HOME   SOCIAL CRITICISM LIB. CAT   TABLE OF CONTENTS   NEXT CHAPTER


 

IX

THE RISE IN THE COST OF MERCHANDISING
BY RETAILERS AND JOBBERS

  BEFORE dismissing this question of responsibility, it is necessary to consider to what extent modern wholesaling and retailing may have contributed to the rise in the cost of distribution.

  It is difficult to say whether the price we pay for wholesaling and retailing is considerably higher today than fifty years ago because there is no phase of our economic life concerning which we know less. We do know, of course, that the numbers of persons engaged in retailing have risen year after year; that the total number of retail stores has risen, and that the number of retail stores per capita is greater today than fifty years ago. As to wholesaling, even less can be said with certainty. In the absence of any census of distribution and of any statistics as to the number of retailers and jobbers today and in years gone by; the volumes of their business and their costs of operation, the student of this subject has to be satisfied with generalizations based upon matters of common knowledge.

  This being the case, if we are to come to some conclusion as to the part which retailers and wholesalers may have played in the rise in the cost of distribution, we must look to the broad, underlying operations of distributors and determine from them whether or not modern retailing and wholesaling tends to increase the cost of distribution.

  The fact that wholesalers and retailers are primarily creators of time and place utilities, while manufacturers are primarily creators of basic and form utilities, is the cause of a significant difference between them and the manufacturers.

  Consumers may not consciously say it to themselves, but in effect they ask two questions of every retailer to whom they give their custom. The first is, "Does this retailer carry what I like or want?" The second is, "Has he the things I desire when I am in the market for them?" Both these questions presuppose that the retailer and wholesaler carry a stock of goods at a place and time that suits the convenience of the customer. The nearer the place and the shorter the time in which the customer can be supplied with his needs, the easier it is for the distributor to satisfy him. The further the place and the longer the time, the greater is the difficulty under which the distributor labors. As between the neighborhood store and the distant department store, and between the village general store and the Chicago mail order house, so great is the advantage of the store nearest to the customer in place and time, that it is necessary for the department store or mail order house to show extraordinary savings and carry very much larger varieties of merchandise in order to secure and hold their customers. The desire of the consumer to go to a place which is convenient and to get the merchandise immediately he wants it, is the basic reason for the existence of the independent retail store. The further retailers and wholesalers are located from the vicinity of their customers, the greater is their cost of serving and holding them.

  From this it should follow that most of our retailers and wholesalers would have to operate in limited territories. This is actually the situation. The overwhelming majority of our city retailers draw their trade from a distance of a few blocks from their store. Nearly all our country retailers draw from larger but still definite circles covering a territory some miles from their stores. Department stores and large specialty stores draw from still larger circles. These are, however, very sharply circumscribed by their delivery services. The fact that retailers and wholesalers generally operate in restricted territories is the principal reason why I have come to the conclusion that they are not fundamentally responsible for the rise in the cost of distribution.

  The maximum amount of business of the retailers in any community is, broadly speaking, limited to the total expenditure of those who reside in that community. Competition between retailers can only result in transferring the purchasing power existing in their territory at any given time from one retailer to another. While one retailer may be able to increase the volume of his business at the expense of competitors, either by selling at lower prices, or giving his customers better service, all the retailers together can not sell more than the residents in that community earn.

  No amount of competition among retailers can increase the total consumption buying in a community unless the community as a whole increases its income or reduces the proportion of its income which it usually saves. By wiping out savings accounts, and bank deposits, and checking investments in stocks and bonds, sales of goods for consumption could be temporarily stimulated, but the period of increased sales would continue for so short a time that it would hardly increase total sales over a period of a single year.

  It is true that competition between retailers, especially in some of the larger cities, has resulted in extravagant expenditures for advertising, display, and similar efforts to win trade. Yet it is extremely doubtful whether the payment of the public for retailing has materially been increased by it. Competition among retailers is so intense that neither individual retailers nor communities of retailers can increase prices arbitrarily. If the retailers in any one community indulge in extravagant and wasteful merchandising and attempt to cover it up by charging higher prices, business simply moves out of town, or the higher local prices invite enterprising merchants to open new stores, which would for a time take advantage of the higher margins for profit prevailing in that town, but which would ultimately bring all prices down again.

  When some misguided retailer tries to increase the volume of his sales by extravagant advertising, display, and salesmanship generally, he very quickly finds that while his extravagance can be continued up to the point at which he has used up his margin of net profit, it can not long be continued beyond that point because he cannot increase his prices to cover. Competition in retailing and wholesaling is still fundamentally a question of price. Even the so-called quality stores have to meet price competition on higher levels.

  This is the nub of the situation. The retailer cannot indulge in distribution extravagances and survive because the price at which he sells is a competitive price. The most efficient retailer sets the price, and the retailer who indulges in extravagant merchandising must cover the cost of it out of his net profits.

  This is the reason why retailers' margins have changed so little over a considerable period of time. For nearly fifty years, the mark-up of the retail grocer has been around twenty-five per cent; that of the dry goods dealer around forty per cent; that of the clothier around fifty per cent; and that of the furniture dealer around 100 per cent. In recent years, as manufacturers have taken on more and more of the function of merchandising, retail margins have been contracting. This is most apparent in the grocery field, in which the retailer and wholesaler have steadily shrunk in relative importance to the manufacturer, with the result that margins on many items in the line of groceries yield the distributors less than the cost of doing business.

  Just as competition regulates retail and wholesale margins, it should regulate manufacturing margins. Just as it prevents extravagant merchandising among the distributors of the nation, it should prevent extravagant marketing among the manufacturers of the nation. Just as it checks undue transportation by retailers and wholesalers, it should check unnecessary transportation by manufacturers.

  But competition has apparently failed in many cases to regulate the distribution practices of some of our largest manufacturers. As we shall see, during the past fifty years, manufacturers have increasingly indulged in those methods of high pressure marketing to which I ascribe so much of the responsibility for the rise in the cost of distribution. With apparent impunity, they have added to the price of their products the cost of extensive selling and advertising campaigns and the cost of shipping to distant territories. They have evidently discovered a mechanism which enables them to lift their products outside of ordinary competition and to hide the fact that they are not giving to the consumers of the nation the benefit of those lower prices to which the general progress in production entitles them.

  Before I finish, I shall show what this mechanism is, why it came into existence, and how a determined effort to establish a less extravagant machinery of distribution would enormously increase the prosperity of the rank and file of manufacturers, wholesalers, and retailers, and add to the well-being and happiness of the consumers of the nation.


HOME   SOCIAL CRITICISM LIB. CAT   TABLE OF CONTENTS   NEXT CHAPTER