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BOSTON PUBLIC LIBRARY 




3 9999 06317 576 2 \%^\.l i\\x 

OFFICE OF NATIONAL RECOVERY ADMINISTRATION 



DIVISION OF REVIEW 



PRICE CONTROL IN THE COFFEE INDUSTRY 

By 
Harry S. Kantor 



WORK MATERIALS NO. 55 



TRADE PRACTICE STUDIES SECTION 
March, 1936 



.OliTICZ OF ILlTIOriiUj raCOAK.ir/ ADHI]}TISTRA.TIOiM 
DIVISION OF IIEVIEW 



PRICE COrTSOL 111 TIO COFFEE INDUSTRY 
Harry S. Kantor 



TRADE PRACTICE STUDIES SECTIOiT 
liARCH, 1936 



9792 



FORSWOZD 

This study of price control in the coffee industry was 
prepared by Hr. Harry S. Kantor, of the Trade Practice Studies 
Section llr. Cornin D. Edwards in charge. 

The report is "based primarily upon price filings and 
correspondence in the files of The Associated Coffee Indus- 
tries of Ar.erica, and \ipon interviev/s with members of the 
association and with certain producers in the industry. 
Fron these sources, and to some extent from materials in the 
IIPA files, the report presents a description of the market 
structure of the industr3'', the relative status of large and 
snail enterprises, the character of competitive conditions 
before the code, the strategic significance of the kind of 
price control adopted, end the extent of the control which 
was made actually effective. Acknowledgment is made of the 
contribution by T. P. Fitzgibbons, author of Chapter V, 
Section c, entiti.ed "The Cost Form\ila". 

At the bacc of the report will be foimd a brief state- 
ment of the studies u'n.dertaken by the Division of Review, 

L. C, Marshall 
Director, Division of Review 

Llarch 11, 1936 



9792 -i- 



TABLE OF CONTMTS 

Page 

Sunmary Statement of tlie Problem 1 

I. Tlie l-jp.ture and Cr;"anizs.tion of tlie Industry 5 

II. 'The Demaxid for tlie Product 11 

III . Tlie Cost Structure of tlie Industry 14 

IV. Competitive Conditions at tLe Time of Code Formulation .... 18 

v. Tlie Price Controls 19 

A. Discounts and Allowances 19 

3. Destructive Price Cutting and Sale 3elov/ Cost 21 

C. Tlie Cost Formula 23 

(1) i.Iinimura price Proposal as Originally Presented ... 23 

(2) Interests and Description of Proponents 23 

(3) Opponents 24 

(4) Development, Presentation and Approval of tlie 

Co st Fonmla 24 

(5) Analysis of Controversial Features of the Cost 

Formula '. 28 

VI. The Administration of the Price Controls 31 

A. Price Filing under the Code 31 

B. Sale Below Cost and Destructive Price Cutting 37 

C . I.ii sh rsiiding 39 

D. Inter-Code 3ela.tionsl.ips 39 

E. Sunmary of Effects of Code Operation 41 



- 11 - 



9792 



-PRICE CONTROL IN THE COFFEE iNDUSTRY- 
SUI.ilAF.Y STATEl.GNT OF THE PROBLEM. (*) 



The provisions iDrohibiting sale belov.' cost and destructive 
price cutting, and such other nrovisions in the Code as were re- 
quired to administer these restraints on -orice competition were the 
essential trade practice features of the code for the coffee in-' 
dustry.. . The su-oporting provisions included: (l) the formulation of 
a cost system prescribing the manner in which cost items were to be 
com-Quted; (2) the requirement thst all members of the Industry file 
their prices rjid terms of sale; and io) the prohibition or restric- 
tion of trade practices involving indirect pr^-ce concessions — such 
as gifts or loans of equipment, free deals, unearned allowances,' 
etc. These provisions were devised in order to mal;;e the knowledge . 
of price as definite as possible and in order to -orovide a uniform 
basis of. arriving at costs for the purpose of comparing cost and 
price. 

The forbidding of destructive price cutting or sa.le below cost 
may be regarded in the coffee industry as the statement of a social 
aim, namely, the protection of small enterprise. Its realization 
depended on the precision with v/hich^ a modal concept of costs was 
defined for the industry. The success of , the defj.nition is obvious- 
ly related closely to the effectiveness with which it took account 
of the distribution of the firms in the industry according to size, 
the f\inctional differentiation in the industry, thfe co-existence of 
widely- varying degrees of integration, the nature of the product, 
the forms taken in its differentiation and the resulting price 
structure,. 

The coffee industry is one in \^hich an enormous . share of the 
total business is done by a very small number of firms. Ranked 



(*) This report is based on an analysis of informp.tion de- 
rived from an inspection of code authority and NEIA, 
files relating to the coffee industry, and on the 
author's discussion of the issues with the former code 
authority managers and with a few members of the indus- 
try. All code authority records hereinafter referred 
to are located in the office of the Associated Coffee 
Industries, New York City. 

The author acknowledged indebtedness to W. F. Williamson 
and J. Rosenthal, manager and assistant manager of Asso- 
ciated Coffee Industries of America for the opportionity 
to go through the files of the industry, for giving him 
the benefit of their personal experience and knowledge 
of the industry, and for courtesies extended in the 
course of this work. 



9792. 



-2- 



according to volume, the smallest fifty percent of the firms in the 
industry do atout as much coffee iDusiness, combined, as the third 
largest firm. This concentration of business in the large firms 
had been increasing in the loeriod preceding code formulation, and 
the code appears to have been intended, in part at least, as a 
curb on the rate of its increase. 

There is a marked diversity in functions performed by coffee 
roasting companies. According to the code definition^ mere roast- 
ing of coffee is sufficient to qualify an enterprise for member- 
ship in the Industry. Some concerns actually operate on this 
limited basis: they roast coffee vrhich is delivered to their plants 
and later called for by the owners, who are ordinarily wholesale 
grocers or grocery chains. The. code, however, covered all dis- 
tributive functions "ondor taken by coffee roasters, except retail- 
ing. Chain store sales to consumers were not governed by the 
coffee code; jurisdiction of that code ceased when the coffee was 
charged out to the wholesale department by the roasting depart- 
ment. I!any firms in the industry distribute through jobbers, others 
sell direct to retailers. Mail order houses distribute their cat- 
alogues to retailers. The chain stores and wagon route companies 
sell to consumers. 

Price regulating difficulties, due to wide differences in 
degree of integration, namely, the problem of evaluating competi- 
tive effects of "orice changes in different stages of the distribu- 
tive function, were further coraplicpted by the operation of a few 
mail order houses which distributed their catalogues to retailers 
over wide areas. In 'this type of operation,, price offers for di- 
rect sale were mpde to many more retailers, tlian the mail order 
firm capacity could have supplied. The offers, nevertheless, had a 
strong influence in the price competition of the more truly effec- 
tive supply-offers. The wide distribution of mail order catalogues 
cuts across the us\ial geographic segregations in an industry in 
which there is a considerable amount of sectional or local business. 
The catalogue is an effective bargaining weapon in the hands of the 
retailer. Visiting salesmen or deliverymen are expected to meet the 
prices offered by the mail order house. 

The code permitted price cutting to meet competition, re- 
gardless of cost, Ho\7ever, a definition of competition was not 
provided, (*) Unless price lists specify the services rendered at 
stated prices, prohibition of sale below cost breaks down quickly 
under pressure of permission to meet competition. A thorough- 
going price analysis of the coffee industry might be expected to 
yield a reasonably definitive statement of the differential struc- 
ture with regard to services rendered and inter-grade competition. 



(*) Article VI, Section 18 of the Code for the Coffee 

Industry, Codes of Pair Competition, Volume VI, page 
276. 



9792. 



-3- 

Witliout sv.ch statement of relationship "between prices in the list 
of a single company and "betvyeen competing lists, argiiiients concern- 
ing the effect of a price cut at one level in the price structiire on 
prices at other points in the structure tend to "be valueless. Price 
analj^sis of the industr]' would he difficult hecause of the competition 
of gra-des and still more so because demand fxinctions would have to he 
developed for the consumer market, the retailer market, and the johher 
market. Each of these three may he e^cpected to show distinct character- 
istics. Loc&,l differences in demand would have to be considered, as 
well as freight differentials, in a study of areas reached out of each of 
the three chief ports of entry for green coffee. The stable character 
of the product and the com-oarative lack of fluctuation in total demand 
for it are in themselves factors favorable to the price analyst, but they 
necessitate an evaluation of the influence of advertising in effecting 
internal reallocation of total coffee biisiness. However, the code was 
not lomiaated upon the basis of such knov.'ledge. The problems of 
economic analysis remain un.sol-"-ed with respect to the coffee industry, 
Evaluation - however tentative - of the industry's functioning under 
the code is made with that serious lack clearly admitted. It was 
generally stated in the industry that the price war under way at the 
time of code-writing was extrem.ely severe and if it had continued 
unchecked wo-uld have been disastrous to a large proportion of the in- 
dustry.'' s members. The code provisions represent a compromise among . 
factions in the industry with respect to the desirable extent of 
price restraints and the machinery best fitted for effect-aating them • 
Some arbitrary/- elements vrere introduced into the technique whereby 
the relationship between costs in the industry and the price structiire of 
the product were to be regulated, in order to maJce the provisions accninis- 
tratively feasible. The belief is widespread in the industry that 
the operation of the code resulted in a substantial improvement in the 
condition of a great majority of the tviits in the industry, particularly 
the snail er units. 

Tliere is very little in Che record of the code-writing period 
that nay be talcen as representing e.-q)licit statements of interest in 
the several code provisions on the part of various t^'^pes of enter- 
prise. To information has been assembled dealing with costs, mar- 
gins and net returns of units differing in size and method of oper- 
ation, covering both unre.gu].ated and code periods. It is, therefore, 
impossible to present a tabxilar statement of the interest of each 
class of enterprise in the coffee industry — that is, no tables 
can be -oresented shov.'ing the costs of various kinds of operation 
and the margins of a s-of ficiently large number of firms of each t^rpe, 
in which the underlying economic facts res-^onsible for existing op- 
positions of purpose in code regulation would be evident. Further- 
more, material necessar^;- for a carefuJL analysis of the price structure 
of the industr^" is not available. 



9792 



-4t- 



Without such an analysis of costs and prices, "destructive 
price cutting" remains a vague phrase and "meeting competition" 
cannot be defined accurately. The effect of code operation 
on the raemhers of the industry and on its customers cannot be 
reduced to a simple numerical statement. The following comments 
consist largely of an analytical presentation. Tne treatment of 
opposing interests in the industry ?jid of the effects of code 
operation is largely inferential, using facts wherever found. 



9792. 



•5- 

I, THE HA.TT'Pi: AND 0EG.1NIZATIC1T OP THE iroUSTRY 

Thp Co:<^f''° Industr''' "f th^ Unit='''l. Sts.t'"^ is fn inir>orting, ■nroc'^rsin^ 
and distri"buting industry. Th^ lom;p nf 'fh^ ■oric.«=! controls Pista'Hlisli'^d 
in its cod^s of fair coiroetiti'^n' dir! n'-t, hoT7«v<^r, ora'bta,c'=^ alT th'^ coffee 
o-p°retions of th<= industr"/' s '-le^nlj^rs. In distribution, 'retail snl'^s, 
or.c^-nt those of wpgon-rout'^! conroanif^s, rT<=>r° urid»r th'^ jurisdiction of ■The 
R^itall Food and (^roc^r^r 00'"^ Sal-^s "by '•'hol'^saTfirs "ho had Tsc'/^Kt from roasters 
""=r» govprn^d "bv th=' WlioTosal^ Trpd<^ Cod'^. Th^r^* ^-ro^p ri''^ nric^ ■orovisir'ns 
affecting irroorting. The -orice of gre«n'ooff°= -as no t> ' sutjeot to code ' 
regulption, hut th^^ code riid T3r°scrihe th^ "i.anner in ^hich th'=^ cost' "of ^tee.ti''" 
coff°e vTps to he conoi.it'^d, rnenh'^rs of the industry ^-'er^ requiTed to set' ' ' ''' 
a price not l°ss than cost, ("^xcent in irie^t-ing crtnTietition) and to ihcluxie ' 
as cost th'= Code Authority's 'bi-'?'^<=W:"' "stiriate of cui^reht naricet price's/ 
for th'= sev°ral grades pf ^re'^n cof-^e*^. 

Green cDf"!'^'=' is ini'r^ort'^'-'' fr^^i -roc^ucing' c-untri^s, r!h=>iflv Brazil 
and Calorahia, Wp'- Yor^- receiy=>s aho^^t RO'I nf th'= iTrroorts, N"'^ Orlepiis 
?5 to 30,3, and Sf^n Francisco ahoi^t IP^o, Snot ouotrtions are nuhlished 
dail'^ in trade jo-irnals in these three ports of "^ntv^r, and futures are 
dealt in on the Sugar and Cof-f^^ Exch'"'nge in Nptt York, Gre^n coffee is ' 
auoted hy source and grade. Eight grad.°s p.v^ d*!f ined hy the E-/:ohange - 
'^ith,so'ne price variation Permitted '-ithin grades - suhstitutions in ^ 
gr^dema^r he rnade in-filMna: contra'^ts on' the h'^sis of differentials 
estahlished in th'= market at th=' ti 'ne of d^liv-'ry. ' 

Current imports ar'^ at the rat° of ap ^ror^'rimate'i y IT million hags 
(13^ po-unds per hag) annually, and have he°n fairl^-- constant on a -ler 
capita hasis for the t ast five vears. Th" slight decline apparent in the 
past fe^ ypars raav not h= significant. It ^ay he merel^r a r^fcession from 
the peak reached '^h^n surplus productir-n in I^ra-jil '-as heing unloaded here, 
rather than the result of encroachn°nt hy conroetinf h^verag^s. A gr°a.t 
deal of gr°=n coff-=° used in this country is imported hy roasters*. '^ho 
maintain resident huyers at source, or -ho m^y at shipping port markets. 
Some of this cof^^e.^ ent-^rs the fpot mar''© ts at the three principal receiv- 
ing ports, either through the sale of overstock or at the decir^ion on the 
importing roasters to take a profit o". the green coffeo, Conyers^l-"-, 
companies that import a large -nnrt of tb^ir green coff^P frequently enter 
the spot markets for needed current supplies. Many do all of their huying 
in the domestic ports from green cof-'e^ ^."buyers and smaller firms genera """ly 
huy^fron gre^n coff== Johher-, Evoe^t for hfokerage' payments, there is 
little advantage in favor of an" '-ne of these methods of securing ereen 
coffee. 

It is prohahle, that the advantages of integration do not include 
any significant henefits traceao'e to direct control of th^ ra'-' material. 
Large coniitments may he m-"de --n favorahI° terms in groT-ring ar-^s, hut these 
are suhject to speculative risks during th« delivery period, very much as 
ordinary transactions in futures. Close governmental regulation of the 
coff°° industry in producing countries tends to ooualize selling conditi'-ns 
in those countries and in the consuming coimtries. Offioipl int«l"' irence 
relating to the st-- tistical position of th= crop-product i'^n, stocks, shipm^As 
en route, ^tc.,- and the market situation in h'^me and foreign ports is readily 

9792 



-6~ .. 

available* 

The fiinoti'^ns r,Prformed by th^ nembprs of the coff^° industry include 
roasting gre^n coff°e and in' most nps'=>s ^sc^aging and distributing the 
product. The errtent to-^hich thes° functions ar=> ■undert-'~il';'^n varies widely 
am^ng enti^rnrises in the industry. . A man orierpting a. small coff'^^, tea 
and s'oice retail stoir°, or a grocery, ma:"" buy gre°n coff'== from a, jobber 
and T'dxx a one-half-ba^: or one-bae' ca-nacity roa.sting machine back of th*^ 
store. The roasted coffee in such inst-^nce is ordinarily sold, in rjappr 
bags, or slin-top cans^ and th'^^ volume handled is extremel'"' small. Another 
tyoe of sraal'^ enterprise in the coff°° industry is th° roast°r '-fho operates 
under contract for a wholesaler who d'=liv<=''s grp°n coff'='^ to the roa.sting 
plant, picks u-o th=^ roasted coffee, -oacks it und°r his own brand nam^^ a.nd 
sells it to retailers or consumers* These are th-e Ic^^r extremes in size 
of establishment and sirai-ilicity of function. At the other end of the scale 
is the A« & IP,, which maintrins r°sid,ent bilyers in loroducing countries, 
and sells the branded, a,dvertised, finished nroduct ' er the co-mter in its 
own retail stores. In bet-'e^n these extrenes are vario\is tyoes of direct 
and indirect distribution. 

In a somewhat separate ca.tegory mi^f^ht be listed the mail order coffee 
CoimDanies and. th^ wagon-routes. - Tn'.? T-agon-i""' 't^r; ma're 
deliveries direct to consumers and c^erate nrincipally in rural districts. 
They a.re not an important -factor in the industry. The mail order comioanies 
sell to retailers, and their method of selling raises "orobl ems very different 
from those of roa.ster?, ^"fho .send salesmen and make deliveries to retail 
stores. The mail-order coraiDanies tended to f°ature a low-grade coffee at 
drastically cut -orices. They get a small percentage response to their mailed 
catalogues and order bla-nks, and they e'-^oect to sell the fea.ttired coffee 
i^ith other brands. Their nlant --ould be. utterly'- inadequa.te to meet the 
demand if the majority of their corres-oond'i'.nts submitted orders, and "ould 
probably be bankrunt if all their actual ctLstorae>'s bo ght only the iDrice- 
leader coffee. Their offer-to-sell wa,s nex'ertheless a potent bargaining 
weaiDon with which retailers could force d.om prices asked by companies 
sending salesmen and deliverymen. Action against loss lea.der selling under 
the co'de provis''on.aga,inst- sale below cost was slow and difficult, and the 
conditions ca.used by such sale '--n the ^art of a mail-order firm could there- 
fore continue for sone^ time, affecting the airhole regi'^n covered by the 
company's mailing list. 

The number of establishments showed a sharn uoward trend in the -oeriod 
1904-1931 as indicated by the accomnoanying table: 



9792 



-7- 

TABLE I 
COFS^E IJTOUSTKY: KUIIBER OF ESTABLISHffiNTS 



Year 



Nnjnl)Pr of 
Esta.bl i shm-^nt s 



1904 
1909 
1914 
1919 
1921 
19?3 
19?7 
19P9 
1931 



4?1 
607 
696 
794 
71:? 
7?9 
784 
9:^8 
917 



Sour 



ce . 



Census of Manufq'-t.ur'=is, 19P9, vv. 109 and 110; 1931, r). 105.- 
Data ars for Cencus classification "Coff^!" and Spic°s, Roasting-, 
and Grinding": I'h'^y do not inclvd=^ estatlislim^nts vrith annual 
production valxied at l°.ss than *>5,000 in 19?1 ancl subs'^'quent 
Census y^ars, for r^rior C-^nsus v^iarn da.te. do not include ..estab- 
lishments with annual -isro duct ion vr«lued,-*^.t less than S50O-. Census 
classification TirP;.s a.bahdoned in 1933, 

PreiDarod by 

Indiistry Statistics Unit, 
Statistics . Ssction, 
Division of R view, HRA 

The series was discontinu«5d in 1931. Th=^ 1- -Tiber shi'-> sho'Ti by the Code 
Authoritj'- is much larger; this -nrobably does not reDr^sRnt- anv increa.se 
in the nunber of members in recent years, but nerely ,r=iflect" the fact 
that the census did not list very small con-ianies. It, is' to be noted that 
ther° '-^s a sham decline in th° mxrab^r Of establishments about the time 
of th° d^'-oression of 19P1. Sitnilarly the total shorm by the census began 
a decline f ol"i ovring 19?9. It is ^robrble that the nunbe- of establish- 
ments decreased considerably durirtg th'=' current deriression, In sr)ite of the 
fact that used equipment can be a.cnuir«^d "ith "rtremel''- small outlay, 

Apioroximately 1200 concerns' are embra-^^d in the code .definition of 
the coffee industry. At the fccr) in siz^ pr° th^- A. ■■&■?,, -^hich boa.sts 
about ISfa of th^* total iranorts, Maxrell House (subsidiary Of General Foods) 
and Ch^se and Sanborn (of Standard Brands), ^"hich bet'-'^^n them account for 
about IB/o more of th° total. The t^n lar'^-^st firms in the 'industry .do 
nearly 50^ of al"" the coff°e roasting,- the smaller>t 600 (50^-of the total 
firms), do a.bout lOf^, 

^a.t)le II r'^TJrosents aio^roximatei^' the current distribution- of coff'^e 
firms according to volnrap handled, ^ith figures -given s-e-oarately for those 



9792 



■-8- 

which sneoialize in coff'^e, or coff=>^, t^a. and s'oic:!, and thos«^ -iiich 
hsndle other products either as food wholesalers or retailers or f.ood 
processors. 

TABLE II (*) 

DISTRIBUTIf^lT OF IffilffiERS OF THE COFFEE 
INDUSTRY ACCORDING TO NUMBER OF BAGS 
ROASTED 

Bags of Green Coffee, and - Wholesale Grocers 

Coffee Roasted Coffee Tea and Food Processors Total 

. S-nice. Conroanifts and Chain Stores 

85 511 

18 142 

13 74 

10 42 

6 38 

2 23 

"1 12 . 

- 7 ■ 
2 4 

- ■ 1 
1 1 

■ - . .1 

9 2 

1 __J 



U Under 2500 


426 


2500-5000 


124 


5000 - 


61 


10000 - 


32 


15000 - 


32 


25000 - 


21 


50000 - 


11 


75000 - 


7 


100000 - 


2 


150000 - , ;■ 


1 


200000 - ■ 


„ 


250000 - 


1 


500000 - 


■• 


1000000 or over 


_ 



Total 718 • 141 859 

(*) Compiled from 1934 assessment lists of the Co dp Authority for the 
Coffee Industry, 

In toth of the groups ther° is a considerable cnncentra.ti'^n of volume in 
the hands of a few very large firms. It is ohvious that the interests of 
firms in these t'-'O groups would not te identical. A clear case of divergent 
interest is that of large roast°rs who are also engaged in grocery retailing. 
Since coffee has "been used effectively a.s a price leader in the grocery 
trade for some time, the roaster-r°ta.ilers maj'- h<? securing "benefits de- 
rived from the drawing porrer of price cuts on coff*e. Roast^-rs who sell to 
independent retailers are likely to "be affected "by raressure of the retailers 
for lowftr prices' comparable to those at vrhich a chain store i^ay be charging 
out coff'^'' to its retailing departments. 

Table III shows the dolTar volume transacted through different methods 
of distribution. It is apparent from this table that grocers selling through 
their own retail branches have the largest sales per company of any of the 
groups classified according to the method of distributi'^n. Differences in 
method of distribution distinguish 'the three largest factors of the industry. 
The A, & P. sells to consumers; Standard Brands to retailers; General Foods 
distributes chiefly through jobbers. 

The Associated Coffee Industries of Anp=^rica, '-hich is the trade asso- 
ciation for the industry ^nd acted as Code Authority during the N.R.A. 
period, includes representatives of all the lypes of enterprise in the in- 
dustry. Chain stores, roasters with jobber distribution, wholesale grocers, 

9792 



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-10- 

roast-rs selMng to r^^tailors and gr-°n ooff--- importers arp all rei^re- 
sent'=id on th^ gov^rnin^ comitt«='=^ of th^ association. At th^ time of the 
code h^arinffs the AssociPtion hpd phout 350 acti v- member-, and claimed to 



re 



present atout 85/' of the coff°e roasting "business. 



9792 



-11-. 

II. TKS-DErAITO FOR THE rRODUCT 

Techniques suitable to the regiOati n of iirices in ?m industry on a 
TDerman'^nt "basis or during a severe d'^ioression ar'^ shai^ed in large measure 
"by th" nature of th^- doninnri for the inriustin'-' s -oroduct. The demand, in 
turn, is af'f^ected h"'' the t^-oe of -mrchasero, th^" nature of th-^ loroduct, 
the circumstances of its nurchps^, and corresponding specif icatii^n of com- 
peting "oroducts. 

The coff°e industry "buys green coffee, hlends and roasts it, and 
distributes it to consumers directl-"- or through intermediaries. In sal°s 
to consumers, the industry's ^^rcduct is actually a labelled package. Coffee 
is a relatively stable product. The industry produces a, large number of 
blends, ^ile ther^ may be changes fr^m tin" to time in the manner in 
T-hich an indentif iable cup flavor is a.chiev^d by blending, ■^ith the re- 
sult that a flavor ma;.' b" dup3 ica+ed. or nearly duplicated ^^ith cheaper 
coffees, startling innovptl.-^ns in blending or roasting ar" unlikely. The 
product has not changed ap^'jreciabl^'" for many yearn; Ne^^ blends may be, 
and are, introduced on the' basis' of slight or imaginary differences in 
taste, and the success of 'the introdncti^n may be e:ri)ect°d to*d*?'o°nd largely 
on the, astuteness and intensity of the sales camp a igin. 

< - . - . 

. Taste and'habit might b'e '^xoect'^d to constitute 'the ba.sis of consumer 
demand for coffee, Peo-ole usually drink coffee i-ath mea.ls, and. are there- 
fore not likSly to 'change their' consumption 8f ' coff'ee',' iP'rice cuts by in-, 
dividual retail outlets are much' more likely to cause!' realT oca'tibn of sales 
volume among outlets in a mar'-et area than an 'incr'^aso In the total sales 
in that ar^a. Demand fa? ■" s'^f^ in' the sum-ier "months,' arid efforts to stim- 
ulate sal°s of iced coffee- hav'" be^n fe- and sPdradic, ' It is difficult to 
teach. thp <r nsumer ho"- to' mak° 'icer! coffee in a -^ay 'that retains th° flavor. 
To sum up, the .demand for coffee is highl^^ stable. 

Sever competition fo7» 'volume is' to >)■= ^T-nected under such conditi'^ns. 
tiuge ap-^ropr rations foT advertising are common among the v^ry large companies. 
Advertisers keep hammering a-ray at the consumer in order to build up a d°raand 
for their product. Brand names become extremely i!!rnorta.nt. Concentration 
of attention- on type of container is a natural conseauence. Roasted coffee 
loses its flavor if exposed to air, and loses it more' rapidly aft°r gVinding 
than in th° -^hole bean. Her chanc'-i sang ca.m-^."igns are ba.s^d on these facts. 
Chase and Sanborn advertises dated coff°e; Ma-'ifell House snend.s. enormous 
sums of money telling the consumer that vacuum cans provide perfect pro- 
tection for the coffee, and the A. & P.' grinds its o^oi coffeeg j,n the store 
at the time of sale to the consumerj Dating coi'fee involves an, expensive 
service in' fr«auent d^liveri^s, rnd a loss-' iri'''th° sale at lo^ej-' prices of 
coffee returned by th^ r°tail<^rs at- the =nd of'''' ten'- days. A -^^-acuum c^n costs 
more- than 5^ per no-tmd, as com^oared '-'ith abcit '?, .'^rf for a slip-top can and 
one cent for a paper bag, (*) G-rinding erch po-i.^rid of coff'^" -"hen it is sold 
adds considerablv to th=' cost- of handling coff'^e in the retail store. Smaller 
coff'^e ropsters ar= forc<=>c"' to fol^OT^ on° or another of th°se procedures or 
to allo'-' a- price differential determined by th^ extent to ^-hich th° in- 
tensive advertising campaigns of the large com-oanies hav° infln.enced the 
consumer. 



(=") Herring of Standard Brands before Hatlonal Conf°rence Board, in H.R.A. 
files. 

9792 



-12- 

The effect of fx>moeting beverages on th=^ demand for coffee iTOUld "be 
extrernely diff icix] t to fcuage. Soft drinks, ^"^r, tea, cereal drinks, and 
decaf feinized coff'^'^ undoubtedly, offer coranetition. B<=or may have the 
effect of widening the sea.sonal dro'o. in summer , although the result may 
not Tie of npticeahle inroortance. The competitive effect of campaigns 
against caffein is, of coui's'=', more inroortant than actual sales of the 
substitute offered tnight indicate, sinc° it may cause consumers to stop 
drinking coffee without loersuading them to take ur) the deca.ff einiz'^d 
■oroduct. Acquisition of the most important of these -Droducts hy a: company 
selling ordinary coff=>° in recent ^.^^ars may have influenced the form of 
advertising on caffein, since the sales of coffe° are much larger than 
those of *the "purified" t)roduct, , . 

The use of coffee as a price .leader in retail sales' is a far more 
im-DOrtant element in coffee marl-ret ing than is the conroetition of substitutes. 
Coffee "is a nackaged., . hrand.ed, intensively advertised Toroduct, and there- 
fore highly suita.lile for such use. In conseciuence, the demand for it he- 
comes 'a composite demand. Consumers -nrohahly do rather little "loss leader 
shopping", except in severe de-oressions. Coffe=> is usually hought' with other 
food products. The consumer demand for it is more than merely joint de- 
mand for coffee and loroducts hahitua.lly used with it, such as cream, sugar 
and coffee qake. Since, coffee is specially selected a,s a price attrnotion, 
it may he hqught together vrith any other product on sale in. the grocery, 

"Competition, amoiig. retail outlets forces -orices on other coffe°s down 
with thf^ price of those highly advertised coffees which are ordinarily 
the first to he cut. The dwindling of retail ma.rkur)s exerts pressure hack- 
ward on Johhers' margins 'and tends to have the effect of reversing the 
advantages of integrant ion with resriect to large comiDariies using intensive 
advertising! if such comDa,nies regularly sell through intermediaries, they 
are in the position of getting -Dractica.lly free distrihutinn. The consumer 
aske for the product and not only weakly nrga.nized independent grocers, hut 
even' chain stores do not dare to stot) carrying it. Small firms selling 
through johhers are not in so fortunate a do sit ion, and must make concessions 
to thoir distrih^^tor.s as the retail price goes down. Coffee, stores in which 
the retail stor^ and the "roasting iDlant" are combined under"" one small roof 
are of course adversely affected hy the use of .their sole product as a -orice 
leader. In this, their iDlight is similar to tha.t of any sioecialized retail 
outlet competing, with a. d'^riartment store. Grocery stores, which have the 
advantage over G0ff°e stores in this resr^ect, are themselves subject to 
severe comqetition of suoer-Tnarkets, a, nupib^r of which use the grocery de- 
TDartment as a loss leader departments Thi§ com-oetition is even more severe 
than that of full line de-nartment stores. Some .sutier-markets make it a 
practice to let all but the grocery deriartment^ This deriartment is located 
in the rear of a one-flo^r establishment, trices are cut severely, and r°nta,ls 
on other d'^Toartments ar';' based i^n the traffic brought .through the store, 
D^tjartment stor'^s a.nd surjer-raarkets ths.t let fe^-' or no de-oartments are also 
prone to lise groceries as loss lea.der T)roducts, 

The foregoing remarks dealt with the natur° of the demand for coffee 
and with characteristics of the consumers' market arising from the structure 
of the retailing industry and marketing loractices of coffee-suionliers. The 
manner in which the ctinsumers' demand is transmitted to the coffee processing 
industry is comblica.ted by the wide variation in current distribution methods. 



9792 



-13- 

Exc°-^t for r°staurnnt an4 hot°l d'^niand - ^Mch constitutp.s a fnirly 
distinct market - internee iary mprkets" for coffee cannot readily be ser- 
r^eat-^d for anal^^sis. Sh«lf stocks and s-an-olies in transit "betwo^n 
roaster and consumer vary videl^^ and retail riric° changes have diverse 
effects on the roaster, according to the dir'=ctness of the transaction. 
The fact that merahers of the coffee industry as defined ^mder the N.R.A. 
sell to consumers, to retailers, to i-jholesalers or to comhinations of 
these, makes it difficult to state rirecisel^ in v/hat market a ^iven 
roaster's ririce is effective., and comolicates considera'bly their relation- 
ship hetvreen consumer demand and selling prices set by coffep roasters. 

Differences in d-^mand for individu.al "brands of coff=>e, "baspd on 
actual coffee quality, "blend taste, t:sT.o cf container and variance on 
these induced "by intensive ad.vertisin,'}^ result in an elaborate structure 
of TDricp differentials in the coffee industry. No information has been 
collected showing "whether or not the r^iff erentials tend to fluctuate 
on the basis of averaging to fized differences between grades, -whether 
they tend to maintain fixed iDercentage rela.tionshi-os ^-ith each other 
or whether and in -hat way they change with ohanges in the price levels. 
Practically no factual information is available on which to base even 
moderately -orecise measurements of th^^ way in which a "orice cut at one 
Doint in the ririce stri.icture spreads through that stnacture. It can'^ot 
be said therefore to what extent a -orice cut exerts its influence on a 
single quality level and to '-h^t extent it tends to STDrea.d thro^igh the 
whole -orice structure. Second -orice analysis of the industry is obviously 
an extremel-5'- important base ^-^n '--hich to build a regulatory system in- 
volving such concerits as "destructive -orice cutting" and "meeting coraoetition. " 



9792 



$: 


.3„00 
,50 

2 c 37 

2,30 
.25 

■ ,30 
,35 

2*50 

.e-50 

.75 










5 , 00 


to 


6 


,00 



_14_ 

III. THE COST STHUCTUHE OF THE INDUSTRY 

ThQ folloTTing tatle illustrates the relative inportance of the 
various cost items in the coffee industrye They are not actual figures, 
but are not actual figures, hut are prqhsolycldiie' estimates, and may 
he regarded. as representing vrith re^isonahl a accuracy the relative mag- 
nitude of the iteras listed. 

TABLE IV 

A. ESTIliATE OE TPIE COST Q? A BRAIID C 0liPAa \5LE ¥ITH S TAJTDAEJ 

brairds', inc. " ■ 

■' ' Per 100 Ihs. 

Green Coffee replacement cost 
Roasting cost . 

Shrinliage cost 
Slip top cover head 
Lahel cost 
Shipping containers 
Labor cost 

General and adninisti-ative overhead 
Freight 
.Delivery to dealer 
Advertising 

$23i,02 to $29.02 

(Fro:.i Transcript of Hearing, Standard Brajids, April 30, 1934, 
pages 105-107.) 

B, ESTIla.TC. or T HE COST OF SAi'TQS COJTBE III l-POUIID LTTHOGPAPHED BAGS 

Per 100 lbs. 

Current rcT)ln.cenent f, o.b, port $11,25 

Inrrard frsi.-ht .40 

Roabting ■..''?. .:n?.lvdir.g dii'ect labor; fuel 
& p'j'.er, deprec Ja'. iun. sr.d iiainterance of 

eouipiv.en 1 ,1 .50 

15^3 i^iiiriii'^HKo 2.14 

Cos'' o-f .^.-.in '.m^; (i..nclV'.o.es labor, porrer, de- 

precir.ticr. ri^-1 nai'itenance of equipment) .IS 

CcsL Ox tag BJT-d :..:i.iier .70 

Cost of pa:l".Trg lauor •22 

Cost of ship-oir.g craibainers, etc, ,25 

Man^ifactti-ing, genci-al and administrative over- 
head (not including distribution cost) »71 

Selling erqiense (including credit and collection, 

bad debts, etc.) ,75 

Freight and/or deliver^'- ,50 

$17.57 
(Fron "Cost Finding" Folder, Deputy's Files, K.R.A. ) 



9792 



-15- 

Both of ther-e estimates xiere presented by the Code Authority, The first 
I$28.0?!.-vSC,02) T;as U3(:;d "by the Code Authority at the hearinA" before 
the haiiional Conpli.aiice Council as an argument for having one of 
Standard Brands' prices declared in violation of the code provision pro- 
hibiting sales below cost. The other ($17,57) Ucxs svib.iittod to the 
Deputy AAninistrator as evidence that a retail price of lesn thtai 19^-? 
should be investigated as a presumptive violation of one or i.iore of the 
goveraing code provisions - sales belou cost in the Coffee Code, 2^o 
niniraun mark up in the vrholesale code ar.d 6;j ninimui! mark up in retail- 
ing. 

Tine does not permit the investigation of the substantial differ- 
ence bet'.Teen the tm cost estinates rdth regard to administrative and 
general overhead. Other discrepancies betreen the nagnitude of the com- 
parable itens for the t\70 sets of figures appear logical, although their 
accuracy in detail has not been checked. The tin ctui is kno\7n to be 
considerably more ejqjensive theji the paper bag, and the delivery system 
used by Standard Brands is necessarily more costly than that of most of 
its competitors because of connany' s. practice of dating coffee and malt- 
ing frequent deliveries direct to retailers. The very large advertis- 
ing cost shora for Standard Brands was probably based on fairly close 
estimates, since the company did not contest this figure at the hearing 
before the Compliance Council, 

It is apparent that green coffee cost, packing and advertising 
constitute the chief cost elements for a company of the tjme of Standard 
Braiids, with general overhead next in importance, HMcent" for advertis- 
iig, these elements also constitute the major e-qoense of other roasters. 
Labor cost^is a very small part of totoJ. cost. Allowing for the possi- 
ble inclusion of labor elements in roasting, grinding and general over- 
head, in the case of the company using paper bags and spending nothing 
on advertising, the total would -.robably bo less than 6f.. Except in a 
borderline case on sale below cost, differences in labor cost played 
practically no part in code administration. The comparative insignifi- 
cance of labor cost served to emphasize tho ver:/ decided imiortance of 
trade. practice provisions in the' code for the coffee industrjr. 

There are several possible areas of cost vr.riation among members 
of the industry. The e::tent to which these lie \,itiiin the domain of 
benefits deriving from large scale operation and integrated function may 
be noted briefly. 

In the purchase of green coffee, small roasters incur an added ex- • 
pense in brokerage fees a.ad l,c.l, freight differentials. Yory many 
roasters b-ay on the Exchsiige, and even large roasters buy considerable 
quajitities through green coffee importers, so that, except for the possi- 
bility of a favorable deal in the producing couiitries, the. advantage of 
the ver:^' lai-ge concerns in the acquisition of raw coffee is --irobably not 
an important element in their strength. It becomes so only in case a 
large roaster with heav;^/- stoc^i on hajid decides to maintain or cut his 
coffee price against a rising green coffee market, Tiiis involves a 
sacrifice on green coffee for the sake of winning new customers, and may well 
yield a net profit,, Smaller concerns can meet this r.rice -oolicy only by 
talcing an out-of-pocket loss on current green purchases, mless^they 
happen to be engaged in an unus^ually large s^ieculative venture in green 



-=16- 

coffee. The 'difference in stoclcs carried would have to 1)6 very large 
and the market movenent strong and of sone duration in order to make the 
campaign on the part of the large company vrorthv/hile, (The huge corpora- 
tions may rell co-ri:^" stocks 'ihich are larger than those of smaller com- 
petitors, even considering dif:rerences in scale of operation. Standard 
Brands has on a numl^er of occasions announced one month sales in the 
face of a rising green coffee market.) 
t 
LiediuEi sized and large compaJiies have an advantage over small op- 
erators in the use of vacuum cans. Host small firms do not use vacuum 
packing because it requires soneTrhat more ex;iensive ma,chinery, and for 
the- more important reason that it is unsound "business practice to put 
too large a part of the selling price of an \uiadvertised product into 
the cost of the container, liedium sized concerns, vrith efficient sell- 
ing, can piit out a vacuum pack. The effect of difference in resources 
is much less pronounced in this indiistry than it \70uld "be if the prod- 
uct :7ere subject to significant inorovement through research. Labora- 
tory vfork on cans and va,cuun jars is done by large can and glass com- 
panies competing for the container bxLsihess of the coffee roasters. 

Very large com-panies have an advantage in the tjnpe of equipment 
that is used for paper b,at.; pack, 7nis eqi\ipnent is very e^ensive and 
is, therefore, quite out of reach of snail or even medium sized compan- 
ies. Its use may maice a diffei-ence of as much as 3;o in the total cost 
of the packed coffee. While this percentag'e raay appear small, it has. . 
an important competitive effect since it reduces the extent to vrhich, small 
compaiiies can resort to their principal means of securing btisiness — 
naifvely, an appeal to 2Ti"ice, The small companies generally sell their 
C-offee in paroer bags and cannrot afford to build up demand by advertis- 
ing, Tlie price differential they can offer is reduced by their lack of 
mechanization, 

A far more important advante/^-e of large scale enterprise is the 
abilit^' to spread the cost of tremendous advertising campaigns over a 
verj'' large output. Even with large volume, the advertising cost of a 
major company was estimated at 5 - 6^ per pound bj'- the Code Authority, 
All three of the major coiT)orations and a. number of smaller ones ca.rry 
on costly radio, newspaper and other advertising campaigns. Since there 
are no definite utility standards for coffee, 'and since consumers cannot 
easily distinguish minor differences in quality, the building up of con- 
simer denrnd for a particular brauid najr.e is extremely important. Some 
comparatively small companies have been successful in advertising the 
"exceptional quality" of their product. Sales of Guatemalan coffee at a 
price of about 80^ .per po\md are now being prdmoted successfxilly by an 
enterprising sales management firms'in New York; the margin over the 
green ;orice of best q-oality coffee groi.rn is ;irobably in the neighborhood 
of AzOtj; per pound. Other compaiiies succeed in adding large narlaips 
through clever salesmanship, addressed to a restricted clientele. From 
the standpoint of the industry as a whole, the national advertising cam- 
paigns of large companies and the intensive local advertising of sectional 
roasters are much more im^iortant than the ercceptional excursions in myth 
creation on ,"supe3r-quality, " The nature of the product mal:os all these 
types of campaign possible; the choice is determined by the individual 
company' s scale of operation. 



979^ 



Grocery chains have an cxiparent advantage over concerns engaged e::- 
clusivel;;^ in roasting coffee, in that they coiihine the ;nrocesEine and 
districting functions. Tliis does not apply to the hotel and restau- 
rant trade, rhich doer, not nove throvign retail outlets, but since spec- 
ialization in that line is rare, most menhcrs of the industry are af- 
fected oy the competitive advantage of integrated concern;.;. The advan- 
tage consists of nore than nerely saving in selling expense, '.hich is 
countcrbalsjiced hy considerahle costs involved in supervision, Tlie 
chief advantage of complete integration, such as the chains, lies in the 
fact that they sell their ovm and their cornetitors' coffees ov.-'r the 
counter, cjid are therefore in a strong position to influence consruner 
denand, A similar situation obtains in the ooeratiorl of vrholesale 
grocers vho roast their ovm blends and also hoJ^dle a large line of com- 
peting coffees, although the; ..contact r,-ith ultimate demand is much less 
direct in this case, 

A concluding' rena?-i:. on costs of operation may be made; the per- 
centage of capacity operrition has an inportaiit' effect on -orocessing 
costs. Some coffee roasters^ are already o;nerating on exclusive agency 
arrangements or are. attempting to do so, in order to get as large a 
part of their sales as possible on a requisitioning rather than a sales- 
mansliip basis. While there arc no fi'aires available oii the effect of 
rate of operation on proceTsin;^; costs, it is apparent logically that lou 
rates nith roasting ovens .of fixed capo-ci.ty are inefficient. The indus- 
trj^ atteni:its, in fact, to ro.n more thrn. one shift, and often does so. 
It is probable that jDrocessing costs vary more "ith rate of operation in 
the same finn, than between one firm and r-nother, vrith the exception of 
extremelj'- large firms. Overhead is also an important item, so that the 
combined pressure of these cost itei-is is exerted for increasing volume. 
Since the per ca,pita consumption of coffee is highly stable and popula- 
tion grouth is decelerating the struggle for volujne is exceedingly 
severe. 



o^op 



-18- 
IV. COMPETITIVE COEDITIONS AT THE TIME OP CODE FORlvIULATIOIJ 



It may "be possible to construct a statement of comnetitive condi- 
tions in the -coffee industry at the time the code was offered for ad- 
ministrative apnroval. Very detailed and rather confidential informa^ 
tion on costs, sales volume and trade relations would be necessary. It 
was not feasible to attempt any such analysis for the present reiDort. 
However, it is of interest to note some plausible hynotheses concerning 
the course of the industry in the period rireceding the establishment of 
the National Recovery Administration. 

The coffee industry includes among its members three of the major 
corporations in the United States: the A. 8- P., General Poods, and 
Standard Brands. Each of these Dossesses enormous reso\irces, either in 
actual cash reserves or in ready access to the ca-oital mar^-et through 
TDOwerful banking connections. Any of them, if operating alone among the 
swarm of lesser competitors, could readily embark UDon a camt)aign of ab- 
sorption or displacement, so as to take over rather ra-oidly a much larg- 
er share of the coffee business. They might, of course, find it diffi- 
cult to restrain business from very small firms since it is easy for a 
new, small enterprise to replace one that ha.s failed. 

■ Perhaps the major gain - if there wars one - would be at the ex- 
pense of medium sized firms. Such a campaign is seriously deterred by 
the actual functioning of three such giant companies in the same indus- 
try. 

A struggle among them might be disastrous to all three, and would 
certainly be extremely costly. Drastic competitive steps on the part 
of the A. &■ P. - such as refusal to handle Chase and Sanborn, or Maxwell 
House Coffee - might quickly drive the other companies into alliance with 
grocery associations that could be dangerous to the whole business of the 
A. & P. Conversely, the A. &■ P. is probably by far ths largest single 
customer of either of the other two, and the sudden decision on their 
part to refuse to sell to the chain Tiould very seriously affect their 
sales program and cost position. The A. & P, therefore continues to sell 
a huge volume of coffee roasted by the other two companies, and the lat- 
ter sells coffee to the grocery competitors of the A. & P. The severity 
of the competition among these three is tempered by the necessity of 
their continued trade relations. 

A competitive condition approaching stalemate between giant corpora- 
tions in an industry with many small members may foster the development 
of an "umbrella monopoly". Uniformity of sales policy misht be achieved 
by. three principal competitors in some other industry without subjecting 
them to persecution for restraint of trade, and mieht materially hasten 
their growth at the expense of smaller companies. The diversity of in- 
terest among the three largest coffee roasters, growing out of their 
differences in mode of operation, militates against their combining with 
each other. The three leaders are definitely and expensively committed 
to their separate ways of doing business. 



9792 



-19- 

i 

Fragmentary evidence - figures on green coffee iTnnorts and on total 
dollar sales of the large comx>anies - indicate an increasing concentra- 
tion of business, in the nands of the large concerns in the -oast decade. 
The position of the next seven firms (ranked in size) indicates that 
the rate of concentration has heen retarded hy the considerations noted 
in the preceding laaragraph, and that 'nedium sized firms have "been los- 
ing volume to the very large firms rather than that the smallest enter- 
•orises of the industry have "been disnlaced. The very large nuraher of 
firms in the industry is an additional influ^^nce against atteirants at 
complete monoDolization. The course of monopoly is, in any case, like- 
ly to stop nowadays with the absorption of that area of the field which 
can be handled efficiently within the bounds of a unified business pol- 
icy. The fact that equipment required, in .coffee roasting is not very 
complex, and that equipment manufacturers may not have adjusted their 
production programs to a replacement .business, makes the coffee indus-r 
try 'comparatively easy to enter. , Hoasting and packing machine's can be 
bought at fairly l£>w prices and on generous terms. The durability of 
the equipment makes it possible for the number of firms in the indus- 
try to remain constant or increase even in the face of a high mortality 
rate. 

The resolution of these economic forces gave the industry margins 
enough to ensure profitable operation, for the great mf'jority of its 
members several years ago. It may 'be that this was an unstable condi- 
tion. Unchanging, or very slowly increasing total consumption was a 
constant temptation to well si tTxated concerns to embark on programs of 
relative expansion. Furthermore, a protective monopoly_ af f ordiiig at- 
tractive, margins invites new enterprise and a thinninff'of volume per 
firm. Yet returns under such a" development could be maintained only 
with,, a still higher price structure, and. the logically expected inelas- 
ticity of demand might break at hitherto untested price levels. 

The impetus to price war, however, came from outside the industry. 
The depression forced coffee prices downward in S'/mpathy with other food 
prices. Still more important was the growth of cut-rate grocery retail- 
ing. With newly developed super-^markets taking the lead in price cut- 
ting, and branded, well known products the favorite objects of price 
attack, coffee prices were cut drastically. In addition ^'^ open price 
cuts, many indirect price concessions were granted. Unearned fees and 
advertising allowances, contracts guaranteeing purchaser against price 
decline during the- delivery period, free deals, re-billing of purchas- 
er's unsold stock when prices fell, loans or gifts of urns and other 
equipment were common. Chain stores retaliated against super-market 
selling prices, and the resulting price wars spread through the indus- 
try. 

V. THE PRICE CONTkOLS ' . " 

A. Discoimts and Allowances 

The representatives of the coffee industry felt that protection 
against destructive price cutting was essential and that prohibition of 
sale below cost was the most effective method of securing such protec- 
tion. Price filing was instituted as a means of making wrices and terms 
of sale public, so that violations of the cdde could'be detected 

9792 



-20- 

readily. (*) Various tyiDes of indirect -Di-ice concession were declared 
to "be unfair' trade -Dractices. Some of these were unotjectionatle in 
themselves, but would have made nrovisions a^^ainst sale 'b'elow'cost 
much more difficult to enforce, ^xam-oles of this type of selling 
TDractice arej' Contractual guarantees against price decline; refilling 
of customer''E uiisold stoc^-, when nt-ices fall; free deals; and loans or 
gifts of equiiDment. An attempt Was also made in the code to nrevent 
the payment of unearned brokerage fees, advertising allowances and 
quantity discounts. (**) Controversies over "brokerage were very involved 
and hitter during" the active life of N.R.A. , and were still going on at 
the time of- the Schechter decisionc However, they did not r«jach the 
stage of litigation or even of compliance hoard hearings. 

Advertising allowances and quantity discounts were also subjects 
of considerable disagreement. (***) With regard to advertising allow-- . 
ances, it may be said 'that large com-oanies, which are the most frequent 
recipients of generous allowances for advertising and disnlay, maintain 
detailed accounting records of selling services rendered in this manner. 
Similarly, large comoanies granting the allowances do or can ascertain 
the extent and approximate value of such services. The Patman inves- 
tigation of the practices appears to have developed fairly convincing 
evidence of over-payment. (****) In view of the size of the comnanies • 
most favored in the receipt of the allowances, the practice may easily 
have a dangerous tendency toward raonon'^ly.' Effective enforcement re- 
quires detailed records of transactions, and is very difficult. 

The Coffee Code required a quantity discount to be "based upon 
and reasonably measured by a substantial difference in the quantity 
sold and delivered". The provision is vague, and could not be exioected 
to result in uniform' discount practices or, of greater importance, in 
clearly defined discount policy. Economics achieved by an order of a 
given size may vary considerably from company to com-oany, and for the 
same company depending on current ODeration conditions. Size of plant 
and Tate of operation arej determining factors in estimating cost reduc- 
tion for given quantities. If a plant is ali'eady working at close to 
maximum output, a large new order may reduce operating efficiency: such 
an order would be beyond the optimum size for current circumstances -and 
would be attractive only at an advanced price' rather than a discount, un- 
less a new and defeirable customer is involved. There is' also the con- 
sideration which is oft,en rated even higher than cost reduction by a 
company manager, and. that is the sales stimulation achieved by selling a 
customer more than the .customer' s ordinary purchase. Such a. sale may be 
expected to induce greater resale effort on the -oart of the purchaser, 

(*) See Article VII of .Code for the Coffee Industry, Code of 
Fair Competition, Volume VI, Page 277 

(**) ibid. Article VI, Sections 7 to 14, inclusive. Pages 

275 and 276 " •" 

(***) Ibid. Article VI, Section 7, Page 275 and Section 13, " • • 
Page 276 ' • 

(****) Hearings before the Special Committee on Investigation American 
Retail Federation,' House of • Representatives 74th Congress, 1st 
Session, July 9', 1935..;, , 

9792 



-21- 

and may have a valuatle influence in the area in ^hich that purchaser 
does "business. 

J,;ost of the large firms in the Coffee Industry filed list nrices 
and quantity discounts which were iDresumahly the same for all cutomers 
for that filing. There ar>-oe.?rs to have he ;n little rear,on to -Drohe 
the reasonahleness of the discounts in most cases., ;. The Quantities quot- 
ed were in 2:eneral very small in relation to total business of the ven- 
dor. In an Industry in which each comiDany has many customers, sine;le^ 
orders are not likely to involve imt.)ortant changes in or^erating effici- 
ency. The cases in wliich this situation did not ohtain - that is, in 
•Durcrases hy extremely large huyers such as chains - were not subjects 
of com-olaint hy coranetitors on the grounds of excessive discount, and 
no Code Authority investigations were instituted. 

B. Destructive* Price Cutting and Sale Below Cost 

Premiums, allowances and discounts mxist he s^oecified if the acttial 
selling price of goods is to he precisely stated. Fixity of contract 
^rice assures the industry that the contract xjrice renresents a comiDlete 
transaction. Price filing also is necessary to the definite knowledge 
of prices. All these elements huild ux) the knowledge of price. The 
Code Authority undertook to decide whether or not the -orice including 
all these elements was ijermissihlei 

The industry regarded -orohihition of sale helow cost as essential 
to the prevention of seiious ca.rital im-oariment and perharis hankruntcy 
on the part of a large nuraher of its raemhers. The protection of cost 
is a social-economic procedure requiring careful evaluation. That 
the cons-umer "benefits in the short run from price cutting is ohvious. 
He may lose later if the price cutting is so severe as to bankrupt the 
whole industry and thereby withdraw the product from the market, or 
if the industry's functioning is disrupted and its total performance, 
in goods processed and services rendered, substantially reduced. The 
society may be injured and the consumer may get less for his money from 
the industry if the price war results in monopoly. These possible 
developments may take place under unregulated price cutting or under 
restricted price cutting. In the former, sales below cost may result 
in the survival of the enterprise with greatest cash reserves or easiest 
access to credit, even if such a firm is not otherwise the most efficient 
in the industry. With price cutting restricted to operating cost as a 
minimum, the competition is m-^re nearly one of efficiency in operation. 

While it appears to be in the interest of the economy as a whole 
to remove p11 obstacles to a competition of efficiency, there may be 
serious drawbacks to the predictable result. There may also be greater 
social costs entailed in the very abrupt dislocation of participants in 
inefficient enterprise than would be recoveied in a considerable period 
of optimum functioning in the adjusted industry. Setting operation cost 
as a floor to price and circujnscribing the manner of computing cost 
serve to reduce the rate of displacement if the computation is so order- 
ed as to prevent the use of non-operating advantages and perhaps even to 
prevent the full use of operating advantages. The E.3.A, was forbidden, 
in the enabling Act, to include in codes of fair competition any provi- 
sions which might tend to foster monopoly or oppress small enterprise, 

9792 



-22- 

The condition of national emergency .attacked "by the N.R.A. was one 
in which, in many industries, small enteriorise was having much greater 
difficulty than laj-ge. Socially minded administrators might therefore 
feel that the K.I.S.A. loermitted the insertion in codes, of rules 
calculated to im-orove the relative Dosition of the small firm. It is 
nertinent here to examine briefly essential features of the nrescrihed 
formula for corariuting cost in the Coffee Industry and comment on the 
significance of the most important rules therein set forth. 



.5792 



C. The Cost Formula. (*) ■ , - . 

( 1 ) Mininum Price Proposal as "Qrifcinally Presente d. 

The Minimun Price Proposal includod in the first draft of 
the Code submitted In August, 1933, 'prohibited a member of the 
Industry from selling "below his own actual cost of production 
as determined by uniform cost finding x)rinciples to be prescrib- 
ed by the Associated Coffee Industries of America," with the one 
exception that he might meet the lawful price of a competitor. 

This t)roT30sal, evidently did not have the full and unqual- 
ified approval of the Indiistry, or of the proponents of the Code, 
The draft of the Code submitted in September, 1933, did not contain 
the "selling below cost" provision. This draft prohibited Destruc- 
tive Price Cutting and in the event of an alleged violation pro- 
vided for an exa::iiria.tion of the records of the accused company by 
a firm of accountants to be selected by the Coffee Industries Cora-' 
raittee. The Code carried no definition of "destructive price cut- 
ting" and there was a short discussion in the Hearing held Oct- 
ober 24, 1933, relative to the isrovision and the steps to be taken 
in determining ',7hether or not a violation had occurred. 

This September draft also provided for the use of an account- 
ing system by every roaster which would conform "to the principles 
and (be) at least a,s deta-iled and complete as the standard and 
uniform system that may be formulated by the Coffee Industries 
Committee," 

The objection to the pronosal submitted in August appears to 
have centered around the use of the Cost Formula, 

(2) Interests and Descri-otion of Proponents 

The Code was -oresented by the Associated Coffee Industries of 
America, In addition, approximately 200 companies who were not 
members of the Association participated in the preparation and adop- 
tion of the Code, This group of 550 represented more than 50't of 
the Industry by number: The 350 members of the trade association 
alone imported and/or processed approximately. 85^. of the total 
volume imported. 

The proponents were apparently fully representative of the In- 
dustry, but few dissenters appearing at the Hearing, 

Price wars were claimed to be prevalent in the Industry, creat- 
ing widespread demoralization and serious impairment bf capital 
assets. 



(*) This account (pages 23, 27 inclusive) of the develoT)ment of 

the cost formula was written by D, P. ij'itzg-ibbojis. See also, 
"Minirmip Price Regulations under Codes of JTair Competition", by 
Saul Helson,lffiA Administration Studies, 2S" et sea. 

9792 



-24- 



It was claimed further that the highly integrated concerns 
and t-hose with large capital assets were gradually acquiring* an 
increasing percentage of the total volume, thus tending tcvard 
monopoly. This was attributed to their ability to make large pur- 
chases in a low price green coffee market, sufficient to carry them 
well into or through a rising market,. and to their low cost of pro- 
duction and distrilDution. " , . .. 

It was "believed by, the proponent's that -a minimum, price floor 
would eliminate, or at least greatly elirtail, the pricS cutting which 
was rampant in the Industry and prevent a number of bankruptcies. 

(3) , Onponents • ' " , . .,.''_""" 

There was evidently suffitiently str&hg -opposition from members 
of the Industry to the proposal included in the August draft of "the 
Code, (which was similar to the one finally adopted), to cause i't to 
be deleted from the draft submitted in September, HRA files contain 
practically no data relative to the members who objected or to the 
nature of their objections, although the objections apparently were 
based on the use of. a uniform Cost Formula* 

IT. R.A. . Consideration of Proposal 

The only Transcript of a Hearing on this Code in the NRA. files 
is that of 'the joint Hearing of October 24, 1933, before the A^A.A. 
and N.R.A. At tha.t time the' September draft of the Code was under 
consideration and the only Sections v/ith which N.R.A« was concerned 
was the Labor Provisions. 

The final draft of' the Code, submitted January 9th, 1934, ap- 
parently was ':7orked out in conferences after full jurisdiction over 
the Code had been given to N.R.A. ■ 

The Code as finally approved prohibited "destructive price cut- 
ting", and provided that no member Pf thp Industry should "sell 
roasted coffee below his own individual cost", with the two excep- 
tions (1) that he might meet the laiTful price^ of a competitor, and . 
(2) that he could sell to government and charitable institutions at 
any price he desired. (Through ah interpretation this last ex- 
ception was ruled to mean only "government charitable" institutions 
and not all government institutions.) It also provided for "open 
price filing" and for the use of an a,ccounting system as complete 
and detailed as that formulated by the Coffee Industries Committee 
'with the approval of the Administrator shall from time' to time set 
forth the elements which shall enter into cost." ... 

(4) Development, Presentation and Approval c3f the Cost 

Formula 

The Cost Formula which was presented with the August, 1933 draft 
of the Code was evidently prepared by the Associated Coffee Indus- 
tries of America. ' As already indicated, there apparently was strong 
opposition from merabe.rs of the Industry to this Formula as it was not 

9792 



-25- 

included in the Minimum Price Proposal of the Code submitted to 
A.A.A. in September, 1933. Mr. Williamson, Secretary-Treasurer of 
the Associated Coffee Industries of America stated at the Hearing, 
October 24, 1933: "We did submit, '76 submitted a cost schedule, 
with the previous Codes, which is not before us at this time, and 
has not the supnort of the Industry." 

Apparently the larf;er units of the Industry originally were 
not in favor of the Cost Formula, but finally agreed not to oppose 
it. 

The minimum price proposal included in the Augiist, 1953 Draft 
of the Code provided that cost should be "determined by uniform 
cost finding principles to be prescribed by the Associated Coffee 
Industries of America subject to the approval of the President, such 
cost to include market replacement value of green coffee as deter- 
mined by a committee authorized by the Associated Coffee Industries 
of America, a minimum shrinkage of 16^^, and cost of delivery in- 
curred by the seller". 

The final draft provided that "the Coffee Industries Committee 
with the approval of the Administrator shall from time to time 
set forth the elements which shall enter cost. " 

The salient features of the August, 1933 proposal were a set 
of "Principles and Procedure of Cost Finding Pursuant to the Pro- 
visions of the Code" and a Cost Chart which set forth the various 
elements of the cost of production and selling with the several 
factors which entered into each. These elements included: 

Green Coffee Cost, 

16'^o Shrinkage 

Roasting Cost, 

Grinding Cost, 

Overhead, 

Selling and Delivery E>rpense, 

Shipping Container Cost, Packing Labor and share of 

Overhead for Bulk Coffee, 
Shipping Container Cost, Package Cost, Packing Labor 

and share of Overhead for Packaged Coffee. 

. The August Proposal provided that "selling price, in the case 
of Chain Stores or retail distributors who operate coffee roasting 
deisartments, shall mean the -orice at which coffee is invoiced to the 
retailing department", and that "selling price in the case of whole- 
sale grocery comx/any which operates a coffee roasting department 
shall mean price coffee is charged to wholesale department. " These 
were not incorporated in the draft submitted to the N.R.A. , and in 
addition the shrinkage allowance was changed from IQfo to 15fa, An 
additional element, "Advei'ti'.-.ir.(j Expense", is found in the draft 
submitted to the N.R.A, Inis had not appeared in the previous draft. 

After a number of conferences the Formula was api3roved March 31, 
1934. The Formula, as approved, contains a number of modifications 

9792 



"26- 

from the draft submitted, the princi-oal ones 'beingi 

1. The shrinkage percentage was changed from 
an arbitrary 15fo to actual shrinkage. 

2. The proposed draft provided that for those 
companies who had no accounting records or 
adequate data for determining cost according 
to the Formula Cost should include, - 
Replacement Cost, 16)o shrinkage, plus such 
additional mark-up for various operating 
functions as should be determined to be the 
average for the Industry on the basis of a 
survey to be made by the trade association. 
This was deleted from the Approved Formula. 

3. Depletion was limited to that portion of the 
plant and equipment actually in operation and 
used in processing of coffee, 

4. The item of "Rent" was limited to rent that 
may be reported for income tax purposes 

5. The item of "Taxes" specifically excludes 
income taxes. 

6. An additional item was included showing the cost 
and weight of any material which is added to coffee. 
The cost figure arrived at -oer lO'"' loouncls of such 
mixture is to be adjusted to reflect the presence 

of the cheaper adulterant. 

7. The items of "Dues and Contributions" and "all 
other e:menses" have been deleted under the heading 
of Overhead. ' 

F.R.A. files do not indicate what steps were taken to induce 
those members of the Industry who had opposed the use of the Cost 
Formula to withdraw their o-oposition. The files contain little evid- 
ence of opposition to the proposal from members of the Industry. This 
opposition came from a group whose profits were secured through spec- 
ulation in the green coffee ma,rket; from Standard Brands, Inc., whose 
objection was that the replacement cost provision of the Cost Formula 
was unfair to and worked a hardship on their particular type of oper- 
ation; and from one mail order company which insisted that certain 
provisions of the Formula were detrimental to its sales policy. 

The changes which were made in the proposed Formula,' were evident- 
ly made upon the recommendations of the Deputy and various Advisory 
Boards, 



9792. 



-27- 

The Consumers* Advisor;- Board objected to the use of "Market 
Ee-olacement Value" in arriving at the cost of green coffee, and sug- 
gested that "Market Renlaceraent Cost, or actual cost, of green 
coffee, whichever is lower" be used. This Bonrd contended that as 
green coffee was the most inrortant element of cost in the Industry, 
"the consumer would be unduly penalized," because the use of "Re- 
placeTient Cost" as TDrorosed vould eliminate such factors as "individ- 
ual purchasing efficiency, the saving resulting from large purchas- 
ing nower, and foresight in buying." The Deputy, in recommending 
ap"oroval of the Fornula, answered the objections of the Consumers' 
Advisory Board rith the statement th.-it use of the "least actual cost" 
would result in enabling "large buyers to throi^' large quantities of 
roasted coffee on the market at prices which would eliminate all com- 
petition and create. mono~3olies for large bu;,'ers, particularly on a 
rising market." 

The Consumers' Board also protested against the inclusion of 
"Selling and Advertising Expenses" claiming that .they "are associated 
with the business policv of each individual in his attempt to gain as 
large a share of the market as possible" and "do not seem to fit in 
with the general -oolicy of regulating the Industrj?- as a unit." The 
Deputy's re-oly was that "since four or five of the largest companies 
mal:e heavy advertising expenditures to secure thei;- volume, and the 
small and less efficient competitors could not pos,a-lbly approach the 
cost of these large concerns, excluding a„dvertising exnense" he 
believed "Advertising and Selling Expense" should be included. 



9792 



-28- 

( 5 ) Analysis of Controversial Featiores of the Cost Form-ula 

Controversy arose on the follouing points: The use of replacement 
cost for green coffee, the use of a two-week effective period for each 
determination of replacement cost, the inclusion of advertising and sell- 
ing in the computation, the allocation of general cost to coffee on the 
"basis of percentage of dollar sales in companies mailing or handling many 
products, and related prohlems involved in permission to sell "below in- 
dividual cost computed according to the code in meeting legal competition. 
The use of replacement cost deprives the consumer of possihle "benefit from 
price cuts "based on relative economies realized "by any coffee roasting 
company on its green coffee deal. Such economies might result in general 
from integration which includes coffee growing, from favora"ble plantation 
contracts, from shrewd "buying in the coffee markets, from clever or fortu- 
nate spectilation (in which a company deli"berately handles, either spora.dic- 
ally or regularly, much more than its own green coffee requirements), or 
from the use of inside information on governmental control policies in 
producing countries. Integration of this type is not a factor in the 
coffee industry. Governmental control of the coffee crops makes continued 
and pronounced advantage in green coffee purchases more likely to "be a 
matter of contacts than of shrewd estimates of trends in the market. This 
is a non-otierating advantage. If successful speculation is irregular, and 
the winners in any market period chose to spend their speculative profits 
on price cuts, to attract a larger relative share of the rather stable 
total sales of roasted coffee, processors \7ho do not gam'ble on green coffee 
could "be eliminated. The use of replacement cost in the code . formula can "be 
interpreted as an attempt to dissociate the processing and distri"buting 
industry from green coffee speculation. Prom the practical standpoint, it 
may "be viewed as a cur"b on the expansion of the -veyrj large companies. 
These companies are in the "best position to make favora"ble deals in the 
producing countries. They are also in a position to finance much longer 
stocks than are customary in the industry. If they choose to sell these 
stocks at cost, or at under average inventory cost prevalent in the indus- 
try, when the green coffee market turns up, they can make serious inroads 
into the "business of their competitors. 

Replacement cost was estimated "by the Code Authority every two weeks. 
The procedure v;as as follows: a green coffee committee met in reach of 'the 
three chief ports of entrj'' — New York, New Orleans and San Francisco — 
to estimate the representative price of green coffee in the port market. 
These estimates were su"bmitted to a central committee in Hew York, and a 
figure "based on all three war? issued to the trade as the replacement cost 
effective for the ne:ct two weeks. The accuracy with which these figures 
represented the current market was seriously questioned in only one import- 
ant instance — the hearing before the National Compliance Council on the 
alleged sale "below cost "by the H-P Company of St, Louis, Ver"bal arguments, 
and comparisons with trade journal quotations compiled "by the N.R,A, , 
satisfied the Council that there was no o'bservaljle "bias of any signific- 
ance in the Code Authority figures. 

The use of a two week period raised a more difficult pro"blem: namely, 
whether or not a short period handicapped companies vihich made frequent 
deliveries, in competition v/ith those whose delivery interval was longer 
than two weeks. The occasion on which the use of a two week period was 

9792 



-29- 

strongly attached vias the Standard Brands hearing "before the National 
Conplian.ee Coiincil. Standard Brands is comiitted to a policy of frequent 
deliveries. The cornpan,-"- maintains a delivery service direct to retailers. 
The service is also used for Fleischmann's yeast, rrhich appears to he suh- 
ject to deterioration if held in stock too long'. Since the delivery ser- 
vice is in operation, and. since coffee is Imovm to lose its flavor after 
roasting, Sta.ndard Brands has advertised its freriuent deliveries of "dated 
coffee" verj'- intensively. Tiie eicpense of the delivery service is "balanced 
against the saving on the jooher's margin and the difference in price be- 
tween a slip-top can or paper hag and a vacuiun ca.n. Incidentally, retail- 
ers do not have to he pcrsiiadod to carry heavy stocks. Hovjever, the com- 
pany complained that its coffee was at a serious handicap in a rising 
market, in competition with heavy dealer stocks of other coffeer>. It is 
a common practice in the industry- for the roaster to try to "load" his 
dealers if a rise in green coffee is anticipated. Standard Brands argued 
that it should he-pemitted to quote its retail ou.tlets competitively with 
the shelf price of competirig coffee. The Coffee Code Authority maintained 
that such procedure T70uld he impractica'ble. 

Moreover, the code -Drovisions prohihiting guarantee against price 
decline in delivery on contract .?.nd forhidding the rehilling of dealers' 
unsold stock, gave the companies using frequent delivery an advantage in 
a falling marliet. Green coffee prices actually fluctuated during the 
code period. That is, tho movement was not entirely in one direction. 
The extent of injnxy (if any) to Stajidard Brands and other companies using 
that method of delivery would he very difficult to estimate. The pro- 
priety of the two-week yieriod would he very difficult to establish on a 
precise basis. Wiile this is not a conclusive agrument in aji industry'' in 
which there are important differences in methods of distribution, it may 
be noted that the industry seemed to be satisfied with the two-v/eek 
period, Tlie national Comr)liance Co^mcil accepted in its deliberations 
evidence supporting the claims that the replacer/ient figures established 
represented market conditions with reasonable accuracy. 

Perhaps a better plan than the two-week replacement cost determina- 
tion might have been worked out through careftd analysis of actual data 
on stocks carried (green and roasted) by roasters, roasted stocks carried 
by jobbers a,nd retailers, rjid of the dm-ation of price swings in the 
green coffee market. This cmold scarcely be done in the haste which 
characterized "the period of the code formulation, and might not have re- 
sulted in usable findings in any case. 

Another "ooint which aroused some discussion in the administration's 
consideration of the cost formula was the inclusion of advertising and 
selling costs. If advertising costs are protected in an ind\istry operat- 
ing under conditions of inelastic denand, there is danger of burdening 
the consumer with prices based on unwarranted advertising expenditures. 
However, a realistic consideration of the coffee industry reveals the 
fact that very many of its members do little or no advertising and that 
some of them do no "selling" bej'-ond that involved in sending catalogu.es 
to prospective customers. The fact that many coffee comiDanies do a sub- 
stantial -.Droportion of their business on a re-order basis, and the fact 
that the code permits selling below cost to meet competition shoudd be 
considered in weighing the effects of including selling costs in the 
formula, 

3792 



"-» 



-30- 

Advertising may Tdq errpected to do one or nore of the folloTjing for 
the conrpany using it: secure and maintain access to market, raise the 
demand for the company's product and thereby cause it to sell at a pre- 
■ mium in comparison with competing goods, increase volume and thus reduce 
operating costs per unit. In the Coffee Industry'-, the first two of 
these possible benefits are probably much more important than the third. 
Severe competition among alternative distribution methods in the market- 
ing of coffee, and loss leader selling of coffee at retail make access 
to market extremely imrjortant to coffee roasters. Retailers are practic- 
ally forced to carry the brands of coffee which are intensively advertised, 
no matter how price v/ars have cut the retail mark-v^) on them. This gives 
the advertiser a very decided competitive advantage. If one of the purposes 
of the Coffee Code was the prevention of the rapid displacement of small 
coffee roasters through sales below cost by their large, po'jerfully financ- 
ed competitors, the inclusion of advertising expense in the cost foriimla 
was logical. The Code Authority — and the advertisers — went further 
in recognising the act^oal effect of advertising. Companies \7hose products 
are very well Icnown woxild not hs.ve been permitted to meet exactly the 
price of non-advertised coffee^ sjid they did not, in fact, attempt to do 
so. Large companies did, hov/ever, try to get low-price coffee business 
through aggressive selling of their own non-advertised brands. In pricing 
both classes of product these companies could use svich advantage as thejr 
possessed in operating efficiency. Only the a,dvertised brands were re- 
quired to carry advertising costs. 

Opposition of the consumer interest to the inclusion of advertising 
in the cost formula has been noted in the account, above, of the approval 
of the formula. There was also s07ie controversy in the industrjr on the 
method of inclusion of advertising in the formula, on the ground that 
advertising e:rpenses should be averaged over a long period because sales 
volume fluctuates with business and corroetitive conditions, and because 
an advertising campaign should be charged to the sales volume it brings 
in rather than current volume. 

The issue involved in the inclusion or omission of advertising cost 
was the rels,tive importance of raising the price of coffee to the const"U".ier 
and, since it is easy to enter the coffee business through the purchase 
of equipment at bahlcruptcy sales, the equipment is verj' likely to continue 
in use even if many small firms are forced out of business, but the 
individual, small enterpriser ma3/ lose in the competition. To the extent 
that non-operating advantages of large firms were responsible for his 
elimination — and perhaps even beyond that — his loss nay be a matter 
of social concern, and one of the forms in which that social concern mas'" 
be e:rpressed is in the design of price controls in the industry. 



9792 



"31" 

V, T-'E AH'ITNISTRATIO^T OF "^"^"^ P^.ICE CO:iT'°.OLS 

A. Price Filing Under tne Corle 

Tlie Code Authority repeatedly pent lett'^rs to the industry calling 
for riricr lists, liut did not ordinarily -orosecute failure to com-nly with 
this code reouirement. The industry includes a large nunher of very small 
firms, many of ^-fhich ch-nge their Dricer inf reouently. Those whose 
Torices were above cost or '^'ere regarded as ■^roh-'bly abovo cost because 
no comrjetitor coin-olame''^ of their being very lo^^, were not -orosecuted 
for neglecting to file. There were ve'^y few com-nliance r'ctions on tirice 
filing. One, in -hich a memoer's Blue Eagle wPs removed, was the case 
of the Sayre Wholesale C-roccry Comt)' ny of Sayre, Olclahoma. 

Corar)laint a.-roinst this conern ™r s made June 19, 197-4, on charges of 
refusal to file -^irice lists and sale belo'" cost. Tlie latter charge was 
dro-o^ed for lack of evidence, "■n'^ the complaint on -orice filing sent to 
the iJational Comolience Coi^Jicil by the State Director on August 7, 1934. 
(it may be of interest to note tiif^ t action was concurrently under way 
against this company for dismissing emxiloyees to "fhom it had be^n re- 
Quired to r)ay back ^ages. Yo record of the outcome of this action is at 
cresent available..) Tlae Sayre Com-oany's Blue E^gle v/as removed November 
37, 1934 and the case turned over- to the Litigation Division. The "Re- 
gional Attorney advised against litigation (in letter dated February 27, 
1935) on the groui:d that the -nresiding judge was unx-'illing to try any 
more KHA cases until a Court of Anneals or Su-oreme Court decision had 
been rendered. The case '^as susDended March 5, 1935. 

The defense offered by the Sayre Corai^any at I'^IA consideration of 
the matter was that they were ne'-' in the business and did not wish to 
ex-oose their -prices to comrjetition. Tjiey had been selling coffee for 
about 3 year and a half, ^/hile the absence of -orice differentials or 
exemT)tions in favor of ne-^ firms under the coffee code removed one of their 
chief means of building sales, the nossibilities of attracting trade 
through efficient service and by salesiranshir) with regarr"! to the q-uality 
of the blends still rerrained. The case is mentioned here only because 
of the argiaraent offered in defense. 

The accomnanying tables and cliarts s-'.im.narize "orice filings in the 
Coffee Industry, "^rice filing became o"oerative on Febriia.ry 26, 1934, 
Of more than one thousand firms that submitted price lists at some time 
during the code -oeriod, only one hundred twenty-five filed ten or more 
-orice lists. (Table V). The number of comnanies which began nrice 
filing in each month is shown in Table VI, as ^vell as the number filing 
their last -orice lists each month and the date of filing for those sub- 
mitting only one list. (There are discre-oancies in these tables due 
chiefly to errors in co-ijnting branches and subsidiary conroanies. Time 
did not -oermit a recount treating all branches and subsidiaries a.s one 
comtiany even where separate lists were filed. The errors do not seriously 
distort the -oresent account of the extent of nrice filing.) 



9792 



-32- 



TABLE 



Fijnilier of Price Lists -Filed 



llTomber of Como.'^nies 



1935 



1 
2-4 
5-9 
10 -14 
15 -19 
20 -24 
25 -29 
30 -34 
35 -39 
4-0 -44 

45 -49 
50 -54 
55 -59 
60 -64 
55 -69 



429 ■ 

"^14 

162 

57 

22 

13 

15 

8 

3 

3 

1 





1 

3 



Total 



1030 



TABLE ?I 



1934 

Feb, 
M^-r. 
Apr. 
May- 
June 
July 
Aug. 
Se-D. 
Oct. 
ITov. 
Dec. 



First Price 


Last 


"^rice 


List Filed 


List 


^iled 


287 




3 


143 




8 


43 




29 


76 




41 


10 




8 


14 




25 


, 11 




15 


9 




8 


3 




40 


2 




12 


5 




148 



FuiTibe-r of Conm a nies 
Onl^' One Price List 



72 

84 

26 

122 

2G 

15 

6 

6 

15 

8 

ii 



Jan. 

Feb, 

Ma r . 

A-or. 

May 

June 

July 

Undated 



Total 




1 
1 

1 




606 



35 
27 
64 
49 
85 
3 
2 

"602" 



10 
2 

3 



15 

419 



9792 






NUMBER OF COMPANIES FILING PRICE LISTS 
IN THE COFFEE INDUSTRY 

FEBRUARY.I934-JULY, 1935 

NUMBER OF COMPANIES FILING FIRST PRICE LIST, BY MONTHS 



NUMBER OF CODES 



290 



140 




m 



NUMBER OF CODES 



V77^ rrrm 



290 



140 



120 



100 



80 



60 



40 



20 



FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL 

1934 1935 



NUMBER OF CODES 
160 



NUMBER OF COMPANIES FILING LAST PRICE LIST, BY MONTHS 



NUMBER OF CODES 
160 



140 




FEB MAR APR MAY JUN JOL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL 

1934 1935 



50t//?Cf PRICE FILES OF THE 

NATIONAL COFFEE CODE AUTHORITY 



N.R.A. 

DIVISION OF REVIEW 

STATISTICS SECTION 

N0.526 



-34- 



The pa.ne material is nrfsent'=^o gra-oMcally in CbTt I. It is to lie 
noted that mpny conr)anies siiSDendeo ^irice filing after it had heen in 
OTDerP.tion only a few months, and that the number filing declined ra-oidly 
from Decemher 1934 on. The interval covered "by ijrice filing is given 
in Tahle VIT. Of the 60-''' corrroanieF ^-'hich filed t^o or morp ni^ice list?, 
134 submitted -orice listr during a -oeriod of ten months or longer. 



TA3LE VII 



ifumber of Months 3et'-'een 
First and Last rilin--; 
IT? 
1 
2 

,7 

4 
c 

6 

7 

8 

9 
10 
11 
1? 
13 
14 
15 
16 
17 



i'gmbe:^ of Comoanies 
l"? 
30 
40 
?1 
1? 
27 
?8 
45 
36 
47 
87 
32 
33 
55 
45 
4^3 



3_ 

Total 608 



Price filing in the coffee industry w"s f ra jiment^ry. This was due 
largely to the f''ct that there are iTkany small firms in the industry and 
because little cooT)eration was obtained in enforcing this 'Provision. 
Table VIII sho^^s the relationshir) bet'.7een size of firm and number of 
■nrice list? filed, and indicates that -orice filing was fairly regular on 
the Tjart of the larger comr)anips. The -oositive relationshi-n bet^-'een 
size of firm and number of lists cannot be expected to continue oeyond 
the T)oint at which ten or more lists were filed. Owing to variations 
in -oricing policy, it is -oossible that companies filing only ten -nrice 
lists "ere act-aally recording all of their "orice changes. Others may 
have cha.nged their lists fifty times or more during the code "oeriod. 

Substantial ga-os in the com-nletener? wit", -"hich terms of sale were 
stated and tne character of the list s-oecified -"^re suggested by the 
summary shc^n in Table IX. The inf orm^'ition afforded by the tabulation 
on which this is based is not ■nrecise: 



9792 



-35- 



e 
u 

■H 

O 

<D 






o 

•H 
<U 



O 



!4) 



<D 
r-i 

■^ 

m 
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to 

•H 

1-1 

o 

•H 

fM 

O 

o 
,9 



^ 



9792 



to 

O +i 

o ol 



03 

o o 
o 



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o o 

LT. O 



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o 
o 

o 

LO 

CM 



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o 
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o" 
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h<- 






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rH 



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C^ 



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r~^'s£) 



r-l 0"^ 



r-H 



;>oi 



1^^ 



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o 

o 

0.1 



o 

o 
o 

o* 



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LO 



CM 



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o o 

-J o 



Li-oj ir^ 



f-O 



to 

J-1 



"ST 
VX) 

I 

LP 



o 



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u 
m 

"A 



IPI -p 

\ -H 

O 

o 

LP) tn 



O 

J- 



LP 



o 



!Pi 
OJ 



LP- 



o 

Q) 
O 
•^^ 
«H 
«H 
O 

-P 

a> 
■p 
rj 
o 
o 



^1 

o 

p-l 

O 

o 

Q) 
/^ 
•P 

•H 



^ 



O "6 

•H <D 

!-. r-\ 
Pi 



rH 


O 




>^ 


(!) 




O 


^ 


•H 


(1) 


fH 


^-5 


P, 




tH 


r^ 


O 


r.) 




•H 


(D 


f. 


rH 


O 


•H 


'"' 


P-4 


^ 



r-l I 

O w; cj 



!^ 



•^lO 



-36- 

' TA3LE IX : 

SUMh'AlY OF TABULATIOIvT SHO^'i:!':^- DISCOUI'ITS AiTD 

I'lATU^J OF LIST FOR PRICE LISTS FILFE TjI'^t^^ 

TIT. COFFFF CODE 

Totals 

D iscounts s-pecified in list: 

C-'sli discount 538 

Quantity cliscount on -Dacka^ed coffee 89 

Quantity disco\mt on oulk coffee 19B 

Freight allOT^ance 85 

Jobber's discount .96 

Advertising or -oronotional allowance 7 

Mature of list: 



List to retailers 497 

List to jobbers 111 

List to restaurant and hotel coffees 342 

List of bulk coffees 734 

List of straight coffees 538 

List of Packed coffees 643 

Price F.O.B. 61 

Price Delivered 317 



comr)anies may liave been doing a business limited to certain varieties 
of product and tynes of customer and may hr-ve been offering only the 
indicated tynes of discount, or they may have ne^rlected to show all the 
releva.nt items in their Price lists. Tiie Code Authority did not secure 
.strict compliance with all these element? in the price filing provision. 



9792 



-37- 

B, S?j1° BpIo'v Cost pnd. Sestructiv" Pricp Cutting. 

Thp Tjrohitition of destructive -oric^ cutting ^•'ar r'ractically of no 
c^ns^au^nce in th^ conduct of th° industry during th'^ . if'=! of the code. 
Three important conriiianc^ actions, on sa].e helov cost and destnictive 
Tjrice cutting, '^ere onter'^d cliiring the code period. Pmctically no at- 
tention Tira-s officiaTiy given to destructiveness of the nrices under com- 
•Dlaint. The foliovring re'narks '^ill therefore he confined to the record 
regarding sale helo™ cost. 

The first of the thr'^e cases '"as that of Standard Brands, Inc. 
Shortl" after the adot)ti'^n of the cost formula, this com^-r'any -out into 
effect a -orice r^diiction on its advertised coffee. The cut "as announced 
as lasting from Ar^ril 9 to May 1, 1934 and '^as made in the face of a risirg 
green coffee market. The defense vjas that the comr)any' s method of distri- 
hution, hased on fr^auent deliveries, -out it at a disadvantage in compe- 
tition '-'ith cora-nanies --hich loaded their dealers in anticiDatinn of a 
rising market. The increased ^rice of Standard Brands' coffee resulted 
in either a sau^eze oii dealers' margins or a. shelf differential i-dth 
consequent c^nsujners' disfavor. The defense contended that hoth green 
coffee cost and advertising e^n^ens" should "be averaged over long periods; 
that the use of an all- inclusive cost system was theoretically aD-nlicatle 
onlv in an industry with uniformity in r»roduction and distrihution methods 
and with no irarjortant fluctuations in volume; that standard reialacement 
cost sho-.ld he hased on a -oeriod r^-presenting ".normal inventory of an 
average unit"; that the use of re-olacement cost hurt small enter-orise in 
a declining market; tha.t general .and selling expense not specifically 
al'iocated hy -oroduct represented 83/^ of these items .in the coranany's 
accounts, and th^" allocati'^n to coff°e "based '"n dollar sales did not 
"even arj-oroximate th^. facts"; and that, in general, "such wide variables 
as selling exuense, advertising and general expense" should he excluded 
from the cost formula. 

As has heen not'^d ahov°, no comorehensive fa'^tual information was 
available for a determination '-'f "normal inventorv of an average unit". 
The sufferings of" small entercrise in a declining market" are an- admission 
of th° fact that ther^ is an -enormous range among the memhers of th'? in- 
dustr;'/ in inventories carried. The same smaJl entemrises would, of course, 
he severely hurt in competition with price cuts hy a -DOi-TerfLil competitor 
in the face of an advancing or ev^n under conditions of a stahle green 
coffee mar^-« t. The extent to which gen°ral e;>!X)enses remain unal'^ocated 
after costs attributahle to individual ijroducts had heen so charged, does 
not destroy the -oropriety of adonting accounting practices of further 
allocation according to dollar sales. Any facts sur^-^orting the statement 
that this -practice '-'as unjustif iahle, wou"i d he in themselves, material 
for a sTjecific allocati'^^'n to "oroduct. Wide varation in selling and ad- 
vertising costs is not necessarily a substantial argument against their 
inclusion. The reasons for their inclusion have been considered previously 
in the -present rerjort. Inequities, resulting fr^^m a-D"olying a short Tjeriod 
replacement cost determination ^n an industry ^ith sharu diversity of 
distribution methods, merit further o.nnsideraticn and might well have been 
reviewejd in connection with "oroblems involving the distrubution codes 
if the NEA had continued. 



9792 



.-38- 

The National Conroliance Council found Standard Srands^ gailty of sale 
t'^lo'^ cost pnd thf^ corrpany agr^od not to r^.^eat th^ offen:;9. However, 
the decision '^as r'^ach^d in the suTTmer o " 19.'^4. In fact the nrice com- 
plaints had all "been withdrawn in accOrda.nce -^ith the Coimoany' s announced 
schedule. Furthermore, a change in the green coffee mar^'e t at the time 
the decision 'fas made •r>ro"ba'bly rendered a, repetition nf the cut unlikely 
for tusiness reasons, • The fact that th'=' cod'^ a,uthority "'as atle to reiDort 
to its members that it had successfully established violation of the pro- 
vision forbidding sale below' cost, in an action against a very iraTjortant 
com-oany, nrobably had a beneficial -osycho logical effect on code enforcenient. 

Pi-ice cutting by th^''-\Iill:in^'^OTrpoz\i- of \!rr^lfi'fiztori'^-.'t'.>, occasioned 
a considerable amount of difficulty in the trade ■■-Thile it ^^as going on but 
was straightened out by th^ cc^.e authority without recourse to official 
proceedings before the A~ministrati'^n, The cha.rg<= was Violation of the 
provision -orohibiting sale below cost. At a. regional cod" hearing held 
in Washington in December of 1934 th^ costs of the comoan'" on its mail 
order business, in w^ieh the Drice cutting had b°en done, were examined, 
but the cost accounting was not very detailed. Th^ shrinkage cost of the 
Cora?oany wgs lowoj- than the"normal" estimated by th° Code Authority, and 
its selling costs on mail business were Iott, In defense against alleged 
violation, actua.1 costs we-'-e the only fig-ares considered! "normal" costs 
were merel-ir a, rule of thumb aid in spotting -oossible violators. When it 
wa.s definitely'- established that the -nrices under complaint were actually 
below cost, the WiUcins Company agreed to withdraw them. 

The third im-->ortPnt case involving sale below cost involved a, much 
longer and more acrimonious interchange. Price cutting on low grade coffee 
on the part of the H, P, Comoanv, a. mail order house selling o\it of St, 
Louis, during th" summer of 1934, resulted in numerous coraolaint-s to the. 
Code Authority. Prolonged arguments at the regional office ^-ielded no 
results and the case wf,s transferred to Washington on October 1, The 
Research and Planning Division Re-oort date'=' December 10, 1934, recommended 
further consideration of replacement cost, raised the Question as to the 
equity of allocation of general cost on the basis of dolla.r sales, and re- 
marked that the maximum er:tent to which price had gone below cost was 
only 6/lOths of '-ne cent, according to the testimony submitted. The first 
two were apparently mentioned because the H,_P, Company based its defense 
on the charge th- t replacement cost figures- issu.ed by the Code Authority 
failed very badly to represent the market, and on the contention that the 
indicated method of allocating general costs resulted in much too high 
an allocation to coffee. It sho-n.ld be remarked that "60 points" under 
cost on low-grade Rio coffee might easily be sufficient price inducement 
to take away the business of competitors. 

The National Compliance Coiincil -adjiidgeo the replacement costs to 
be reasonably close representations of the current market price of green 
coffee on the basis rf trade journal quotations compiled by the NRA, It 
further declared th" method of allocating general costs to be a 'recognized 
accounting procedure, acceptable generally tc the coffee industry. It re- 
fused to reopen the question of the propriet-"- of using replacement cost, 
on the gro-onds that to do so lay entirel--^ outside the assigned function 
of the Council. The ruling of the Council accordingly held the H.-P. 
Coraoany guilt'^'- of sale below cost on its lo-7-priced coffee, and held that 



9792 



"39- 

the Com'^any h^^d fsil'=d to shoTir thnt its -nric^s wpr'=! <=sta'blished to ni'^et 
conroetition. It i^as also h^ld that th*^ conro'lainants had failed to show 
destnictivT iDrice cutting. The H,-P, Cora-nan-^r refused to withdraw" the nrices 
under com-olaint, and was accord ingl''- ordered to return its Bl\i° Eagle 
on Becemljer §8, The c'^s'^ "'as turned over to the Litiga.ti^n Division on 
January 3, 1935, It re-nos'^d th=re imti"! the Schechter Decision automatically 
terminated all NRA. litigation. 

It is quit° -nrssihle thr^t by the end of 19'^4 th'^ r-^moval of the Blue 
Eagle was no long<=r regard°d as a s^ricus loss "by nany concerns. The 
failure to secura any -Dunitive action through litiga.tion in th^ course 
of the ensuing months sinoly s^rv^d to strengthen the greying feeling 
in the industry that actual enforcement ^p.s not to "be ex'oected, 

C, Mjshranding , 

A case involving violation of th^ code nrovisi'^n cm labelling is of 
interest as furnishing additional background '^n -nrocedure. On Senteraher 
5, l'^34, the Coffeo Code Authority entered a cora-Dlaint against the New 
England Tea and Coffee Co'Toanv of Hprtforrl, Connecticut, for selling a 
mixtvire of coffe^-^, cereal and chicorv "without indicating on the -oackage 
that the -oroduct included chicorj'' and cereal. The governing cod.e pro- 
vision requirer' a statement on each package th^t th^ cof±o<^ was mixed 
'^ith chicory, and also a statement '^f the Tjercentag^ of cereal in the mixture. 
The Company's Blue Eagle was removed "nd' th° cas'= turned over to Litigation 
Division en Df^cemher 6, 1934, This case was regarded in the NEA as a- good 
one to bring "before th° Federal Trade Commission, Affidavits of ■:)urchase 
of the r^s-oond^nt' s coffee in retail stor°s in Massachusetts had. h^^n se- 
cur-^d in the course of th° "oreliminar;^'- investiga.t ion. Motion vas received 
by the Federal Trad° Commission on January 31, 1935 and notice served Feb- 
ruary ?6, of a hearing March ?2, 'This ^as deferred, a,nd en ArDril 3, 1935 
the Federal Trade Commission issued its ord°r dismissing th° motion, on 
the ground that the Commission had n<^ jurisdiction since interstate com- 
merce '--as not involved. Authority/ cit^d wpg Ward Baking Com".-iany v. Federal 
Trad.e Commission, 364 Fed. 330, in which the Circuit Court of A-prioals held 
that sending goods across stat^ lines, in charj'^e nf drivers did not con- 
stitute intersta + e commerce. The circumstances of the woU-V^no-wn ca.se 
vrere "oaralleled in th^ case uv, for hearing, in so far as interstate com- 
merce was concerned, 

D, Int°r-code Relati^nshi-ns. 

The o-neraticn cf integrated units in th^ coffee industry brought the 
Code Authorit-' into a difficult nositi^n with regard to relations with 
distributing codes, The right of th° coffe=> indn-stry members to sell below 
cost in ra'^eti-ng competition raised th° -problems involved of deciding what 
'"'as conTjetiti^n, Permitting a coffe^ roaster to meet the -orice of another 
roaster on a comnarabl° grad° and ^oack of coffee, both sales being made 
in the same Quantity and to th° same tiro'i '^f customer, iB a clearcut citua- 
tion. Altering sn.y "ne nf the conditions s-ated in the rreceding sentence 
introduces difficulties. Precise laiowio^^-o of the -orice structure of the 
industr""- would be required to decide whether th'^ -^-irice nf a low-grad.e coffee 
could b° cut to meet a dro-o in -nrice of p. qualit?,- blend, or of a better- 
back — and how rrjiach of a cut is justified by th» change in differential, 

8792 



-40- 

Pric«^ differences for grade pnd container may "be exoected to vary ^ith the 
level of the -nrices involved. 

Again, it is not easy to decide ho"T much, if at p11, a com-oany selling 
to jobbers may cut its lorice in resTDonse to a, dowi^ard shift in urice 
chargeri to retailers or consumers hy a com"oetitor. The r^rice to retailers 
Tfould h^ governed "by the coffee cod", the -orice to consumers ordinarily, 
would not. Strictly retailing operations w°re governed "by the retailing- 
code. The Coffee Code actually permitted coffe^- roasters distrihuting 
through intermediaries to meet only th^- accoi^nting figures at \7hirh roasted 
coi'fee '^as charged out to ^i^arehouse or retail ctor°s in competing with 
chain store roasters. The retailing code restricted -orice cutting only to 
the extent of reouiring a, minimtun mark-uxi of Gfa on net invoice or reT3lacement 
cost. ■ 

TThile the coff°° code could enforc° a charge-out figur" .covering 
actual costs to th= tine th^ roastoci coffee is ijacked at th'= roa.sting -olant, 
its cost computation conlcl te evaded "beyond tha.t point. If cost of calling 
for unground coffee -oacked in drums at the ropsting rilant "^er" charged to 
the retail store, it came vithin th-^ fla.t mark-u-o area. In the later days 
of code operation the Eetail Trade Cod" ^as amended to r'^quire the inclusion 
of transportation in retail costs, if incurred hy the retailer. . Comrdiance 
with this amendment a-D"oears to have iD^en negligihle. Taking the coffee out 
of the drums, grinding it and rjacking it in tags or sli-o-top cans could 
all he Ighelled as retail costs; the retail marlcuri could stil^ he only 
670, It is well known that si^me chains charged at least the grinding ahd 
the cost of the final container to the retail store. The demand for 
permission to meet a comrietitor' s shelf pric" is therefore readily under- 
standable, AttemTjts at joint consideration of this, 'orohlem hy the coffee, 
wholesaling and retailing Code A-athorities woj-p made in the latter ■i:)art of 
the code Tjeriod, "but ^'ere unsuccessfijl. 



9792 



E. Suirmai"' of Effects of Code Operation 

During the first ^''ear of its operation, the Coffee Code appears to 
have "been olDserved "by the great majorit-"- of the industrj'-'s neinhers. Com- 
pliance uas n£.intained chiefly on a voliintary baGis. Tlie imdesirahility 
of ■becoming involved in long dra^7n out i'lRA proceedings nay have acted as 
a deterrent of price slashing "by the large chains. These :7ere certainly 
in a position to hring aoout a serious breakdovm in the Coffee Code he- 
cause of their integrated operation. Their advantage in this respect 
consisted in the nature of price control in the retailing codes and in the 
fact that a retailing operation malces it possihle to use widely different 
r.ark-ups on individual products. The niark-ups used nay differ even more 
than actua.l difference in handling costs for the separate products. A 
chain store could secure a net profit upon retail sales even \7ith cut 
prices on coffee, "because of the increase in store incone resulting fron 
"business attracted "by coffee as a price leader. IThile drastic price cu.ts 
on coffee nay not have oeen the ordina.r:^ policy of the chain stores under 
prosperous "business conditions, the}/ may have "been tempted to mal^e such 
cuts during the period of code operation. They were very quick to meet 
competitive -orice cuts. TTnether or not the latter constituted perraissihle 
prices in the latter stages of code operation "became a matter of minor 
importance, Diuring the first, 3^ear of the code, menhers of the industi?'" 
appeared to 'oe willing to wait on an investigation hy the code authority 
as to v'hetlier or not a competitive price was legal. 

A difference should "be recognized "between procedure appropriate to 
OTDerating •'onder permanent regulation of fair trade practices, and under 
emergency regulation. In the former, long delays in administrative 
decision 6.ue to the time requirements of e:diaustive factual analysis, nay 
well "be jListified "by the results obtained. A temporary set-up requires 
prompt decision "based on the "best possible judgment that can be formed 
with materials and e;'diibits readily available. An administrative procedvxre 
which incurs the delays of the former to achieve the results of the latter 
does not make for effective reg-alation of industry. 

The code itself inadequately treated the problems involved in defining 
competition. Among these problems was the difficult one of relations \7ith 
codes governing wholesaling and retailing. Dijxing its period of comparati- 
vely successful functioning, the code for the coffee industry'' did curtail 
the drastic price cutting involving sale below cost prevalent in the pre- 
cede period. 

Retail coffee "orices published by the Bureau of Labor Statistics show 
an increase in 19S4, of apnroxinately ifo over 1933, and a steady decline 
beginning January 1935. These figxires are very roijgh. Pra.ctically speak- 
ing, no figij.res are available, for this report, on the trends in margins 
and selling prices just prior to, during, and after code operation. In 
personal interview with the heads of three me6.iuji-sized coffee compajiies 
which mcz' be taJcen as representing a fairly large nunber of concerns simil- 
arly sit-uated, all three were highly favorable to the code and the code 
authorit3^. 



9792 



-42- 

One of these conpanies ( Conpa.nj'- A)' does a vol-uiae of 50,000 to 75,000 
tags aiinr.ally and sells upon a semi-national; 'basis. The second, (Company 
B) does a sectional business of approximately the same total volume. The 
third, (Conpanj- G) is an important local company roasting hetneen 25,000 
and 50,000 hags. Each of these three was hurt 'hy the abandonment of the. 
code. Price cixtting on low grade coffees is now very severe. Company A 
is now attempting to persuade a number of its retail outlets to enter ex- 
clusive bir'ing arrangements. The president of the comioany- feels confident 
that pxitting the business on a requisitioning basis will enable the whole- 
saler-retailer type of distrib\i.tion to match the efficiency of chain stores 
and pos3ibl3^ to surpass it. He said that a considerable part of the com- 
pany's bi\siness had been handled on as low a margin as 2fo when the volfxie 
was normal. Com"Da.ny 3 has just embarked on a ventiire in resale price 
maintenaiice on sales of its breinded coffee in Kew York City using the 
contracts permitted under the Pew York State Jair Trade taw*-' Although, this 
policy had been under consideration for some time, the undertaking was 
considerably" hastened because of the severe price cutting of the post- 
code period. 

Representatives of two very large firm.s in the industry ercpressed 
satisfaction vrith the abandoni'.ient of codes. They regarded it as relieving 
them of serious additiona-1 complications in doing business and felt that 
the code set up was impracticable, at least as far as its actual operation 
was concerned. Failure of -the code to define "meeting competition" in 
precise terns was regarded as a serious obstacle to equitable code regule,- 
tion. 



9792# 



OFFICE OF THE NATIONAL RECOVERY ADMINISTRATION 
THE DIVISION OF REVIEW 

THE WORK OF THE DIVISION OF REVIEW 

Executive Order No. 7075, dated June 15, 1935, established the Division of Review of the 
National Recovery Administration. The pertinent part of the Executive Order reads thus; 

The Division of Review shall assemble, analyze, and report upon the statistical 
information and records of experience of the operations of the various trades and 
industries heretofore subject to codes of fair competition, shall study the ef- 
fects of such codes upon trade, industrial and labor conditions in general, and 
other related matters, shall make available for the protection and promotion of 
the public interest an adequate review of the effects of the Administration of 
Title I of the National Industrial Recovery Act, and the principles and policies 
put into effect thereunder, and shall otherwise aid the President in carrying out 
his functions under the said Title. I hereby appoint Leon C. Marshall, Director of 
the Division of Review. 

The study sections set up in the Division of Review covered these areas: industry 
studies, foreign trade studies, labor studies, trade practice studies, statistical studies, 
legal studies, administration studies, miscellaneous studies, and the writing of code his- 
tories. The materials which #ere produced by these sections are indicated below. 

Except for the Code Histories, all items mentioned below are scheduled to be in mimeo- 
graphed form by April 1, 1936. 

THE CODE HISTORIES 

The Code Histories are documented accounts of the formation and administration of the 
codes. They contain the definition of the industry and the principal products thereof; the 
classes of members in the industry; the history of code formation including an account of the 
sponsoring organizations, the conferences, negotiations and hearings which were held, and 
the activities in connection with obtaining approval of the code; the history of the ad- 
ministration of the code, covering the organization and operation of the code authority. 
the difficulties encountered in administration, the extent of compliance or non-compliance, 
and the general success or lack of success of the code, and an analysis of the operation of 
code provisions dealing with wages, hours, trade practices, and other provisions. These 
and other matters are canvassed not only in terms of the materials to be found in the files, 
out also in terms of the experiences of the deputies and others concerned with code formation 
and administration. 

The Code Histories, (including histories of certain NRA units or agencies) are not 
mimeographed. They are to be turned over to the Department of Commerce in typewritten form. 
All told, approximately eight hundred and fifty (850) histories will be completed. This 
number includes all of the approved codes and some of the unapproved codes. (In Work 
Material s No 18, Content s of Code Histries . will be found the outline which governed 
the preparation of Code Histories.) 

(In the case of all approved codes and also in the case of some codes not carried to 
final approval, there are in NRA files further materials on industries. Particularly worthy 
of mention are the Volumes I, II and III which constitute the material officially submitted 
to the President in support of the recommendation for approval of each code. These volumes 
9768—1. 



-ii- 

set forth the origination of the code, the sponsoring group, the evidence advanced to sup- 
port the proposal, the report of the Division of Research and Planning on the industry, the 
recommendations of the various Advisory Boards, certain types of official correspondence, 
the transcript of the formal hearing, and other pertinent matter. There is also much offi- 
cial information relating to amendments, interpretations, exemptions, and other rulings. The 
materials mentioned in this paragraph were of course not a part of the work of the Division 
of Review. ) 

THE WORK MATERIALS SERIES 

In the work of the Division of Review a considerable number of studies and compilations 
of data (other than those noted below in the Evidence Studies Series and the Statistical 
Material Series) have been made. These are listed below, grouped according to the char- 
acter of the material. (In Work M aterial s No . 17, T entative O utlines and Summaries of 
Studies in Process , these materials are fully described) . 

I ndustry Studies 

Automobile Industry, An Economic Survey of 

Bituminous Coal Industry under Free Competition and Code Regulation, Economic Survey of 

Electrical Manufacturing Industry, The 

Fertilizer Industry, The 

Fishery Industry and the Fishery Codes 

Fishermen and Fishing Craft, Earnings of 

Foreign Trade under the National Industrial Recovery Act 

Part A - Competitive Position of the United States in International Trade 1927-29 through 

1934. 
Part B - Section 3 (e) of NIRA and its administration. 
Part C - Imports and Importing under NRA Codes. 
Part D - Exports and Exporting under NRA Codes. 

Forest Products Industries, Foreign Trade Study of the 

Iron and Steel Industry, The 

Knitting Industries, The 

Leather and Shoe Industries, The 

L.umber and Timber Products Industry, Economic Problems of the 

Men's Clothing Industry, The 

Millinery Industry, The 

Motion Picture Industry, The 

Migration of Industry, The: The Shift of Twenty-Five Needle Trades From New York State, 
1926 to 1934 

National Labor Income by Months, 1929-35 

Paper Industry, The 

Production, Prices, Employment and Payrolls in Industry, Agriculture and Railway Trans- 
portation, January 1923, to date 

Retail Trades Study, The 

Rubber Industry Study, The 

Textile Industry in the United Kingdom, France, Germany, Italy, and Japan 

Textile Yarns and Fabrics 

Tobacco Industry, The 

Wholesale Trades Study, The 

Women's Neckwear and Scprf Industry, Financial and Labor Data on 

9768—2 



I 



- Hi - 

Women's Apparel Industry, Some Aspects of the 

Trade Practic e Stu dies 

Commodities, Information Concerning: A Study of NRA and Related Experiences in Control 
Distribution, Manufacturers' Control of: Trade Practice Provisions in Selected NRA Codes 
Distributive Relations in .the Asbestos Industry 
Design Piracy: The Problem and Its Treatment Under NRA Codes 
Electrical Mfg. Industry: Price Filing Study 
Fertilizer Industry: Price Filing Study 

Geographical Price Relations Under Codes of Fair Competition, Control of 
Minimum Price Regulation Under Codes of Fair Competition 
Multiple Basing Point System in the Lime Industry: Operation of the 
Price Control in the Coffee Industry 
Price Filing Under NRA Codes 
Production Control in the Ice Industry 
Production Control, Case Studies in 

Resale Price Maintenance Legislation in the United States 

Retail Price Cutting, Restriction of, with special Emphasis on The Drug Industry. 
Trade Practice Rules of The Federal Trade Commission (1914-1936): A classification for 
comparison with Trade Practice Provisions of NRA Codes. 

Labor Studies 

Cap and Cloth Hat Industry, Commission Report on Wage Differentials in 

Earnings in Selected Manufacturing Industries, by States, 1933-35 

Employment, Payrolls, Hours, and Wages in 115 Selected Code Industries 1933-35 

Fur Manufacturing, Commission Report on Wages and Hours in 

Hours and Wages in American Industry 

Labor Program Under the National Industrial Recovery Act, The 

Part A. Introduction 

Part B. Control of Hours and Reemployment 

Part C. Control of Wages 

Part D. Control of Other Conditions of Employment 

Part E. Section 7(a) of the Recovery Act 
Materials in the Field of Industrial Relations 
PRA Census of Employment, June, October, 1933 
Puerto Rico Needlework, Homeworkers Survey 

Administrative Studies 

Administrative and Legal Aspects of Stays, Exemptions and Exceptions, Code Amendments, Con- 
ditional Orders of Approval 

Administrative Interpretations of NRA Codes 

Administrative Law and Procedure under the NIRA 

Agreements Under Sections 4(a) and 7(b) of the NIRA 

Approve Codes in Industry Groups, Classification of 

Basic Code, the — (Administrative Order X-31) 

Code Authorities and Their Part in the Administration of the NIRA 
Part A. Introduction 
Part B. Nature, Composition and Organization of Code Authorities 

9768—2. 



I 



I 



Part C. Activities of the Code Authorities 

Part D. Code Authority Finances 

Part E. Summary and Evaluation 
Code Compliance Activities of the NRA 
Code Making Program of the NRA in the Territories, The 
Code Provisions and Related Subjects, Policy Statements Concerning 
Content of NIRA Administrative Legislation 

Part A. Executive and Administrative Orders 

Part B. Labor Provisions in the Codes 

Part C. Trade Practice Provisions in the Codes 

Part D. Administrative Provisions in the Codes 

Part E. Agresments under Sections 4(a) and 7(b) 

Part F. A Type Case: The Cotton Textile Code 
Labels Under NRA, A Study of 

Model Code and Model Provisions f-jr Codes, Development of 

National Recovery Administration, The; A Review of its Organization and Activities 
NRA Insignia 

President's Reemployment Agreement, The 

President's Reemployment Agreement, Substitutions in Connection with the 
Prison Labor Problem under NRA and the Prison Compact, The 
Problems of Administration in the Overlapping of Code Definitions of Industries and Trades, 

Multiple Code Coverage, Classifying Individual Members of Industries and Trades 
Relationship of NRA to Government Contracts and Contracts Involving the Use of Government 

Funds 
Relationship of NRA with States and Municipalities 
Sheltered Workshops Under NRA 
Uncodified Industries: A Study of Factors Limiting the Code Making Program 

Legal Studies 

Anti-Trust Laws and Unfair Competition 

Collective Bargaining Agreements, the Right of Individual Employees to Enforce 

Commerce Clause, Federal Regulation of the Employer-Employee Relationship Under the 

Delegation of Power, Certain Phases of the Principle of, with Reference to Federal Industrial 
Regulatory Legislation 

Enforcement, Extra-Judicial Methods of 

Federal Regulation through the Joint Employment of the Power of Taxation and the Spending 
Power 

Government Contract Provisions as a Means ;f Establishing Proper Economic Standards, Legal 
Memorandum on Possibility of 

Industrial Relations in Australia, Regulation of 

Intrastate Activities Which so Affect Interstate Commerce as to Bring them Under the Com- 
merce Clause, Cases on 

Legislative Possibilities of the State Constitutions 

Post Office and Post Road Power — Can it be Used as a Means of Federal Industrial Regula- 
tion? 

State Recovery Legislation in Aid 3f Federal Recovery Legislation History and Analysis 

Tariff Rates to Secure Proper Standards of Wages and Hours, the Possibility of Variation in 

Trade Practices and the Anti-Trust Laws 

Treaty Making Power of the United States 

War Power, Can it be Used as a Means of Federal Regulation of Child Labor? 

9 768—4. 



- V - 

THE EVIDENCE STUDIES SERIES 

The Evidence Studies were originally undertaken to gather material for pending court 
cases. After the Schechter decision the project was continued in order to assemble data for 
use in connection with the studies of the Division of Review. The data are particularly 
concerned with the nature, size and oporations of the industry; and with the relation of the 
industry to interstate commerce. The industries covered by the Evidence Studies account for 
more than one-half of the total number of workers under codes. The list of those studies 
follows: 



Automobile Manufacturing Industry 
Automotive Parts and Equipment Industry 
Baking Industry 

Boot and Shoe Manufacturing Industry 
Bottled Soft Drink Industry 
Builders' Supplies Industry 
Canning Industry 
Chemical Manufacturing Industry 
Cigar Manufacturing Industry 
Coat dud Suit Industry 
Construction Industry 
Cotton Garment Industry 
Dress Manufacturing Industry 
Electrical Contracting Industry 
Electrical Manufacturing Industry 
Fabricated Metal Products Mfg. and Metal Fin- 
ishing and Metal Coating Industry 
Fishery Industry 

Furniture Manufacturing Industry 
General Contractors Industry 
Graphic Arts Industry 
Gray Iron Foundry Industry 
Hosiery Industry 

Infant's and Children's Wear Industry 
Iron and Steel Industry 



Leather Industry 

Lumber and Timber Products Industry 
Mason Contractors Industry 
Men's Clothing Industry 
Motion Picture Industry 
Motor Vehicle Retailing Trade 
Needlework Industry of Puerto Rico 
Painting and Paperhanging Industry 
Photo Engraving Industry 
Plumbing Contracting Industry 
Retail Lumber Industry 
Retail Trade Industry 
Retail Tire and Battery Trade Industry 
Rubber Manufacturing Industry 
Rubber Tire Manufacturing Industry 
Shipbuilding Industry 
Silk Textile Industry 
Structural Clay Products Industry 
Throwing Industry 
Trucking Industry 
Waste Materials Industry 
Wholesale and Retail Food Industry 
Wholesale Fresh Fruit and Vegetable Indus- 
try 
Wool Textile Industry 



THE STATISTICAL MATERIALS SERIES 



This series is supplementary to the Evidence Studies Series. The reports include data 
on establishments, firms, employment. Payrolls, wages, hours, production capacities, ship- 
ments, sales, consumption, stocks, prices, material costs, failures, exports and imports. 
They also include notes on the principal qualifications that should be observed in using the 
data, the technical methods employed, and the applicability of the material to the study of 
the industries concerned. The following numbers appear in the series: 
9768—5 . 



I 



- vi - 

Asphalt Shingle and Roofing Industry Fertilizer Industry 

Business Furniture Funeral Supply Industry 

Candy Manufacturing Industry Glass Container Industry 

Carpet and Rug Industry Ice Manufacturing Industry 

Cement Industry Knitted Outerwear Industry 

Cleaning and Dyeing Trade Paint, Varnish, and Lacquer, Mfg. Industry 

Coffee Industry Plumbing Fixtures Industry 

Copper and Brass Mill Products Industry Rayon and Synthetic Yarn Producing Industry 

Cotton Textile Industry Salt Producing Industry 

Electrical Manufacturing Industry 

THE COVERAGE 

The original, and approved, plan of the Division of Review contemplated resources suf- 
ficient (a) to prepare some 1200 histories of codes and NRA units or agencies, (b) to con- 
solidate and index the NRA files containing some 40,000,000 pieces, (c) to engage in ex- 
tensive field work, (d) to secure much aid from established statistical agencies of govern- 
ment, (e) to assemble a considerable number of experts in various fields, (f) to conduct 
approximately 25% more studies than are listed above, and (g) to prepare a comprehensive 
summarj report. 

Because of reductions made in personnel and in use of outside experts, limitation of 
access to field work and research agencies, and lack of jurisdiction over files, the pro- 
jected plan was necessarily curtailed. The most serious curtailments were the omission of 
the comprehensive summary report; the dropping of certain studies and the reduction in the 
coverage of other studies; and the abandonment of the consolidation and indexing of the 
files. Fortunately, there is reason to hope that the files may yet be cared for under other 
auspices. 

Notwithstanding these limitations, if the files are ultimately consolidated and in- 
dexed the exploration of the NRA materials will have been sufficient to make them accessible 
and highly useful. They constitute the largest and richest single body of information 
concerning the problems and operations of industry ever assembled in any nation. 

L. C. Marshall, 
Director, Division of Review. 
9768—6 .