers choose to 
slaughter but on how many the farmers choose to produce and 
market at the price offered. All the wh«at produced is ultimately 
milled, and all the milk is used. There are, of course, some exceptions 
to this general statement,^ but broadly speaking it is the farmer and 
not the food handler who controls directly the volume of food 

The fact that food handlers do not directly control the food supply 
does not m^an that there could not be food monopolies, nor that such 
monopolies might not be extremely hurtful to farmers and consumers. 
The point is that the monopolist would try to increase his profits by 
widening his margins rather than by direct limitation of supply. The 
nature of his margin policies would affect the volume of supply; 
but only because and to the extent that farmers would adjust their 
marketings to changes in the price offered them. 

A widening of food margins either because of monopoly or for any 
other reason, obviously would result either in higher prices to con- 
sumers, lower ones to producers, or both.^ 

In the short run (that is, within a crop year or whatever period of 
time is necessary for farmers to adjust their production), the food 
supply is relatively fixed. Once the crop is produced, it "may be 
presumed that farmers will be willing to deliver it for any price above 
the cost of harvesting. The immediate effect of a widening of food 
margins thus would be reflected mainly in lower prices to farmers 
rather than in higher ones to consumers. 

In the long run, however, the situation would be different, depend- 
ing on the relative slopes of the curves of consumer demand and farm 
supply. If farmers responded to lower prices with a sharp cur- 
tailment of their production, then the effect of a food monopoly 
would be mainly to increase prices to consumers rather than to lower 
the farm price. If the situation were reversed (that is, if farmers 
tended to maintain their production despite lower prices), then it is the 
farm price which would be lowered and consumers would not be 
greatly injured by the monopoly. In either case the effect of the 
monopoly would be to lower the gross farm income. If farmers tended 
to maintain their production, their price would be lowered; and if they 
curtailed it, their income would be lowered because they would have 
less to sell. 

The supply of farm products in the aggregate is relatively in- 
elastic, even for periods of "some length. Having made their invest- 
ment in land and equipment and their own labor being somewhat in 
the nature of an overhead, farmers tend to go on producing at a 
point near the capacity of their farms regardless of price. This being the 
case, the expectation would be that not much of the incidence of a 
food monopoly would fall on consumers — at least until broad popu- 
lation shifts between agriculture and industr}^ had worked themselves 

For single products, however, the case m.ight be different. Farmers 
are reasonably quick to shift production from one product to another 
in response to phanoring relative prices. A widening- of iixargins for a 

' Makers of breakfast cereals, for instance, are not so closely governed in their output by the volume of 
cereal production as are the flour millers. Other exceptions are fruit and vegetable canners, who usually 
contract with growers for specliic acreages of canning crops and in this way exercise some measure of control 
over their own output. 

' This assumes, of course, that agricultural production is carried on under conditions of increasing cost, 
as it usually is. 


single product therefore would be likely to cause a nearly proportion- 
ate rise in its price to consumers as farmers shifted away from its 
production. Beyond this, one hardly can generalize regarding the 
incidence of food monopoly. 


The general principles which govern the determination of price and 
supply under com.petition and varying degrees of monopoly are well 
understood and require no extended elucidation here. The food in- 
dustries, however, present som.e special problem.s for price theory 
which we shall want to examine. It will contribute to the clarity of 
the discussion to begin with a definition of terms and concepts. 

In its etym.ological derivation, the word "monopoly" means simply 
that all the supply is concentrated in the hands of a single firm. As 
thus defined, the term, obviously could be applied to a case of several 
firm.s if they were in com.plete agreement as to their price and produc- 
tion policies so that they tended to act as one. From tim.e to time 
in the course of the discussion the word may be used also in a looser 
sense to connote som.e departure from, com.petition, but not single-firm 
monopoly. It will be clear from the context in what sense the term 
is being used. 

At the opposite extrem.e from, monopoly as thus defined is perfect 
com.petition. The distinguishing feature of perfect competition is that 
the number of firm.s is great enough and all of them, are small enough 
to prevent any one of them from, exercising a significant degree of con- 
trol over price. To put it differently, the dem.and curve of the indi- 
vidual firm, under competition is horizontal because no single one has 
m.ore than an infinitesimal part of the total supply. 

Between the of single-firm, monopoly and perfect compe- 
tition are varying degrees of m.onopolistic or im.perfect com.petition. 
Im.perfect competition may be defined as a situation in which the 
price obtainable by an individual firm, is not altogether independent of 
its own output but in which no one firm has com.plete control of supply 
as under simple m.onopoly. Cases of im.perfect competition might 
arise either because of the limited num.ber of fiiTii.s or because of the 
relatively large size of a few of tlien\. In the food industries the sit- 
uation is commonly one of a few large firm.s and num.erous sm.all ones. 

The concept of m.onopoly and monopolistic com.petition involves 
not only the number and size of firm.s, but the nature of the product 
itself. To the extent that the product of one firm, is differentiated 
from, that of its competitors, it m.ay be said to have a m.onopoly. 
The difference may be important or unimportant and it may even be 
fancied rather than real. But so long as buyers or consumers do dis- 
tinguish between the products of different sellers the conditions of 
perfect com.petition are not fully met regardless of the num.ber or size 
of competing firm.s. Exam.ples of product differentiation usually arise 
out of the use of brands and trade-hiarks. Generally speaking, these 
devices are less effective as a means of differentiation for food staples 
than is the case with most industrial commodities. There are, how- 
ever, a few instances in the food industries where brands and trade- 
marks are important, and these will be discussed more fully in a 
subsequent chapter. 



It is an elementary principle of economics that, under conditions of 
perfect competition, price will tend to equal the average cost of the 
marginal firm, which gains access to the market. The general pre- 
sumption is that this is the "right" price in the sense that it results 
in the proper allocation of productive resources different in- 
dustries and hence in the maximizing of public welfare.^ The criti- 
cism of imperfect competition or monopoly thus turns on the fact 
that it leads to some departure in price and output in any given 
industry from that which would obtain under perfect competition.* 

The central tendency of monopoly is a lunitation of supply by the 
monopolist in such a way as to maximize net profits. Actually a 
maximizing of profits is rarely if ever attained because in a changing 
world businessmen have neither the foresight nor the perspicacitj'- to 
do so even if they wanted to. Moreover, to carry a restrictive policy 
to this point would almost certainly result in economic and political 
reprisals wliich businessmen are too prudent to bring down upon them- 
selves. The tendency of monopolistic control is nevertheless in tliis 
direction, although the situation rarely works out with the nicety and 
precision of the assumptions usually made by economists with respect 
to it. 

If the monopolist is to maximize his total profit, he will carry his 
output only to the point where the additional cost of the last unit pro- 
duced will equate the additional revenue he can get from it. In other 
words, he will equate his marginal cost with his marginal revenue. If 
he does this and if his cost function is similar to that wliich would 
obtain under competition, then obviously his price will be liigher and 
his output smaller than would obtain under competitive conditions. 

Here it is necessary to enter the first major qualification in compar- 
ing output under monopoly with that of competition. The assump- 
tion of identical cost functions for the two situations is not only un- 
warranted but is contrary to what nearly everyone will admit to be 

' This assumption is not necessarily a valid one in all ca-ses. The most favorable allocation of resources 
depends not only on the degree of competition but on the nature of costs. Some gain in the public well- 
being would obviously result by an artificial transfer of resources from industries of increasing cost to those 
of decreasing cost . In this connection R . G . Kahn has suggested arran ging all industries in descending order 
with respect to their external economies. Then "All industries above the average have to expand to reach 
their ideal outputs and those below have to contract * • *" (Economic Journal, March 1935, p. 6). 
' * Note on the relation of monopoly to the allocation and full use of the productive factors. Most econo- 
mists make the tacit assumption that the best allocation of productive factors among the various industries 
is that resulting from perfect competition, and hence that the restoration of competition in any monopo- 
lized sector of the economy will result in the proper flow of resources into it. This assumption may or 
may not be altogether correct, depending on further circumstances. If monopoly is the exception and not 
the rule in the economy, then the assumption is a valid one. If not — that is, if monopolistic elements are 
widespread and competition is the exception— then it is altogether probable that the preservation or res- 
toration of competitive conditions in a given line of industry will result in too many factors of production 
finding their way into it. The excessive duplication of services and facilities in the field of grocery retailing 
today would seem to offer a case in point. 

Also involved is the more fundamental question of the effect of monopolistic control on the full use of the 
factors of production. Classical economic theory blithely assumed that all economic resources would find 
employment. If correct, this would mean that monopoly would result simply in some diversion of resources 
from the less competitive to the more competitive fields. It is needless to remark that the characteristics 
of modern capitalism utterly belie the assumption of full employment. But there is by no means a general 
agreement that this situation is attributable solely, or even mainly, to the presence of monopolistic elements. 
Some economists have indeed maintained that monopoly goes a long way toward explaining the existence 
of unused resources in the economy. (Of. Alvin Hansen, Full Recovery or Stagnation, Harvard Univer- 
sity Press, p. 27.) Others have emphasized the factor of rigid costs. Still others have insisted that the 
prevalence of administered prices as distinguished from market prices accounts for the tendency of many 
firms to reduce output rather than to lower prices. It is probably correct to say that none of these is in 
itself an adequate explanation of the underutilization of economic resources or of the instability which 
characterizes most modern economies. The writer prefers to see the explanation in an admixture of these 
and other causes inherent in capitalism itself. Certainly, it seems a little unrealistic to hope for a solution 
of capitalism's dilemma solely through the dissolution of the monopolistic elements within it. (For an 
excellent summation of some of the different points of view regarding the effect of monopolistic control on 
the use of the productive factors, see J. K. Galbraith, Price Policy Research: A Problem in the Application 
of Economic Theory, unpublished.) 


the facts of the matter. For example, we have seen that the structure 
of food distribution under large-scale organization is vastly different 
from that of the older system of srnall, functionally specialized handlers. 
If our analysis of the preceding chapter is correct, mass distribution 
has led to definite and incontrovertible gains in the way of improved 
efficiency and cost reduction. Presumably complete monopoly might 
go even further m this du'ection by eliminating some of the duplication 
inherent in a competitive system. In any case there are no grounds 
for assuming that marketing costs will b^ the same under competition 
as under monopoly; and it might plausibly be argued that the reduc- 
tion m costs attendant upon monopoly would go far toward balancing 
its restrictive tendency arising out of the eft'ort to increase profits above 
the competitive level. ^ 

\Mien we come to situations intermediate between those of perfect 
competition and simple monopoly, price theory becomes much more 
complex. This has been made the subject of a vast new literature in 
economic theory which we can pause here to summarize only in the 
briefest sort of way. 

The central thesis of the theory of imperfect competition is that the 
outcome as to price and supply is indeterminate except on the basis 
of the particular assumptions which are made.® If the number of 
firms is limited, and if each has regard to its total influence on price, 
The outcome will be the same as that of complete monopoly. If, on 
the other hand, all firms neglect to take account of this influence, the 
price will be the competitive price regardless of numbers. Between 
these two extremes, the equilibrium point will vary, depending upon 
the assumptions each firm makes as to the policy likely to be followed 
by his competitors. As Chamberlin puts it, "If each assumes his 
competitors' supphes to be unchanged, the equilibrium price is con- 
tinually lower than the monopoly one as the sellers are more numerous, 
descending to the purely competitive level only when their numbers 
are infinite. If each assumes his competitors' prices imchanged 
* * * the equilibrium price is the purely competitive one for two 
sellers and, of course, for any greater number." The important point 
to be made with respect to the theory of imperfect competition is that 
the solution of theory does not necessarily foUow from any given 
postulates as to the demand and supply functions, as is the case with 
perfect competition and simple monopoly. 


Theories of imperfect or monopolistic competition have been devel- 
oped mainly for small numbers of competing firms. We have seen, 
however, that in the food industries the situation is more likely to be 
one in which there are a few large firms and numerous sipall ones. 
The presence of numerous small firms obviously precludes a solution 
based on small numbers, as in ordinary oligopoly. At the same time, 
the situation is not strictl}^ competitive despite the numerous small 
firms because of the presence of a few large ones whose price is not 
independent of their output policies. 

• This is not to inlply, however, that unregulated private monopoly is tolerable from the public stand- 

« The be.«t summation of the tlieory of oligopoly is that to be found in Edward Ohamberlin, The Theory 
of Monopolistic Competition, Harvard University Press ,1933, pp. 53-54. 



The problem involved here might be designated as that of the 
dominant firm. So far as the writer is aware, it is one which has been 
somewhat neglected in the development of the theory of imperfect 
competition/ Because of its particular relevance to conditions in the 
food industries we shall look with some care into its implications for 
price theoiy. 

We may suppose first the case of a large firm in competition with 
many small' ones. Since none of the small firms has any appreciable 
part of the total supply it may be presumed that they wUl tend to 
behave competitively in adjusting themselves to any given situation. 
The existence of the large firm in no way alters the fact that their 
individual demand curves are virtually horizontal. 

Chaet X 
Imperfect competition: The case of a dominant firm 





Q Q 

Explanation. — The demand or average revenue curve for the market is repre- 
sented by DD. The quantities of supply which the small firms v/ill offer at 
varying prices is measured along the line ss (this being their curve of long-run 
average costs). The difference between the amount which the small firms will 
offer at any given price and that which the market will take at this price represents 
the effective demand for the large firm (i. e., the output which it may sell at the 
price). In the above figure this is measured for varying quantities of supply 
along the line dd. 

It may be assumed that the large firm will adjust its supply to its effeciive de- 
mand in such a way as to maximize its net profit. In the above illustration it 
would limit its supply. to OQ, thus fixing the price at QP (its marginal cost being 
equal to its marginal revenue at this point). At a price of QP, the small firms 
would offer a supply of QQ', which would result in a total market supply of OQ'. 

If it is assumed that there are several large firms rather than only one, the 
solution within the limits of their effective demand would follow the ordinary 
theory of oligopoly. 

With the large firm, however, the case is somewhat different. With- 
in the limits set on the one hand by the market demand and, on the 
other, by the supply of the small firms, the dominant firm will be in_ 

' The problem was suggested by George Stigler in an article entitled "Theory of Imperfect Competition," 
Jou'npi of Farm Economics, vol. XIX, No. 3, p. 716. 


position to exercise some degree of monopolistic control. The situa- 
tion thus becomes one of price leadership with the dominant firm set- 
ting whatever price it thinks compatible with increasing or maximiz- 
ing its total profit. In doing so, it must of course take into account 
the production response likely to be made by the small firms. 

The type of market adjustment likely to result from our supposed 
example can best be illustrated by resort to the diagram on the preced- 
ing page (see chart X). At any given level of prices, the small firms 
(acting competitively) will offer a supply based on the curve of aver- 
age costs for the mnrginal producer. The difference between this 
supply and that which the market will take at the given price repre- 
sents the range within which the large firm can adjust its operations 
in order to maximize its profits. 

The general principles illustrated in chart X are not chan;7ed ma- 
terially by the assumption that there are several large firms rather than 
only one. In this case, the solution follows the lines of oligopoly 
theory within the limits of price control for the large firms. 

Several practical conclusions follow from the example which we 
have described. In the first place it is evident that the price is no 
longer uncontrolled or automatic in the sense that it results from the 
blind adjustment of competitive forces. By the very nature of the 
case the dominant firm appears to assume a position of price leader- 
ship. It may reasonably be expected to take the initiative in making 
price changes as it seeks to maximize its profits under varying market 
conditions. To each new position taken by the dominant firm the 
small ones will tend to adjust on the basis of competitive behavior. 

Obviously a large firm which controls only 10 percent of the total 
supply will be less likely to attempt price enhancement than one 
which controls 50 percent. In the former case even a halving of its 
output would increase its price only a little even if the small firms held 
their supply virtually constant. 

Equally important in determining the policy of the dominant firm is 
the elasticity of the supply for the small ones. If they respond to an 
increase in price by the large firm with a sharp increase in output then 
a restrictive policy on the part of the large firm will result mainly in its 
losing part of the market. To put the matter a little differently, the 
more elastic the supply of the small firms the more elastic the demand 
for the dominant firm, and hence the less incentive the dominant firm 
has for reducing its supply. 

The supply response of the small firms will be affected by several 
factors. In the short run, a dominant firm conceivably might be able 
to raise prices quite considerably before the small ones could expand 
the scale of -their operations to take advantage of the higher prices. 
This the large firm presumably would. not do if it felt reasonably sure 
that the smaller ones sul)sequently would expand their operations or if 
new firms should be attracted into the industry. Moreover, most of 
the food industries are already characterized by unused resources and 
facilities so that they could quickly step up their output under the 
stimulus of hisrher prices. 

Ease of v^ntrance into a parucular industry would also tend to influ- 
ence the nature of tlie supply response on the part of the small firms. 
In a sense the very .existence of numerous small firms indicates that 
the entrance of new enterprisers is not difficult. Thus a widening of 
margins by the grocery chains would quickly attract many new" enter- 


prises into this field, but a widening of margins by the meat packers 
might not do so immediately because it is not so easy for a new firm to 
establish plant facilities and market connections in this industry. 

For reasons already made clear, one cannot generalize as to the 
effect of a dominant firm on price and total supply. The existence of 
such a firm would not necessarily mean that prices would be higher or 
supplies smaller than under perfect competition. As a matter of fact, 
the opposite might be true, and probably would be true if the costs of 
the large firm were substantially below those of its small competitors. 
It might hmit its output to the point of maximum profit for itself and 
stiU offer its product at a lower price than its small competitors could 
do if they were to replace it. If there are advantages in large-scale 
organization from the standpoint of efficiency, then competition 
between several large firms able to match each other on this score 
almost certainly would result in a lower level of prices than under 
perfect competition. Certainly the existence of large firms and some 
degree of imperfect competition is not necessarily incompatible with 
the public interest if cost differentials are significant. 


Another special situation more hkely to be encountered in the food 
industries than in most others is that of bilateral or successive monop- 
oly. Such a situation might be defined as that existing when there 
are two monopolists (or several oligopolists) , one above the other in the 
marketing system. A hypothetical example would be that of a process- 
ing monopolist who sold his entire output to another firm which had 
complete control of its distribution. 

Needless to say, no pure examples of this kind are to be found 
anywhere in the economy. But to the extent that we may have 
imperfect or monopolistic competition at various points in the market- 
ing system, we do have an element of bilateral monopoly. For 
example, in the cereal industry we have had the growth of large-scale 
baking superimposed on large-scale flour milling with a separate set 
of firms in each field. Another potential example is that of the meat 
packers and the grocery chains. 

In the field of fluid milk distribution, however, the question of 
bilateral monopoly appears to be one of immediate and practical 
importance. The milk producers in most large city markets are 
organized into cooperative associations through which most of the 
milk is sold to distributors. The distributors, in turn, are also 
relatively few in number, three or four of them often controlling as 
much as three-fourths of the total supply in a given market. 

In the ordinary course of bargaining between these two groups, 
each concentrates its interest primarily on its own price or margin. 
Not infrequently each group is willing to grant the other certain 
concessions, provided there is reciprocity in the matter. Thus the 
distributors will agree to pay the producers' cooperative a high price 
for its milk, if by so doing they can widen their margin between the 
price paid the cooperative and that charged the consumer. 

It is obvious that this sort of bargaining is not calculated to lower 
the, price to consumers and may actually be carried to the point where 
the farmers and distributors themselves lose by it. This could almost 
certainly be true if the demand for fluid milk were elastic. In this 


case the efforts of each monopolistic group to improve its own position 
might force prices so high that the combined profits of both groups 
would be reduced, a situation which would never occur under condi- 
tions of horizontal monopoly or oligopoly. 

Indeed, economic theory affords a demonstration of the likelihood 
of just this outcome. So far as the writer knows, the case of bilateral 
monopoly has received very little attention from economic theorists.* 
We will not burden the discussion at this point with a proof of the 
principles which are involved in it. Such a proof can be found, how- 
ever, in an appendix at the end of the dissertation. It will suffice here 
to lay down only the conclusions to which the theory leads: 

(1) Two successive monopolists, one above the other, would tend 
always to raise prices and limit supplies more than a single monopolist 
combining both their functions. 

(2) As the number of points of successive monopoly increases in 
the marketing system, the situation so far as the public is concerned 
becomes progressively worse. 

(3) Paradoxical as it seems at first thought, the public would 
probably be helped rather than injured by a conspiring between the 
successive monopolists to increase the amount of their combined 

(4) These general principles would be modified in degree but not 
invalidated by the assumption of monopolistic competition rather 
than monopoly at the various points. 


Thus far we have discussed the question of monopoly only in terms 
of abstract principles. A measurement of its consequences in quan- 
titative terms is a more baffling task. During the course of the past 
two decades, much progress has been made in developing an economic 
theory to fit the conditions of modern economic society. Progress in 
. the compilation and classification of economic data has been equally 
rapid. But it is not too much to say that the breach between the 
two has not been perceptibly narrowed. Economic theorists continue 
to formulate concepts which are not measurable and questions which 
are not answerable; and quantitative workers at best have furnished 
data which are only partially satisfactory. Under the circumstances 
it is not surprising, and perhaps not unfortunate, that in dealing with 
the problem of monopoly under the antitrust laws the Supreme 
Court has come to rely upon the so-called rule of reason — meaning, 
in plain terms, its common sense. 

The fact that all the business in a particular line of enterprise is 
concentrated in the hands of a few firms in itself means little. What 
is really wanted is a measurement of the consequences likely to flow 
from such a situation in terms of prices, margins, and output. To 
put it a little dMerently, it is the effect of monopoly rather than the 
latent ability to exercise monopolistic control which is important. 

Monopoly, or some degree of it, in the case of a commodity for 
which demand is elastic is almost certain to be less serious than in- 
the case of one with an inelastic demand. One might even generalize 

• iClarshall meDtions a case which is somewhat analogous (Principles of Economics, pp. 494-495), but made 
no effort to analyze it other than to saj- he believed the outcome would be indeterminate. 



to the point of saying that complete monopoly under conditions of 
elastic demand is of less economic consequence than even a small or 
partial degree of monopoly where demand is inelastic. 

A further extension of this principle may be made in terms of sub- 
stitution and product differentiation. Thus a firm in complete con- 
trol of the canned-peach industry is much less to be feared than 
one which would control the entire canned-fruit industry; and even 
less serious is a monopoly of a particular brand of canned peaches. 
Concepts of this kind are a part of everyday thinking on the subject 
of monopoly and require no amplification here. 

Somewhat more complicated are the considerations on the supply 
side. If the nature of the cost function is such that any diminution 
of supply is likely to be associated with a material reduction in cost, 
then clearly monopoly control will lead to a greater curtailment of 
output than where this is not the case.^ A distinction must also be 
made from the standpoint of costs between short- and long-nm 
tendencies. If a considerable part of the cost is in the nature of 
an overhead, then we may expect at least a more stable output and a 
better sustained one in times of business crises than when most of 
the costs are variable. This will tend to be true in monopolized 
as well as competitive industries. 

One of the simplest criteria of the degree of competition is "ease 
of entrance" into a particular industry. Perhaps a better way of 
putting this is in terms of the divisibility of the productive factors. 
It can be demonstrated that all economies of scale, both internal 
and external, arise out of the indivisibility of productive resources.^" 
If the factors of production cannot be easily divided and combined 
into small business units, then long-run average costs tend to be 
decreasing and perfect competition is impossible." A case in point 
is the difference between the business of meat packing and grocery 

Greatly complicating the whole problem of monopoly are the 
social, philanthropic, and conventional elements which go into the 
determination of business policy.'^ The policies followed by business- 
men do not necessarily conform to what might seem to be their best 
interest from the standpoint of an immediate maximizing of profit. 
For philanthropic reasons, they may at times choose to forego pressing 
the advantage of their position to its utmost. More com.monly, 
however, their motives for foregoing profits probably are ulterior 
rather than philanthropic; as, for example, when they shape their 
policies to avoid governmental intervention, or to discourage the 
entrance of new firms into their particular line of business. But for 
whatever reason, it will be true that the precise outcome of monopoly 
cannot be predicated solely on the functional characteristics of the 
demahd-and-costs factors. 

• Here it is necessary also to keep in mind that output under monopoly and competition cannot be directly 
compared unless something is known of their respective costs functions. 

1" Cf. J. Robinson, the Economics of Imperfect Competition (appendix), Macmillan & Co., Ltd., Lon- 
don, 1933. 

11 Knight insists that indivisibility is the exception and hence that the economic advantage of large-scale 
enterprise is mairjly an illusion. (The Ethics of Competition, 1935, p. 2)0.) 

12 In its recent study of industrial jirice policies, the Brookings Institution lays great emphasis on what 
it chooses to call "business statesmanship" in the determination of price policy. (E. O. Nourse and H. B. 
Drury, Industrial Price Policies and Economic Progress, Brookings Institution, Washington, 1938, esp. 
ch. XI.) It is the central thesis of this book, as well as of other recent studies by this institution, that a 
policy of lowered pricts in most industries is in the public interest, and that this policy is not altogether 
incompatible with the best interests of the individual concern. There will be little agreement that in a 
capitalistic society there is this imn ediatc identity of interest. Certainly it is unrealistic to expect of busi- 
nessmen that they shall so forpet thcrrselves and their stockholders as to exercise their "statesmanship" 
in the public interest when this conflicts with their own. 


Lerner^s measure. 

In the last analysis, what is wanted is a measure of how far the actual 
outcome under monopoly or monopolistic competition diverges from 
that of perfect competition. Obviously the number and size of com- 
peting firms tells us nothing with respect to this for reasons already 
made abundantly clear. 

Several abstract measures of monopoly have been suggested by 
economic theorists. Among the best of these is perhaps that of A. P. 
Lerner, although even his has its limitations.'^ The index of monopoly 

power offered by Lerner is: — p— > where P= price and (7= margi- 
nal cost. Obviously what the formula gives is the divergence of mar- 
ginal cost from average return or price, which is the very essence of 
monopoly. The wider this divergence, the greater is the degree of 
monopoly power which is being exercised. 

The above formula is admittedly a satisfactory criterion of monopoly 
control for frnj situation in which the demand and cost functions are 
given.'* Beyond this it has little applicability. Some degree of 
monopoly as evidenced by this index obviously would not mean that 
prices were necessarily higher or output smaller than under perfect 
competition unless the cost functions were identical in both instances. 
We have repeatedly insisted that no such assumption is legitimate. 

Moreover, the size of Lerner's coefficient will be a function of the 
elasticities of demand and supply as well as of the degree of monopoly 
control which is being exercised. Similar coefficients for two different 
industries therefore will not indicate the same degree of monopoly 
power unless the functions which describe their demand and supply 
curves are also similar. The concept is nevertheless a very useful 
one in promoting straight thinking on the subject of monopoly because 
it distinguishes clearly between the basis for monopoly iu terms of 
concentration of control and its actual effects in terms of price and 

Quantitatv'e and legal criteria. 

Those charged with the administration and interpretation of the 
antitrust laws might properly say that many of the concepts discussed 
in this chapter are of little practical use to them. What they feel 
they must have is quantitative evidence whereby the existence of 
monopoly can be recognized as a provable circumstance. From this 
standpoint the Federal Trade Commission and the courts are likely 
to insist tliat the}' cannot rely on principles wiiose workings cannot be 
verified or whose results cannot be measured. The theorist will reply 
that some of 'the data and criteria which they have used are not only 
inadequate but also irrelevant to the real issue. To this charge the 
rejoinder will be made that as a practical proposition the Commission 
was unable to do other than it has done. 

With tliis argument we need not here concern ourselves. The situa- 
tion as we find it is that the Federal Trade Commission and the courts 
have recognized certain measures and criteria of monopoly for pur- 
poses of investigation and procedure under the antitrust laws. In 

"A. P. Lerner, Monopoly and the Measurement of Monopoly Power, Review of Economic Studies, 
vol. I, No. 3. p. 16<<. 

" Oalbraith (op. cit., p. 3) objects that the formula makes the assumption that businessmen seek to keep 
their profits always at a maximum, which in a dynamic situation is mconsistent with the maxlmiiing of 
profits over a period of time. His obvious solution is to think of the problem in terms of the long-run, or 
whatever period of time businessmen take into account in olanninfi their operations. 


general these might be said to fall into four types: (1) Concentration of 
control, (2) profits and rates of return on invested capital, (3) prices 
and price policies, and (4) circumstantial evidence of collusion and 
restraint of trade as found in the acts and practices of business firms. 
That these are not in themselves deemed adequate as a basis for public 
policy is evidenced by the fact that the Supreme Court has come to 
rely m the last analysis on the "rule of reason/' A factual approach 
to the problem is nevertheless pretty much limited by the data avail- 
able to the above lines, and it is to these that we turn in the succeeding 



Concentration of control may be defined simply as the extent to 
which the total supply (or business) is centralized in the hands of a 
relatively few firms. It was made plain in the preceding chapter that 
this is not necessarily synonymous with the problem of monopoly 
itself, which in the last, analysis must be thought of in terms of the 
actual divergence of price and supply from that which would obtain 
under competition. A study of monopolistic conditions in any given 
industry nevertheless should, and usually does, begin with the facts 
as to the degree of concentration of control which exists. The Federal 
Trade Commission and the courts always have stressed this in connec- 
tion with the administration of the antitrust laws, and with some jus- 
tification. It is probably correct to say that they have attached to 
this factor more importance than it deserves — perhaps, because it is 
one of the few lines of approach by which the}^ could lay hold of a 
provable body of facts. In any case, we are justified in dealing here 
at some length with concentration of control in the food industries, 
if for no other reason than the emphasis placed on it by others. 


The earlier chapters have given a fairly definite idea of the degree 
of centralization to be found in the various food lines. It nevertheless 
will be convenient for the discussion at this point to summarize the 
situation and to compare it briefly with that found in some of the 
nonfood industries. 

Despite the tremendous growth of the food corporations in recent 
years, concentration of control in this field does not approach that to 
be found in some of the other major industries (see table 27). In 
grocery retailing, no single firm has more than 15 percent of the total 
business. In meat packing, where large-scale organization has gone 
further than in most other food lines, the largest single firm controls 
only 20 percent of the meat supply; and the three largest combined, 
only 43 percent. In none of the major food lines is more than one- 
third of the supplj^ concentrated in the hands of one firm. 

For the highest degree of centralization in the food industries, one 
must turn to some of the minor food products. For example, two 
firms shell and distribute most of the shelled pecans in the United 
States and, in some areas of production, are virtually without com- 
petition from each other. Another firm packs most of the Persian 
limes and avocado pears grown in the vState of Florida. Similar 
situations prevail with many of the special crops grown in other parts 
of the country, notably in CaUfornia. It is not uncommon in the 
latter State to find two or three organizations handling practically 
the entire output of some of the products grown there. Either be- 
cause the firms involved are not large enterprises or because they are 




cooperative in form of organization, situations of this kind do not 
receive much public attention. But if concentration of control is to 
be the criterion of danger, then we have not always looked in the right 
places or indicted the right firms so far as the food industries are 

Table 27. — Concentration of control: Percentages of total business done in their 
respective lines by leading food corporations compared with percentages done by 
leading firms in other selected industries 


Proportion of 
total business 
controlled by 
the three lead- 
ing firms in 
their respec- 
tive hues 

Proportion of 
total business 
controlled by 
largest single 
firm in its line 

Food groups: ' 

Grocery retailing 








Meat packing 


Dairy products: 



Cheese - .. 


Condensed milk 


Flour milling ., 


Bread baking 


Canned vegetables 


Canned fruits 


Nonfood industries: 

Automo Pile manufacture '- - 


Steel manufacture ' .. 


Rubber tires '... 


Gasoline* ..... 


Cigarette manufacture ' ... 


Farm machinery : « 


Tractors . 


1 Data summarized from earlier tables of present study. 

s Based on new car registrations for 1936 as reported in the Annalist. 

' Based on corporation reports as given in Standard Corporation Records. 

•< Federal Trade Commission, Report on Petroleum Industry. S. Doc. No. 61, 70th Cong., table 25. 

* Federal Trade Commission, Agricultural Income Inquiry, Principal Farm Products, 1938, p. 275. 

* federal Trade Commission, Report on the Agricultural Implement and Machine Industry, 1938, 
table 30. 

Generally speaking, the degree of control possessed by the big food 
concerns is far short of that possessed by the leading industrial con- 
cerns. One industrial firm controls 40 percent of the steel output, 
another makes 43 percent of the automobiles, and another refines 45 
percent of the gasoline (see table 27). In the manufacture of some of 
the speciahzed industrial products, these percentages run even higher. 

Concentration of control must be thought of not only in terms of 
the percentage of business controlled by the leading firms, but also in 
terms of the number of firms. In this respect, too, the food industries 
tend to be more atomistic than most nonfood industries. The usual 
situation in the food industries is one of some half-dozen or more 
large firms in competition with many small ones. In contrast to 
this is the relatively small number of firms (all of them sizable) to be 
found in many lines of mdustrial manufacture. One of the reasons 
for this is, of course, that mass food distribution has developed within 
the framework of smaU-scale enterprise; whereas, some of the newer 
industries have been characterized from the first by large-scale 


While the Federal Trade Commission always has emphasized con- 
centration of control as a measure of competition, it has not been very 
specific about the matter. Never has it attempted to sav nreciselv 


what degree of concentration is permissible or what percentage of 
business a firm might hope to control without running afoul of the 
Sherman Act. 

It has cited for violation of this act corporations whose control has 
ranged from as much as 90 percent of the total supply to as little as 
10 percent of it. For example, it sought in 1925 to restrain the 
Continental Baking Co. from making a proposed merger on the grounds 
that such action would have tended to create a monopoly. The 
company's output, even after the nlerger, would not have exceeded 
10 percent of the competitive supply of bread in its trade area.^ 
Additional complaints were listed against the Continental Baking Co. 
and the Commission may or may not have been correct in its charge 
that the proposed merger was in restraint of trade. The point is that 
indictment of business firms under the Sherman Act sometimes has 
been sought when they had no great degree of control, while other 
firms with a larger share of the business in their respective lines have 
been left uncited. 

In its interpretation of the antitrust laws, it is of course weU known 
that the Supreme Court has refused to judge the monopoly question 
solely in terms of concentration of control. By its decision in the 
Standard Oil case of 1911, it took the position thct it was the actual 
exercise of monopolistic power and not the latent ability to exercise 
it which was illegal.^ The evidence of violation therefore was not to 
be found in the mere act of merging nor in any specific degree of cen- 
tralization, but in the efTect of these things on prices, profits, and 
business policies. As to whether or not a given situation was illegal 
under the Sherman Act, the Court thus announced its intention to be 
guided by the "rule of reason" rather than by any absolute act or 
provable circumstance of monopoly. 

In only one decision has the Court ever given any indication as to 
the precise percentage of the total business which a firm legally might 
control.^ This case involved the United States Steel Corporation, 
which at the time of its indictment had just a little under half the 
total steel output. With respect to the relation of this fact to monop- 
oly the Court said: 

The power attained (by theU.S. Steel Corporation) was much greater than that 
possessed by any one of its competitors — it was not greater than that possessed 
by all of them. Monopoly, therefore, was not achieved . . . 

This decision was widely taken at the time to mean that no firm 
need fear indictment under the antitrust laws unless it controlled more 
than 5C percent of the total business in its respective line. It is 
doubtful that the Court meant to imply any such thing.* But if it 
did, then the degree of control possessed by most food concerns would 
not bring them within the category of monopoly as indicated by this 

It is evident from what has been said thug far that neither the 
Federal Trade Commission nor the Court has laid down any defiijite 
rules or formulas' by which the existence of monopoly is to be legally 
determined. As the antitrust laws are now being administered, such 
determination requires a judicial process so involved and so beclouded 

' Federal Trade Commission, Combination and Profits in Bread and Flour, S. Doc. No. 98, 70th Cong., 
Istsess., p. 266. 
> Standard Oil Company of New Jersey v. the United States, V. 8. Repts. 211:1-106 (1911). 

* The United States v. the U. S. Steel Corporation, U. S. Repts. 2.51:417. 

* A. R. Burns, The Decline of Competition, McGraw-Hill Book Co., New York, 1936, p. 19. 


by subjective elements and opinion as to render effective administra- 
tion of the laws almost impossible. Even when the existence of some 
degree of monopoly is taken to have been proved and dissolution 
proceedings have been ordered, the difficulties of breaking up a 
going concern so as to restore competition have been almost insur- 
mountable in some cases/ For example, the terms of the packers 
consent decree entered into in 1920 have not yet been completely 

To alleviate this circumstance from a legal and administrative 
point of view, the Federal Trade Commission recently has made a 
]nost remarkable proposal. It has suggested legislation to provide 
that no enterprise engaged in interstate trade be permitted to acquire 
more than a specified percentage of the assets or output in its respec- 
tive line of business.^ The Commission gave no indication as to 
what the specified percentage ought to be, how it would be deter- 
mined, or if it would be the same for all industry groups. It did say 
that it would not suggest limiting the growth of an enterprise by 
virtue of its ability to attract new customers, but that it believed 
there should be limits to growth achieved by combination and merger 
for what it called the sake of greater power. 

Lawyers and public officials charged with the administration of the 
antitrust laws will see much merit in such a proposal. Obviously it 
resolves some of the difficulties into which the Supreme Court gets 
itself when it tries to apply its "rule of reason" to the cases brought 
before it. But if it resolves some of the legal issues involved, it 
creates only a new set of economic ones. 

What percentage of the competitive supply, for instance, is neces- 
say to give a firm a significant measure of monopolistic control? 
And if a specific percentage were agreed on, would it be the same for 
all industry groups? If so, and if a comparatively low percentage 
figure — say 25 percent — were set, then most food corporations would 
be left untouched; but a great many industrial concerns would have 
to be dissolved. 

It is reasonable to presume that different percentages would have 
to be set in various industry lines, depending somewhat on the char- 
acter of the industry and the present degree of centralization prevail- 
ing. If this were done, it would have the effect of "freezing" the 
industrial structure in something like its present form. One can only 
imagine what would have happened had an attempt been made 25 
years ago to make the automobile industry conform to the economic 
patterns of the horse-drawn-vehicle industry. On the other hand, if 
the percentage figure is made flexible to permit the natural develop- 
ment of mass production and distribution, then we are back into our 
present dilemma as to what degree of centralization is reasonable. 

It must be clear that there can be no satisfactory standard of 
competition in terms of the number and size of competing firms. 
Modern economic theory recognizes no such standards; and we have 
just seen that in their efforts to apply one, the Federal Trade Com- 
mission and the courts have been neither very specific nor altogether 

' Cf. Eliot Jones, The Trust Problem in the United States, The Macmillan Co., New York, 1921, 
especially Ch. XVni. 

« The Federal Trade Commission, Agricultural Income Inquiry, Principal Farm Products, pt. I, 1938, 
p. 38. 



The subject of profits is one in which there is much popular interest. 
Many people are disposed to regard exorbitant profits as one of the 
chief causes of what they believe to be an unduly wide spread between 
farm and retail prices of food products. In the course of the present 
chapter, we shall have occasion to look into the factual basis of such 

Profits — or more properly, rates of return on invested capital — also 
have been widely used as one of the criteria of monopolistic control. 
This approach to the verification of monopoly is of course compatible 
with monopoly theory, which teaches that one of its characteristics 
is a higher-than-average rate of profit. When one comes to an 
analysis of profits in any given line of industry, however, it becomes 
plain at once that they wUl admit of no simple explanation in terms 
of the degree of competition which prevails. Profits in an accounting 
sense (which is the only form in which data are readily obtainable) 
are determined by an admixture of factors whose separate influences 
cannot be isolated. To ascribe differences in profit rates to differences 
in competitive conditions or to any other single factor obviously is 
unwarranted. This is not to say that profits have no significance for 
verifying the existence of monopoly, but certainly they are not in 
themselves a very satisfactory criterion of it, as we shall soon see. 

There is, of course, no specific figure which can be designated as 
the competitive profit rate. Because they involve more risk to capital, 
or for certain other reasons peculiar to them, some industries naturally 
will show a higher profit rate than others under equally competitive 
conditions. Even more important is the effect of operating efficiency 
on profits. Within any given industry, differences in the earnings of 
various individual firms are to be explained chiefly on this basis. 
Such differences in operating efficiency are likely to be especially marked 
in the food industries, where firms engaged in the same type of busi- 
ness may vary in size from small, individual enterprises to national 
concerns. These elementary points must be kept in mind throughout 
the ensuing discussion. 


Data as to the profits of food corporations are obtainable from two 
sources. The first is the Federal Trade Commission, wliich has 
compiled such data in connection with its recent agricultural income 
inquiry. Also available of course are the financial statements made 
annually by the corporations to their stockholders and, in recent years, 
to the Securities and Exchange Commission. So as to obtain a series 
of data for a longer number of years, the writer has supplemented the 



Federal Trade Commission's material with a computation of profit 
ratios from the latter sources. 

The usual measure of profitability is the ratio between net earnings 
and total invested capital. Net earnings represent the amount of 
money available for dividends' on stock, bond interest, and Federal 
income taxes. Salaries to officers, which in many cases are in the 
nature of profits rather than salaries in the proper rneaning of the 
latter term, usually are reported by corporations in the form of an 
operating expense, so that they are not a part of earnings as we shall 
show them. The total invested capital on: which the profit rate is 
calculated usually is taken as the sum of the capital stock, surplus 
and surplus reserves, and long-term debt, plus or minus any adjust- 
ments for intangibles and revaluation of assets. 

Anyone having occasion to work with corporate data of this kind 
will realize the difficulties involved in their compilation and interpre- 
tation. Concealment of earnings under operating expenses, "stock- 
watering," and 'fictitious asset valuations are all too common in 
modern accounting practice. So far as could be done from the 
financial statements available, the writer has sought to make adjust- 
ments in the data for imperfections of this kind. Admittedly all 
financial data are accurate only within comparatively rough limits. 
But these shortcomings in the way of precision will not be such as to 
invalidate the general conclusions to be drawn. 


Before looking into the profits of specific types of food corporations, 
it will be of interest to compare their average level with those in 
other industries. The best data for this purpose are those furnished 
by Epstein in his work entitled, "Industrial Profits in the United 
States." Epstein has computed the percentage of profit to total 
capital, using a sample of more than 2,000 corporations for the years 
1924 to 1928, inclusive. His data were taken from the annual reports 
of the corporations filed with the Bureau of Internal Revenue for 
purposes of income tax collection. 

The average rate of profit made by corporations engaged in the 
processing of food products does not appear to be greatly different 
from that made by corporations engaged in other lines of manufac- 
turing. (See table 28.) During the period 1924-28, 215 food cor- 
porations earned approximately 10 percent on their invested capital, 
which was slightly under the average of 10.4 percent earned by the 
entire sample of more than 2,000 manufacturing corporations. In- 
cluded in Epstein's sample were corporations of all sizes and with 
various percentages of the total business in their respective lines. 
The data tell us very little other than that the general level of profits 
in the food industries is about the same as thnt to be found elsewhere. 



Table 28. — Percentage of profit to total capital for 2,0Jf6 manufacturing corporations 



215 food 
smg com- 

289 tex- 
tile com- 

26 rub- 
ber com- 

190 lum- 
ber com- 

648 metal 


















1927 . . 




Five-year average 








R. C. Epstein, Industrial Profits in the United State?, table 42, p. 242. 


Moving now to profits for specific types of large food concerns, the 
reader is referred to tables 29 and 30, and to chart XI. The data in 
table 29 are those obtained by the Federal Trade Commission in con- 
nection with its agricultural income inquiry, and those in table 30 
were compiled by the writer from the financial reports of the several 
corporations. Such differences as there are between the two sets of 
data are explainable mainly by the fact that the corporations are not 

Chain-store profits. 

The highest profit rates to be found anywhere in the food industries 
are those of the big grocery chains. In 1929, the Federal Trade Com- 
mission found them to be earning 23.5 percent on their invested capital, 
and in earlier years their profits were even higher. (See tables 29 and 
30.) It would be difficult to find anywhere in the economy a group 
of similar sized corporations whose profits have been so uniformly and 
consistently high as those of the grocery chains. Not even in the 
heyday of the older trusts were very many of them able to show such 
a- high level of earnings as those of the chains during the 1920's. 

Table 29. — Rates of returns on total invested capital for leading food corporations 
as found by the Federal Trade Commission, 1929-85 


6 leading 
chains ' 

10 dairy 

panies ' 

10 leading 

packers ^ 

11 leading 


panies * 

4 leading 
firms » 

9 leading 
fruit and 
canners « 





















iTable201, p. 891. 
» Table 178, p. 853. 
« Table 189, p. 87). 

• Table 155, p'. 818. 

• Table 163, p. 829. 

• Ft. II, p. 783. 

Federal Trade Commission, .\gricultural Income Inquiry, pt. I— Principal Farm Products, 1938. 


Table 30. — Earnings of leading food and tobacco corporations expressed as percent- 
ages of their capitalization, 1925-37 ' 


5 food 

4 dairy 

4 meat 
packers ^ 


3 fruit 

3 baking 


4 tobacco 

All cor- 




3-. 29 


5 -8. 55 



16 88 





1927 .._. 


9 59 


14 84 


15 20 


14 28 






9 48 


9 95 


9 89 


11 89 



> Computed from the balance sheets and operating statements of the several companies, 
were computed by dividing earnings by adjusted capitalization. 

2 Swift & Co. excluded in the years prior to 1930. 

3 Indicates deficit. 

Earnings ratios 

The first inclinatioR is to say that here certainly is evidence of 
monopoly. But we already have seen that concentration of control, 
as measured by the percentage of the total grocery business in the 
hands of the chains, is not great and is, in fact, lower than that to be 
found in most other food lines. Fev/ will argue that the chains have 
anything approaching a monopoly in this sense. The Federal Trade 
Commission has made many charges against the chains from the stand- 
point of fair trade practice, but it never has insisted that they are 
monopolistic in the broad meaning of the term, nor has it moved for 
their dissolution as in the case of some of the older trusts. 

It becomes even more difficult to explain the high chain-store profits 
in terms of monopoly when it is realized that their profit rate has 
declined steadily as their percentage of the total business has increased. 
This tendency to a declining rate of profit was clearly in evidence even 
before 1930. Had their growth during these years been such as to 
give them any significant degree of price control, one would have 
expected their profit rate to rise rather than fall with increases in their 
size and percentage of business controlled. That it did not do so is 
at least prima facie evidence that exorbitant chain-store profits must 
have some other explanation.' 

? If profits may be taken as an indication, then competition appears 
to be keener in the retail grocery business todaj^ than it was 20 years 
ago. As a matter of fact, there is fairly general agreement on the part 
of the trade that this is true. Certainly, mass distribution has placed 
competition on a lower cost plane than it was formerly. Indeed, the 
accusation usually made against the chains is that they have reduced 

1 Note on the relation of chain-store j.ioflts to diminishing returns. Several economists, notably Prof. 
Roland S. Vaile (cf. his "Grocery Retailing." University of Minnesota Studies in Economics and Business, 
No. i, 1932), have analyzed chain-store earnings with a view to seeing whether or not diminishing returns 
have set in for the larger systems. Vaile observed that, as the size of these systems increased, their rate of 
return on invested capital tended to decrease. He therefore was led to conclude that "there is evidence 
■ hat this point (the point of increasing costs) has been reached for some of the larger grocery chains, which 
■nay prevent their further expansion." 

There is little liasis for .such a conclusion. Those familiar with the grocery industry know that factors 
otbi r than their increasing size have been mainly responsible for the decline of chain-store profits during the 
last 15 years Had Mr. Vaile looked a little more closely into the matter, he would have seen that size was 
positively coi related with the size of profit ratios as of any given period, which should have led him to a 
different conclusion. 



retail prices to the point where independent grocers have difficulty in 
meeting their competition. 

Chabt XI 









Data from Table 30. 


Profits in other food lines. 

Profits in other types of large-scale food concerns have been con- 
siderably below those of the groceiy chains, but, in most cases, some- 
what above the general average throughout industry. The pre- 
depression level of their profits as found by the Federal Trade Com- 
mission shows the large dairy companies to have earned about 16 
percent on their capital investment; the big millers, 12 percent; the 
wholesale baking concerns, 16 percent; and the fruit and vegetable 
canners, 19 percent. (See table 29.) All these concerns had their 
profits sharply reduced by the depression. 

Profits of most of the large food concerns seem to have been trending 
downward even before the depression (table 30). If this may be 
taken as an indication of the long-run tendency, their profits are not 
likely to regain earlier levels even with complete economic recovery. 
Several other factors point to this conclusion. One is the general 
tendency for corporations as they grow older to become more over- 
capitalized, to build up what might be called a corporate bureaucracy 
within themselves, and in general to be less energetic in holding their 
position than they were in buLlding it up. Moreover, in nearly all 
lines of food processing there are now several large firms having 
virtually the same advantages as to size and method of operation. 
The competition which they now must meet is not only that of the 
older marketing system but of other firms having whatever advantages 
there may be in large-scale operation. Unless there is collusion among 
such firms, their profits are not likely to be so great as they once were. 
Even though there were collusion as to price policies, it would have to 
be exercised within the limits set by handlers in the regular channels 
who still handle the greater part of the total supply in these fields. 

The profits oj the big meat packers. 

One of the anomalies of the profit figures shown in table 29 is that 
the oft-accused meat packers have the lowest profit ratio of all the 
large-sCiale food corporations. The big packers have dominated the 
meat-packing industry for years. They repeatedly have been 
charged with violation of the antitrust laws and with various prac- 
tices deemed by the Government to be in restraint of trade.^ But 
seemingly they have not been able to profit greatly from their sins. 

The Federal Trade Commission's figures show their rate of return on 
invested capital since 1928 to have varied from no higher than 7.2 
percent to as low as eight-tenths of 1 percent. During these same 
years the grocery chains had a profit rate four times as high and most 
other large-scale food concerns, at least twice as high. It was charged 
by the Commission in an earlier investigation that the big packers 
made an exorbitant rate of profit during the World War, and they did. 
Their profits in these years ran as high as 15 to 18 percent. But even 
on this count, the big packers were able to reply that the profit rates 
of the independent packers were still higher.^ 

2 Federal Trade Commission, Report on the Meat Packing Industry, 1920. In this report (pt. I, pp. 
32-33) the big packers were specifically charged with having made illegal use of their power to manipulate 
livestock markets, restrict food supplies, control meat prices, and take exorbitant profits. 

' Ibid, pt. V, p. 15. Profit rates of 65 independent packers averaged from 18 to 22 percent m the war 



The fact that the big meat packers have had a low rate of return on 
invested capital does not mean that the charges made against them 
by the Federal Trade Commission are without foundation. The 
point is that, on the basis of profits alone, it is difficult to make out 
much of a case against them. 


Before leaving the subject of profits, it will be well to consider them 
lA relation to marketing spreads and the total costs of food products to 
the consumer. 

Some idea of the proportion of marketing spreads represented by 
corporate profits may be obtained from table 3 1 . (See also chart XII.) 
Table 31 shows the profit margins of three types of large-scale food 
concerns — the grocery chains, the meat packers, and the leading dairy 
companies. The profit margin is computed by dividing the earnings 

Chart XII 







\ ^^ — - Foil 

r dairy compa 


Five grocery 





b"'' " 

— \ 


'Four meat pc 





1 \ 

■ .-/ 











Data from Table 31. 


of a corporation by its dollar sales. The resulting percentage repre- 
sents the proportion of its dollar sales retained by the corporation for 
payment of interest on borrowed cap tal and dividends on capital 
stock. This percentage is not to be confused with the rate of return 
on capital and gives no indication w^hatever as to whether or not this 
return is reasonable. Neither are comparisons of profit margins 
between different types of food concerns of any significance, since the 
amount of business done with a given amount of capital will vary, 
depending on the nature of the enterprise. 



Table 31. — Profit margins of leading grocery chains, dairy companies, and meat 

packers, 1926-36 » 

Earnings as percentage of sales 


Earnings as percentage of sales 

Year . 

5 grocery 
chains 2 

4 dairy- 
companies ' 

4 meat 
packers < 

5 grocery 
chains 2 

4 dairy 
companies ' 

4 meat 
packers * 













5 -0.14 







1928. .. 






1 The profit margins have been computed by dividing the earnings of the corporations by their dollar sales. 

» Great Atlantic & Pacific Tea Co., First National Stores, Inc., Kroger Grocery & Baking Co., Safeway 
Stores, Vac, and American Stores Co. 

' National Dairy Products Corporation, the Borden Co., Beatrice Creamery Co., and Fairmont Cream- 
ery Co. (Del.). 

< Swift & Co., Armour & Co., Wilson & Co., and the Cudaby Packing Co. Swift & Co. excluded prior 
to 1930. 

' Indicates deficit. 

It is evident from the figures shown in table 31 that the earnings 
of these corporations represent only a small part of their gross receipts 
or dollar sales. Thus, out of the average dollar spent by the con- 
sumer in a grocery chain, only about 2 cents is retained by the firm 
to cover its capital costs and dividends. The dairy companies and 
meat packers retain a slightly higher percentage because they use 
more capital per dollar of sales. If the profits of the successive 
handlers of a food commodity were figured as a percentage of the 
price paid by the consumer, the profit margin would be somewhat 
higher than those shown for handlers performing only a single function. 
Even so, profits in themselves represent only a small part of the 
marketing spread as compared with various other elements such as 
wages, rents, and material costs. 

It is not meant by this to imply that profits are unimportant or 
that monopoly is to be condoned simply because profits do not bulk 
large in relation to gross sales. A food monopoly, through limitation 
of the supply or restriction of the flow of productive factors into a 
particular line of enterprise, may be much more injurious to the 
social welfare than is apparent frxjin its profits alone. But it is 
essential to see clearly just what the relationship of profits them- 
sslves is to food margins and to pricpis. Clearly such profits represent 
only a small part of the marketing spread, and to double or halve the 
profit rate would not greatly affect food prices. 



The best food-marketing system is that which performs the neces- 
sary functions of processing and distribution in the least possible cost 
in terms of human and material resources. Looked at in this way, 
neither the preservation of competition nor of any particular type of 
marketing system is an end in itself. The ultimate objectives in 
food distribution are — or ought to be — narrower marketing spreads 
and reduced prices to consumers, so long as these ends are obtained 
without the sacrifice of useful marketing services. Our concern in 
the present chapter and in the one which follows it is therefore with 
the price and margin policies of large-scale food distributors. 


The outstanding characteristic of chain-store merchandising in the 
grocerj" field is the low-price appeal. At no stage in their development 
thus far has their influence been in the direction of higher prices than 
those charged by their independent competitors. 

The most thorough investigation yet made with reference to chain- 
store prices and price pohcies was that of the Federal Trade Com- 
mission in its chain-store inquiry. On the basis of its own data, 
the Commission concluded that "on the average, chain stores can 
and do sell at prices which are somewhat lower than the prices charged 
by independent retailers or ever cooperative chains." ' The price 
data on which this statement is based are shown in table 32. 

The figures in that table show the chains to be selling on the average 
at prices from 5 to 7 percent below those of independents on identical 
items. These figures have never been disputed as a basis for general- 
ization, and have been verified by a number of other studies made 
by other public agencies.^ Average figures should not be taken to 
mean that chain -store prices are invariably below those of inde- 
pendents, for there will be many cases where this is not true. Neither 
do the Commission's data show the extent to which the lower selling 
prices of the chains may be due to their rendering less service to 
consumers in the way of credit and delivery of goods. The Com- 
mission made an effort to ascertain this, but was unable to do so 
because there was no relationship between the prices and the tj^pe of 
service rendered by independents. 

' Federal Trade CommissioD, Final Report on the Chain-Store Investigation, S. Doc. No. 4, 74th Cong. , 
1st sess., 1935. 
» See pp. 60-62, ch. VII. 


267003—41 — No. 35- 



Table 32. — Comparison of selling prices, cost prices, and gross margins of chain and 
indzpendent grocery stores for identical food items, as found by the Federal Trade 


Washington, D. C 




Total average sell- 
ing price 


$58. 03 



Total average cost 
price ' 




$41. 50 
17. 15 

Gross margin ' 


$15. 23 



> After deduction of all discounts from net invoice cost. 

2 The gross margin of the chains is the spread between the net cost (after discounts) and the retail selling 
price. The margin of the independents is the spread between the cost to the wholesaler (after dis- 
counts) and the .selling price in the retail store, except on a few items sold direct to the retailer by the proces- 
sor, in which case the cost is that to the retailer. 

So far as enhancing prices to consumers is concerned, there is no 
evidence that the chains have ever tried or succeeded in doing any- 
thing of this kind. The Commission's charge against them was 
rather that they engaged in price-cutting tactics to the detriment of 
other types of retailers. This, however, falls within the category of 
what is called "unfair trade practice" rather than of monopoly in the 
sense in which the term is commonly used. Except as they may be 
misled by "price leaders" into thinking all chain store prices are lower 
than they really are, it is difficult to see how consumers are injured by 
competitive practices of this kind. This statement ignores, of course, 
any long-run effects of such tactics on competitive conditions in the 
grocery industry. 

The Federal Trade inquiry discloses the fact that most chain 
systems make it a policy to price their goods in accordance with 
company rules or standards as to mark-up, but that they are quick to 
deviate from this in order to meet any price competition which is 
offered in local neighborhoods.^ The Commission was inclined to 
censure them for varying their prices between stores, holding that they 
sometimes used this as a means to establish themselves by crushing 
their independent competitors. There seems to have been some 
truth in this claim, but here again the interests of a particular group of 
retailers should not be confused with that of consumers. Consumers 
are not injured by local "price wars" unless they result in the elimina- 
tion of local competition, and cases of this kind in the grocery industry 
are comparatively rare. At the same time, it would be a mistake to 
assume that "price wars" benefit consumers to the extent of the price 
reduction on particular items, since retailers will naturally seek to 
recoup their losses on other items or in other stores. 

The one danger in groc&ry retailing, if indeed there is any, is a 
growing lethargy or indifference on the part of the chains to the low- 
price appeal. During the period of their rapid expansion, the chains 
almost without exception had an aggressive price policy calculated to 
bring new customers into their stores and expand their business. But 
close observers were able to note late in the decade of the 1920's that 
the chains were placing less emphasis on the price appeal and were 
giving less attention than formerly to methods for reducing retail 

3 Feder^al Trade Commission, Final Report on the Chain-Store Investigation, pp. 32-34. 


costs. Competition had begun to take the form of institution adver- 
tising and more elegant store buildings and equipment. 

Some of the older grocery chains therefore had a rather rude 
awakening several years ago when the supermarket type of store was 
introduced. For them it was a new experience to find themselves 
consistently undersold by this type of competitor. The effect on 
them, however, seems to have been salutary from the public standpoint. 
Most of the larger chains were quick to adopt the new idea themselves 
and began to convert some of their own retail units over into markets 
of this type. As a result of this newer technique of retailing with its 
emphasis on low prices, competition and rivalry between the chains 
on the selling end seems to be keener today than at any time in the 
past 10 years. 



It may very well be true, and generally speaking it is true, that mass 
distributors are able to undersell their smaller competitors. But if 
they are enabled to do this only because of unwarranted price con- 
cessions in buying, then obviously their lower selling prices are no 
measure of their efficiency, nor can they lay any claim to having 
reduced marketing spreads in a real sense. 

Before taking up the buying policies of mass distributors it will be 
well to recall briefly the functional set-up of large-scale food concerns 
and its relation to prices and buying methods. Among nearly all 
such concerns a considerable degree of vertical integration is to be 
found. Chain systems, as well as other types of large-scale handlers, 
have taken over many of the functions performed in the regular chan- 
nels of distribution by specialized middlemen. Naturally the prices 
at which they buy in comparison with those of other handlers may be 
expected to vary considerably because of this factor. When, for 
example, chain grocery systems buy fruits and vegetables direct from 
growers and shippers at country points, the prices which they pay 
will not be the same as those paid by the independent grocer in the 
terminal wholesale market. Neither can a food processor reasonably 
expect to receive the same invoice price when selling direct to a mass 
distributor as when selling through a broker or intermediary whose 
charges must be deducted from this invoice price. Wliat he can and 
should expect is the same net price after the deduction of all costs and 
charges incidental to making the transaction. 

The buying operations of all the larger food chains are highly 
centralized. Local store managers of course purchase none of the 
items which they sell, except in very rare instances. Some products, 
particularly the perishables, are purchased by buyers in local ware- 
house districts, but even this practice seems to be giving way to 
purchases either at chain headquarters or through subsidiaries which 
buy for the entire system. This centralization has greatly increased 
the size of buyers in relation to that of sellers wnth important con- 
sequences from the standpoint of price making as well as price 

The first advantage of the large buyer over the average seller is a 
better knowledge of dem.and and supply conditions. For example, the 
Atlantic Comm.ission Co. (subsidiary of the A. & P.), buys fresh fruits 


and vegetables in nearly ail of the important producing areas of the 
country. Its buyers receive daily and even hourly instructions rela- 
tive to general market conditions and prices to be paid. Against such 
buyers are pitted sellers whose knowledge of the market is usually 
confined to their own situation and locality. In such circumstances 
the chain buyer naturally has an advantage in the way of market 
information not only over the sellers but probably over most other 
local buyers as well. 

The Federal Trade Commission has shown some apprehension over 
situations of this kind, and has claimed that some of the chains have 
used their superior knowledge of m.arkets to play the sellers in one area 
against those in another. It is said that the chains frequently threaten 
to stop their purchases unless prices are reduced to the level at which 
they purportedly can buy elsewhere. So long as this practice results 
only in equalizing prices in different markets, no legitimate complaint 
can be made against it. As a matter of fact, when local gluts and 
shortages occur, as they frequently do in the case of perishables, the 
influence of large buyers in equalizing prices and supplies is salutary. 
The danger occurs when m,ass buyers constitute the only outlet for a 
group of sellers, so that their buying operations become the dominant 
factor in price determination. This, however, is a dift'erent ro.atter 
and has little to do with the question of m.arket information. 

Members of the trade have often com. plained that the chains use 
their buying power to lower the price on certain commodities in order 
to obtain supplies for special sales in their retail stores. The Federal 
Trade Commission looked into some of these complaints, but stated 
that it was unable to prove or disprove them conclusively.^ The 
notion that a reduction in retail prices initiated by m.ass distributors 
can be passed back to producers is widely held. It is based on the 
belief that other retailers, in order to m.eet the chain com.petition, will 
be forced to bid lower for their supplies and in this way force down 
prices all along the line. Price-m.aking is a com.plex process and m.ay 
indeed be tero.porarily influenced by considerations of this kind. But 
it is also true that a reduction in retail prices arising from any cause 
will tend to increase the movem,ent into consuro.ption ; and that this in 
turn will require retailers to increase their purchases from wliolesalers 
and suppliers; with the effect of strengthening prices.^ If this takes 
place, it is difficult to see how retail price cutting can be reflected back 
to the producer unless the general market conditions warrant it. 

Quantity discounts and trade allowances. 

The most serious charge m.ade against mass buyers in connection 
with their buying policies is that they have sought to obtain unfair 
and unwarranted discounts and allowances on their purchases. In its 
chain-store inquiry, the Federal Trade Comm.ission went so far as to 
say that "lower selling prices are a very substantial, if not the chief 
factor in the growth of chain-store m.erchandising, and lower buying 
prices than are available to independents are a substantial, if not the 
chief, factor in these lower selling prices." 

The evidence adduced by the Com.mission in support of this con- 
tention was of two kinds — (1) a colnparison of the actual buying and 
selling prices of chains and independents on a sam.ple of identical 

* Federal Trade Commission, Agricultural Income Inquiry, 1938, pt. II, p. 605. 

' For a more complete discussion of this subject, see A. C. Hoffman, Retail Sales Campaigns for Farm 
Products, Bureau of Agricultural Economics, 1938 (mimeographed). 



goods, and (2) sales records of food processors showing discounts 
granted to different types of purchasers. 

The Commission's data as to the buying and selling prices of chains 
and independents are summarized in table 32. The comparison in- 
cluded several hundred grocery items in each of four cities, identical 
as to brand and quality. The buying price of the chains was taken as 
the net cost to the chain after the deduction of all discounts and trade 
allowances. Since most of the goods sold by the independents were 
bought through wholesalers, the cost of these goods was taken as the 
price paid by the wholesaler after deduction of any discounts the 
wholesaler may have received. In other words, the gross margin in 
the case of the chains represented the difference between their selling 
prices and their net buying prices; whereas the gross margin of the 
independents was the d iff erence between price paid by the wholesaler 
and the price charged by the retailer. The Commission's method of 
comparison is generally conceded to be as good as any that can be 

The data in table 32 show that in Washington, D. C, the chains 
charged $54.07 on a bill of goods for which the independents received 
$58.03, a difference of $3.96. For these goods the chains paid a net 
of $41.50, and the independent wholesalers $42.80, a difference of 
$1.30. Thus only about one-third of the difference in selling prices 
between the two types of stores can be explained by the difference 
in buying prices. Obviously some other factor must have been in- 
volved. Approximately the same situation was found by the Com- 
mission in the other three cities in which it obtained data. In 
Memphis, 45 percent of the chain-store advantage in selling prices 
could be attributed to lower buying prices; in Detroit, 34 percent; 
and in Cincinnati, only 18 percent. 

Table 33. — Total sales and allowances made by 45'^ food processors to different types 
of buyers, as found by the Federal Trade Commission, 1929 and 1930 

Kind of buyer 


Corporate grocery chains 

Independent grocery wholesalers 
Voluntary chains 


C orporate grocery chains 

Independent grocery wholesalers 
Voluntary chains 


Total sales 

$300, 947, 853 
42, 760, 306 
24, 909, 498 

298, 988. 934 
39, 003. 072 
23, 649, 038 

Total allow- 

$5, 684, 094 
372, 917 
249, 201 

5, 840. 230 
354, 012 
245, 271 

as a per- 
centage of 





Federal Trade Commission, Chain Store Inquiry, Report on Grocery Discounts and Allowances, S. 
Doc. No. 84, 73d Cong., p. 3. 

The data obtained by the Commission from food processors and 
manufacturers show even less basis for its claim that chain-store ad- 
vantages arise mainly from special discounts and allowances. From 
a sample of 457 such firms it obtained figures as to the volume of sales 
made to different types of buyers, with the discounts and allowances 
made on each sale. The data are summarized in table 33, which shows 
the discounts expressed as a percentage of total sales. 


Table 33 shows the discounts and allowances received by the cor- 
corporate chains to have averaged a little less than 2 percent of the 
purchase price, as compared with about 1 percent for the voluntary 
chains and slightly under 1 percent for the independent wholesalers. 
The advantage of the corporate chains over other types of buyers was 
thus about 1 percent. We have already seen (table 32) that the sell- 
ing prices of the chains averaged from 5 to 8 percent under those of the 
independents. Clearly this differential cannot be explained by special 
discounts and price concessions extorted by the chains. How the 
Federal Trade Commission can reconcile its conclusions in this matter 
with its own data is difficult to understand. 

It is not improbable, however, that on occasion mass buyers can 
and do exercise their strength to threaten or coerce individual sellers 
into giving them special price concessions. The Federal Trade Com- 
mission's investigation revealed that 33 food processors out of a total 
of 129. insisted that they had been "coerced" by the chains into giving 
them preferential treatment. The charges against the chains in these 
cases were that they had insisted on unwarranted quantity discounts, 
advertising allowances, and brokerage rebates — all made under threat 
by the chains of withdrawing their patronage from the seller if not 
granted. It is not easy to draw the line in such cases between what is 
fair and what is unfair. Obviously the chains have a right to buy 
from whom they choose and for the lowest price at which the goods 
are obtainable, provided that the terms at which they buy are avail- 
able to all other buyers who pm'chase in similar quantities and under 
the same conditions. 

The small food processor who sells all or the major part of his out- 
put to the mass buyer is not infrequently at considerable disadvantage 
from a bargaining standpoint. In selling to a particular chain, he has 
perhaps given up his other trade connections, and these cannot be re- 
newed quickly if his arrangement with the mass buyer is no longer 
satisfactory to him. It would probably be incorrect, however, to 
exaggerate this disadvantage, since any seller no matter how small can 
usually find some sort of outlet for his product through brokers and 
other specialized middlemen of this sort. 

In the case of big buyers dealing with big sellers, the case is a little 
different, although here again the advantage is likely to be with the 
buyer. As the situation is today, no food chain is dependent on a 
single seller for its supply of goods, except in the case of specially 
processed articles. The seller, however — and this applies even to the 
biggest of them — may find himself seriously inconvenienced by the 
loss of a big chain-store account which he formerly had. As a result, 
he will go to considerable lengths to get and hold such accounts, and 
may temporarily be induced to make unwarranted price concessions. 
He is not likely, however, to continue this as a permanent policy. It 
is to protect themselves against situations of this kind that sellers 
commonly enter into long-term contracts with mass buyers, the agree- 
ment being that the price shall be in some fixed relation to the market 
price established on the organized auctions or exchanges for farm 

It is of some significance in this connection that most of the chains 
majiage to retain more or less permanent connections with those from 
wtLom they huy.^ This statement applies not only to food processors 

. ' Cf. Hoffman and Bevan, Chain Store Distribution of Fruits and Vegetables in the Northeastern 
States, pp. 27-31. 



but also to farmers and local shippers who sell direct to them. Criti- 
cisms against the mass buyer come more often from those who do not 
sell to them than from those who do. It is, after all, to the advantage 
both of the mass buyers and of their suppliers to retain semipermanent 
and more or less amicable relationships. Generally speaking, the mass 
buyer today places less emphasis on trying to drive shrewd bargains 
here and there, and more on building up steady sources of supply on a 
price basis which insures their permanence. 

The whole matter of bujang methods and practices is in a state of 
uncertainty and confusion at the moment because of the recent pas- 
sage of the Robinson-Patman Act. The Federal Trade Commission is 
interpreting the act in such a way as to preclude the giving or receiving 
of brokerage rebates and allowances on direct purchases, and has not 
thus far clarified its policy as to quantity discounts. There will 
perh-^ps be no definite clarification of the matter until the Federal 
Trade Commission's interpretation of the Robinson-Patman Act has 
been reviewed by the Supreme Court. The legal aspects of the matter 
will be made the subject of more extended discussion in a subsequent 


Most suspect of all food corporations have been the big meat 
packers. They have been made the subject of repeated investigation 
by the Federal Government during the course of the last 50 years, 
and on several occasions have been enjoined from certain practices 
in which they had been engaged. A liistory of mergers and pools in 
the meat-packing industry was given in an earlier chapter. 

Our present concern is with some of the practices of the meat packers 
as related to the problem of monopoly and price manipulation. In 
its exhaustive report on the meat-packing industry made just after the 
World War, the Federal Trade Commission charged the five leading 
packers with the following practices deemed to have been in restraint 
of trade and monopolistic in character:^ 

1. That the five packers "are in agreemenc for the division of live- 
stock purchases throughout the United States according to certain 
fixed percentages." 

2. That these companies "exchange confidential information which 
is used to control and manipulate livestock markets." 

3. That they "act collvisively in the sale of fresh meat." 

In supjrort of its contention that the packers were in agreement as 
to the percentage of the total supply of livestock each was to buy, the 
Commission cited the following figures as to their livestock purchases 
for the vears 1913-17: 





















Federal Trade Commi.ssion, the Meat Packing Industry, pt. I, p. 52. 

' Federal Trade Commission, Report on the Meat Packing Industry, pt. I, summary, pp. 28-45. 


The Commission contended that these figures revealed such a 
remarkable uniformity from year to year that they could have been 
obtained only by agreement. Moreover, it argued, and produced 
evidence to show, that the percentages were nearly as constant from 
month to month and even from day to day as those for the total 
year's business. It held this as conclusive evidence that collusion 
existed between the packers in what might be called "sharing the 

The packers sought to refute the Commission's charges on several 
eounts. They contended first that the distribution of the business 
between them was not completely stable, although they could not 
refute the Commission's data concerning the facts. They did argue 
with some plausibility, however, that the stability of the figures 
themselves was of no particular significance as evidence of monopolistic 
control of prices and supplies.® Their claim was that each of the 
•companies had reached a more or less stationary stage in its develop- 
ment, and that each had its regular sources of supply and trade outlets. 
In these circumstances they contended it was reasonable to suppose 
that each would tend to get practically a constant percentage of the 

They also tried to explain the stability of the figures as the result of 
an effort on the part of each packer to maintain his relative position. 
According to their contention, this was a matter of some pride to 
them. Anent this. Swift & Co. said: 

The fact is that the packers are in such active competition with each other that 
not one of them is willing to lose ground to another in volume of business handled, 
and accordingly they watch each other so closely that no single packer is able to 
increase his business inordinately.* 

In other words, their contention was that the Commission's figures 
only tended to show the keenness of their competition. 

This argument is an ingenious one, almost too much so to be very 
convincing. In an industry in which supply and demand conditions 
change as rapidly as they do in meat packing, it is a little odd why each 
of several competing firms should have such a constant percentage of 
the business from month to month. One would suppose that differ- 
ences in firm policies and expectations with respect to market trends 
would lead to more variable percentages. That it did not do it is at 
least prima facie evidence that the packers did not choose to incur the 
retaliation of their competitors by recklessly seeking to increase their 
portion of the business. 

It would be a mistake, however, to insist that "sharing the market" 
is definite and conclusive evidence of price control. It might tend in 
this direction because of the likelihood that it would restrain the firms 
most likely to try to increase their supply and thus bid up the price 
of livestock to all packers. But in itself, a constant percentage of 
the business in the hands of a single firm or group of firms does not 
necessarily mean that the level of prices is being controlled. 

Merely agreeing among themselves as to what percentage of the 
total shipments each will take is not tantamount to control over live- 
stock supplies or prices by the big packers. The volume of livestock 
shipments is the result of the production and marketing decisions of 
farmers, not of the packers. It is therefore incorrect to think of the 

' Hearings on the Packer Consent Decree, 1923, p. 1105. 

• Swift & Co., Analysis of the Federal Trade Commission Report, p. 27. 


packers as directly controlling the level of meat prices and supplies. 
What is subject to their control is the margin between the buying 
prices of livestock and the selling prices of dressed meat. 
The Commission stated that — 

In the long run, the highest prices which the packers can pay for livestock are 
those which would equal the prices which they are able to get for the products 
minus the actual cost of operating the business and a small profit on investment — 

and — 

* * * the lowest prices \\hich it is advantageous for them to pay are those 
which will yield the maximum profit.'" 

As between these limits, the Commission contended the packers 
sought "to keep the actual prices of livestock as near as practicable 
to the level which yields them the maximum profit." In other words, 
they were accused of widening their margins beyond their actual costs 
of doing business. 

Data for the calculation of packers' margins on an accurate basis 
are unobtainable. Market quotations on livestock and on dressed 
meat are not accurate enough for this purpose. Moreover, the. vast 
number of packing-house byproducts would make a computation on 
this basis unreliable even if it could be made. Neither the Federal 
Trade Commission nor the packers offered any data as to rnargins 
which purported to prove or disprove the Commission's charge that 
such margins were unduly wide. Indeed such proof is impossible on 
this basis. 

It is reasonable to presume that any advantage obtained by the 
meat packers through an undue widening of their margins would be 
reflected in a higher-than-average rate of return on their invested 
capital. But on this point we have already seen that the profits of 
the big packers are among the lowest to be found anywhere in the 
food industries, and are lower even than those of the small packers 
with whom they are in competition. It is not easy to make a case 
against the big packers on the basis of exorbitant profits. 

In ordinary course, it would be presumed that any undue widening 
of packers' margins would attract new firms to the business. Meat 
packing, however, is not an industry which new firms can enter easily. 
There are, of course, numerous independent packers competing locally 
with the big firms. But there is at least some doubt as to whether 
their competition was always as active as it might have been. With 
respect to this, the Federal Trade Commission charged that the big 
packers tried to discourage competition from their smaller rivals by 
telling them that they "could not maintain themselves * * * if 
they should attract unfavorable attention by aggressively trying to 
increase their volume of business." " Consequently, the Commission 
beheved that the small packers were not inclined to exert their full 
competitive powers and tended to "come in under the umbrella of the 
big packer prices." 

This charge is another of the sort which can be substantiated only 
with circumstantial evidence. Of this, the Commission seems to have 
had plenty in this case. Whether or not such coercion of the small 
packers actually had the effect of widening packers' margins is not 
subject to statistical verification. The fact that the small packers 
now have a slightly larger percentage of the total meat business than 

"i Federal Trade Commission, Report on the Meat Packing Industry, pt. HI, pp. 105-106. 
" Federal Trade Commission Report on the Meat Packing Industry, pt. I, p. 114. 


they had at the close of the World War would indicate at least that 
the effect of such coercion has not been to put them out of business. 

The control of the big packers in meat distribution has always been 
greater than their control over slaughtering operations. All of the big 
firms own extensive distributing facilities and operate their own branch 
warehouses for making deliveries to local retail outlets. They also 
have their own sales force for the solicitation of retail sales and do not 
utilize the service of brokers and wholesale purveyors. Small packers 
obviously cannot integrate these functions and are forced either to 
confine their sales to local outlets or to sell through intermediaries in 
distant markets. The result is that the big packers appear in the past 
to have had a greater opportunity for coordinating and controlling 
local prices of dressed meat than for controlling prices of livestock. 
This seems also to have been the conclusion of the Federal Trade 

One of the main charges made against the big meat packers by the 
Federal Government was that they sought to control shipments and 
supplies of dressed meats. Their first efforts along this line were the 
dressed meat pools, organized during the latter part of the nineteenth 
century.'^ The members of these pools pledged themselves to regu- 
late their meat shipments into each district on the basis of quotas 
assigned to them by the pool. Of the existence of these pools and 
of their actual operation there was never any question. How suc- 
cessful they may have been in manipulating prices is another matter 
not subject to verification. In any case, they were dissolved by the 
Federal Government soon after the beginning of the twentieth cen- 
tury and have never been formally operated since. 

The Federal Trade Commission insisted that even after the disso- 
lution of these pools the big packers continued to act in collusion for 
the fixing of local dressed meat prices. It charged them with seeking 
to keep local prices in line, with attempting to prevent undue price 
cutting, with the exchange of sales information, and with actually 
visiting each other's plants for the purpose of insuring the carrying 
out of such collusive practices.'^ As a means of local price control, 
it was said that the packers reduced meat shipments into local areas 
or reshipped to other markets, froze meat so as to hold it over for 
later sale, and sold to other packers. It is a little difficult to see how 
these things in themselves could result in a permanent or widespread 
enhancement of dressed meat prices. Meat not sold in one area must 
be sold in another, and the freezing of meat obviously results only in 
changing the time of sale. 

Several factors have been at work in the past 15 years to broaden 
and intensify competition in the local dressed meat trade. The first 
of these is the motortruck which has made it possible for local slaugh- 
terers and purveyors to compete more effectively with the big packers 
in soliciting and servicing retail outlets with meat products. Cotintry 
towns particularly are no longer at the mercy of one or two sources of 
meat products, but are visited daily by the trucks and salesmen of 
numerous concerns. 

Even more important in its effect on competition in meat distribu- 
tion is the grocery chain. All of the larger chains have established 
their own meat wafehouses for the purpose of servicing their retail 

" Federal Trade Cojnmission Report on the Meat Packing Industry, pt. II, pp. 9-18. 
"Federal Trade Commission, op. cit., pt. II, pp. 108-131. 


units with meat products. In a few cases they operate their own 
slaughtering plants, and frequently they purchase their meats from 
independent packers who operate no branch warehouses. In this way 
the nature of their operations tends to complement that of the small 
packer rather than of the large packer. The result is that the big 
grocery chains have put considerable pressure on the big packers to 
distribute and handle meat locally at less cost and with greater eflB- 
ciency. As a matter of fact, the packers have used this as an argu- 
ment in petitioning the Federal Government to permit them to engage 
in retailing operations, which they had agreed not to do under the 
terms of the packer consent decree. 

\\Tiether the meat packers were ever very successful in controlling 
either the prices of livestock or the prices of dressed meat is a subject 
about which there is much disagreement. The writer is inclined to 
think that they were less successful than is commonly thought, a con- 
clusion shared by A. R. Burns in his monumental work entitled, "The 
Decline of Competition."^^ Whatever the situation at one time may 
have been, the evidence is reasonably clear that certain modem devel- 
opments, particularly the motortruck and the chain store, have tended 
to sharpen competition in this industry. 

i< Cf. A. R. Burns, The Decline of Competition, especially pp. 180 and 188. With regard to conditions 
in the meat-packing industry. Burns states that "Although the meat-packing industry presents more infor- 
mation concerning sharing the market than any other, the effects of such a policy are not evident. It was 
never the whole market that was shared, and the lack of satisfactory statistics obstructs any conclusion 
concerning the change in the relative position in the industry of the large packers as a group. Theii-'relBf 
tlons with other packers were more in the nature of those between a group of leaders and followers • • • 
It is difficult to prove any attempt to obtain monopoly profits, if for no other reason, because the onopoly 
profits available cannot be calculated • * * Possibly the large meat packers * * * have exerted 
pressure to maintain prices on a higher level than would otherwise have prevailed but the growth of small 
packers must have placed serious limitations upon their policy." 



There has been great concern in recent years over what is thought 
to be an increasing degree of inflexibility in the economic system.^ It 
has been observed widely that in times of business crises prices of some 
commodities decline sharply with falling demand, while in the case of 
others prices are maintained by a reduction of output. The latter type 
of adjustment— =- that is, rigid prices and flexible output — has come to 
be associated in the minds of many economists with the growth of large- 
scale organization. Since it is obvious that this type of price behavior 
is not compatible with a full and proper use of productive resources, 
lai^e-scale organization has been subjected to much criticism on this 
score. In the present chapter our purpose is to see what evidence 
there may be that large-scale marketing organization has led to greater 
rigidity in the prices and margins of food products. 


It was pointed out in an earlier chapter that the supply of most food 
products usually is determined in the first instance by the volume of 
agricultural production rather than by the marketing system. For 
reasons already m.ade clear, farmers tend to m.aintain their aggregate 
volume of production in times of business crises despite the lower 
level of prices which they receive. Equally well known is the opposite 
tendency of m.any other industries to maintain prices by reducing 
supplies.^ Under these circum.stances we reasonably may expect food 
prices to be more flexible than those of m.ost other products, and in 
general this ought to be true regardless of the degree of m.onopoly or 
large-scale organization which prevails in food distribution. 

That food prices actually are more flexible than those of most other 
products has been demonstrated by Mason in his analysis of whole- 
sale prices for the years since 1890.^ The usual tests of price flexibility 
are the frequency and amplitude of price changes. By either test, 
prices of food products as a group are the most flexible to be 
found anywhere in the economy. 

' Economists are by no means agreed that prices really are more inflexible today than they were .50 years 
ago. For example, Rufus Tucker contends that there is "very strong reason to believe that a hundred years 
ago ' * " rigid prices were proportionally more numerous and more important to the consumer than 
now." (American Economic Review, vol. XXVIH, p. 42.) On the basis of a study of wholesale prices 
since 1890. Edward S. Mason also was led to conclude tliat he found no support for the thesis that the price 
system is becoming more inflexible in a price-behavior sense. Mason, however, qualified this conclrsion 
by saying "it may well be that with respect to those price responses to change in economic quantities which 
Tclat<; to business fluctuations, the 'system' is becoming more inflexible." (Cf. The Review of Economic 
Statistics, vol. XX, N'o. 2, p. 6».) 

' A number of writers have sought to explain this difference in price behavior between agriculture and 
industry largely on the basis of monopolistic elements in the latter. (Cf. J. K. Oalbraith, "Monoiioly 
and Price Rigidities," Quarterly Journal of Economics, May, 193fi, pp. 45f)-475.) This appears to be only 
a partial explanation of it. Stability of output in agriculture is due not .so much to competition as to the 
fact that most of the production costs, including the labor of the farm operator, are in the nature of an over- 
head. N'or is it true th<it instability of output in industry is confined to those concerns whose opportunities 
for monopolistic control are greatest. 

' Edward S. Mason, "Price Inflexibility," Review of Economic Statistics, May, 1938, pp. 53-64. 




Most variable of all prices are, of course, those received by farmers. 
Mason's com.putations show the average amplitude * of changes in 
farm, prices since 1929 to have been 118 percent, as com.pared with a 
range of 23 to 73 percent for prices of nonfood products (table 34). 
This table shows farm, prices to have fluctuated m.ore widely in per- 
centage term.s than did wholesale food prices, which is explained by the 
fact that certain processing and marketing charges tend to be relatively 

Table 34. — Average amplitude of price change for 10 groups of commodities by 

8-year periods, 1890-1936 


Farm products 


Hides and leather products 
Fuel and lighting materials 
Metals and metal products. 

Building materials 

Chemicals and drugs. 

House furnishing goods 

Textile products 


Average - 

22. 12 
36. 95 

54. 31 

62. 21 



42. 27 


138. 49 
138. 07 
161 25 
103. OS 
1.59. 36 
105. 53 
50. 05 
178. 32 
103. 87 

127. 88 



34. 32 
63. 03 
56. 39 


Review of Economic Statistics, May 1938, p. 62, table 2. 

There is no evidence in Mason's data that the growth of large-scale 
organization in the food industries has led to greater rigidity of food 
prices. In every 8-year period since 1890, wholesale food prices have 
fluctuated m.ore widely than have nonfood prices, with only two or 
three m.inor exceptions. The amplitude .of their change has been as 
much above the average of all Avholesale prices in recent years as it 
was in earlier years. Were food prices being stabilized significantly 
as a result of m.ass distribution, or for any other reason, this probabty 
would not be true. 


More significant for our present purpose than the fiexibility of food 
prices is the flexibility of m.arketing spreads and margins. Unfor- 
tunately most of the available data with respect to food margins are 
not of the sort which can be used for measuring the influence of any 
one factor, such as large-scale organization. In most instances, food 
margins have to be com.puted from, data which leave m.uch to be desired 
in the way of precision. There is, moreover, a very inadequate fund of 
data from, which the margins of a particular type of processor or 
handler can be ascertained. Even though such m.argins could be 
com.puted, other factors such as wage rates probably would have more 
significance in explaining tlieir changes over a peroid of tim.e than would 
large-scale organization. 

It nevertheless will be of interest to examine the general trend of 
m.arketing spreads for food products during the past several decades. 
For this purpose, the best data are those com.piled by the Bureau of 

* The amplitude of price change as used here may be defined as the percentage ratio of the diflerenee 
between the highest and the lowest monthly quotation and the arithmetical average of prices for the com- 
modity involved during the period studied. 



Agricultural Economics showing the spread between farm, and retail 
value of 58 food products for the period 1913-38. The farm value of 
the 58 products was com.puted from the farm prices published by the 
Bureau of Agricultural Economics; and the retail value was derived 
from the retail prices obtained by the Bureau of Labor Statistics. 
The basic data as to farm, and retail prices are not such as to the 
com.putation of exact marketing spreads, but they suffice to show the 
changes over a period of yeai-s. 

It will be seen from table 35 that food marketing spreads since the 
World War have been nearly twice as high as in pre-war years. For 
an identical bill of goods, the spread between the farm and the retail 
value was $118 in 1913, $242 in 1920, $220 in 1930, and $191 in 1938. 
In 1933 the spread was as low as $172, a reduction of about 20 percent 
below the spread of 1930. Clearly, marketing spreads for food prod- 
ucts have been much less flexible during the course of the depression 
than have those for farm prices, and in this respect their behavior 
more nearly resembles that of industrial .prices. 

Table 35. — Estimated farm and retail value of 58 food -products, 1913-38 












1917 ... 













































R. O. Been and F. V. Waugh, Price Spreads Between the Farmer and the Consumer, Bureau of Agri- 
cultural Economics (mimeographed), table 8. 

In themselves, these figures enable us to say very little with respect 
to the influence of large-scale organization on food margins. Year-to- 
year changes in food margins are due mainly to four factors; changes 
in hourly wage rates, in the efficiency of the marketing system, in the 
amounts of processing and services, and in the profits of food handlers. 
Of these factors, the first (hourly wage rates) is by far the most im- 
portant and explains most of the changes which have taken place in 
marketing spreads since 1913. (See chart XIII.) 

Certainly we are not warranted in saying, on the basis of these 
data, either that large-scale organization has widened or that it has 
narrowed marketing spreads for food products. Whatever its in- 
fluence has been, it has been overshadowed by changes in hourly wage 
rates, into which most of the costs of food distribution are ultimately 

It can be said that, during the course of the present depression, food 
margins were reduced about as much as was warranted by the decrease 
in hourly wage rates. Such rigidity as these margins have appears 
to be due more to the rigidity of wage rates than to any other factor. 


Chart XIII 




Margins of 58 

y foods combined * 

1 on - 









/ * 
/ » 







1 » 
f » 


^^ Hourly earnings * 


y : 

.^^ " 













1913 15 



•23 •as 



•35 '37 





It is assumed frequently that stable prices and fluctuating supplies 
are associatjed closely with large-scale organization, and that industries 
in which this form of organization predominates are more likely to 
reduce output in times of business crises than are industries comprised 
of numerous small units. Whether or not this assumption is valid for 
the nonfood industries need not concern us here. But most certainly 
it is not always valid in the food industries where the supply is subject 
to a different set of controlling factors. 

So far as food products are concerned, the stability of the supply 
from year to year depends not so much on the size of the marketing 
firms or the degree of competition between them as on whether the 
farmer or the processor controls the volume of production. As we 
have seen, this in most instances is controlled by the farmer. But 
there are some food products for which this is not true, and these fur- 
nish an interesting contrast from the standpoint of price and supply 

To illustrate this, we have selected three food products, each sub- 
ject to different types of supply control and processed under different 
degrees of large-scale organization. These products are pork, canned 
vegetables, and corn flakes. In the case of pork, the supply is deter- 
mined by what farmers choose to market; but for the other two prod- 
ucts, supply control is in the hands of the processor. The packing of 
pork and the numufacture of corn flakes are carried on under condi- 
tions of large-scale organization, whereas there are more than 2,000 
separate firms engaged in the canning of vegetables. 

Chart XIV shows the wholesale prices of these three food products 
together with the output of firms engaged in their manufacture. 
(See also tables 36 and 37.) 

Chabt XIV 


Prices and outputs of three food products subject to different types of supply 

control, 1926-37 


1929 PRICES 



1926 1927 1928 1929 1930 1931 1932 1933 1934 I93S 1936 1937 1938 



1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 


The first thing to be noted is the contrast in the behavior of the 
wholesale prices of pork and corn flakes, during the past 12 years. The 
processing of both products is centralized in the hands of a relatively 
few firms. But prices of corn flakes have been very rigid, while those 
of pork were cut nearly 50 percent during the course of the depression. 
The explanation of this, of course, is that farmers maintained the vol- 
ume of pork production despite lower prices; whereas the makers of 
corn flakes reduced their output in order to maintain prices. The 
point to be emphasized is thiit, so far as stability of output is con- 
cerned, the important thing is not large-scale organization in market- 
ing, but whether or not this output is directly related to the volume 
of agricultural production. 

267003 — 41— No. 35 9 



Less easy to explain is the behavior of the vegetable canning 
industry. Here is an industry, comprised of many small firms, 
wliicli is generally assumed to be one of the most competitive of the 
food groups. Yet the output of the vegetable canners is less stable 
and was reduced more during the worst years of the depression than 
was that of the four big meat packers. 

Table 36. — Average annual wholesale prices of three food products subject to different 
types of supply control: Pork, canned tomatoes, and corn flakes, 1926-37 


Canned tomatoes ' 

Breakfast cereals ' 


sale value 
for 100 

age of 1929 

sale price 
for dozen 

age of 1929 

sale price 
per case 

age of 1929 

1926 ------ 

$14. 86 








1928 . . - 






1931 -- 


1932 - -- 




1934- - _- -.- 


1935 - - 





93. a 

1 Bureau of Agricultural Economics, Livestock, Meats and Wool Market Statistics, 1937, p. 66. 
' Bureau of Agricultural Economics, The Outlook for Tomatoes for Mfg., 1939. (Mimeographed.) 
» U. S. Bureau of Labor Statistics, Wholesale Price Bulletins. 

Table 37. — Output of three types of food processors: Four leading meat packers,^ 
2,000 vegetable canners, and several corn cereal manufacturers, 1926-37 

4 meat packers ' 

2,000 vegetable can- 
ners 2 

Corn cereal Manu- 
fatJturers 3 



age of 1929 


age of 1929 


age of 1929^^ 

1926 -- 

3, 392, 000 
3, 405, 000 
3, 331, 000 
3, 046, 000 
3, 140, 000 
3, 047, 000 
3, 530, 000 
3, 623, 000 

2, 794, 000 

3, 577, 000 

94 3 

52, 918, 000 
45, 708, 000 
47, 016, 000 
60, 163, 000 
66, 743, 000 
49, 042, 000 
40, 092, 000 
43, 547, 000 
49, 386, 000 
73, 155, 000 
55, 383, 000 
71, 283, 000 








1927 . .. 

293, 465, 000 


1928 - --- 


383, 867, 000 


1930 - --- 

1931 -.- - -- 

371, 169, 000 


1932 . -. . - - 


236, 983, 000 


1934 - . 

1935 -. 

184, 348, 000 


1936 -.- 


238, 337, 000 


' Bureau of Agricultural Economics, courtesy Packers and Stockyards Administration. 

' Bureau of Agricultural Economics, Division of Crop and Livestock Estimates. 

' U. S. Biennial Census of Manufactures, flour and other grain mill products and cereal preparations. 

The vegetable canning industry appears to offer an excellent 
illustration of the relationship between the nature of costs and sta- 
bility of output. Plant and equipment overhead represents a com- 
paratively small part of the canner's cost. His main items of expense 
are wages, cans, and raw materials, all of wliich are variable. This 
being the case, he is almost certain to respond to falling prices with a 


sharp curtailment of output — and this will be true under conditions of 
competition as well as under monopoly. 

If our analysis of the present chapter is correct, there is no evidence 
thai food piices are less flexible today than they were before the ad- 
vent of large-scale organization in the food industries. Nor have 
food margins been more flexible during ihe course of the recent 
depression than would seem to be warranted by the relative rigidity of 
hourly wage rates. So far as food supplies are concerned, they have 
been maintained at a much higher level in recent years than have 
supplies of most industrial products. That tlds has been true is not 
ascribable to the marketing system but to the characteristics of 
agricultural production. 

It should not be inferred from this that there is no inherent danger 
in food monopoly. Its monifestations, however, will come mainly 
through a widening of food margins rather than by direct limitation 
of the food suppl3\ Food corporations are no less avid in the pursuit 
of profits and no more public-minded than others that close their 
plants and cease production in times of business crises. But the 
nature of their position is such that their self-interest does not lead 
to so much instability as will be found in most other lines of industry. 


A topic closely related both to the specific problem of monoply and 
to tbe broader subject of large-scale organization is that of patent 
control. The purpose of the patent system is to provide greater 
incentive for technological progress by guaranteeing the inventor 
exclusive rights to the use of his discovery for a period of 17 years. 
The patentee thus has what amounts to a legally conferred monopoly 
during the life of his patent. This legal right is not analogous to 
private monopoly either in its social implications or in its ultimate 
objective; but the short-run effect on price and production pohcies is 
likely to be not greatly different in principle. 

In the ensuing chapter we shall seek to describe the role played 
by some of the more important patents in the food industries. The 
four groups of food patents which have been most important com- 
mercially are those relating to milk products, the breakfast cereals, 
the quick-freezing process, and the flour-milling industry. In numer- 
ous instances the origin and early growth of some of the leading firms 
in these lines can be traced directly to basic patents which they held. 

Research relating to the history and character of food patents is 
virtually nonexistent. Most of the source material used in the present 
chapter has been obtained from an examination of the patents on file 
in the United States Patent Office. One of the chief difficulties 
encountered by one not familiar with the technical processes involved 
was in knowing which are the basic patents. On this phase of the 
problem the writer received invaluable assistance from governmental 
research workers in the respective fields involved. Another difficulty 
was that the assignment of patents can be traced only with the greatest 
difficulty in the years prior to 1895 and in some cases it is impossible 
to find any records other than the original patent grant. From other 
sources, however, it has been possible to trace the early history of 
most of the important ones, and when this could not be done it has 
been so indicated in the text. 


For probably no agricultural commodity have patents been more 
important than for milk and milk products. Although the basic 
processes of making butter and cheese have been known for centuries 
and hence are not patentable, innumerable innovations have been 
made during the past 50 years in the various tecliniques of processing 
milk products. Methods for making dry milk, condensed and evap- 
orated milk, and processed cheese — to name only the more important 
ones — all have been developed within this recent span of years. 
Particularly significant at the moment are new chemical discoveries 
in the field of casein utilization which may expand greatly the use of 
milk byproducts for industrial purposes. 



Nearly all the significant discoveries in milk processing during the 
past several generations have been patented by private individuals or 
concerns.^ In many instances, control of important processes by 
means of the patent right has given the holder marked commercial 
advantages and, as we shall show, in a few cases seems to have been 
the major factor in the growth of larger corporate concerns in this 

Patents relatively unimportant for butter, natural cheese, and ice cream. 

No patents relating to butter have any great comjnercial significance 
at the present time. As already stated, the mechanics and chemical 
processes involved in making butter are centuries old. A few patents 
relating to the treatment and deodorizing of cream are now in effect 
but are of little commercial significance. Methods for making plastic 
cream (which might make possible the more economical sliipment of 
butterfat from which butter could be made) have been developed and 
patented, but thus far are not being widely used. 

The making of natural cheese is also an old and universally used 
process. Insofar as patents relate to it, they apply mostly to equip- 
ment which can be purchased by any cheese manufacturer. How- 
ever, the making of processed cheese from natural cheese is a com- 
paratively recent development in which patents have had a very 
important role, as we shall see in a moment. 

Ice cream, like natural cheese and butter, is made by well-known 
and widely used methods. Numerous patents are held, of course, 
on manufacturing equipment but are not such as to affect the basic 
process. Patents apply to ice cream "stabilizers" (soluble protein 
substances for improving the body and texture of ice cream), but there 
are a number of such products on the market and no finn enjoys any- 
thing approaching a monopoly of their manufacture. 

Fluid milk and cream. 

The chief process involved in preparing milk and cream for con- 
sumption in fluid form is pasteurization. The general principles of 
pasteurization were developed more than 70 years ago by the great 
French scientist, Louis Pasteur. Commercial application of pasteuri- 
zation to fluid milk, however, was not made until the beginning of 
the twentieth century. 

No patents ever were granted in this countiy relating to the princi- 
ple of pasteurization itself. Machinery and equipment used in the 
process, however, have been patented, although most of the important 
patents of this type have expired. 

Among the first types of pasteurizing equipment was the Potts 
pasteurizer, develrped by the University of Wisconsin in 1899. At 
about the same time a Danish type of heater was introduced in this 
country, the principle of which still is used on modern pasteurizing 
equipment. Neither appears to have been patented. 

The first notable patents relating to m.ilk-pasteurizing equipment 
were issued to Joseph Willraan in the early part of the twentieth 
century. Among these was one issued in 1909 describing a machine 
for the so-called "holding method" of milk pasteurization.^ Most 
modern pasteurizing equipment is based on this method, or on some 

' An important exception has been the Babcock test for determining the 'butterfat content of milk and 
cream, as developed by the late Stephen M. Babcock. 
2 U. S. Patent No. 913,600, Process of Pasteurizing Milk, issued to Joseph Willman, February 23, 1909. 


adaptation of it. Mr. Willman for a time manufactured the pasteur- 
izing equipment covered by his patents but later sold his enterprise 
to the Davis Milk Machinery Co., which was in turn merged with 
the Creamery Package Manufacturing Co., one of the l;*igest of the 
present concerns in its field. The Willman patents were at one time 
of considerable commercial value, but have expired and are now ir en- 
eral use by manufacturers of dairy equipment. 

A recent innovation in milk-pasteurizing equipment is the plate 
heat exchanger. This m.achine was developed in England in 1923 
and is manufactured in this country by the York Ice Machinery Cor- 
poration, of York, Pa. The latter company has American patents on 
the machine and is the sole manufacturer of this type of pasteurizing 
equipment. It is being rapidly adopted for use by many of the larger 
dairy companies. 

Considerable interest is being shown at present in developing a paper 
container for fluid milk and cream. The use of such container seems 
almost certain to increase greatly in the next few years because of its 
adaptabvity for handling fresh milk through grocery stores. One 
such container has been developed by the American Can Co., which 
sells it to any dairy firm desiring to use it. Machinery for filling and 
closing the container in the dairy plant is rented by the American Can 
Co. Several other concerns are also in the market with patented 
containers, so that no single firm can be said to have control of the 

Processed and packaged cheese. 

Processed cheese is made by patented methods of heating and 
pasteurizing natural cheese, to which usually is added a small amount 
of an emulsifying salt. Its chief commercial advantages over natural 
cheese are greater keeping qualities, more uniformity as to ^aste and 
texture, and better adaptability to packaging in small units. At the 
present time approximately one-third the Am.erican and foreign types 
of cheese produced in this country is marketed in some form of 
processed cheese. 

The dom.inant factor in the processed cheese industry is the K!raft- 
Phenix Cheese Corporation, subsidiary of the National Dairy Products 
Corporation. For the past 15 years, its patents have given it exclu- 
sive control over the methods of making processed cheese. The com- 
pany itself manufactures most of the processed cheese which is made, 
although in recent years it has leased the process to several other 
firms on a royalty basis. 

The patents on which the Kraft-Phenix Cheese Corporation based 
its claim to the making of processed cheese were obtained about 20 
years ago. The first of these was issued to J. L. Kraft in 1916,^ who 
at that time was one of the owners of a local cheese business in Chicago. 
The patent described a method for heating cheese to a temperature of 
about 175°, after which it could be run off into hermetically sealed 
containers for permanent keeping. According to the patentee, his was 
the first successful method for heating cheese for purposes of steriliza- 
tion without its disintegration and the loss of its cheesy character. 
The process was intended to be used for the soft varieties of cheese 
which, in their natural forms, sometimes became semiliquid in 
advanced stages of curing. 

' U. S. Patent No. 1,186,524, Process of Sterilizing Cheese and An Improved Product Produced by Such 
Process, issued to J. L. Kraft, Chicago, 111., June 6, 1916. 


Another patent covering a method for processing all forms of 
cheddar cheese was issued to J. L. Kraft in 1919.'' The process was 
similar in principle to that already described for the soft cheeses, but 
it was of much greater commercial importance because it applied to 
cheese of the cheddar genus, which represents the common type made 
in this country. The process described in the patent was a simple 
one, involving the grinding of natural cheese into small pieces, heating 
it to what the patentee called a ''critical" temperature, adding a 
little water and, in some cases, a small percentage of coconut oU to 
enable the cheese to withstand the effects of hot weather. No 
complicated equipment, no chemical processes, and no special treat- 
ment other than that just described were mentioned in the patent, 
yet it was one which gave the Kraft Cheese Co. virtual control of 
the processed cheese industry until very recently when the patent 

Several other patents relating to processed cheese were granted, 
one of them, for the addition of sodium phosphate to the cheese, for 
the purpose of improving its texture after pasteurization. Such a 
patent^ was granted to one George Garstin in -1921, who assip-ned it 
to Lhe Phenix Cheese Corporatiou of New York, later merged with 
the Kraft Cheese Co. 

Another rather important processed cheese patent covered a method 
for blending whey solids with cured cheddar cheese to produce a 
product for which the patentee claimed "a more appetizing flavor 
than the usual so-called 'processed' cheese." ® One of the advantages 
of the method was that it utilized whey solids which often are wasted 
by cheese factories. The patent was granted in 1927 to one Elmer 
E. Eldridge, who assigned it to the Pabst Cheese Corporation of 
Milwaukee, Wis. The latter corporation was acquired in 1928 by 
the Kraft Cheese Co. 

The main patents for processed cheese have expired in the course 
of the last few years. A number of recent patents relating to it have 
been granted, not only to the Kraft-Pheuix Corporation, but to a 
nimiber of other firms and indiviauals. It remains to be seen whether 
or not any of these newer patents will give their holders a degree of 
control over the making of this cheese similar to that heretofore 
exercised by the Kraft-Phenix Cheese Corporation. From present 
indications, they wui not. 

Another recent innovation in the curing and packaging of cheese is 
the valve-closed metal container. Within such a container natural 
(not processed) cheddar cheese can be cured and stored with a mini- 
mum of loss from spoilage and rind waste. Moreover, it provides a 
means of handling natural cheese in small, merchandisable packages 
in the retaU store, heretofore a great advantage of processed cheese 
over natural cheese. 

The chief feature of the metal container is a valve by which the 
gas generated by the cheese in process of curing may escape without 
the entrance of air into the can. Several patents ^ relating to such a 

* U. S. Pateni 1,323,868, Process for Treating Cheese. Issued to J. L. Kraft, Chicago, 111., December 2, 

' U. S. Patent >! x 1,368,624. Cheese and Process for Sterilizing Same. Issued to George H. Garstin and 
asslened to Phenix Cheese Co., February 15, 1921. 

• U. S. Patent No. 1,034,410. Processed Cheese and Method of Making the Same. Issued to Elmer 
Eldridge and assigned to the Pabst Cheese Corporation of Milwauljee. Wis.; July 5, 1927. 

' U. S. Patent No, 1,941,048 (issued in 1933), U. S. Patents Nos. 1,960,325-7 (issued in 1934} to William F. 
Punte and assigned to Continental Can Co., Inc., New York. 


container have been assig:ned to the Continental Can Co., one of the 
large manufacturers of metal containers. Thus far this concern has 
the only metal cheese container in commercial use. Whether or not 
other firms can perfect one without infrinfrcment of the Continental 
Can Co.'s patents is, of course, conjectural. 

Condensed milk and evaporated milk. 

Methods for the condensing of milk were developed about the 
middle of the nineteenth century. Although most of the basic 
patents long since have expired, they were at one time of great com- 
mercial value and helped lay the basis for several of the larger dairy 
corporations of the present daj'. 

The inventor of condensed milk manufacture was Gail Borden, 
founder of the present Borden Dairy Co. His patent was taken out 
in 1856,® and it was a basic one. It described the production of 
condensed milk by evaporation in vacuo. Mr. Borden began com- 
mercial manufacture of condensed milk under liis patent around 1860, 
but it was not untQ the twentieth century that his company attained 
anything like its present size.^ 

Aleanwhile, several other patented processes relating to the produc- 
tion of condensed and evaporated milk were being developed. The 
most important of these was a method of preserving the unsweetened 
condensed milk by heat sterilization, which obviated the need for 
adding sugar or other preservatives to insure keeping. The originator 
of tlie idea was one J. B. Meyenberg, who obtained a patent on his 
process in 1884.^° A small company, known as the Helvetia Milk 
Condensing Co., was formed in 1885 to manufacture evaporated milk 
by the Meyenberg process. The Helvetia Milk Co. was reincor- 
porated in 1889 as the Pet Milk Co., one of the present-day leaders in 
the industry. 

These two processes, the Borden method of vacuum evaporation and 
the Meyenberg method of heat sterihzation, form the basis of the 
modern evaporated-milk industry.'^ . There have been, hovrever, 
many improvements in the macbi-^ry and equipment used by the 
industr}''. Most of these improvements, of course, have been patented 
and some of them liave been quite valuable to the patentees. As a 
general thing, patents relating to machinery are held by the manu- 
facturers of dairy equipment rather than b}^ the dairy companies 
themselves. Naturally the manufacturers of patented equipment are 
anxious to sell or rent as man}^ of their machines as possible, so the 
effect of equipment patents generally has not been to limit directly the 
use of the patented machine. Patent control, however, may have had 
considerable influence on machinery prices. 

As we have already seen, the evaporated -milk industry is largely 
concentrated in the hands of five or six companies. Patent control 
undeniably has been an important factor in the growth of some of 
these companies. The maintenance of their present position, however, 
does not depend on patent control. Most of the important patents 
affecting the evaporated-milk industry have expired, and the methods 

» U. S. Patent 15.553. Issued to Oail Borden. Aucust 19. 185fi. 

« For a good history of the development of this industry and the part patents played in it, see 0. F. Hun- 
ziker. Condensed Milk and Milk Powder, La Favette, Ind., 1914, pp. 1-11, 4th edition. 

i« United States Patents Nos. 308,421 and 308,422. Issued to J. B. Meyenberg in 1884. 

" One of the disadvantages of evaporated milk as made today is its caramel flavor, the removal of which 
would be of great economic importance in the industry. A patent relating to this, the success of w hich has 
not yet been commercially demonstrated, was issued to Charles O. Ball and assigned to the American Can 
Co. in 1934. 


and equipment involved are available to any firm desiring to use them. 
For instance, several of the larger grocery chains and some of the 
producer cooperatives have successfully entered the evaporated milk 
business during the last 15 years. The small or new enterpriser in the 
industry is handicapped not so much by patent control as by the 
amount of capital required, and especially by the inability to market 
his product successfully without an integrated sales organization. 

Dried milk and milk -powder . 

Closely related in origin and history to the condensation of milk is 
the manufacture of dry milk powder. The difference between 
condensed milk and dry milk powder is mainly one of degree of con- 
centration. The patent history of dried milk, however, is somewhat 
different from that of condensed milk. 

The first usable process for drying milk was developed by an 
Englishman who secured a British patent in 1855.'^ His method 
consisted of adding potash to fresh milk, which was then evaporated 
in open pans, until of a doughlike consistency ; after which it was dried 
between heated rollers and pulverized. Since then, however, new and 
better principles for milk drj^ing have been evolved, so that the British 
patent was of httle significance for the industry in this country. 

There are two main methods for mUk drying now in common use in 
this country. The first is the film-drying system, by which the milk 
is dried on revolving drums charged with steam or hot water, from 
which the thin film of dried milk may be removed with an adjustable 
knife or scraper. The second is the spray-drying system in which a 
fine mist of nulk is introduced into a current of hot air, the mUk powder 
falling in the form of a snowlike deposit on the bottom of the hot-air 
chamber. The first method is adaptable to small plants and is widely 
used, but .the larger volume of dried milk is produced by the second. 

Numerous film-drying machines have been developed and patented. 
Most of the important ones have expired. Film-drying machinery is 
at present being manufactured by numerous concerns and is freely 
available to any dairy manufacturing enterprise. 

For the spray-drying process, however, patents have played a more 
important role. The first successful application of the principle was 
known as the Stauf process, patented by Robert Stauf, of Germany, in 
1901.^^ The Stauf patent was purchased by the Merrell-Soule Co., 
of New York, in 1905, and thus was laid the basis of that firm's 
paramount position in the dried milk industry for many years. The 
Stauf patent expired in 1918. During the life of this patent, no firm 
could lise the spray-drying process for making milk powder without 
paying tribute to tliis company. The Merrell-Soule Co. was acquired 
by the Bordon Co. in 1927, although by this time its earlier basic 
patents had expired. 

The spray-drying of milk today is done mainly by the Gray-Jensen 
process, which was secured by several patents issued during the years 
1913-18.'* Machinery for the use of tiiis process is manufactured 
today by the Douthitt Engineering Co., of Chicago, 111. The method 
is being used by many of the larger manufacturers of dairy products. 

i» O. F. Hunziker, op. cit., pp. 424-428, fourth edition. 

» United States Patent No. 666,711, issued to Robert Stauf on January 29. 1901. 

»« United States Patents Nos. 1,078,848 (1913), 1,007,784 (1914), and 1,266,013 (1918). 


Casein and casein products. 

One of the most interesting aspects of the dairy industry at present 
is the increasing use of milk byproducts for industrial purposes. 
The use of casein for such purposes is especially important. De- 
velopments in tliis field are so recent and fast-moving that their 
ultimate significance cannot now be foretold. That casein patents 
will have considerable economic importance in the next few decades, 
however, is certain. 

Casein itself is an old and well-known dairy product. It has been 
made for many years in dairy plants of all types and sizes by the so- 
called vat process. No basic patents apply to this method. Re- 
cently, however, there has been developed a new method, known as 
the continuing recovery process, which promises considerable change 
in casein manufacture. Advantages of the new method are that it 
is more rapid, cheaper, and better adapted to use in large dairy 

The patent for this new process of casein making was issued to 
William H. Sheffield, of New York, in 1929, and is now held by the 
National Dauy Products Corporation.^^ The latter firm uses the 
method in its own plants, and at present is leasing machinery for its 
use to other users on a royalty basis. 

One of the more important uses of casein is in the making of ad- 
hesive glues and cements. Patents covering the process are con- 
trolled by the Borden Co. Among the first of these patents were 
several granted to A. A. Dunham in 1926 and subsequently assigned 
to the Borden Co.'^ Among the Dunham casein patents is an exclu- 
sive one covering waterproof casein glue. Casein is not indispensable 
to the making of glue and adhesive cement, but, insofar as it is so 
used, it is commonly done under the Dunham patents. 

Another recently developed use of casein is in the making of paints, 
for which casein serves as the base. There appears to be a large 
potential outlet for casein in paint manufactulre. Patents for the 
process were issued to E. C. Atwood, of the Atlantic Research Asso- 
ciates, an affiliate of the National Dairy Products Corporation. 

A very interesting possibility at the moment is the use of casein 
for the making of synthetic fiber from which textiles can be woven. 
The process was first developed and announced in Italy in 1935. 
Production there is already on a commercial scale, $20,000,000 worth 
of the fiber having been produced in 1938. The fiber has the appear- 
ance and many of the qualities of wool. Its economic potentialities 
as a source of textile fiber are self-evident. Because it thus far has 
been produced in this country only on an experimental basis, its 
commercial costs have not been definitely determined. It is the 
opinion of chemists, however, that it can be manufactured and sold 
at a price comparable with that of rayon, which is about 50 cents- per 
pound. *^ 

Only one patept covering the process of making casein fiber has 
been issued thus rar in this country. It was granted to two chemists 
(E. Whittier and S. P. Gould) in the United States Department of 

" United States Pateut No. 1,716,799, issued to William H. Sheffield in 1929, and now owned by the 
National Dairy Proaucts Corporation. 
"• United States Patents Nos. 1,537.939; 1,551,471; and 1,551,472. (Issued to H. V. Dunham, 1926.) 
" See press release by the U. S. Department of Agriculture, Washington, D. C, August 15, 1938; 


Agriculture and dedicated, as are most patents obtained by Govern- 
ment employees in line with their regular duties, to the free use of the 
people of the United States. ^^ Other patents relating to the same 
process by the same chemists are pending, but have not yet issued. 

So far as can be seen at the present time, the patents applied for 
by Whittier and Gould are basic to the process of casein fiber manu- 
facture. If this proves to be true, it will be one of the few instances 
in the dairy industry where commercially important processes are 
secured by public rather than by private patents. 

Irradiation with ultraviolet light. 

A recent discovery of great nutritional and therapeutic importance 
is a process for the irradiation of food products with ultraviolet light 
to increase their vitamin D content. The process is used extensively 
in the dairy industry for the irradiation of fluid and evaporated milk. 
The purpose of the irradiation is to increase the vitamin D content, 
which is the nutritional factor that prevents rickets. Since its dis- 
covery the method has been widely used commercially, especially bv 
the dairy industry. 

The method was developed at the University of Wisocnsin by Prof. 
Harry Steenbock. The patent for it (United States No. 1,680,818) 
was issued to him in 1928 and assigned to the Wisconsin Alumni 
Research Foundation. The latter organization leases rights to the 
process to any firm whose purposes appear to it legitimate, and uses 
the royalties derived for the purpose of encouraging further research 
and investigation along the same general lines. The Steenbock patent 
is another of the few commercially important ones not held by private 
firms or individuals. 


A recent and very rapid development in the food industries is the 
preservation of certain food products by the process of quick freezing. 
The principle of freezing food to protect it from spoilage long has been 
imderstood, but quick freezing to preserve taste and texture has been 
discovered only within the last several decades. The advantage of 
quick freezing over the slow methods is that the ice crystals formed 
are much smaller, which causes less damage to the cells of the prod- 
ucts. Quick freezing also checks certain chemical and enzymic 
actions which produce ofi'-flavors and discoloration of the product. 

Some idea of the growth and present status of the frozen-food 
industry may be obtained from table 38. The process at present 
is being applied mainly to fruits and vegetables and to fish. The 
pack of frozen fruits and vegetables has nearly trebled in the last 3 
years, and that of frozen fish has nearly dojiibled. Opinion is almost 
unanimous that the industry will be expanded greatly in the next 
few years. 

" United States Patent No. 2,140.274. Issued to E. Whittier and S. P. Gould and dedicated to the free 
use of the people of the United States. 



Table 38. — Yolume of quick-frozen foods and number of companies engaged 

production, 1936-38 

in their 











Fruits and vegetables (fruit juices 

89, 009. 000 
64, 335. 000 
24, 790, 000 

1, 075, 000 


161, 374, 766 
82. 369. 000 
27, 599. 000 

2, 065, 000 


242, 901. 000 
93, 000, 000 
34, 480. 000 

5, 070, 000 









169, 209, 000 


273, 407, 766 


375, 451, 000 


1 Meat frozen by packers for sale to institutional trade iS not reported. 

C. R. Mundee and F. C. Porcher, Quick- Frozen Foods, Bureau of Foreign and Domestic Commerce 
1038 (mimeograph). 

There are, as will be shown, numerous patents relatmg to quick 
freezing, and some of them are important. No single firm or indi- 
vidual, however, has patents which give it exclusive rights to the basic 
principle of quick freezing. The chief factor in the frozen-food industry 
at the present time is the General Foods Corporation, which controls 
the Birdseye process subsequently to be described. Several other 
methods of quick freezing are in use, however, and numerous other 
firms engage in the business (table 38). 

Early history of quick freezing. 

Although quick freezing was not commercially important until 
after the World War, its history goes back nearly 100 years. As early 
as 1861, one Enoch Pifer was granted a United States patent for the 
freezing and storage of fish. His method consisted of placing fish 
under (but not in contact with) metal pans containing a mixture of 
ice and salt.^^ Interestingly enough, the Supreme Court held his 
patent invalid because it had been preceded by the ice-cream freezer. 

Next in the field were D. W. and S. H. Davis, who froze fish in 
metal pans by packing them in alternate layers of salt and ice. They 
were issued patents covering the process in 1869, and considerable 
quantities of fish were, and still are, frozen by this method. 

During the latter part of the nineteenth century, numerous other 
patents were issued relative to the freezing of fish, although none of 
them was such as to preclude the obtaining of later and more important 
quick-freezing patents. Most of these earlier methods used salt as a 
freezing medium, and a few used direct immersion of the product 
in brine. Progress also was made in methods oi sharp freezing (i. e., 
freezing in uncirculated air), but this method is not directly analogous 
to modern ways of quick freezing. 

Freezing by direct and indirect contact with refrigerant. 

It is generally considered that commercial quick freezing dates 
from about 1920. The first process to be applied commercially was 
direct immersion of the product in brine. Such a process was de- 
veloped in Europe just before the World War, and was introduced 
into the United States by Otteson in 1918. Otteson's methods were 
covered by foreign patents and by several American patents.^ His 

>• D. K. Tres.sler and Cliflord F. Evers, The Freezing Preservation of Fruits, Fruit Juices and Vegetables, 
The Avi Publishing Co., Inc., New York, 1936, p. 48. 
"United States patents Nos. 1,129,716 (1915); 1,532,931 (1925); 1,562,360 (1925). 


method of direct brine immersion, however, was not widely used 
commercially because of the likelihood of salt penetration into the 

Somewhat related in principle to the above method is that of freez- 
ing the product by means of brine spray. H. F. Taylor patented a 
machine for freezing fish by such a process in 1923.^' Later, he and 
others improved this process by spraying brine on the cans in which 
the fish were packed. 

Another method of quick freezing is that of indirect immersion, 
sometimes called freezing bj'" indirect contact with the refrigerant. 
There are at least a half dozen patented variations of this process, all 
in commercial use. Among the first patents of this type was one 
granted in 1921 to P. W. Petersen. ^^ His method consisted of placing 
the product (usually fish) in narrow metal containers immersed in 
cold brine. Kolbe improved on this method by devising a way for 
keeping the pans from becoming flooded with brine. ^^ Cooke added 
still other variations by conveying the product over cold brine on an 
endless chain of flat aluminum plates.^* 

A method of a somewhat different sort from any thus far described 
is the so-called "Z" process. It was developed by M. T. ZorotschenzefF, 
to whom a series of patents was issued beginning in 1933.^^ The 
process is used commercially, especially for poultry and other meat 
products. Freezing is accomplished by means of an atomized liquid 
refrigerant which is sprayed either directly on the product or on a 
package containing it. 

The Birdseye process. 

The process in most common use today, especially for the freezing 
of fruits and vegetables, is the Birdseye process. The process was 
developed by Clarence Birdseye, who subsequently assigned the patent 
rights to Frosted Foods Co., Inc., a subsidiary of the General Foods 

Birdseye obtained the first of his patents in 1924.^^ It described a 
method for freezing fish by the can-immersion principle. It was simi- 
lar in many respects to Petersen's method, which already has been 
described. In fact, Petersen brought suit against the General Foods 
Corporation in 193G, charging an infringement of his patent. The 
case was dismissed in 1932 by the United States district court at 

Quick freezing under the Birdseye process is done now by two types 
of patented machinery. The first is known as the "double belt" 
system, in which the product is frozen between two metal belts running 
through a freezing tunnel. The metal belts are cooled by a spray of 
calcium chloride brine, which is similar in principle to some of the 
spray processes already described. This type of freezing apparatus 
is suitable only for permanent installations and is being replaced by 
the new multiplate method. 

The multiplate method is covered, by a series of patents issued to 
Birdseye and assigned to General Foods in 1930 and in 1931.^^ As 

»i United States patent No. 1,468,050, issued in 1923. 

" United States patents Nos. 1,388,295 and 1,388,298, issued in 1921. 

M United States patent No. 1,527,56^ issued in 1925. 

« United States patent No. 1,795,3.30; issued in 1931. 

M United States patents Nos. 1,894,813 (1933); 1,995,729 (1935); 2,134,295 (1938). 

w United States patent No. 1,511,824, issued in 1924. 

»' Cf. The Cafliner, vol. 74, p. 16, for an account of tiiis litigation. 

« United States patents Nos. 1,773,079-81 (1930); 1,817,890, and 1,822,077 (1931). 


the name implies, the apparatus consists of superimposed hollow 
metal plates, between which the food can be placed and frozen under 
any desired pressure. Low temperatures are obtained by means of 
cold brine circulated within the hollow plates. The entire apparatus 
is encl'^sed within an insulated cabinet which can be moved easily by 
truck from place to place. This compactness and mobility of the 
multiplate equipment constitutes one of its main advantages. 

Important litigation is currently in progress, challenging the validity 
of the Birdseye patents.^ In July of 1938, the Booth Fisheries (a 
concern engaged in the quick freezing of fish) brought suit against the 
General Foods Corporation, charging that the Birdseye process con- 
trolled by the latter is an infringement of some of the Cooke patents 
owned by Booth Fisheries. In a denial filed by the General Foods 
Corporation, it is claimed that the Cooke process never was used com- 
mercially and that the latter was itself an infringement of certain prior 
patents. The case was brought before the United States district court 
of Wilmington, Del., but a decision has not yet been handed down. 
The outcome of this case will obviously have an important effect on 
the patent situation in the frozen-food industry. 

Other methods of quick freezing. 

There are at least a dozen other patented methods of quick freezing, 
most of them variations of principles already described. Among these 
are the Haslacher process (to utilize the refrigeration always available 
in artificial-ice plants) ; the Bloom method (brine spray) ; and the 
Murphy process (circulating cold air). 

A special type which is growing in commercial application is the 
Grayson process in which freezing is effected by blasts of very cold 
air.^° One could list at least a half dozen others. 

Summation of patent situation for quick freezing. 

It is evident from the foregoing discussion that there are many 
ways by which foods can be quick frozen, and that no single firm or 
individual has patents whi9h tend to limit use of the principle itself. 
Most of the patents relate to machinery and equipment for quick 
freezing. Holders of such, patents usually permit manufacture on a 
royalty basis by companies engaged in the making of refrigerating 
equipment. There are numerous companies of this kind. With the 
notable exception of the Birdseye apparatus, any food processor 
desiring to engage in the quick-freezing business can purchase the 
necessary equipment from any one of several manufacturers of such 

The outstanding example of quick-freezing patents held exclusively 
by a food processor is the Birdseye process controlled by the General 
Foods Corporation. This corporation is today the largest single 
factor in the industry. Its patents, particularly in the freezing of 
fruits and vegetables, have undoubtedly contributed to its present 
dominant position. But it would be a mistake to overemphasize the 
role of patents in this case. 

The chief advantage possessed by General Foods in the field of 
quick freezing appears to be that it has a distributive system for 
getting frozen foods into retail stores and local food outlets. Because 
of the special storage equipment required, frozen foods cannot be 

w See The Food Field Reporter, issue of July 25, 1938. 

" United States patent No. 1,814,915, issued in 1931 to R. V. Grayson and C. M. Foster. 


handled easily in the ordinary channels of food distribution. The 
small processor of frozen foods has thus had some difficulty in market- 
ing his product, an obstacle not encountered to the same degree by 
the General Foods Corporation. Other advantages possessed by the 
latter firm at the present time are that its products are widely adver- 
tised and sold under the claim of superior quality. Things of this 
sort, rather than its patents, appear to be mainly responsible for the 
present pos-ition of the General Foods Corporation in the frozen-food 

One of the chief obstacles to the expansion of the frozen-food indus- 
try has been the high cost of equipment for handling the product in 
the retail store. Here again General Foods m.ay have some slight 
advantage because of its patented store cabinets. There are, how- 
ever, several other types of cabinets available to all retailers or dis- 
tributors without restriction other than that of cost. 

Thus far, the corporate grocery chains have not undertaken the 
retailing of frozen foods on an extensive scale.^^ There are perhaps 
several reasons for this, the chief one of which seems to be the high 
cost of the retail equipment. Patent control by firms already in the 
business does not seem to be an important deterrent to the entrance 
of new factors, particularly when the scale of their operations is large 
enough to overcome some of the marketing difficulties described above. 


The manufacture of breakfast cereals is carried on today mainly 
by large firms specializing in that enterprise and operating on a 
national scale. While unimportant at the moment because of their 
expiration, basic patents at one time gave their holders almost exclu- 
sive rights to the manufacture of certain kinds of these cereals. The 
origin and development of several of the present leading firms in this 
field can be traced directly to some of the patented processes which 
their founders either developed themselves or purchased from the 
original patentees. It is probably correct to say that patent control 
in this field has played a larger role than in any other branch of the 
food industries. For this reason, the history of patents and processes 
for breakfast cereals is especially interesting. 

There is today a bewildering variety of breakfast cereals. Nearly 
all of them, however, fall into one of the four following classes, accord- 
ing to the types of process used in their manufacture: (1) The cooked 
cereals; (2) the puffed cereals (puffed rice, etc.); (3) shredded biscuit; 
and (4) cereal flakes. The cooked cereals (oatmeal, farina, etc.) are 
made according to methods known for years. A number of patents 
for their manufacture were taken out during the latter half of the 
nineteenth century, but they were not such as to restrict the basic 
process involved and were of relatively little commercial importance. 
Cooked cereals were, and ^ill are, made by a number of companies 
which have little more than a brand name to differentiate their prod- 
uct from close substitutes. This has not been true, however, for the 
ready-to-serve breakfast cereals. 

1 Of. Quick- Frozen Foods, issue of October 1938, p. 9. 



Shredded cereal biscuit. 

The most common form of cereal biscuit is Shredded Wheat, a 
product originated and for years made exclusively by the Shredded 
Wheat Co. The Shredded Wheat Co. traces its origin back to 1901, 
at which time it was incorporated as the Natural Food Co., that name 
having been changed to the present one in 1908. The assets of the 
Shredded "Wlieat Co. were acquired in 1930 by the National Biscuit Co. 

At one time the Shredded Wlieat Co. held exclusive patents covering 
the manufacture of shredded cereal biscuits, and for many years was 
the only company engaged in the making of such products. The 
basic patent was one issued to H. D. Perky in 1895 and later assigned 
to the Natural Food Corporation.^^ This patent described a method 
of making cereal biscuits from porous threads of filaments. The 
process consisted of cooking whole wheat, allowing it to cool and 
partially dry, and then running it between compression rollers, one of 
which had a series of fine circumferential grooves fronr which the 
product emerged in threadlike form. It then was massed together in 
biscuit form and toasted. The essential feature of the process was 
the filamentous character of the fibers, and the original patent was 
such as to prevent any other firm from making biscuits composed of 
cereal in such. form. 

Numerous patents, some of them still in effect, relate to the manu- 
facture of shredded cereal biscuit. None of them, however, is such 
as to retain for the. Shredded Wheat Co. its former control of the 
manufacturing process. The Kellogg Co. (another cereal firm) began 
the manufacture of shredded wheat biscuit after the expiration of the 
Perky patent in 1912, and products of this general type today are 
made by a number of companies. 

Considerable controversy and litigation has developed in recent 
years regarding the name "Shredded Wheat." In 1927 the Kellogg 
Co. began the manufacture and sale of an article which it described 
as shredded wheat biscuit. The Shredded Wheat Co. brought suit 
against the Kellogg Co., charging that the action of the latter con- 
stituted an infringement of its trade-mark. The ease was dismissed 
in 1930, but in 1932 the National Biscuit Co. (which meanwhile had 
acquired the Shredded Wheat Co.) again brought suit against the 
Kellogg Co. This case also was dismissed by the district court, 
but the decision was appealed and finally it reached the Supreme 
Court. In a decision recently handed down, the Supreme Court 
found for the defendant, holding that the National Biscuit Co. had 
no exclusive right to the term "Shredded Wheat" as a trade name.^^ 
As the matter now stands, the National Biscuit Co. no longer has 
exclusive control either of the manufacturing process or the name of 
Shredded Wheat biscuit. 

Puffed cereals. 

Another form of breakfast cereal is puffed grain, usually wheat or 
rice. The process for making this cereal, like that for making shredded 
cereal biscuit, was also covered from the first by patents and was 
limited for many years to the Quaker Oats Co., which acquired the 
original patents. 

" United States patent No. 548,086, issued October 15, 1895, to H. D. Perky. 
« U. S. Supreme Court, Nos. 2 and 56, October term, 1938. 

267003 — 41— No. 35 10 


The basic patent for the process of making puffed cereals (United 
States patent No. 707,892) was issued to A. P. Anderson in 1902. In 
1905 the Quaker Oats Co. formed a subsidiary known as the Anderson 
Puffed Rice Co. to acquire the rfght to the above parent. Manu- 
facture of Puffed Wheat and Puffed Rice was inmiediately begun 
by the Quaker Oats Co., which firm had exclusive rights to the manu- 
facture of these products during the Ufe of the Anderson patent. 

The Anderson patent described a process of treating starch materials 
under air pressure in a dry air condition and then suddenly, reducing 
the pressure so as to gasify the liquids contained in the starch particles. 
The resulting product was a dry, porous article, preserving its original 
shape and substance, but in greatly enlarged form. Grain had pre- 
viously been subjected to treatment under heat and pressure, but 
always in a moist condition so that the resultant product was paste- 
like and imsuitable for eating in that form. The Anderson patent was 
the first relating to puffed dry cereal, and it described the puffing 
process in such a way that the operation could not be carried on 
successfully without the iilcelihood of patent infringement. 

The manufacture of puffed cereals is still done according to the 
general method described by Anderson, but many improvements 
have been made in the process and in the machinery for carrying it 
on. Numerous patents have been issued relative to the process, 
some of them still in effect. For the most part these later patents 
relate to machinery, and their effect is not such as greatly to advantage 
their holders. Puffed cereals are made at the present time by several 
cereal companies, the original Anderson patents having expired soon 
after the close of the World War. 

Cereal flakes. 

A third type of ready-to-serve breakfast food is flaked cereal (corn 
flakes. Post Toasties, etc.). Products of this type were first placed on 
the market more than 30 years ago. Earlier methods of manufacture 
were, of course, patented, but the nature of the patents was not such 
as to limit manufacture to a single firm for a very long period. 

The first patents relating to cereal flakes were issued to J. F. Gent. 
In 1880 Gent described a process for separating the hulls from corn 
kernels, steaming the granular product thus obtained, warm-rolling 
it under pressure so as to flake the cooked grits, and then toasting the 
flakes.^* He amplified this general method in another patent obtained 
in 1887 (United States patent No. 372,065). It is not known to whom 
Gent's patents were assigned, but if his process was used commercially 
it was in a very small way. 

The next patents — and these were the commercially important 
ones — were issued to J. H. Kellogg, brother of the founder of the 
present cereal company of that name. Kellogg's first patent, issued 
m 1896, applied to the making of dry cereal flakes from whole wheat. ^^ 
He first soaked the grain, then cooked it to the stage where the starch 
was hydrated (which hydration, he claimed, was very important to 
the process), rolled the product between cold rollers, and then toasted 
the flakes thus obtained. His general method was seemingly quite 
similar to that described by Gent in his patent of 1880. The question 
of infringement, however, was not involved, because the Gent patent 
expired shortly after the Kellogg patent was obtained. 

3< United States patent No. 223,847, issued to J. F. Gent in 1880. 
3» United States patent No. 558,393, issued to J. H. Kellogg in 1896. 



Corn flakes first were- put on the market by the Kellogg Toasted 
Corn Flakes Co., incorporated in 1906 to manufacture this and 
similar breakfast cereals. The name of this company subsequently 
was changed to the Kellogg Co. and is so known today. 

The original Kellogg patents apparently were not such as to give 
it exclusive control of the. making of corn flakes because the Postum 
Cereal Co. began the manufacture of a similar product (Post Toasties) 
in 1907. However, manufacture of corn flakes was limited largely 
to these two firms for many years — whether because of patent control 
or for other reasons, the writer is unable to ascertain. 

Several patents relating to the manufacture of com flakes were 
taken out by both the Kellogg Co. and the Postum Cereal Co. shortly 
after the World War.^^ All these patents related to improvements 
in machinery and methods of manufacture and were in no sense basic 
to the method itself. Even these later patents have expired, or soon 
will. Machinery for the manufacture of these or similar cereal prod- 
ucts are made by a number of tooling and machine equipment con- 
cerns and can be bought by any cereal processor. 

Summation of the situation with respect to cereal patents. 

It is evident that patent control has been very important in the 
manufacture of breakfast cereals and has contributed directly to the 
growth of several of the present leading concerns in this field. Patents 
never were, and are not now, of much importance to the making of 
cooked cereals. But for years the manufacture of dry puffed cereals 
was limited by patent to the Quaker Oats Co., just as the manu- 
facture of shredded cereal biscuit was limited to the Shredded Wheat 

Most of the important cereal patents have now expired. Those 
stUl in effect relate mostly to details and improvements in the basic 

The manufacture of breakfast cereals, especially the ready-to-serve 
kinds, is stUl pretty largely concentrated in the hands of a few leading 
firms. Any legally conferred advantages which such firms might have 
over other manufacturers, however, inhere largely in their trade- 
marked brands rather than in the manufacturing process itself. The 
value of these brands unquestionably is considerable because some of 
them became household words during the years when few firms had 
exclusive patent rights to the manufacture of certain cereal products. 


Two technological developments literally revolutionized the flour- 
milling industry during the latter part of the nineteenth century. 
The first of these was the roller mill to replace revolving disks for the 
grinding of grain, and the second was the air-blast purifier. The 
significance of the roller mill was that it multiplied by many times 
the capacity of the milling unit and thus contributed directly to the 
growth of large-scale organization in the milling industry. The air 
purifier made it possible to make an acceptable fiour from spring 
wheat. The purifier had even more important economic consequences 
than the roller mUl in that it was one of the main factors leading to 
the subsequent growth of the spring-wheat industry. 

" U. S. Patents 1,286,766, issued in 1918 to the Postum Co.; 1,321,753 and 1,321,754, issued in 1919 to the 
Kellogg Co. 


The origin o/ the roller mill goes back at least 100 years and there 
is some doubt as to who its real inventor was. Edgar ^^ believes it 
to have been a Swiss miller named Helfenburger, who buUt an experi- 
mental mill of this kind as early as 1820. Dedrick '^ credits a Hun- 
garian named Mechwart with the first practicable roller mill in 1830. 
It is a well-known fact that numerous mills of this kind were in oper- 
ation in Europe before 1850, although they were crude affairs and it 
remained largely for American mUlers to bring them to their present 
degree of perfection. 

The first roller mill in the United States was put into operation 
at Minneapolis in 1874 by the Geo. H. Christian Co.^^ The rolls 
were made by an American foundry. Several years later, similar 
equipment was installed by the G. Washburn and C. A, PUlsbury Cos., 
both of which were destined later to become leading firms in the 
industry. The use of the roller mill, however, was not long confined 
to these companies, and by 1890 was in operation in most of the 
merchant mills of the country. 

The principle of the roller mill — i. e., the grinding of the grain 
between two revolving rolls rather than between two circular discs — 
was known long before its introduction into America. The principle 
itself was therefore not patentable. Many American patents never- 
theless were issued regarding improvements in the machinery. Such 
patents related to methods of adjusting the rolls, types of corrugation 
on the rolls, and methods of applying power — all of which were 
important but not basic. 

An examination of the United States patent files reveals that many 
patents relative to roller mills were granted prior to 1890. The 
names of more than a dozen inventors appear and assignments were 
made to at least a half dozen manufacturers of milluig equipment. In 
no instance did the milliiig concerns themselves obtain important 
patents relating to roller mUls. 

It is impossible to assess the commercial importance ot tnese roller- 
mill patents other than to say that none of them was indispensable to 
the method itself. No single firm appears to have had anything like 
a monopoly in the manufacture of milling equipment. The rapidity 
with which the roUer mill was installed throughout the country within 
the short span of a few years Indicates that it was freely available to 
all millers who wished to purchase it. No patents of any conse- 
quence remain in effect regarding such machinery at the present time. 

The air purifier. 

The patent history of the air purifier, however, was greatly different 
from that of the roller mill. While not such as to limit or withhold 
the process from use by millers, patent control played a much more 
important role and appears to have led to a serious miscarriage of 
justice in this case. 

For many centuries millers had followed the practice of separating 
the flour from the outer layers of the grain by means of cloth sieves, a 
process commonly known as bolting. The method worked reason- 
ably well for the hard wheats, but was not very successful for the soft 
varieties. The air purifier was simply a method of separating the 

3" Win. C. Edgar, The Story of a Grain of Wheat, D. Appleton & Co., New York, 1903, p. 166. 
38 B. W. Dedrick, Practical Milling, 1st ed.. National Miller, Chicago, 1934, p. 97. 

«» Cf. H. A. Bellows, A Short History of Flour Milling, the Miller jPublishing Co., Minneapolis, 1924,. 
pp. 37-38. 


flour from the bran particles- by means of an air curigpt used in con- 
jimction with the bolting process. The key to the new process was 
the application of air which, if patentable, was obviously destined to 
give the patentee important -rights. 

The originator of the idea for an air purifier is commonly conceded 
to have been a Frenchman named Perrigault, who patented a crude 
machine of this kind in France as early as 1860. But apparently no 
conmiercial use was made of this machine either in France or else- 
where until more than 10 years later. 

The first successful air piu-ifier was buUt for a small Minneapolis 
mill in 1870 by a Frenchman named E. N. LaCroix, To him certainly 
goes the credit for introducing the idea in America, as well as for build- 
ing the first practicable machine. LaCroix appears to have been 
more interested in perfecting and operating his machine than in 
securing patents for it. For whatever the reason, he made no move 
in this direction for several years. 

Employed in the same mill as LaCroLx was another workman named 
G. T. Smith who perceived the commercial possibilities of the former's 
machine. Smith accordingly applied for and was issued a patent on 
an air purifier under date of April 1, 1873. His patent (U. S. Patent 
No. 137,495) was basic in that it covered the use of an air blast in 
separating flour from wheat middlings. He claimed ** * * * the 
process of manufacturing flour from middlings by subjecting them to 
successive grindings, boltings, and purification by currents of air 
* * *." The terms of the grant obviously were broad. 

LaCroix then hastened to secure patents on his own machine, but 
too late. He received his first patent on June 3, 1873, just about two 
months after the Smith patent issued. 

Meanwhile, Smith lost no time in interesting capital in the manu- 
facture of an air purifier and had gone actively into the business. 
In 1878 the Smith Middlings Purifier Co. was formed. This company, 
of course, had Smith's patents and moved immediately to obtain a 
monopoly in its field by getting control of all similar patents. To this 
end, it brought infringement suit against all flour millers using purify- 
ing machines other than those made by itself, of which there were by 
this time some thousands. To defend themselves against the suit by 
the Smith Co., the millers formed an organization and reputedly spent 
more than $100,000 in litigation costs. 

The whole matter finally was settled out of court by compromise 
According to the terms of the "compromise," the Smith Co. dropped 
its suit against the millers, in return for which they agreed not to 
purchase any purifiers other than those made by the Smith Co. 
This, of course, gave the Smith Co. a virtual monopoly over the manu- 
facture of purifying machines, which it enjoyed for about 10 years. 
How much this added to the cost of milling machinery it is impossible 
to say, but Edg&r *" says the Smith Co. made "immense sums" during 
the life of its patents. 

Patent control is of no particular importance in the flour milling 
industry today. All of the earlier patents have expired^ and those 
which remain in effect relate only to minor improvements in milling 
machinery. Even these patents are held by manufacturers of milling 
equipment and suf^lies rather than by milling concerns themselves, 
so that any patented improvements are av«ji1able to all millers alike. 

« Edgar, op. cit., p. 160. 


In recent years the manufacturers of miUing equipment have made 
great progress m improving the machinery and mechanizing the opera- 
tions of the small mill, so that mills of this type are relatively less 
disadvantaged than they were 10 or 20 years ago. 


In none of the other major food lines have patents been so impor- 
tant commercially as in the four fields already described. It will 
nevertheless be of interest to summarize the situation briefly for the 
other major food industries. In doing so, the writer has not attempted 
to examine the patent files as carefully as was done in the previous 
cases and has been forced to rely mainly on general sources and the 
opinions of those more famihar with food-processing techniques. 

Meat 'packing. 

Patents are not, and never have been, of great importance in the 
slaughtering, preparation, and curing of meat. Even in the modern 
slaughterhouse, most of the work is necessarily done by hand. Many 
mechanical aids have been introduced in the course of the years, but 
such equipment is not manufactured by the meat packers themselves, 
and all packers have equal access to it. 

The outstanding development of the past centiu'y in the handling. 
of fresh meats was artificial refrigeration. The role of this develop- 
ment in centrahzing the meat industry was described in an earlier 
chapter of this study. Our concern with it here is in connection with 
the topic of patent control. 

The first important American patents relating to artificial refrigera- 
tion issued soon after 1850. Most of these patents were taken out by 
scientists and professional inventors having no connection with the 
meat-packing industry.** Usually they were assigned to manufac- 
turers of refrigerating equipment. One of the few meat packers to 
hold patents relating to refrigeration was T. D. Kingan, founder of 
the present company of that name. His patents, however, were of 
little consequence in the growth and development of his meat-packing 

One of the products connected with the meat-packing industry for 
which patents have been quite important is oleomargarine. The 
packers themselves, however, never controlled the basic patents for 
this product. As a matter of fact, they were sued on several occasions 
by holders of such patents who charged infringement.*^ 

There are literally hundreds of packing-house byproducts, and many 
patents relate to them. However, the more important of these prod- 
ucts — tankage, bone products, soap, gelatin, glue, etc. — are processed 
by the packers according to methods in general use throughout the 
industry to which no exclusive patents apply. 

Among the newer types of packing-house byproducts are the phar- 
maceuticals made from the glands and membranes of livestock. All 
of the larger packers arc conducting extensive research relative to the 
use and methods of obtaining such products. Numerous patents per- 
taining to pharmaceuticals of this kind are to be found in the Patent 
Office, many of them assigned to the meat packers. How important 
these may be it is impossible to say, but the products themselves 

" R. A. Clemen, The American Livestock and Meat Industry, the Ronald Press Co., New York, 1923, 
pp. 216-218. 
« Ibid., p. 369. 


represent only a fractional percent of the total value of livestock 

The 'preservation oj jood iti metal containers. 

Food processors engaged directly in the business of putting food 
products into tin cans have no patents worthy of mention. The mak- 
ing of metal food containers is largely centraHzed today in the hands 
of two firms — the American Can Co. and the Continental Can Co. 
These two firms sell the cans to the food processors and rent them 
machinery for the filling and closing of the cans. 

The tin can itself has been in use for many years, and there are no 
basic patent rights to its manufacture. A recent innovation of some 
importance in can manufacture is the treating of the inside of the can 
with lacquers so as to insure better preservation of certain food prod- 
ucts. Methods of doing this, of which there are several, are patented 
by the two leading can cc mpanies. As would be expected in an indus- 
try so highly centralized as can manufacture, most patents pertain- 
ing to metal containers are assigned to one or the other of these two 
companies. Patent control, however, does not appear to be an 
important element in the present position of either one. 

Patents owned by General Foods and Standard Brands. 

The two food concerns which today possess patents of the greatest 
aggregate value of any in the food industries are the General Foods 
Corporation and Standard Brands, Inc. Both these firms handle a 
wide variety of products, many of them made by special patented 
methods. It was mainly to obtain control of their patents and trade- 
marks that some of the subsidiaries of these two concerns were acquired. 

Among the General Foods patents are those pertaining to the 
Birdseye process of quick freezing which have already been described. 
The Postum Co., holder of some of the breakfast-cereal patents dis- 
cussed earlier, is also a subsidiary of the General Foods Corporation. 
Another important group of patents held by this concern relates to 
the packing of certain foods in vacuo (the so-called Vitapack process). 

Listed among the subsidiaries of General Foods is also the Sperti 
Lamp Co., and General Development Laboratories, both classified as 
patent-ouTiing units. 

Patents held by Standard Brands, Inc., probably are not less 
valuable than those of General Foods. There is of course no way of 
assessing the actual value of such patents to either firm., but the 
following figures for Standard Brands, Inc., relative to income from 
royalties are of some interest in this connection.*^ 

Table 39. — Income from royalties for Standard Brands, Inc., 1935-37 


of the 


1935 - 

$337, 766 
464, 224 





133, 171 

Compiled from reports of the corporation filed with the Securities and Exchange Commission 
Washington, D. C. 

" This corporation is one of the few whose financial reports to the Securities and Exchange Commission 
are such that the income from patent royalties is shown separately. 


The figures in the first column of the above table arise out of the 
fact that the patents owned by Standard Brands (a holding company) 
are leased on a royalty basis to its subsidiaries which do the actual 
manufacture of the products. These royalties, amounting to nearly 
half a million dollars, thus represent an intracorporation transfer of 
funds which may or may not be an accurate measure of the value of 
the patents but at least give some rough idea of it. 

The second column shows the revenue derived from royalties paid 
by outside firms using processes patented by Standard Brands. Such 
royalties (around $133,000 in 1937) are not large in relation to the 
operating income of the company, but it must be remembered that 
income derived from this source is net in that it involves no direct 
expense outlay. 

conclusions: revision of patent law and procedure 

It is evident from the foregoing discussion that technological inno- 
vation has been, and will probably continue to be, a factor of no little 
moment in the food industries. Because most of the basic methods 
of food processing and preparation have been known for centuries, 
it may seem strange at first thought that this is true. On the whole, 
fewer innovations have been made in the food industries than in many 
other fields where science and invention have played a more spectac- 
ular part in recent years. But the fact is sometimes lost sight of 
that many of -the foods which we eat today were unknown two gener- 
iations ago, and that changes of great commercial importance have 
recently taken place even in the basic methods of processing and 
preserving food products. 

The outstanding fact developed by our inquiry mto food patents 
is that most of the important ones are held today by the larger food 
corporations. In several cases the origin and present position of some 
of these firms can be traced directly to certain basic patents which 
they possessed. Outstanding examples of this are to be found in the 
dairy industry and among manufacturers of breakfast cereals. Many 
of the older basic patents have long since expired, but some of the 
advantages which they once gave their holders still inhere by reason 
of established brands and trade connections which patent control 
helped to make possible. 

It would be a mistake to conclude that patent control has been the 
major factor, or even one of the prim.aiy ones, in bringing about the 
general growth of large-scale organization in the food industries. As 
we have seen, there are some food lines in which patents never have 
been" important and there are many large food concerns which at no 
time in their existence possessed any valuable patents. The point 
is that most of the key patents in the food industries are now held by 
the larger food corporations. WTiatever commercial advantages may 
arise out of patent control in this field are likely therefore to go mainly 
to the organizations of this kind. 

The reasons for this are obvious. Most of the commercial research 
being done today is carried on in the laboratories of the larger cor- 
porate concerns. Small firms have neither the funds nor the facilities 
for work of this kind. When patents of potential value are taken 
out by unaSniated individuals, they usually are acquired by corpora- 
tions interested in the particular process involved. The chief excep- 


tions to this general statement are the public patents granted on the 
basis of research done by public agencies. 

The patent system of the United States originally was set up to 
benefit the public by advancing the useful arts and it unquestionably 
has contributed to this end. The framers of these early laws, how- 
ever, could not foresee how they might operate in an economy of 
large-scale enterprise. The original intent was to encourage cLe 
individual inventor by giving him exclusive rights to the use af his 
discovery for a period of 17 years. Modern science and discovery, 
however, is no longer individualistic. Most of the important tech- 
nological innovations arc made today by scientists and engineers 
employed by industrial concerns. The benefits of the patent privilege 
accrue not directly to these individuals, but to the firm wliich employs 

It is properly contended that some form of patent privilege is neces- 
sary to encourage industrial concerns to devote funds to the research 
from which progress comes. But it is also true that the patent system 
has certain abuses and shortcomings as it now operates, and that some 
of these might be obviated without destroying the incentives to tech- 
nological advancement. 

The charge most commonly brought against the patent system is 
that it sQjiietimes results in the public being deprived of the full bene- 
fits of new techniques because patents are "salted away," or because 
their application is limited to a single firm which has what amounts 
to a monopoly. There is not much evidence of important food patents 
being "salted," but many of them have tended to limit the application 
of new methods to one or a few firms. 

The first suggestion for improvement in this respect is the volun- 
tary patent pool. A patent pool is simply an agreement on the part 
of a number of competing firms to grunt each other the use of their 
respective patented processes. Such a pool has been operated for 
years by the leading automobile manufacturers, and unquestionably 
has had the salutary effect of bringing engineering improvements into 
immediate and general use throughout the industry. 

Patent pools, however, arc not to be found in the food industries, 
and it is doubtful if they ever will be. Most of the food industries 
are comprised of a few large firms and many small ones. The small 
firms, having little or nothing to contribute to a patent pool, could 
hardly expect to share in the benefits of one. For example, the large 
daily firms, which now have most of the important dairy patents, 
conceivably might form a patent pool among themselves. But it is 
quite improbable that they would extend voluntarily the use of their 
patented processes to all who chose to apply them. Probably any 
sign'ficant change in the present situation will have to come therefore 
through some change in the patent laws themselves. 

The first major point of issue is the length of the patent period, now 
fixed by law at 17 years. At one time a period of this length might 
have been necessary to enable an inventor to perfect his tliscovery, 
interest capital in its development, and derive a just measure of com- 
pensation from it. But this situation scarcely can be said to obtain 
today. Wliat might be called economic tempo is much faster in our 
time than it once was. The progress of research and discovery is so 
rapid that an individual inventor hardly can expect to hold an im- 
portant process secret and develop it privately in any circumstance. 


Moreover, new processes can be perfected and new products put on 
the market almost overnight, particularly by the large going con- 
cerns to whom most important patents now issue. No one can say 
with certainty, but probably a much shorter period than 17 years now 
would suffice to maintain the incentive for research and progress. In 
this connection, the Science Advisory Board in a special memorandum 
on patent reform has this to say: 

The justification for the extension in a democratic country of an absolute 
monopoly to an inventor for 17 years, on the basis that this is a reasonable reward 
for his disclosure * * * no longer applies generally." 

A second suggestion for revision of the patent system pertains to 
the greater equality of access to patented processes. As the patent 
system now operates, the patentee may retain the sole utee of his proc- 
ess, or he may allow others to use it on a royalty basis. If he follows 
the latter course, the patentee exercises sole discretion in naming the 
parties to whom he will lease his process, and determines with them 
the royalties to be paid. In our examination of food patents, we have 
seen that holders of important patented processes usually did not 
lease rights to other firms, although in some cases this was done to a 
limited extent. 

Two things might be done to insure greater equality of access to 

})atented processes: One would be to provide for the compulsory 
icensing of all patents so that they could be used by parties other than 
the patentee, presumably on some royalty basis. Obviously this is 
drastic in its implication and goes directly to the heart of the present 

Less drastic is the proposal that, if a patentee chooses to lease his 
process, it be offered on equal terms to anyone who wishes to use it. 
The purpose of this would be to prevent a few favored lessees, who 
had- nothing to do with developing the process, from enjoying advan- 
tages not equally available to all enterprisers. A necessary corollary 
to this proposal would be to provide for some degree of governmental 
supervision over the terms and conditions of royalty payments. 

Anyone having occasion to examine patents relating to the food 
industries cannot but be struck by the trivial nature of many of them. 
Most such patents are of no particular consequence one way or the 
other, except as they burden the staff of the patent office and cause 
some degree of inconvenience to processors who must take care not to 
infringe on them. 

In a few cases, however, comparatively simple innovations have been 
patented in such a way as to insure for the patentee virtual control 
over important food processes. For instance, the processed cheese 
patents hinged on the mere cooking of natural cheese, and the shredded 
biscuit patent on the filamentary fiber. Neither could be classed 
as a major contribution to the science and technique of food processing 
and there were several methods other than those patented for doing 
substantially the same things. Yet the terms of the patent grant 
were such as to insure the patentees virtual control over their respec- 
tive lines of food manufacture for 17 years. 

Situations of this kind prompt the suggestion that two types of 
patent grants might be made— the first, to cover new techniques of a 

" Second Rt'port of the Science Advisory Board, Washington, D. C, September 1935, p. 333. 



major character; and the second, those of minor or secondary impor- 
tance. Some inventions are of a sort that large and perhaps perilous 
expenditures are required if they are to be developed conmiercially. 
Cases of this kind ought obviously to have more patent protection 
than trivial innovations relating to methods and processes which are 
already in general use. Certainly there will be general agreement that 
the patent right should not — as has sometimes been the case — defeat 
the very purpose for which it was intended, namely, that of encourag- 
ing not only the discovery but the use of new and improved production 


Legislation affecting large-scale organization in the food industries 
has been of three general types: (1) The Sherman Act and related 
legislation designed to preserve competition; (2) price laws affecting 
the terms upon which commodities may be bought and sold (notably 
the Robinson-Patman Act and the so-called "fair-trade" laws); and 
(3) punitive taxation, as exemplified by State chain-store taxes. 

Our treatment of these three topics in the present chapter neces- 
sarily will be somewhat cursory. The general status of the food 
industries under the Sherman Act and the charges made against them 
on the grounds of monopoly and restraint of trade have been dealt 
with at some length in earlier chapters. At this point we shall 
concern ourselves only with' the broad outlines of public policy. 

Price maintenance legislation and punitive taxation are compara- 
tively recent developments so far as the food industries are concerned. 
It is too soon either to predict their ultimate course or to appraise their 
economic consequences. It is probably correct to say, however, that 
legislation of this sort will exert more influence over the type and scale 
of food distribution in the next several decades than the older antitrust 
laws ever have done. 


Legislative policy with respect to the size of business enterprise 
in the United States first was laid down by the Sherman Act, passed in 
1890. The objective of this act was the preservation of competitive 
enterprise. Its central provision was to declare illegal "every contract, 
combination in the form of trust, or otherwise, or conspiracy, in 
restraint of trade or commerce * * *" Subsequent legislation has 
modified the form, but not the objective, of the Sherman Act. 

It is important to note at the outset that the Sherman Act was 
passed primarily for the protection of the public rather than for the 
special benefit of the small enterpriser. While the complaints of the 
latter undoubtedly weighed heavily with the legislators, their main 
concern was to protect users and consumers of goods and services 
against exorbitant profits and undue price enhancement by the 
monopolist.^ Certainly this was uppermost in the mind of Senator 
Sherman, whose objective seems to have been much different from 
that of some recent legislators whose purpose is only to aid small firms 
in lines of industry which are admittedly competitive. 

Since the passage of the Sherman Act, Congress has passed several 
pieces of legislation designed to augment or supplement its provisions. 

1 Thischaptor was written in the latter part of 1938. Since that time there have been iiu rtunt develop- 
ments, particularly in the interpretation of the Robinsoa-Patraan Act, which are not uiscnssed in this 

' O. W. Knauth, The Policy of the United States Toward Industrial Monopoly, Columbia University 
Press, 1914, pp. 13-42. 



Most important of these was the Clayton Act of 1914. In this legisla- 
tion Congress undertook to spell out a little more clearly what it meant 
by the term "restraint of trade" and to lay down certain further princi- 
ples regarding corporate amalgamation. The Clayton Act specifically 
forbade any corporation engaged in interstate commerce from acquir- 
ing or holding any part of the capital stock of a competing corporation 
"where the effect of such acquisition was to substantially lessen com- 
petition between the corporation whose stock was so acquired and the 
corporation making the acquisition * * *" This still left oppor- 
tunity, as we shall see, for varying judicial interpretation, but it was 
at least somewhat more specific than the Sherman Act itself. 

A further provision of the Clayton Act forbade price discrimination 
to different buyers not based on differences in selling costs, or the 
effect of which was substantially to lessen competition and create 
monopoly. The act did not compel a one-price policy, and it left to 
the courts the problem of deciding when competition was "substan- 
tially lessened." This provision as to price discrimination received 
very little attention, and until recent years it was practically a "dead 
letter." It is important mainly as a precedent for recent price legis- 
lation, notably the Robinson-Patman Act. 

For more than 20 years after the passage of the Clayton Act, Con- 
gress enacted no important antitrust legislation, and until the last 
few years did not appear greatly concerned about the problem. Judi- 
cial interpretation of the older legislation during these years was such 
that businessmen felt reasonably free to proceed with the formation 
of large enterprises. Indeed the basic principle of the antitrust legis- 
lation; i. e., the preservation of competition, was abandoned tempo- 
rarily by Congress itself when it passed the National Recovery Act at 
the outset of the "New Deal." 

Judicial interpretation of antitrust legislation. 

The most interesting aspect of our antitrust laws has not been the 
legislation itself, but the judicial interpretation made of it. Viola- 
tions of both the Sherman Act and the Clayton Act are, of course, 
subject to the jurisdiction of the courts. As the matter actually has 
worked out, it has been the courts and not Congress which have 
determined our public policy with respect to corporate development 
during the last two generations. 

The first case to reach the Supreme Court under the Sherman Act 
was the Knight case of 1895. This case involved the American Sugar 
Refining Co., which was charged with having violated the law by the 
acquisition of four independent refineries. Despite the fact that the 
American Sugar Co. had almost complete control of sugar refining at' 
that time, the Court held that it had not violated the Sherman Act 
and found for the defendants. Its ruling turned on a technicality, 
but it was nevertheless interpreted to mean that corporate mergers 
were largely exempt from the provisions of the Sherman Act. Busi- 
nessmen went ahead largely on that assumption for the next 10 years. 

The next case to come before the Court was the Northern Securities 
case of 1904. The complaint of the Government involved a holding 
company which reportedly had been organized by financial interests 
for the purpose of controlling the operations of several competing 


This time the Court completely reversed itself and found for the 
Government. The ruling was such as to imply that practically 
anj'^ merger of previously competing firms was in contravention to the 
Sherman Act. 

Meanwhile other cases were moving through the lower courts and 
were being decided against the defendants on the basis of the Northern 
Securities case. Two of these — The Standard Oil Co. case and the 
American Tobacco Co. cdse — finally reached the Supreme Court in 1911. 
And again the Court changed its interpretation of the Sherman Act, 
this time applying the so-called "rule of reason." 

The "rule of reason" as applied by the Court meant simply that 
corporate consolidations per se were not necessarily unlawful under 
the Sherrnan Act, but that they might become so when their intent 
was to monopolize trade or to restrain competition. This the Court 
sought to determine on the basis of numerous indications such as the 
proportion of the total business controlled, the policies and trade 
practices of the purported monopolist, any evidence of exorbitant 
profits or prices, and «iny other factors the court chose to consider. 

In the years since 1911, numerous other cases have been brought 
before the Supreme Court ujider the Sherman Act, to all of which the 
Court has sought to apply its "rule of reason." ^ Its decisions have 
varied somewhat, but on the whole they have been such as to encourage 
business men to go ahead with the formation of any enterprise calcu- 
lated to show any operating advantages, and with some which did not. 

It has become the fashion nowadays to censure the Supreme Court 
for its wavering and contradictory interpretation of the Sherman Act. 
Jerome Frank suggests that while a member of the Court rarely, if 
ever, changes his mind, the Court does change its membership.* 
Quite properly he calls attention to the fact that the Court's decisions 
in questions of this kind sometimes are determined by the economic 
and political preconceptions of its members. 

But the explanation is hardly so simple as that. The truth is that 
the Court could not, and cannot yet, make up its mind unanimously, 
consistently, and irrevocably whether big business is good or bad. 
When it undertook to interpret the antitrust laws it was confronted 
with all the perplexities of the problem which Congress should have, 
but usually did not, take into account. If its policy has been waver- 
ing and uncertain, it is because the Court has wrestled with problems 
in connection with the rise of big business which even now are not 
fully appreciated by some of the Court's critics. 

Legislation to control rather than dissolve big business. 

Two general lines of action are open to the public when it is con- 
fronted with monopoly; one is to dissolve it as the antitrust legislation 
was intended to do, and the other is to regulate or control it. We 
have just reviewed briefly the legislation and judicial procedure under 
the fii-st line of action. This has been the dominant policy of the 
American people since the rise of big business in this country, but there 
have been also some elements of the second. 

In the course of the last generation, Congress abandoned the idea 
of trying to preserve com.petition in some industries and enacted legis- 
lation giving them public-utility status. Among the first laws of this 

' For a more complete discussion of some of these cases, see National Industrial Conference Board, 
"Mergers and the Law," ch. III. 
* Jerome Frank, Law and the Modern Mind, Tudor Publishing Co., New York, 1936, p. 23. 


kind was the Shipping Act of 1916. This act specifically relieved 
steamship lines from the provisions of the Sherman Act, and permitted 
them jointly and under governmental supervision to do certain things 
theretofore prohibited. In the interest of more efjBcient and orderly 
operation, the steamship lines were allowed to operate pools for the 
apportioning of traffic, fix rates, allot ports, and pool earnings. All 
their action along these lines, of course, was made subject to govern- 
mental approval through the United States Shipping Board. 

Next to be freed from the provisions of the Sherman Act were 
corporations or associations engaged exclusively in foreign trade. 
The Webb-Pomerene Act of 1918 and the Merchant Marine Act of 
1920 extended to such firms privileges similar to those granted the 
steamship lines under the Shipping Act. 

The most signal exemption from antitrust legislation granted up 
to that time was given to the railroads by the Transportation Act of 
1920/ This legislation specifically authorized the railroad companies 
to consolidate control of lines which theretofore had been in compe- 
tition. It was a complete reversal of the earlier policy of trying to 
maintain competition in this industry. The railroad problem is 
today as acute as it ever was, but a return to competition is not even 
considered as the solution. 

Many other pieces of legislation designed to regulate monopolistic 
elements in industry and com.merce are on State and Federal statute 
books. Most important of these are, of course, the various State 
laws for the regulation of public utilities. In this field competition 
is clearly impossible and. public policy literally has been forced in the 
direction of regulation. But it is a policy which the people have 
been loath to adopt, and which applies today in only a comparatively 
small sector of the economy. 


The main purpose of the antitrust laws was to protect the public 
against undue price enhancement by purported monopolists. Re- 
cently, however, we have had a series of State and Federal laws, the 
purpose of which is not to reduce prices but to prevent what is termed 
unfair price cutting. 

At first thought these two types of legislation appear to be flatly 
contradictory in purpose. Actually, however, there is no real con- 
tradiction and the explanation of the paradox is simple enough. 
Price-maintenance laws of whatever type are designed primarily to 
protect the regular marketing channels against the inroads of the 
mass distributor by depriving the latter of the weapon of price cutting 
by which he is presumed to destroy competition and unfairly injure 
his smaller competitors. The method is diff'erent but the end is 
the same. Both types of legislation look toward the preservation of 
competition in its old fonns — the antitrust laws, by the dissolution 
of the ro.onopolistic elements; and the price-maintenance laws, by 
curbing the growth of large-scale organization. If this appears to be 
an oversimplification of the m.atter, it is because proponents of price- 
maintenance laws have not always been wholly candid as to their 
real purpose. 

' Act of February 28, 1920, 41 Stat. 80, U. S. Coile, title 49, uh. I. sec. 5. 


Provisions of the Robinson-Patman Act. 

Most important of the price-maintenance laws, so far as the food 
industries are concerned, is the Robinson-Patman Act. This act, 
passed in 1936, is an amendment to section 2 of the Clayton Act of 
1914, which in turn was a supplement to the Sherman Act. In the 
main, it represents an effort to clarify certain provisions with respect 
to price discrimination, which in the older laws had been practically 
a "dead letter." 

Section 2 of the Clayton Act contained the following provision: 

* * * it shall be unlawful for any person engaged in commerce * * * to 
discriminate in price between diflFerent purchasers of comn^odities * * * 
where the effect of such discrimination maj' be to substantially lessen competition 
or tend to create a monopoly * * * Provided, That nothing herein contained 
shall prevent discrimination in price between purchasers on account of differences 
in the grade, quality, or quantity of the commodities sold, or that makes only due 
allowance for differences in the cost of selling * * * ^ 

Obviously this provision of the Clayton Act was a loose one. It 
did not compel a one-price policy and it did not seek to define, except 
in the vaguest of terms, either the lim.its of price discrimination or 
the rules by which businessmen were to be guided in this matter. 
The problem of deciding whether or not price discrimination had 
been carried to the point where competition was "substantially 
lessened" was left, of course, to the courts. In its interpretation of 
this provision, the Supreme Court limited its application even further 
by holding until 1929 that it was not meant to apply to competition 
between buyers.^ This of course exem.pted the grocery chains 
from indictment while this ruling held. Under the circumstances, it 
is not to be wondered at that businessmen paid little attention to 
this part of the Clayton Act and continued to operate as though it 
were not on the statute books. 

The Robinson-Patman Act was intended to clarify this situation 
and to set forth specifically the terms and conditions upon which price 
differentials, quantity discounts, and rebates of one kind or another 
are legitimate. Like the Clayton Act, it forbids these practices where 
their effect is substantially to lessen competition or create a monopoly. 
But it also goes further than "this and forbids price discrimination 
when it may work to the injury of a competitor, either of the seller or 
of the buyer. What this added provision of the law does is to include 
protection to a firm which is discruninated against, even though the 
effect may not be such as to lunit competition in a broad sense. In 
other words, two standards of judgment are to be applied to price 
discrimination: (1) Does it unduly restrain competition? (2) Is it 
fair as between individual competitors? 

The law does not prohibit price differentials per se. It permits the 
granting and receiving of quantity discounts and similar allowances, 
provided that thev are limited to actual savings in cost of manufac- 
turing, selling, or delivering. And provided also that they are avail- 
able on an equitable basis to all firms dealing under like conditions. 
The Federal Trade Commission is empowered to make determinations 
as to cost differences and, on the basis of these determinations, to set 
limits for price differentials. 

« The Clayton Act, Public, No. 212, 63d Cong., sec. 2 

» Mennen v. Fed. Trade Comm. (28S Fed. 774). This decision was reversed, however, by a decision handed 
down In 1929 (Van Camp v. American Can Co. (278 U. S. 245)). 

267003— 41— No. 35 11 


The sponsors of the Robinson-Patman Act were interested prhnarily 
m preventmg the mass distributor's underselling independents in the 
retail market; and this was to be accomplished by limiting the buying 
advantages which large-scale, integrated distributors hitherto had 
enjoyed. Whether pr not the objectives of the sponsors are legitimate 
depends on whether x)r not the buying advantages of the mass dis- 
tributor are legitimate. 

There can be nothing but condemnation for price discrimination 
not based on cost differences or efficiency factors. And there can be 
no objection to doing away with much of the secrecy and subterfuge 
surroundmg business dealings in matters of this kind. But to use 
legislation as a means of preserving a particular type of marketing 
organization or to thwart the growth of a different type is a question- 
able purpose. 

The terminology of the Robinson-Patman Act is not necessarily 
subject to criticism on the latter grounds. The important thing is 
how it will be administered by the Federal Trade Commission and 
interpreted by the Supreme Court. Policy with respect to this has 
not yet been fully clarified, but on the basis of the limited experience 
to date there are some indications of what it is likely to be. It is to 
this which we now turn. 

Present admvnistrative interpretation. 

Some indication of the way in which the Federal Trade Commission 
iniends to interpret the Robinson-Patman Act may be obtained from 
two cases involving food concerns. The first of these was an order 
against the Biddle Purchasing Co., a brokerage agent for a number of 
grocery wholesalers and voluntary grocery chains ; and the second was 
an order against the Great Atlantic & Pacific Tea Co. 

The Biddle Purchasing Co. was engaged in the business of selling a 
market-information service and also in purchasing supplies for whole- 
salers and distributors throughout the coimtry. Its practice was to 
charge the manufacturers and processors from whom it purchased a 
brokerage fee which it remitted in full or in part to the buyers of the 
commodities involved. The Federal Trade Commission charged that 
this was a violation of section 2 (c) of the Robinson-Patman Act, 
whi(^h forbids the granting or receiving of commission or brokerage 
fees to or from any intermediary acting in behalf of either the buyer 
or the seller. It contended that the Biddle Purchasing Co. was 
acting as the buyers' agent in this case, and hence was not providing a 
bona fide brokerage service. On that ground it ordered the Biddle 
Co. to cease the practice of receiving and granting a commission for its 
services, and this order was sustained by the United States circuit 
court of appeals.^ 

The significance of the Biddle case lies in its definition of a bona fide 
broker. No agent having any connection whatsoever, either with the 
buyer or seller, according to present interpretation, is entitled to 
receive a fee or commission for its services. Obviously this precludes 
the deduction of a brokerage fee from the purchase price by a buying 
subsidiary of a corporate grocery chain. 

More instructive and far-reaching in its implications was the case 
involving the Great Atlantic & Pacific Tea Co. Prior to the passage 
of the Robinson-Patman Act the Tea Co. received rebates in lieu of 

« United States Circuit Court of Appeals, Second District, Biddle Purchasing Co. et al. v. Federal Trade 
Commission, May 2, 1938. On October 17, 1938, the Supreme Court denied a petition for writ of certiorari. 


brokerage from many firms from which it bought goods. It was in a 
position to obtain these rebates because it purchased directly from 
the food processor, who was thus saved the brokerage fees he had to 
pay when selling through the regular channels. After the passage of 
the Robinson-Patman Act the Tea Co. followed the practice of asking 
for ciuantity discounts equal to the brokerage rebates it formerly had 
received. Testunony before the Federal Trade Commission indicated 
that this arrangement was satisfactory to the sellers and that such 
sellers granted the same terms to other buyers who purchased in like 
quantities and under similar conditions. 

The Commission nevertheless held that this practice was in viola- 
tion of the Robinson-Patman Act on the grounds that the buying 
agents for the Atlantic & Pacific Tea Co. were not bona fide brokers 
and that the company hence was not entitled to receive any discount 
in any form for their services. It forbade the company from "making 
purchases of commodities * * * at a so-called net price, and 
every other price which reflects a deduction arrived at by deducting 
* * * any amount representing brokerage currently being paid by 
sellers * * *." Respondent has appealed from the order to the 
United 'States Circuit Court of Appeals, but a ruling has not yet been 
handed down. 

What this ruling actually does is to fortify, at least temporarily, the 
position of the specialized middleman in food distribution. If the 
mass distributor is not entitled to receive brokerage fees on his direct 
purchases (or a discount in price equal to such brokerage), then 
obviously he has no incentive to go around the regular channels and 
deal directly with farmers and processors. If there were no other 
alternative, then the effect of the Robinson-Patman Act indeed would 
be to reinsert the specialized middleman into the system of mass 
distribution, a position from which the economics of the situation 
would tend to eliminate him. 

But it is by no means certain that the final outcome of the Robinson- 
Patman Act, whatever the interpretation placed on it, will benefit 
greatly either the specialized middleman or the independent food 
retailer. Under the terms of the present act, a seller could not be 
indicted for violation if he should sell all his output to one buyer, such 
as a chain system. The result, then, is likely to be that processors 
and sellers of food products will divide themselves sharply into two 
groups — those who sell all their output to the mass distributors, and 
those who sell none to them. There is evidence that this trend is 
already under way. Obviously such a situation would have many 
disadvantages, even for the handlers in the regular food channels 
whom the Act was intended to assist. The line of demarcation 
between the two systems of distribution would be further accentuated, 
sellers would be limited in their outlets and buyers hampered in their 
sources of supply. And still more contractual rigidity would be 
injected into a situation which already has too much of it. 

What the chains are likely to do probably will depend on the tei-ms 
they can obtain from processors and handlers on direct purchases. 
Their organization is such in many cases that they have no need for 
the services of an independent broker or wholesaler, and they will not 

Eay willingly for the services of such agents. If they cannot obtain, 
ecause of the Robinson-Patman Act, what they believe to be satis- 
factory price terms from food processors they will have more incentive 


than ever to acquire or merge with the independent processors from 
whom they formerly purchased their goods. Such an outcome would 
be contrary to the very purpose for which the law was intended. 


Another form of price legislation is that represented by the resale 
price-maintenance laws (sometimes referred to as "fair trade laws"). 
Laws of this type pertain to the right of a manufacturer to specify the 
price at which his goods are to be sold by retailers and wholesalers. 
Forty-two states now have laws of .this kind, most of them passed 
within the last 2 years. In 1937, Federal legislation (the Tydings- 
Miller "rider" to the District of Columbia Appropriation bill) also was 
passed. This "rider" permitted manufacturers to make resale price- 
fixing contracts with distributors in all States having fair trade laws, 
without fear of violating the Federal antitrust laws. 

The chief purpose of such laws, like that of the Robinson-Patman 
Act, is to help the independent retailer meet the competition of chain 
systems. The fair-trade laws are justified sometimes on the ground 
that they are necessary to protect the manufacturer from having his 
product made a "price football." It is true that such laws have had 
the support of some manufacturers, who in a few instances may 
benefit from them. But the most ardent supporters of the fair-trade 
laws have been the associations of independent retailers, just as the 
chief opponents have been the chains.^ 

The first fair-trade law was passed by California more than 30 years 
ago. The law declared it to be an infringement of a copyright or 
patent to sell an article at a price other than that stipulated by the 
manufacturer, if he chose to stipulate one. /In a decision handed down 
in 1908, the Supreme Court held that this restriction as to resale price 
could not validly be made.^° In another decision several years later, 
the Court declared that a system of contracts between manufacturers 
and distributors regarding the price at which articles were to be sold 
was in violation of the antitrust laws.^^ 

Efforts to pass resale-price-maintenance laws were made intermit- 
tently during the next 20 years, but without much success. Then in 
1936 the Supreme Court validated a fair-trade law passed by Califor- 
nia in 1931. On the basis of that decision nearly every State in the 
country has rushed forward in the last 2 years to pass similar legis- 

Because it has become the model for most legislation of its kind, the 
California law ^^ is of particular interest. Originally it provided only 
that a manufacturer could draw contracts with distributors specifying 
the price at which his article could be sold at retail. Naturally a pi ice 
cutter would refuse to enter into such a contract, so that the law as 
first passed was virtually a "dead letter." It then was amended to 
provide that a price contract drawn by a manufacturer was binding 
upon all distributors regardless of whether or not they were themselves 
parties to such a contract. By making a contract with a single retailer, 

» Sumner S. Kittelle. The Fair Trade Decision and the Growth of Resale Price Maintenance Legisla- 
tion, p. 11. (Reprint of an article appearing in George Washington University Law Review in Novembar 

10 210 U. S. 339, 28 Sup. Ct. 752 (1908). 

11 220 U. S. 373, 31 Sup. Ct. 376 (1911). 

■" Calif. Stat. 1931, c. 278, as amended in 1933 by Stat., c. 260. 


a manufacturer thus could fix the price at which all others would have 
to handle his product. 

In upholding the California law, the Supreme Court passed over 
most of the important issues which its opponents thought were 
involved.'' The latter contended that it constituted price fixing in 
an industry not affected with a public interest, that it deprived of their 
constitutional rights retailers who had not entered into specific price 
contracts, and that it went beyond what was reasonably necessary to 
prevent harmful price cutting. The Court, however, did not question 
the essential reasonableness of the law. Neither did it raise objection 
to the power of a State legislature to engage in this kind of price fixing 
nor to delegate to a manufacturer the power to fix prices. It justified 
its decision mainly on the ground that the statute sought to protect 
the manufacturer in the enjoyment of the goodwill inhering in his 
brand or trade-mark, and that to do so was a proper legislative 

Thus far few food processors have attempted to fix the retail price 
of their products. There are Several very good reasons why they 
have not. One is that consumers probably would be quick to shift 
to other brands if the price of any one brand was inordinately high. 
Moreover, there is probably the fear in the mirds of some processors 
that the grocery chains, which have consistently fought resale-price 
maintenance, would refuse to push an article sold under its terms. As 
a matter of fact, the chains might even welcome resale-price mainte- 
nance on nationally advertised products as a means of increasing the 
sale of their private brands. In this event the fair-trade laws, like 
the Robinson-Patman Act, probably would prove a boomerang to the 
veiy groups most active in sponsoring them. 

Equalizing prices in different types oj retail outlets. 

A recent legal development vitally affecting food distribution is the 
attempted use of the fair-trade laws to equalize prices in different types 
of retail stores. During the course of the last few years most of the 
larger grocery chains have converted many of their small retail units 
into large supermarkets, featuring self-service and lower prices to 
consumers. Some of them have instituted the practice of pricing 
their goods in these supermarkets below those in their regular stores, 
claiming that the difference in prices represented the difference in 
retail costs. 

Recently, however, this practice has been challenged under the 
fair-trade laws of several States. The charge against the chains was 
that the practice was being used to injure their competitors and to 
lessen or destroy competition. Thus far three States (Minnesota, 
Kansas, and California) have sought to enjoin food chains from having 
two sets of prices in their retail units located within the same trade 

Whether or not the fair-trade laws can be used to equalize prices 
in this way is not yet definitely known. None of the three cases 
mentioned above has reached the Supreme Court. Only one of them 
has reached a Federal district court, and in this case the court held 
that the fair-trade laws could not be used to equalize prices in this 

» 299 U. 8. 198, 57 Sup. Ct. 139 (1936). 


The opinion of the court in the Minnesota case expresses so suc- 
cintly the view of the writer in this matter that he can do no better 
than quote from it: ** 

Differentials in prices justified by differences in selling costs at different stores 
have not heretofore been considered as iniquitous, wrongful or unfair, nor as 
having any tendency to destroy competition or foster monopoly. In fact, such 
price differentials have been regarded as beneficial to the public and not harmful 
to anyone; and, even though they may affect competition, they cannot be con- 
sidered as the evil which the Legislature was seeking to stamp out. The effect 
upon competition of differences in prices honestly based on differences in selling 
costs is the normal and natural result of fair competition between merchants 
whose overhead expenses differ. This type of competition is to be encourag^id 
in the public interest, rather than restrained. 


Another way in which pubhc poHcy is affecting the type and scale of 
business enterprise in the food industries is through State chain-store 
tax laws. The purpose of such laws is openly and avowedly to help 
the independent retailer by imposing special taxes on their chain 

At the present time more than 20 States have special chain-store 
tax laws on their books (table 40). Most of these laws were enacted 
within the last 3 or 4 years. 

Table 40. — Chain-store tax laws: States having such laws and type of tar in each 

State, as of Dec. 31, 1937 


Type of tax 


Graduated up to $112.50 for each store over 20. 

California • 

Graduated up to $500 for each store over 10. 


Graduated up to $300 for each store over 24. 


Graduated up to $400 and 5 percent of gross receipts for each store 

over 15. 
Graduated up to $500 for each store over 19. 



Graduated up to $150 for each store over 20. 



Graduated up to $300 for each store over 50. 


Graduated up to $550 for each store over 500.' 


Graduated up to $50 for each store over 25. 


Graduated up to $250 for each store over 25. 

Minnpsnf.ft ..... 

Graduated up to $155 for each store over 50, plus graduated percentage 


of gross sales. 
Graduated up to $300 for each store over 40. 


North Carolina ... ... 

Graduated up to $225 for each store over 200. 

South Carolina 

Graduated up to $150 for each store over 30. 

South Dakota 


of gross sales. 


Graduated up to $750 for each store over 50 

West Virginia 

Graduated up to $250 for each store over 75. 


' Law defeated in a referendum at ceneral election in 1936. 

' The Louisiana law is on the basis of all stores operated by the chain, whether in Louisiana or elsewhere. 

The type of chain-store tax law is quite similar in most States, but 
there is considerable variation in the rate of the tax. The tax per 
store varies from $200 to $500 per year in most States, and is as much 
as $750 in Texas (table 40). The usual form is a graduated annual 
license tax, based on the number of stores operated by the chain 
within the State. A notable exception is the Louisiana law (recently 
upheld by the Supreme Court) in which the tax ra.te is based on the 

'« U. S. District Court, Districtof Minnesota, 4th Div. The Great Atlantic and Pacific Tea Co. ^.Attorney 
General for the Slate of Minnexota e* at., N. 2981, April 29, 193S. 


total number of stores operated by the chain, regardless of where they 
are located. Three States— Florida, Minnesota, and South Dakota — 
supplement the graduated license tax by a further tax on gross receipts. 

Judicial review of chain-store tax laws. 

Most forms of chain-store tax laws have been declared constitutional 
by the Supreme Court. First to be sustained was the Indiana law 
in 1 93 1 . In this case the Court was called upon to examine the validity 
of a license tax graduated from $3 on the first store up to $25 on all 
stores over 20. By a decision of 5 to 4, the Court declared the law 
was constitutional. 

The Court appeared to base its decision on the fact that chain 
systems had special operating advantages, and that to levy special 
taxes upon them was, therefore, not discriminatory. In other words, 
the court contended that the chains could legally be made to pay the 
tax because they were more efficient. In this connection, it also 
remarked that voluntary chains of independent retailers were not, 
in the nature of things, as efficiently operated as the corporate chains, 
thus paving the way for a subsequent exemption of voluntary groups 
from chain-store taxes. It is to be noted that in this case the Court 
did not pass upon the propriety of the law, nor did it discuss the ques- 
tion of public policy in relation to chain stores. 

Next to reach the court was a case brought against the Florida law 
by the Louis K. Liggett Co. This law imposed a graduated tax up to 
S400 per store, and a graduated gross-receipts tax up to 5 percent of 
the total receipts of all chains with more than 15 retail units. The 
Court sustained the graduated per store tax, as it had done in the 
Indiana case, but voided the gross receipts tax. 

The interesting thing about the Florida case was the dissenting 
opinion of Justice Brandeis, who contended that the law should have 
been upheld in its entirety. With complete candor. Justice Brandeis 
recognized that the purpose of the law is to protect the independent 
retailer, and then proceeded to argue that it is the proper function of 
legislation to do so. His opinion ran in part as follows: ^^ 

Through size, corporations * * * have become an institution — an institu- 
tion which has brought such concentration of economic power that so-called 
private corporations are sometimes able to dominate the State. The typical 
business corporation of the last century, owned by a small group of individuals, 
managed by their owners, and limited in size by their personal wealth, is being 
supplemented by huge concerns in which the lives of tens or hundreds of thousands 
of employees * * * are subjected * * * to the control of a few men. 
Ownership has been separated from control * * *. The changes thereby 
wrought in the lives of workers, of the owners, and of the general public are so 
fundamental and far-reaching as to lead scholars to compare the evolving "corpo- 
rate system" with the feudal system; and to lead other men of insight and experi- 
ence to assert that this "master institution of civilized life" is committing it to the 
role of a plutocracy * * *. Such is the Frankenstein monster which States 
have created by their corporation laws * * *. By furthering the con- 
centration of wealth and power and by promoting absentee ownership (the chains) 
are thwarting American ideals * * * converting independent tradesmen 
into clerks * * * and sapping the vigor and the hope of smaller cities and 

In essence, what Justice Brandeis does is to identify the public 
interest with the well-being of the small business enterpriser. His 
opinion in this case is the most forceful reiteration of the creed of 
nineteenth-century liberalism that has come from the Court m recent 

» United States Reports, vol. 288, pp. 565-569. 


years. It represents the view of a great number of people who would 
prefer to tax big business out of existence rather than attempt its 

The last chain-store tax to be brought before the Supreme Court 
involved the Louisiana law. This law differed from those of other 
States in that the graduated tax was based on the total number of 
stores operated by the chain, regardless of whether they were located 
in Louisiana or not. Obviously such a law would fall very heavily 
upon large chains with stores in all parts of the country. If a number 
of other States were to enact similar laws it is evident that the tax 
burden on such chains would be unbearable. 

In a case brought before the Supreme Court by the Great Atlantic 
& Pacific Tea Co., the Louisiana law was nevertheless held to be 
constitutional.^® The Court based its decision on the fact that the 
operating advantages of a chain increase with an increase in the 
number of its stores. The decision turned on virtually the same point 
as that made in upholding the Indiana law in 1931; namely, that 
chains may properly have special taxes levied against them because 
they are able to pay the tax. Nowhere does the Court seem to 
recognize that consumers nlay be adversely affected by penalizing 
what it admits is the more efficient system of retail distribution. 

" United States Reports, vol. 301, No. 652. 


In the preceding chapters we have sought to describe the character 
of large-scale organization in the food industries and to evaluate its 
economic significance. The nature of our undertaking has made it 
necessary to include a wide variety of topics and to present a rather 
voluminous body of factual material. In the few remaining pages, 
we shall try to recapitulate briefly our conclusions, and to focus 
attention on some of the main issues which are involved. 

Some of these .issues obviously transcend what is usually thought 
of as the field of economics. The problem of mass distribution has its 
broad social aspects as well as its economic ones. For many people, 
economic individualism and^ small-scale enterprise have a value in 
themselves, apart from any purely economic considerations. Other 
people are inclined to emphasize considerations of the latter kind, and 
to create for themselves a different set of social values more nearly 
in conformity with modern economic tendencies. Needless to say, 
each of us is likely to settle such matters in his own mind on the basis 
of predilections and opinions to which no objective tests or standards 
can be applied. 

Large-scale oi^anization has long since been accepted as a fait 
accompli in many parts of the economy, but it has not been so accepted 
in food distribution. As we saw in the last chapter, public policy has 
sought — and still seeks — to preserve older business patterns in this 
field by the enactment of various legislative measures designed to 
penalize and limit the growth of mass distribution. 

In the opinion of the writer, such a policy is both impracticable 
and unwise. If our analysis of the matter is correct, mass distribution 
has advantages from the standpoint of reducing food costs which are 
clear and incontrovertible. It is, moreover, no less a product of the 
times than is large-scale organization in other fields. Basic to this 
trend in all parts of the economy have been technological changes and 
innovations which make this form of business enterprise all but 
inevitable if we are to maintain our present mode and standard of 
living. This is not to imply that all corporate developments in the 
food industries can be explained or justified on the basis of technologi- 
cal factors alone. But to overlook them is to miss the underlying 
cause of what is happening. 

Some form of large-scale organization is clearly needed if we are to 
have anything approaching maximum efficiency in the handling of 
food products. The best use of modem food-processing technique 
require>s larger plant units than those of 30 or even 20 years ago. 
Innovations m.ade in food distribution are even more important than 
those made in food processing. The outstanding feature of mass dis- 
tribution is the integration of successive marketing functions within 
a single firm. If the objective is to reduce selling costs, there are 



obvious advantages in reducing by moans of vertical integration the 
number of buying and selling transactions necessary to move goods 
along in the m.arketing channels. 

The most likely place to effect significant savijigs in food distribu- 
tion is in the field of retailing. The retail margin is usually the largest 
single elero.ent in the cost of food distribution, and often it is larger 
than all other transportation and ro.arketing costs combined. Be- 
cause their' operations have been primarily in this phase of distribu- 
tion, the innovations m.ade by the grocery chains probably have 
been more important from the standpoint of reducing food costs 
than those made by othf^r types of large-scale food concerns. 

Marketmg: costs are high partly because of the duplication of serv- 
ices and facilities arising out of com.petition itself. This is true in all 
phases of food distribution, but particularly, in the field of i-etailing 
where the num.ber of grocery stores has multiplied out of all propor- 
tion to the needs of the public. Unnecessary facilities of 
this kind m.ust result either in wider m.argins than would otherwise 
be the case, or in lower rates of compensation to the labor and capital 
used in m.arketing enterprises. The present situation in the food 
industries appears to have som.e elements of both. 

Interwoven with the growth of large-scale oro:anization is the prob- 
lem, of m.onopolistic control. Obviously it avails the public no tiling- 
if the advantages of m.ass distribution from the standpoint of efficiency 
are diverted to the selfish purposes of proprietary groups. It is not 
enough that large-scale organization be able to efl'ectuate economies in 
food distribution, these econom.ies must also be reflected in narrowed 
marketing spreads either through the pressure of competition or 
some form of public control. 

The criteria com.m.only used by the Federal Trade Com.m.ission and 
the courts for proving the existence of monopoly are (1) concentration 
of control, (2) profits, and (3) price policies. 

Despite the tremendous growth of food corporations in recent years, 
concentration of control in this field does not approach that found in 
m.any other parts of the economy. Concentration of control in itself 
may be irrelevant to the real problem of monopoly— which, of course, 
lies in the limitation of output below (or a raising of prices above) 
what would obtain under com.petitive conditions. But insofar as 
economic centralization is. used as the criterion of monopoly, not many 
of the food industries can be singled out for indictm.ent on these 
grounds without also indicting m.any other industries. 

Many of the large food concerns, and particularly the grocery 
chains, make a higher-than-average rate of return on invested capital. 
It would be wrong, however, to conclude from this that these concerns 
are monopolistic in the usual meaning of the term. Their profits 
have been high not because they have been able to manipulate food 
prices and margins, but mainly because they have had operating 
advantages over the regular marketing channels. Profits of the large 
food concerns were showing a tendency to decline even before the 
depression of 1930. There are several reasons for this, chief of which 
appears to have been more intense competition between the large 
firms themselves, which have been able to match each other in operat- 
ing efficiency. 


Monopoly becomes injurious to the public when it results in higher 
prices and wider margins than would otherwise prevail. Yet curi- 
ously enough, the charge usually made against the mass distributors 
is not that they have raised food prices, but that they have unduly 
reduced them. It may be true that tliis is uijurious to other types of 
handlers and in some cases eveji unfair to them. But the public 
interest in the matter should not be confused with that of any par- 
ticular groups of private enterprisers. 

Large-scale organization in the food industries has not been without 
certain ofTsetting disadvantages and abuses from the public stand- 
point. Investigations made by the Federal Trade Commission and 
other governmental agencies have shown instances of unfair and 
even illegal operations on the part of some of the big food corporations. 
Financial manipulation and overcapitalization of assets have demon- 
strably accompanied some of the corporate expansion in this field. 
Moreover, some of the acquisitions and mergers of large food concerns 
appear to have had no basis in greater operating efficiency, and were 
obviously entered into for reasons of bargaining advantage. Neither 
the writer nor anyone else can say how important abuses of this kind 
have been in terms of dollars and cents to consumers. 

This brmgs us to the question of public regulation and control. 
The writer is not insensible fo the danger of uncontrolled private 
monopoly. "VMien such a situation develops, one of two general 
courses are open; either an attempt to restore competition ])y the 
dissolution of the monopolistic elements, or some foi-m of govern- 
mental regulation — maybe even operation — of the marketing func- 
tions which are monopolized. Which of these two general courses 
should be followed will depend on the special circumstances surround- 
ing each case. WTiere there are no clear and attainable economies in 
large-scale organization, the preservation of competition is the easier 
and perhaps the better course. Otherwise, public policy should go 
in the direction of control rather than the dissolution of big business. 

Admittedly, public regulation is inherently difficult, often ineffec- 
tive, and sometimes corrupt. But where competition breaks down 
or fails to produce a proper balance, there is no other alternative. A 
wrong-headed policy cannot be defended on the grounds that it is the 
easier course to pursue. 

We have not yet reached the point in most of the food industries 
where competition has seriously broken down. It is being questioned, 
however, in a few lines, notably fluid milk distribution. It is not 
without significance that a grov/ing number of people are beginning to 
think in terms of public utility status for this industry. 

Those who look with disfavor on mass distributon may agree with 
all we have just said, but nevertheless may oppose it on other grounds. 
Many Americans have an admitted antipathy toward big business. 
Part of this stems from a reasonable fear of imcon trolled private 
monopoly, but over and above this is a feeling that somehow it is 
alien to our social and economic traditions. Usually we cling to old 
economic patterns long after they have become outmoded, even at 
some sacrifice of material well-being. Few of us would be willing to 
give up the automobile to restore the position of the blacksmith or 
the carriage-maker; but many gladly would make lesser sacrifices for 
the small businessman in other fields. 


There is a tendency among us to idealize nineteenth century business 
patterns. Usually this is done on the assumption that they made for 
flexibte prices, reasonable efficiency, and proprietary satisfaction. But 
let us look a little more closely at these things. 

The nearest thing we ever have had to monopoly in grocery retailing, 
for example, was the old village grocery store. The prices which it 
charged were not elastic and usually not very competitive until the 
automobile made them so. 

So much sentiment is shown for the preservation of what is called 
individualism that it becomes pertinent to inquire why and for whom. 
To the wage earner it is largely a matter of indifference whether his 
employer is a large enterpriser or a small one. He has no great amount 
of economic security in either case. So far as wages and hours are 
concerned we have seen that, in the food industries at least, it is 
usually the large firms rather than the small ones which pay the higher 
wages. This is not because the big corporations are more open-handed 
with respect to labor but because the scale of their operations affords 
labor a better chance to organize and because big firms often have 
economic advantages which enable them to pay higher wages than 
their smaller competitors. 

Many small firms are able to stay in competition with the mass 
distributor only because their proprietors and employees are willing to 
work long hours and at relatively low rates of pay. As we repeatedly 
have said, this respresents economic tenacity rather than economic 
efficiency. Carried to the extreme, it sometimes results in "sweat- 
shop" conditions for which there can be no justification in these times. 
It is, of course, an individual's right to "sweat" himself in his own 
enterprise, but when this is done it must be set against whatever 
satisfactions there may be in individual proprietorship. 



The theory of monopoly (and monopolistic competition) has been 
developed mainly for firms engaged in the sam.e type of enterprise. 
The assumption is tacitly made either that such firms combine all the 
functions of producing and marketing the commodity involved, or 
that they represent the only monopolistic element in an otherwise 
competitive chain of operations. Actually, however, monopolistic 
control may be exercised at more than one point in this chain of opera- 
tions, a situation commonly referred to as one of bilateral monopoly. 
When this occurs, it is demonstrable on the basis of theory that the 
outcome will be far different from — and in some respects may be the 
reverse of — that which would obtain under conditions of simple 

As an hypothetical example of bilateral monopoly, we may take 
the case of two firms, one having complete control of the processing 
of a food product and the other of its retailing. For simplicity it ^.n. 
be assumed that no other handling operations are involved, or that if 
they are involved, they would be competitive. 

To illustrate the first principle which would govern the outcome in 
such a situation, it will be convenient to refer to diagram I in chart XV. 
In this diagram, D'D' has been derived from the consumers' demand 
curve by the deduction of the retailing costs, and similarly SS repre- 
sents the farm supply curve plus the unit costs of processing the pror 
duct. Equilibrium under competition w^ould, of course, obtain at 
point P, with quantity OQ produced and offered to consumers. If 
either processing or retailing were monopolized while the other re- 
mained competitive, equilibrium would come at point P', with the 
supply (OQ') now equal to half that under competition. 

Suppose now that separate and independent monopolies developed 
in each field. The m.ost profitable policy for both, assuming that 
they could hit upon som.e method of dividing the total quantity of 
monopoly profit !o be derived, would be to offer quantity OQ'. This 
is, of course, the same outcome as that under single m.onopoly. 

But it is quite improbable that the monopolists would be able to 
agree on how to divide this total profit. Jockeying between them 
would almost certainly develop, each trying to obtain a larger share 
of the profit by widening his profit margin per unit. To see what, 
would happen now, let us turn again to diagram I. 

We may start by assuming that the processor is first in the field 
vrith his monopoly, in which case he is offering a supply of OQ' to 
competitive retailers at a price of Q'P'. All the monopoly profits 
are his. But now some firm contrives to get control of retailing. 

' Of. ch. vrn, pp. 84-85. The writer is indebted to Mr. R. O. Been, of the Bureau of Agricultural 
Economics, formapy helpful suggestions in the preparation of this appendix. 




Obviously the retail monopolist will not permit equilibrimn at point 
F\ since this would leave him nothing above his actual costs of doing 

On the expectation that the processor will ro.ainta)n his price at 
Q'PS the retailer will put his margin above his costs equal to P^p', 
which will maximize his total profit under the given conditions. 

Chart XV 

Diagrams illustrating the effect of successive monopoly (oiie monopolist ahove the 


Slagreia I 

In no event woxxld the food supply 
te larger under successive monopoi; 
than under single monopoly, ar.d It 
would probably b-' much smaller 
(diagram I) . 


DiagrwB II 

The greater the numt'sr of successive 
monopolists Aud t)i5 less tbsy son- 
spire together to lacreaea their 
contlned pro'lt, the worse will be 
the plight of faraerg ead coasoaers 
(diesraas II, III, XT). 


Olagram III 

But see to what this leads: Supply will be restricted to OQ [half 
that under single monopoly and only one-fourth that of corapotition, 
using straight-line relationships as has been done in this diagram 
(with curvilinear relationships, the results would be qualitatively the 
same, however)]. Clearly everyone is worse off than before, except 


the retail monopolist who now has some monopoly profit represented 
by ABP^p- in the diagram I. 

The unfortunate result just demonstrated is not changed in principle 
by ditlerent assumptions which either monopolist might make as to 
the price policy of the other. Suppose that the processor, after seeing 
what happened when he tried to maintain a price of QT^ decided to 
lower it soniewhat, the retailer now making his profit margin P^p^. 
This will result in slightly larger supplies and everyone is better off 
than before, but supply is still more restricted than it would have 
been under single monopoly. 

We have now defined the limits within which the supplj'- will vary, 
depending on the policies of the two monopolists. But we do not need 
to (Irop the ro.atter here. If the two monopolists act independently of 
each other, there appears to be a determinate solution from which 
neither monopolist would find it to his advantage to deviate. O;- 
rather there are several determinate solutions, depending on the 
particular assum.ptions made. 

These determinate solutions are dcm.onstrated in diagrams II and 
III of Chart XV. It is assumed in diagram II that the processor 
fixes a price to which the retailer adjusts; and in diagram. Ill, that 
the processor adjusts to the retailer's price. The solution in both 
cases involves the use of m.arginal revenue (MR) and m.arginal cost 
(MC) curves. In both diagrams, equilibrium under single monopoly 
will result in a supply of OQS since it is here that marginal cost is 
equal to marginal revenue for the monopolist. 

AVhen the second monopolist (the retailer) onto the scene he 
will presumably find the processor selling at a price of Q'P' (diagram 
II). The retailer would then tiy to maxijuize his profit by fixing his 
profit margin at P^p^ (where his marginal revenue as described by 
MR is just equal to the price of Q'P^ fixed by the processor). Supply 
is then lim.ited to 0Q-, which, as we have already seen, is the lower 
limit of restriction for tvvo successive m.onopolists. 

The processor will now find it to his advantage to lower his price 
slightly so as to increase his total profit. This he would do imtil final 
equilibrium would result in a supply of 0Q\- From this point it 
will not pay the processor to deviate, since here his m.arginal cost 
will equate the return which he can expect from the retail m.onopolist. 

If it is assum.ed that the retailer fixes the price to which the processor 
m.ust adjust, the solution is that shown in diagram III. The proces- 
sor, being a m.onopolist, will adjust his operations so as to offer varying 
quantities of sujjpl}' at prices described by his m.arginal cost curve 
(MC). The m.arginal cost of the product to the retailer is then shown 
by M'C, wliich is derived from. MC as MC was from SS. The retailer 
will thus seek equilibrium at the point where his marginal return 
equates M'C\ whicli in diagram III results in a supply of OQ*. 

The outcome so far as farm.ers and consum.ors are concerned is 
about the sam.e in diagram. II as ui diagram III, and it would have 
been exactly the sam.e if the slopes of D'D^ and SS had been equal in 
both cases. The effect on the monopolists themselves, however, is 

' The solution i.s obtained as follows: Since the processor is selling to a retail monopolist instead of com- 
petitive retailers, the price which the processor could obtain for varying quantities of supply is described 
by MR rather than by D'l)'. The line which describes the marginal revenue for the processor is thus 
represented by .M'pi (which is derived from MR in the same way that MR was derived from D'D'). With 
MiR' representing his marginal revenue and MC his marginal cost, the processor will eo.uate the two at a 
point where the supoly is OQ^, the price chareed bv the processor is Q'p', and the retailer's unit profit is 


vastly different. When the processor was assumed to fix the price 
to which' the retailer was forced to adjust (diagram II), the retailer 
got only a small part of the monopoly profit; but when the assumption 
was reversed (diagram III), it was the processor who got the lesser 

Instead of assuming that the monopolists fix the prices at which 
they buy and sell to each other, it might be assumed that they fix their 
margins. In this case the equilibrium outcome would be slightly 
different from the one we have described above, but the basic principle 
would be the same. 


We pass now to the case of three or more successive monopolists, one 
above the other. The principles according to which the outcome 
is finally determined are much the same as those we have just deduced 
for the case of two successive monopolists, except that supply is almost 
certain to be limited even further. 

The solution for three or more successive monopolists is shown in 
diagram IV. Again we use marginal revenue and marginal cost 
curves, as in diagrams II and III. As we have shown, equilibrium 
for a single monopolist would give a supply of OQ^ If a second 
monopolist enters the picture, supply will be further limited to OQ.^ 

Now suppose we introduce a third monopolist. In order to get some 
share of the profit, the third monopolist will increase his margin and in 
doing so he will tend to limit supply still further. He will not get much 
profit because, according to our assumption, he must operate within 
the restricted limits of supply left to him by the first two monopolists. 
The final outcome for three monopolists as shown in diagram IV will 
find supply limited to OQ^ (or thereabouts, depending on the relative 
slopes of consumer demand and suppl}^ costs). 

On the assumption that the first monopolist fixes a price to the 
second monopolist, and the second to the third, the third monopolist 
will get the least profit. The advantage among the monopolists would 
be reversed (as we have shown in diagrams II and III) if the fixing of 
price ran in the opposite direction. 

The saipe sort of solution could be shown for any number of succes- 
sive monopolists, with the situation becoming progressively worse for 
farmers and consumers as more monopolists managed to insert them- 
selves into the marketing system. 


It may be objected that the assumption of complete monopoly at 
successive stages in the marketing system is very unrealistic and so it 
is. But so, for that matter, is the usual text-book assumption of 
horizontal n onopoly. 

The highly restrictive tendency of successive monopoly would be 
modified, but not changed in principle, by assumption of monopolistic 
competition rather than of complete monopoly in any or all of the 
marketing functions. 

Suppose, in our earlier example, that retailing were carried on under 
conditions of monopolistic competition. The retail margin would then 
be determined in accordance with the principles of ordinary oligopoly, 



which means that it would vary from that of competition to that of 
complete monopoly, depending on the assumptions each firm made as 
to the effect of its actions on the others. Similarly the processing 
function might also be only partially monopolistic, which would lead 
to a further modification of the outcome. Under these conditions 
supply might be less restricted than under complete monopoly in 
each function, but more restricted than if the oligopolists were ver- 
tically integrated. 


The solutions shown for successive monopoly are vastly difl'erent 
from those demonstrated by Chamberlin and others for horizontal 
monopoly and monopolistic competition. Those familiar with the 
main outlines of theory will recall that under ohgopoly the outcome as 
to price and supply will vary from that of monopoly to that of pure 
competition, depending on the assumption each firm makes as to the 
effect of its policies on those of its competitors. It is unnecessary for 
our present purpose to go into the various refinements of this principle. 
Its import for us here is that in no event would the public be worse off 
under oligopoly than under complete monopoly, and that in most 
cases it would fare much better. 

But if our analysis of the matter is correct, the reverse is true for 
successive monopolists. Two or more monopolists, one above the 
other, would never provide as many goods and services as a single 
monopolist combining all their operations. And what at first seems 
even more of a paradox, the public would be helped rather than harmed 
by the conspiring of the monopolists to increase the amount of their 
combined profits. 

2070(1^-41— No 35 12 


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Baum, H. A., and others; A Symposium of New Trends in Food Distribution 
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Baxter, W. J.; Chain-store Distribution and Management (Harper & Bros., New 
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Becker, Samuel and Hess, Robt.; The Chain-Store License Tax and the Four- 
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Berle, A., and Means, Gardiner; The Modern Corporation and Private Property 
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Berle, A. A.; Confidential Memorandum to the Congressional Monopoly Investi- 
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Bjorklund, E., and Pahner, J. L.; A Study of Prices of Chain and Independent 
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Black, John D.; Production Economics, especially part IV (Henry Holt & Co., 
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Black, J. D., and Price, H. B.; Cooperative Central Marketing Organization 
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Brinkmeyer, Aloys ; Die Preisgestaltung auf dem Brotmarkt (Berlin Verlagsbuch- 
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Bureau of Agricultural Economics; The Direct Marketing of Hogs (U. S. Dept. 
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Burns, A. R.; The Decline of Competition: A Study of the Evolution of Anlerican 
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Carter, George; The Tendency Toward Industrial Combination. 

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Chamberlin, Edward; The Theory of Monopolistic Competition (Harvard Uni- 
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Clark, J. M.; Studies in the Ecrnomics of Overhead Costs (University of Chicago 
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Clark, Victor; History of Manufactures in the United States, 1607-1860 (Pub- 
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Converse, Paul D.; Prices and Services of Chains and Independent Stores (Journal 
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Copeland, M. T.; Present Day Problems of Distribution (Harvard Business 
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Copeland, M. T.; The Present Status of the Wholesale Trade (Harvard Business 
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Copeland, M. T.; Recent Economic Changes in the United States, chapter V, 
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Crow, W. C; Wholesale Markets for Fruits and Vegetables in 40 Cities (U. S, 
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Deming, A. S.; A Statistical Test of the Success of Consolidation (Quarterly 
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Engle, Nathanael Howard; Competitive Forces in the Wholesale Marketing of 
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Engle, Natlianael Howard ; Economic Phases of the Wholesale Market (American 
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Federal Tr&de Commission: 

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Chain Store Inquiry (U. S. Gov't Printing Office, Washington, D. C, 1933). 
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Gordon, Robt. A.: Ownership by Management and Control Groups in the Large 

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Bull. No. 94, Chain Store Expenses and Profits, an interim report for 1932. 
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Hoffman, A. C, and Bevan, L. A.: Chain-Store Distribution of Fruits and 

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ADVERTISING: Chain-store economies in 48,67,71-72 

ALLOWANCES. See Discounts. 




Development of 6-9 

Integration in 12 



Administrative 21-22, 47, 49, 90-92, 104, 107-110, 150-151 

Legislative. See Sherman Act; Robinson-Patman Act; Clayton Act; 
State price-maintenance laws; State chain-store taxes; Public policy. 


ARMOUR & CO 15-23,33,35,36,107 


Court cases against 150-151, 156 

Dairy products, leading distributor of 35, 36 

Development of 5-9 

Efficiency of 68 

Fruit and vegetable distribution i 54 

Integration, vertical, in (see also Robinson-Patman Act) 11-14 

Louisiana chain-store tax and 156 



Concentration of control in, compared with that in other industries . . 90 

Flour Mills and, bilateral monopoly 84 

Profits in 97-98 


BEEF. See Meat packing. 

BIDDLE PURCHASING CO., court case against 150 

BIG BUSINESS (see also Concentration; Monopoly; Chain stores; etc.): 

Historical 1-3 

Public policy and 1 57-160 



BORDEN DAIRY CO 25-28,35,36,125,127 


Fruit and vegetable distribution in 12 

Milk distribution in 35 

BREAD. See Baking. 
BROKERS. See Middlemen; Wholesalisg. 
BUTTER. See Dairv products. 

Chains' 103-107 

Meat packers' 107-1 1 1 

CALIFORNIA: Price-maintenance legislation in 152-153 


CANNING: Fruits and vegetables ._ 51-53,90,97-98, 116-119 

CARNATION CO 25,29,35,36 

CARTAGE. See Transportation. 
CASEIN. See Dairv products. 

CEREALS (see aiso Baking) . 55, 116-119, 132-435 


Advertising, savings in , 48, 67, 71-72 

Bakeries of 6, 11-12,47-48 

Buying policies of _ 103-107 


170 INDEX 

CHAIN STORES— Continued. Page 

Cooperative, importance of 9-10 

Corporate, development of 5-9 

Supermarkets, use of 10-1 1 

Dairy products and: 

Distribution 12, 29 

Processing 6, 11-12, 29-30, 35-36, 126 

Disadvantages of 65-66 

Discounts received by 104-107 

Efficiency of 60-75 

General discussion of 5-14 

Independents versus 59-75 

Integration, vertical, in 11-14 

Legislation a " ainst ^ ^. 148-1 56 

Local, imporcance of 8-9 

Margins of 62-63,99-100, 101-105, 114-116 

Prices of (see also Price-maintenance laws) 60-62, 70-71, 101-103 

Profits of 95-100 

Types of 5 

Wholesaling by. See Wholesaling. 

CHAMPAIGN-URBANA, ILL.: Food prices in 61 


CHEESE. See Dairy products. 

CHICAGO: Food prices in ._ 62 


CINCINNATI: Food prices in 61, 102, 105 

CLAYTON ACT - 146, 149 

COMBINATIONS {see also Integration, vertical): 

Bakers' . 45-47 

Causes of . 2, 22-23, 38, 45, 57 

Flour millers' 39^-44 

Meat packers' 21-23 



Characteristics of 79-80 

Combination, a basis for 2, 22 

Flour millers' 43-44 

Meat-packing, result of overexpansion in 22-23 

Preservation of. See Antitrust activities, governmental. 

Restraint of (see also chain stores, legislation against) 22, 32, 43-45 

Waste in 59 

CONCENTRATION OF CONTROL (see aiso Combinations; Integration, 
vettical; Monopoly): 

As a criterion of monopoly.. 87-92, 158 

In food and other industries 89-90, 158 

CONSOLIDATIONS. See Combinations. 



CONTROL, CONCENTRATION OF. See Concentration of control. 


Chain grocery 9-10 

Dairy-products , r 30-34 



Reduction of, by large-scale marketing 23, 59-75, 80-81 

Retailing. See Retailing. 
Transportation. See Transportation. 
Wholesaling. See Wholesaling. 


Monopoly concepts of 86,87-88,91-92, 155 

Public policy o^ monopoly determined by 146-147, 150-151 

CREAM. See Dairy products. 

CUDAHY PACKING CO _. 15-23, 107 


INDEX 17^ 


Chain stores and 6, 11-12, 35-36 

Concentration of control in, compared with that in other industries.. 90 

Large-scale organizations in, growth and importance of 25-36 

Meat packers and . 16, 23, 35-36 

Monopolistic organizations ii 84-85 

Patent controls in 121-128 

Profits in industry of 97-100 

Dairy Products Cofporation. 

DETROIT: Food prices in 61, 102, 105 


DISCOUNTS AND ALLOWANCES in buving 104r-107 

DISTRIBUTION {see also Chain-stores; Wholesaling; Retailing; and 
names of various commodities) : 

Costs of, basis for combinations 22-23, 57, 67-70, 157-160 

Frozen foods and, basis of competitive advantage 131-132 

DOMINANT FIRM: Eflfects on price and supply 84 

DUPLICATIONS in marketing 1 74r-75 

EFFICIENCY in marketing (see also Costs; Advertising) 59-75, 157-160 

EXPENSES. See Costs. 


FARMERS: Response to price changes 78, 113-114, 116-117 


Activities to prevent restraint of trade. 22, 47, 49, 91, 104, 107-110, 150-151 

Criteria of restraint of trade > 90^92 


Development of 6-9 

Integration in 1 1-1 4 

FISH: Freezing of .... 128-129 

FLORIDA: Chain-store tax case 155 


Bakers and, bilateral monopoly 84 

Concentration of control, compared with that of other industries 90 

Patents in ■. 135-138 

Profits in 97-98 

FREEZING OF FOOD: Patent controlin 128-132 

FREIGHT. See Transportation. 

Fresh, distribution of 12-13, 53-54, 70, 73-74 

Frozen 128-129 

Canned 51-53,90,97-98 


GENERAL FOODS CORPORATION . 55-57,130-132,139 



GOVERNMENT. See Antitrust activities, governmental; Public policv. 
GREAT ATLANTIC & PACIFIC TEA CO. See Atlantic & Pacific Tea 
Co., Great. 


HAMMOND CO., G. H . 21 

HOLDING COMPANIES: Meat packers' - 21 

INDEPENDENT STORES (see also Chain stores) chains versus.. 59-75, 101-103 
INTEGRATION, HORIZONTAL. See Pools; Combinations. 

Amount of 11-14 

Beginnings of 6 

Causes of .; 14 

Cooperatives in 9 

Efficiency of 65-74, 157-158 

Meat packing, in - •.. 1^20 

INVENTIONS. See Technology. 



KANSAS CITY: Baking industry in 45-46 

KELLOGG CO 133-135 

172 INDEX 



Development of . 6-9 

Fruit and vegetable distribution 54 

Integration in 1)-14 


Efficiency in chains 63, 67-69 

Wages paid by chains and independents 63-65 


LEGISLATION. See Antitrust activities, governmental; Public policy. 

LEXINGTON, KY.: Food prices in 62 

LIBBY, McNeill & LIBBY 51-53 


loose-wiles biscuit CO 49 

LOUISIANA: Chain store tax case 154, 156 

MANAGEMENT: Efficiency of, in chains and independent stores 65-66 

MANUFACTURING. See Processing. 

MARGINS (see also Costs; Efficiency in marketing) 62-63, 

99-100. 101-1Q5, 109, 114-116 

MEAT PACKING . . 1&-23 

Buying and selling policies in 107-111 

Combinations in 20-22 

Concentration in, compared with that jn other industries 90 

"Consent Decree" in 22 

Dairy products, distribution of, by packers 16, 23, 35 

Freezing, use of 128-129 

Integration in: 

Causes of 22-23 

Extent of 15-19 

Vertical 19-20 

Interior plants in ^ 16-19, 73 

Patents in 138-139 

Profits in 97-100 

Small packers 15, 17 

Wholesaling by packers. See Wholesaling. 

MEMPHIS: Food prices in 61, 102, 105 

MERGERS. See Combinations. 

Integration, effects of, on , 12, 19-20, /3 

Robinson-Patman Act and 151 

MILK PRODUCTS. -See Dairy products. 

MINNESOTA: Dairy products, distribution of 32-34 



MONOPOLY (see also Competition; Combinations; Antitrust activities, 
governmental) : 

Concepts, criteria, and operation of 77-88,90-92, 158, 161-165 

Public policy and 157-160 

MORRIS & CO 15,21,107 




Baking industry in 45-46 

Cartage costs of vegetables in 70 

Fruit and vegetable distribution in 12-13, 70 

Milk distributors in 27 

NEW YORK STATE: Milk distribution in 30-32 

OLIGOPOLY. See Monopoly. 


PASTEURIZING: Patent controls in 122-123 

PATENTS, control of 55-56, 121-143 

PET MILK CO 25,29,35,36,125 


Baking industry in 45 

Costs of food distribution in 68 

Fruit and vegetable distribution in 12 

INDEX 173 


PHOEXIX, ARIZ.: Milk distribution in 35 



Meat packers' 20-21 

Patent 141 

PORK. See Meat packing. 

POSTUM CEREAL CO 55,135,139 

POULTRY: Freezing of 129 

PRESERVATION OF FOOD (see also Canning; Freezing; Refrigeration): 

Patents in canning industry 139 



Chains t;s. independents 60-62, 101-103 

Discrimination in. See Robinson-Patman Act. 

Flexibility of 70-71, 113-119, 151 

Leadership in (dominant firms) 81-84 

Maintenance of. See Competition, restraint of; Robinson-Patman 
Act; Price-maintenance laws. 

Monopoly 77-88, 161-165 


Baking 44-49 

Canning.. 51-53, 97-98, 116-119 

Chain-store 6, 11-14 

Dairv products 25-36 

Flour milling 37-44 

Meat packing 15-23 

Patents in 55-56, 121-143 


Food corporations' 93-100 

Importance in marketing spreads 99-100 

Monopoly, a criterion of 87-88, 93, 158 

PUBLIC POLICY (see also Antitrust actiyities, goyernmental; Courts; 
Monopfjly; Patents; Prices): 

Food industry and monopoly in ■ 157-158 




REFRIGERATION (see also Freezing) : 

"Big business," a basis of 15, 23 

Meat packing, basis oflarge units in 15, 23, 138 


RETAILING (see also Chain stores) ; 

Concentration of control in -- 89-90 

Costs of 59-66,69-72, 158 

Mass, deyelopment of 5-14 

Meat packers' desire to enter 22, 72, 111 

Prices in. See Prices. 

Stores, number of 74-75 

ROBINSON-PATMAN ACT 107, 145, 148-152 


Deyelopment of • 6-9 

Fruit and yegetable distribution 54 

Integration in 11-14 


Baking industry in 45 

Milk distribution in 35 

SAN DIEGO, CALIF.: Milk distribution in 35-36 


Federal Trade Commission's criteria of y iolation of 90-92 

Meat packers' part in passage of 21 

Policy in "145-148 



STANDARD BRANDS, INC 55-57,139-140 



174 INDEX 





SUPERMARKETS 10-11, 153 


Conditions of, in food industries 77-79, 113, 116-119 

Monopoly, characteristics of 80-88 

SWIFT & CO 15-23,35,36,53,107-108 


Big business, a basis of _. ^-4, 15, 37-38, 55, 157-158 

Flour-milling, basis of large units in 37-38 

Meat packing, basis of large units in_^ 15 

Special food products, basis of large units in manufacture of _ - 55 

TEXAS: Chain-store tax in ' 154 


TRANSPORTATION, costs of : 70 


Direct marketing, a basis of 73 

Smaller plants in meat packing, basis of 17, 110 



VERTICAL INTEGRATION. See Integration, vertical. 

WAGE'S: Chains vs. independent stores 63-65 



Baking industry in 45 

Food prices, chain vs. independents, in 61, l02, 105 



Chain stores and. _ . 6, 9-14, 47, 54, 65-69, 71-72, 103-107, 110-111, 150-152 

Costs of - 23, 65-69, 71-74 

Dairy companies m 29, 33-35 

Fruits and ^ eget£.bles 12-13, 53-54 

Meat packers in .- 16, 19-20,22-23,33-36,69,73,110 

, Prices' in 114 

WILSON & CO -- 15-23, 107 

WISCONSIN: Dairy products, distribution of_.. 32-34 



3 9999 



927 4