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VI

THE COST OF PRODUCTION AND DISTRIBUTION

  THE price which consumers pay for the merchandise they buy is the sum of four costs. These four costs are

  1. The cost of the raw material;

  2. The cost of fabrication;

  3. The cost of physical distribution, including transportation and storage through all the stages of production and distribution;

  4. The cost of marketing, including

  (a) the cost of buying and selling the product by the producers of the raw material and the fabricators of it, and

  (b) the cost of buying and selling the finished product by wholesalers and retailers.

  In the report on Marketing and Distribution of the Joint Commission on Agricultural Inquiry there is a discussion and an analysis of the consumer's dollar expended for corn flakes between the producer, manufacturer, wholesaler, and retailer, covering the period from 1913 to 1921.* While this product is not a staple, in the old significance of the term, it has very largely taken the place of staple foods, and the shift in consumption from the staple cereals which used to be sold out of the barrel, to a food specialty such as corn flakes, is one of the most significant changes which have taken place in the production and distribution of commodities during the past fifty years.

  * Report No. 408, House of Representatives, 67th Congress, 1st Session, page 212, Table D15. Upon this table the committee report comments as follows:

  " That it should cost approximately an average of 63 cents of the consumer's dollar to distribute 37 cents worth of corn flakes, indicates a very definite need of an improvement in the processes of distribution. During the period shown in above chart, the producer received from his corn in his local market an average of 22.1 cents out of the dollar which the ultimate consumer paid for the corn manufactured into corn flakes. The service of transporting, grading, handling, and selling to the manufacturer costs on the average approximately 7.5 cents. In 1921 the manufacturers had reduced the cost of advertising and selling to 11.8 cents out of the dollar the consumer paid for corn flakes, in comparison with an expenditure of 16.7 cents in 1916 and 21.3 cents in 1913 for the same purpose. It seems quite probable that an increased turnover of corn flakes on the part of the wholesale grocer and the retail grocer could materially reduce their operating expenses. The wholesaler in 1921 absorbed a loss of 0.4 cents and his operating cost was 8.3 cents. The retail grocer handled corn flakes at an operating cost of 13.3 cents and received out of the dollar in sales of corn flakes 6 cents profit. The manufacturer's profit of 8.3 cents out of the dollar the consumer paid for corn flakes seems disproportionate to the wholesaler's loss of 0.4 cents and the retailer's profit of 6 cents."

  The following table is a rearrangement of the congressional committee's analysis of the consumer's dollar spent for corn flakes so as to show these four costs.

 

                              TABLE IV
         Analysis of Consumer's Dollar Spent for Corn Flakes

                                      Rearrangement of: 
                      Analy-    Production        Distribution 
                      sis of
                       Com.
                        on                               Marketing
                      Agric.                     Phys
                       In-      Basic   Fabri-   ical           Whole
                      quiry     Prod.   cation   Dist.   Mfr.   saler & 
                                                                Retailer

Producer received ...  21.0     21.0      ...      ...     ...    ...
Transportation ......    5.9    ....      ...      5.9     ...    ... 
Elevator margin and
  profit ............    1.6    ....      ...      1.6     ...    ...
 Manufacturer:
  Cost of manufacture    8.1    ...       8.1      ...     ...    ... 
  Manufacturer's cost
    of selling ......    7.3    ...       ...      ...     7.3    ...
  Advertising .......    4.5    ...       ...      ...     4.5    ...
  Transportation ....    9.1    ...       ...      9.1     ...    ...
  Taxes .............    7.0    ...       1.96     2.17    2.87   ...
  Profit ............    8.3    ...       2.324    2.573   3.403  ... 
Wholesaler:
  Net margin ........    7.5    ...       ...      5.27    ...    2.63
  Loss ..............     .4    ...       ...      same    ...    same 
Retailer
  Operating expense .   13.3    ...       ...      6.384   ...    6.916
  Profit ............    6.0    ...       ...      2.88    ...    3.12
   
                       100.0   21.0      12.384   35.877  18.073 12.666

Plate IV-A is a graphic presentation of this analysis of the consumer's dollar spent for corn flakes.

PLATE IV-A
Analysis of Consumer's Dollar Spent for Corn Flakes

 

PLATE IV-B
Analysis of Consumer's Dollar Spent for Fresh Beef

 

PLATE IV-C
Analysis of Consumer's Dollar Spent for Bread

 

PLATE IV-D
Analysis of Consumer's Dollar Spent for Rolled Oats

  The report of the Commission on Agricultural Inquiry (which contains, I believe, the most authoritative figures published with regard to the proportion of the consumer's dollar paid to the raw materials producer, manufacturer, wholesaler, retailer), contains figures covering a considerable number of products in addition to the corn flakes. Some of these products show higher distribution costs and some of them lower than corn flakes. But all of them reveal the large amount which the consumer paid for physical distribution, and the surprisingly large amount paid the manufacturer, rather than the so-called middlemen-the wholesaler and retailer, for marketing the products. The three products concerning which the committee's data is sufficiently complete to permit a similar rearrangement to that made of the corn flakes data, are analyzed in Table IV-A-B-C-D, and graphically shown in the corresponding plates.

                      TABLE IV-A-B-C-D
    Analysis of Consumer's Dollar Spent for Corn Flakes,
             Fresh Beef, Bread and Rolled Oats

                             Corn   Fresh           Rolled 
                            Flakes   Beef   Bread    Oats 

Production:
  Basic Production ......... .21     .61     .28     .18
  Fabrication .............. .12     .06     .18     .13 
Distribution
  Physical Distribution .... .36     .19     .11     .32 
Marketing
  Manufacturer's ........    .18     .04     .33     .23
  Wholesaler's & Retailer's  .13     .10     .10     .14 

                           $1.00   $1.00    $1.00  $1.00 

  Table IV differs radically from other analyses of the consumer's dollar in that every physical distribution and marketing cost has been eliminated from the cost of production.

  The cost of growing the corn and of converting it into corn flakes was 33.384 cents.

  About one-third of the consumer's dollar was, therefore, paid for raw materials, for labor in production, and for factory expenses of all kinds, including factory overhead, and profits earned on the production of the corn flakes as distinguished from the marketing and distributing of them.

  Over one-third of the consumer's dollar--35.877 cents--was paid for physical distribution. This includes not only the amount paid directly for transportation and storage, and the incidental expenses of the growers, manufacturers, wholesalers, and retailers, but also the estimated profit which was earned in the course of this work.

  A little less than one-third of the consumer's dollar was paid for marketing, but the manufacturer received 18.073 cents out of this sum, while the wholesaler and retailer together received only 12.666 cents.

  We have been so busy excoriating retailers and wholesalers--under the hated name of middlemen --that we have never really taken time to find out to whom the consumers of the nation actually pay their money for distribution. Isn't it something of a shock to realize that most of the money paid is for physical distribution, and that more is paid to the manufacturers for marketing this product than is paid for all their services to wholesalers and retailers combined

  The value of all merchandise distributed by retailers in 1923, according to an estimate made by Paul H. Nystrom, (Harvard Business Review of January, 1925, "An Estimate of the Volume of Retail Business in the United States," p. 150.) was approximately thirty-five billion dollars.

  This estimate makes it possible to secure an appreciation of the significance of Table IV. That table presents the facts in the form of percentages, but percentages can not possibly give us an adequate appreciation of the situation thus revealed.

  If we assume that the totals in Table IV represent proportions of the 35 billion dollars spent at retail, with possible variations of from 10 to 20 per cent., then the consumers paid for raw materials from $6,650,000,000 to $8,050,000,000; for fabrication from $3,850,000,000 to $5,000,000,000; for physical distribution from $11,301,500,000 to $13,790,000,000; for marketing by manufacturers from $5,670,000,000 to $6,930,000,000; and for merchandising by wholesalers and retailers from $3,990,000,000 to $4,900,000,000.

  These are colossal sums. Each fraction of a per cent. saved or wasted is important. Every time improved methods of production result in a decrease of only one per cent. in prices, it means a saving of three hundred and fifty million dollars a year; every time we add an extravagance in distribution amounting to one per cent. of sales, it means an increase of three hundred and fifty million dollars in the cost of distribution. Each one per cent. saving creates a market for three hundred and fifty million dollars' worth of consumption goods, and each one per cent. waste destroys a market of equal size.


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