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ONE of the strange things in connection with the National Distribution Conference held under the auspices of the United States Chamber of Commerce, in 1925, was that while the word "distribution" was on everybody's lips, nobody in attendance at the conference thought it necessary to agree with anybody else as to what they meant by the word. To a great many of the conferees, it meant only wholesaling and retailing; but to some of them it meant transportation; to others, it meant selling and advertising. If a general connotation might be distilled from the meanings ascribed to it by this group of about two hundred and fifty men called together expressly to discuss distribution, it would have to be in a vague fashion, the handling of merchandise after it is a finished commodity.
So vague a definition, if it may be called a definition at all, is of course worthless. If we are to seek the causes of the high cost of distribution, we must first of all determine what is, and what is not, properly a part of the cost of distribution. Production costs must be sharply differentiated from distribution costs, and from any other kinds of costs which would tend to confuse our thinking upon the subject.
We shall then see, first, that not only manufacturers, but also retailers and wholesalers are engaged in production; and secondly, that not only retailers and wholesalers, but also manufacturers and producers are engaged in distribution. We shall have to seek therefore for the causes of the rise in distribution costs not only by studying the merchandising methods of retailers and wholesalers, but also by studying the marketing methods of manufacturers.
There are two uses of the word distribution which must be clearly differentiated at this time; first, the use of the word to describe physical distribution such as transportation and storage; second, the use of the word distribution to describe what is better termed marketing.
There is a third use of the term--the special and technical sense in which it is used in pure economic science--which might be called income distribution. In this sense distribution is the process by which the total income of the entire nation is apportioned to labor and capital and to all the factors which contribute to its production. It therefore has to do with rent, wages, interest, and profit; their nature; their relationship one to another; and the economic validity of the proportion which is paid out to labor, to land, to capital, and to management. Income distribution treats the subject of physical distribution and the buying and selling of goods, the questions in which we are at present most interested, from a standpoint with which we are not here concerned.
What I shall call physical distribution is that part of the complete process of distribution which is involved in the transporting and storing of goods. The cost of physical distribution is the cost of transporting goods from the places of production to the places where they are to be consumed, of storing them in warehouses and stores until such time as consumers are in need of them, and the overhead expense incidental to these two processes. This cost is a part of the total cost of distribution which has to be distinguished from the cost of marketing in order to make clear the relative responsibility of transportation and marketing for the rise in the cost of distribution. To determine whether a very large part of the rise is caused by "high pressure" selling, advertising, and marketing by manufacturers who desired to operate to a capacity in excess of the current demands of the market, it is necessary to separate the cost of physical distribution from the cost of marketing.
Buying and selling are necessary adjuncts to our present system of distribution. The cost of buying and selling and the overhead incidental to it, principally advertising, traveling, clerical and office expenses, I shall call the cost of marketing.
Methods of buying and selling today are the result of a gradual evolution from earlier methods when production, distribution, and consumption were almost entirely local, and when each community was practically self-sustained. When the farmer took his wheat to the local grist mill to have it ground, and took away the meal himself, no complex marketing system was necessary. Today the farmer has to sell his wheat to a local elevator, and the cost of this step in distribution is the first in a long series of distribution costs which represent in the aggregate a sum far in excess of that which prevailed years ago. In fact, many of our present day marketing costs are for operations which could hardly be said to have any existence at that time.
The introduction of modern machinery and of modern labor-saving methods after the Civil War did not immediately result in any great increase in the cost of marketing, nor did it require men to devote more time to the performance of this work. At first the demand for manufactured goods was in excess of the production and the manufacturer had only three problems--to make, to deliver, and to collect.
"For a considerable time," says the Report of the Joint Commission on Agricultural Inquiry on Marketing and Distribution, "the demand exceeded the capacity of manufacturers, and the entire effort was to devise improved methods of mechanical production.* (Report No. 408, House of Representatives, 67th Congress, 1st session.)
When, however, production began to exceed the capacity of the markets to absorb the commodities being made and manufacturers found it necessary to create additional markets for their products, marketing became one of the serious problems of manufacturers.
Today it is a problem which exceeds in importance that of production. The greater part of the average manufacturer's thought is engrossed with this problem, and a considerable portion of the manufacturer's total expenditures is today devoted to marketing his production. A large part of the capital of many manufacturers is represented by investments made to maintain a market for their production. In addition to securing a price sufficient to cover direct expenditures for selling and advertising, manufacturers must earn profits to pay dividends upon this part of their investment of capital. What manufacturers receive for their product today is therefore a payment proportionately less for production and proportionately more for distribution. Manufacturers are distributors, not merely producers.
If a farmer spends half his time in growing vegetables, and half his time in huckstering, then in spite of the fact that he is called a "producer," only half of his time may be properly chargeable to production. Half is just as truly distribution as if the selling of vegetables had been performed by a green goods grocer.
If a manufacturer maintains an extensive staff of traveling salesmen, conducts an expensive national advertising campaign, and finally, earns immense profits because of the demand for his trade-marked brand, the portions of his gross margin which he devotes to marketing and the profits earned by reason of his marketing skill, are distribution costs even though he is, like the farmer, generally called a "producer."
For the same reason that it is important to distinguish between the manufacturers' cost of production and their cost of marketing, it is important to distinguish between what we may call the productive margin of wholesalers and retailers, (what they are in reality paid for the physical distribution of the merchandise they handle), and their margin for merchandising, (what they are paid for selling, displaying, advertising, and similar costs of merchandising.)
The public's general impression that the entire sum paid to wholesalers and retailers is non-productive, while the sum paid to manufacturers for goods is productive, makes it necessary to distinguish carefully these two groups of costs.
The cost of transportation is obviously not a marketing or merchandising cost. Neither is the cost of warehousing, without regard to whether the expense for storage is incurred by manufacturer, wholesaler, or retailer. Physical distribution is a process of producing time and place utilities, just as truly as mining, farming, or manufacturing are processes of producing basic and form utilities. The work of adding these time and place utilities to finished products is an integral part of the productive process. It is production when it is done by manufacturers. And it is production when it is done by retailers and wholesalers.
To establish the fact that these are really parts of the productive process, it is only necessary for us to give a little consideration to the four recognized stages of production and the utilities or values created at each stage.
The raw materials of commerce are the basic utilities of economics. Wheat, corn, and oats; cotton and wool; coal and iron--these are basic utilities, and farming, stockraising, mining, fishing, in fact every operation which results in the production of our basic commodities is a part of the process of producing basic utilities.
Raw materials, however, are rarely ready for consumption as they come from the basic producer. With the exception of products such as fresh vegetables, fruits, nuts, eggs, and milk, every basic utility is fabricated before it is ready for consumption. This applies to vegetable and animal products such as cotton, flax, wool, and hides, which have to be made into cloth, clothing, and shoes, and to mineral products such as iron, copper, zinc, lead, and oil, which rarely reach the ultimate consumer in the form of raw material. While some of the processes of fabricating or changing the form of raw materials are performed by basic producers, the overwhelming majority of products are processed and fabricated by millers and manufacturers.
The production of basic utilities and their fabrication into finished products usually takes place where it can be done most economically and therefore most profitably. Cotton is not grown in the north because there it would be necessary to produce it in green houses. For the same reason--economy in production--steel is produced in great quantities in Pittsburgh and little or none is produced in New York. It can, of course, be produced in New York City, but only at greatly increased cost. Value or utility is therefore added to the Pittsburgh steel by transporting it from the point of fabrication to the point of consumption in New York which is equal to the difference in the cost of producing in New York and the cost of producing it in Pittsburgh.
All transportation of goods, regardless of whether the goods are in the raw state, semi-finished, or finished, since it results in the placing of the goods where they can be used or consumed more economically than at the point of production, involves the creation of place utilities.
Cotton on the farm is a mere basic utility. Transported in the farmer's wagon and then by freight to the cotton mill, the process of moving it from the farm to the mill has added to its utility. In the same way when woven into a finished cloth, its transportation from the mill to the store where it is convenient for a consumer to buy it, adds to its value. The cost of transporting goods from one place to other places where they are more valuable is the cost of creating place utilities. This cost and the cost of producing time utilities together make up the cost of what I have called physical distribution.
There is nearly always a "lag" between production and consumption which makes storage of goods essential. Consumption of most products is generally a continuous process, while production is often an intermittent one. Goods therefore have to be stored until the consumers are ready to use them. The value which is thus added by storing commodities is a value resulting from the creation of time utilities.
The cost of maintaining and operating the elevators in which our cereals are kept, the huge oil tanks in which gasoline and kerosene are stored, the warehouses in which manufacturers store raw materials, and in which they accumulate their finished products, the cost of the warehouses in which jobbers and wholesalers keep supplies of all kinds of commodities, and finally, the cost of the store rooms and the space in retail stores devoted to shelves and counters and display cases containing goods, are all costs incurred for the creation of time utilities.
The storage warehouse industry brings up to most people merely a picture of cold storage. Our cold storage warehouse system is a gigantic industry, it is true. Yet the value of the time utilities created by the cold storage and public warehouse industry is relatively trifling in amount compared to the values created by farmers, manufacturers, wholesalers, and retailers in storing goods until the time comes when consumers can use them.
In the case of the retailers, the major proportion of what they spend for the rent of their stores is, of course, actually devoted to the selling and displaying of their merchandise. But every retail store has storage rooms which are not used for selling and the rent paid for such space and for the space used for storing goods on shelves, under counters and in display cases represents expenditures for the creation of time utilities. To determine exactly the cost of creating time utilities, rents have to be divided into two parts, one part--the cost of creating the time utilities--being for the space actually occupied by goods, and the other--the cost chargeable to marketing or merchandising--being for the space used exclusively for selling.
A similar division into two parts would naturally have to be made of the time of those working in every stage of production and distribution in accordance with the time devoted by them to the care of goods, and the time devoted to actual selling. Labor devoted to the storage and care of stock is labor devoted to the creation of time utilities. Labor devoted to actual selling is labor devoted to marketing or merchandising. Because there is no practical necessity for making this division in day to day bookkeeping, we have failed to recognize the importance of the distinction. But to get to the truth about distribution, it is necessary to keep from confusing the two costs. One is the cost of producing a time utility--the other is a marketing or merchandising cost and not a physical distribution cost.
The creation of any of the four utilities is an operation which produces values. Their creation is production. There is absolutely no excuse, therefore, for considering the production of time and place utilities as any less production than the creation of basic and form utilities.
The fact that the greater part of the time and place utilities which are consumed are created by our so-called middlemen, the retailers. and wholesalers, has tended to blind us to the fact that in this part of their work, retailers and wholesalers are engaged in production.
All of what we pay to retailers and all of what we pay to wholesalers should not, therefore, be considered payment for distribution, any more, as we shall see, than all of what we pay to manufacturers should be considered payment for production.
To distinguish the work of creating time and place utilities from that adjunct to the process of distribution which I have called marketing, I have called the process of creating these two utilities the work of physical distribution. It is true that, from the standpoint of pure economics, marketing, since it is necessary to the regulation of production and the distribution of the goods produced, can ultimately be resolved into the four utilities and in that way considered a. part of the process of production. From the standpoint of our immediate inquiry, however, we shall see that the distinction is very important.
This distinction becomes clear if we divide the expenditures of wholesalers and retailers into three groups: (1) Such items as interest on investment in stock, depreciation on stock, storage of stock, freight, and delivery, which are almost in their entirety incurred for physical distribution, are expenses incidental to the pure and simple creation of time and place utilities. (2) Items of expense such as rent, bookkeeping, and credit, are partly chargeable to physical distribution and partly to merchandising. (3) Items such as advertising, window display, salaries of salesmen and buyers, and all items of expense which are directly involved in the buying and selling of merchandise, are entirely merchandising or marketing costs.
A careful analysis of retailers' costs indicates that if divided in this way about one-half of the total is chargeable to merchandising. About half of what we pay to the retailers of the country, therefore, is spent for what every economist must acknowledge to be production, and only half for what the general public believes to be non-productive.
On the other hand, the prevalent notion that what is paid to the manufacturers of the country represents payment for production only is a fallacy. In many cases, as we shall see, a large part of the sum the manufacturer is paid for his product is used to cover distribution costs.
The habit of using distribution as a synonym for retailing and wholesaling is responsible for much confusion about the responsibility for the high cost of distribution. The belief that distribution begins only after goods have been fabricated and are ready for use by the ultimate consumer is responsible for the belief that while retailers are distributors, manufacturers are producers. The truth, of course, is that both are both producers and distributors.
Every factor in the process of production is engaged in distribution just as truly as is the retailer and wholesaler.
The farmer who grows cotton, (surely no one will question his status as a producer) must move it from his fields--where there is no way for using it and it is practically valueless--to the cotton gin and then to his local warehouse or shipping point so that he may market it. The grower is thus not merely a producer of a basic utility--cotton--but a creator of time and place utilities--and these operations all involve distribution.
The factor, broker, and cotton merchant, who in turn buy and sell, and assemble the cotton, are all engaged in distributing it.
The cotton mill which fabricates the fiber into cloth, (surely no one will doubt that the mill is a producer), is also engaged in distribution. The mill not only transfers cotton, from the warehouses in which it is assembled, to the points where it can be spun and woven economically, but it stores the raw cotton until such time as it is ready to weave it, and then repeats both the storing and shipping after it has woven it into cloth. In other words, the cotton mill in buying its raw material and selling its finished product is involved first in the distribution of the raw cotton, and then in that of the woven cotton cloth.
Distribution, then, is not a process which begins after the cotton has been woven and finished--after its conversion into a form ready for use by ultimate consumers. It does not begin after it is in the hands of wholesalers and retailers. It is a process inseparable from production. It begins when raw materials are marketed and assembled for fabrication. It continues when the finished products are marketed and distributed by manufacturers. It ends when the retailer merchandises goods and delivers them to the ultimate consumers.
Whoever sells and whoever buys is engaged in distribution. Whether he grows cotton, spins cotton, weaves cotton, converts cotton, wholesales cotton, or retails cotton--he distributes cotton.
It is the sum of all the transportation, storage and marketing costs involved in moving goods from the producers of the raw material to the ultimate consumer and making them available when and where they are needed or desired that gives us truly the entire cost of distributing any product.
And since the producers and manufacturers of the nation market and distribute goods, it follows that they have marketing and distribution costs, and that we must compare their costs with the costs of the wholesalers and retailers in determining whether the distributors or the manufacturers are making distribution cost so much. Nine-tenths of all the problems of the world would solve themselves if time were taken to properly state them and to define the terms in which they are stated.
No better illustration of the truth of this can possibly be found than in the discussion of this question of the rise in the cost of distribution.
If the rather detailed definitions upon which I have been dwelling have been tedious, I think I can justify the tedium because they should have established the soundness of the following propositions:
(1) That what is usually called distribution refers to two entirely distinct things, one of which I have called physical distribution, and the other marketing;
(2) That physical distribution is an integral part of our productive processes and that if this kind of work is production when it is performed by a manufacturer, it is also production when it is performed by a retailer or wholesaler;
(3) That both manufacturers and retailers, or if you prefer the terms, our producers and distributors, are engaged both in the physical distribution and in the marketing of the products of the country;
(4) That it is necessary to separate the cost of physical distribution from the cost of marketing in order to determine the relative responsibility of our transportation systems on one hand and of manufacturers and distributors on the other for the rise in the cost of distribution;
(5) That the cost of marketing by manufacturers must be compared to the analogous costs of wholesalers and retailers in order to determine the relative responsibility of the manufacturers and the distributors for the rise in the cost of distribution.