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VIII

THE RISE IN THE COST OF MARKETING

OUT of every dollar spent by the consumer for corn flakes in 1921, only 12-2/3 cents was paid to cover the charge of merchandising by wholesale and retail grocers combined. Out of the same dollar, however, a little over 18 cents was paid to cover the charge of the manufacturer for marketing.

  The manufacturer's charge was about 50 per cent. greater than the combined charge of the so-called distributors. This is a startling fact. It is true that it is not yet universally a fact concerning everything consumers buy. There are still a considerable number of products which are being economically marketed by the manufacturers. But the whole tendency of the times is toward a reduction in their numbers. The methods which were originally used to exploit patent medicines, alcoholic beverages, and cigars and cigarettes are being year by year applied to more and more of our staple commodities; to the bulk of the products purchased at retail and to a considerable part of those purchased for industrial uses.

  Most of the staple groceries--flour, sugar, coffee, soap, canned and bottled goods; many of our staple meat products--ham and lard; nearly all of our drugs and toilet articles; dry goods and furnishings which lend themselves to labeling and trade marketing, and all kinds of merchandise which can be packaged, are no longer marketed as staples but as specialties. Each year sees an additional number of staples converted into specialties which are marketed by the high pressure methods used by the manufacturers of corn flakes. Another twenty-five years of such changes in the control of distribution as we have experienced since 1900, and the marketing charges of nearly all manufacturers will be higher than the combined charges of the retailers and wholesalers who will sell their products.

  That so much should be spent to market a grocery specialty of such wide sale as corn flakes indicates the need for careful examination of manufacturer's marketing costs.

  Corn flakes are made from our leading American cereal. Fifty years ago no corn product carried such a burden of marketing expense. Corn and corn products were sold in bulk. The cost of marketing by the millers was an item so insignificant that it could hardly be measured. With the change to modern methods of selling and advertising, the manufacturers introduced nearly every one of the new and costly methods of distribution which I have called high pressure marketing.

  Today corn is shipped to mills often located at great distances from growing centers, then processed, and shipped even greater distances to jobbers and retailers at the points of consumption. The corn flakes and other corn products are trademarked and packed in small, elaborately decorated cartons containing a few ounces of the actual foodstuff itself. The cartons are in turn shipped in small and comparatively expensive containers. Armies of salesmen call upon retailers and jobbers to see that they are amply stocked with their brands. Over the whole nationwide field of operations, millions of advertisements are distributed by the manufacturers. Every medium of advertising is utilized--the billboard, the newspaper, the magazine, the street car card--to persuade the consumer to eat corn flakes.

  I submit in all seriousness the proposition that it is not necessary for manufacturers to advertise in order to make human beings eat. They used to eat before the national advertising of foodstuffs became one of our great national sports, and they will continue to eat even if some miracle were to efface every vestige of food advertising from the American scene. Grocers would continue to supply them with groceries, just as druggists would supply them with drugs, hardware dealers with hardware, and clothiers with clothes. The only difference would be that consumers instead of being confused by the rival claims of superiority by manufacturers would rely more completely upon their dealers for advice and information than they do now, and manufacturers, instead of arguing their case before an audience of consumers who are amateurs in knowledge of merchandise, would have to argue their case before a better trained and more experienced audience of jobbers and retailers. Having to sell their product to the trade would tend to eliminate buncombe from manufacturer's claims. Selling would have to be on the basis of quality, price, and value. Few of the arguments about consumer demand and acceptance, which are now used by manufacturers to persuade jobbers and retailers to feature brands rather than merchandise, could survive such a regime. Manufacturers' marketing costs would inevitably shrink and the saving would represent a clear economic gain.

  Let me make myself clear. In allocating the responsibility for the rise in the cost of marketing, I am placing major responsibility upon the manufacturers of the country and minor responsibility upon the wholesalers and retailers. Indeed, I am sometimes tempted to absolve the distributors entirely and hesitate only because they also are infected with the mania for sheer volume of sales, and indulge in extravagances of merchandising for which there is no necessity. Price competition, however, sets sharp limitation upon such extravagances among jobbers and retailers.

  I base my statement as to the major responsibility of the manufacturers for this state of affairs on two self-evident propositions:

  1. That manufacturers are under an apparently inescapable pressure to extend their markets and that the capitalization of the goodwill created by the demand for their trade-marks enables them to shift the high cost of marketing to wholesalers, retailers, and the general public.

  2. That the vast majority of wholesalers and retailers are under no essential compulsion to indulge in merchandising wastes, and that price competition prevents those who do indulge in such extravagances from passing the cost on to the public.

  It is not necessary in order to establish these two propositions to furnish evidence that in many industries the manufacturers are spending more for marketing than are the wholesalers and retailers.

  I have cited one industry out of many of those studied by the Commission on Agricultural Inquiry. The report of the Commission furnishes other cases. But even if the manufacturers spent less than the so-called distributors, what they do spend has a much greater importance because their extravagances are pyramided while the retailers' are not.

  In the very nature of things, retailers and jobbers are passive factors in the distribution of the products in their line. They are suppliers of the various commodities and of the various brands of each commodity they handle to their customers.

  The retail grocer's real unit of sales, for instance, is not units of a product sold, but numbers of customers who buy their groceries from him. His biggest asset is not the fact that he sells many cases of soap or bags of flour, but the fact that he has many regular customers who buy all kinds of groceries from him. Eighty to ninety per cent. of the entire trade of retailers consists of sales to regular customers. It is to all intents and purposes a matter of indifference to the grocer just what product or just what brand a customer buys from day to day, since in the course of time he will supply to each customer all the various items which the customer uses. The retailer exists because he supplies the demand for groceries, not because he creates a demand for individual items like corn flakes. He gets the proportion of their income which his customers spend for groceries as long as he remains their grocer.

  If stocking mayonnaise will please and help to hold his customers, or tend to secure new ones for him, he will add a line of it to his stock. If it fails in this regard, he will drop it.

  If featuring the Pink Violet brand helps him to hold and to build trade, he will push that brand for "all it is worth."

  But if the brand fails to build trade, he may not only cease to feature it--he may drop it from his stock entirely or even replace it with another commodity.

  Manufacturers, on the other hand, are active factors in the distribution of the particular commodities which they manufacture. The mayonnaise manufacturers can not rest content with the fact that consumers eat. They must make them eat mayonnaise. It is to the interest of each individual manufacturer to stimulate the consumption of mayonnaise generally, but above all the consumption of his particular brand. The individual manufacturers in every industry are engaged actively in enlarging the market for the production of their own factories at the expense of the production of their competitors, while their industry as a whole is actively engaged in enlarging the market for its product at the expense of the market of competing industries.

  Clothing manufacturer competes with clothing manufacturer, but the clothing industry as a whole is engaged in competing with all the automobile, the radio, and the furniture industries. If the consumer diverts a considerable portion of his income to a new product such as radios or phonographs or automobiles, of necessity the consumer's expenditure for clothing is in some proportion lessened. The entrance of new industries into the arena of production intensifies the marketing problem of all industries.

  It is the competition between manufacturers, both inside each industry and between industries, which furnishes the fertile soil in which high pressure selling, advertising, and marketing flourish. The manufacturer of a grocery specialty, anxious to operate his plant to its full capacity, and resentful of the indifference of jobbers, puts crew after crew of canvassers, demonstrators, and specialty salesmen in the field, increases his advertising appropriation, and literally "forces" his product into distribution.

  A manufacturer of shoes, dissatisfied with the volume he is able to secure from sales to established retailers, eliminates the retailer from consideration in territory where his sales are insufficient, and opens chains of shoe stores to insure adequate distribution for the productive capacity of his factory.

  A manufacturer of brooms and brushes, anxious to extend his business, finds jobbers and retailers well supplied with such products, so he cuts clear across the normal channels of distribution--starts an immense advertising campaign using double page spreads in colors in magazines circulating by the millions, hires an army of house to house canvassers, and lo, his product is being distributed!

  What is the effect both upon business and upon consumption of this high pressure marketing?

  The corn flakes furnish a particularly flagrant illustration. Here is a foodstuff consumed by millions of people yearly, and made from a cereal which has been an item in the diet of the country since its settlement. Marketed as it is today, 21¢ worth of corn, in the form of corn flakes, costs the consumer one dollar.

  The high pressure method of selling this cereal results in jobbers and retailers carrying many brands. Carrying many brands means larger stocks of corn flakes than are really needed to meet the desires of their customers for this particular product. The turnover of both wholesalers and retailers is reduced; deterioration of stocks is increased, but what is even worse, prices are raised and consumption, instead of being stimulated, is reduced.

  If it be objected that corn flakes represent an extreme case--that I should use an average case rather than a flagrant one--I can only say that, flagrant as it is, it is already typical. If I really wanted to cite an extreme case, I would cite the case of bran, which one advertising trade paper boasted, costs $20 per ton, and is being sold to consumers for $1,000. When I think of that sublime example of modern marketing magic, I am astonished at my moderation in calling attention to a case in which 21 cents worth of corn is sold to the consumer for $1.00.

  Fifty years ago there was scarcely a single section of the country which did not have its own flour mill, its own iron forge, its own saw mill, its own tanneries, and its own manufacturing establishments of various kinds. Nothing was brought from a distant point of manufacture which it was possible to produce near at home. The cereals which were ground in the local mills were home grown. The lumber, the hides, the iron, the fuel used in these local industries were principally neighborhood products.

  Today one can find the remains of these old industrial establishments in almost every section of the country which was well populated during the Civil War. There are numberless mills fallen into ruin, abandoned forges, even abandoned mines--mines which were operated as long as there was a local market for the minerals extracted from them, but which were abandoned because they could not be profitably operated when it became necessary to ship ores to distant forges and mills.

  Statistics furnish only a faint record of this transformation.

  The census of 1870 lists 252,148 manufacturing establishments. The population at that time was 38,558,371. This means that there was one manufacturing establishment for every 152.9 persons.

  In 1920, the number of establishments was 290,105--an increase in the number of establishments of only 37,957. In the meantime, population had grown to 105,710,620, making the average number of persons to each establishment 364.4.

  It is evident that the change from local manufacturing (and therefore local distribution) to distant manufacturing (and national distribution) is reflected in the relative reduction in the number of factories.

  However, these figures do not adequately convey the transformation which has taken place, principally because they make no allowance for concentration of production within each industry. In many of the industries, especially those which lend themselves readily to high pressure marketing, a comparatively few manufacturers supplying a national market produce more than all the other manufacturers combined.

  According to Hotchkiss and Franken, ("The Leadership of Advertised Brands," 1923) L. E. Waterman Company does 85% of the fountain pen business of the country. Wm. Wrigley Jr. Company does 70% of the gum business of the country. Eastman Kodak Company does almost the entire business of the country in cameras and films. Colgate and Company does around 60% of the tooth paste business. Mint Products Company, Inc., makers of candy, do 75% of the business in their product. Proctor & Gamble Company, makers of "Crisco," do almost 60% of the business in this product. O'Sullivan Rubber Company estimates that nine out of every ten rubber heels affixed to shoes by dealers are O'Sullivan.

  There are several hundred factories producing crackers and biscuits, yet two of them practically dominate cracker and biscuit production. According to Frederick Beers, Manager of production for the National Biscuit Company, that company does the following proportions of the total business in its lines in the country:

Year                 Sales     Per Cent 
                               of Total 
                             U.S. Business
1914 .........  46,143,210      51
1919 ......... 101,707,597      49.9
1921 ......... 104,536,255      55.7

  As the Loose-Wiles Company, which is the second largest biscuit and cracker manufacturer of the country, does from 15% to 20% of the total business, these two manufacturers do about 75% of the total business in this line. (Printer's Ink, December 20, 1923.)

  All these concerns do a national business and cultivate the national market.

  The period in which larger and more economically operated factories have replaced smaller and more expensively operated factories is a part of the story of the industrial development of the country full of fascinating history. The new large factories were able to undersell and outsell the old small factories--sometimes in fair and open competition by furnishing a superior product, or the same product at a lower price, or by using those methods of high pressure marketing in which we are interested, but sometimes the supremacy of the larger factories was unfairly won by cutting prices section by section until one local factory after another was ruined. The national enterprises were able to survive the losses in territory in which there were local competitors because they could recoup their losses on sales in other sections. One fact of great importance which emerges in connection with the disappearance of these local manufacturing enterprises and their replacement by larger factories is this: the local enterprises had no complex problem of distribution. They could rely upon the simple distribution methods needed to supply the territory in which they were located and in which they could operate economically. But the great factories which today have taken their place have naturally very complex problems of distribution. As factory production moved further and further from the points of consumption, distribution machinery had to be developed to cope with the new conditions.

  The question is, have the higher costs of the methods of distribution necessary under the new system eaten up the economies in mass production which modern methods make possible?

  Concerning a great many lines of production, I think this question would have to be answered in the affirmative. What has been saved by lowering the cost of production and fabrication has been lost in unnecessary and wasteful transportation and extravagant marketing. Out of the enormous quantities of commodities which science and art makes it possible for us to secure from our farms and factories, we produce and consume but a very small part, because of foolish systems of distribution. We utilize so little of our potential production principally because we have never fairly faced the problem of distributing economically all that it is possible for us to produce.


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