The Magazine

The Big Store

The mythology of small business meets a retailing giant.

Apr 29, 2013, Vol. 18, No. 31 • By JAY WEISER
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Not long ago, New York City stopped a Walmart store from being built in its downtrodden East New York neighborhood, another defeat in the giant discounter/grocer’s six-year effort to enter the five boroughs. Small retailers and unions, in prevailing, embraced a century-old tradition of political suppression of retail competition. Notwithstanding the loud American romance with entrepreneurship, Marc Levinson’s history of the erstwhile supermarket giant A&P—the Walmart of its day—rewrites the story. Inefficient small businesses often entrenched themselves through regulation, with free market innovators and consumers eking out only partial victories.

Outside the A&P (ca. 1960)

Outside the A&P (ca. 1960)

AP

Excavating decades of lawsuit records, not to mention trade journals like Central Manufacturing District Magazine, Levinson has pieced together the history of this closely held, publicity-averse company. For almost a century, A&P, controlled by George H. Hartford, and then sons George L. and John, led serial revolutions resulting in the rise of what are now part of our everyday retail landscape: branded goods, prepackaging, self-service, volume buying, vertical integration, and, finally, supermarkets. Like Microsoft a century later, A&P was rarely the first mover, but its refinements prevailed. It could offer the lowest prices through innovations and economies of scale, and it freely cannibalized existing business lines to catch the next wave.

John Hartford was the company’s retail genius for over 60 years, but Levinson underestimates the “inside” finance/accounting brother George. An information revolution, no less than technological and manufacturing changes, was transforming retail distribution three-quarters of a century before large businesses began adopting mainframe computers in the 1950s. John deployed information in radical new ways: by reducing working capital needs through low prices and high volume, and, in that pre-spreadsheet era, analyzing consumer demand by region and store with elaborate tables. But George created the accounting systems for a retail empire that had reached 9,236 stores by 1923. (Similarly, Walmart’s technology-driven logistics revolution has been slighted in favor of more glamorous hardware and software firms like Apple.)

A&P was not unique. F. W. Woolworth created a giant international five-and-dime empire, while regional food chains like Safeway and Kroger and British chains like Sainsbury and Tesco were moving down the same path; but as late as 1939, A&P had more supermarkets with sales over $250,000 than all other American retailers combined.

Early 20th-century food retailing was fragmented and small-scale. Every neighborhood or town had grocers, greengrocers, butchers, bakers, and dairymen. Tiny retailers, supported by networks of small jobbers and regional wholesalers, eked out a living from tiny trade areas by working long hours serving by hand from behind counters. For some, this offered a promise of independence or, in bad times, survival. My grandfather, after losing a tailor’s job in the Depression, opened a candy store that the family operated from 6 a.m. until 2 a.m. seven days a week. The small retail niche became ever more tenuous as A&P squeezed out distribution costs and cut prices.

By the time of the Depression, as hardpressed consumers became even more price-conscious, small retailers found their political voice in an anti-chain-store movement—first in certain states, and then nationally, spearheaded by the populist Texas congressman Wright Patman. This dovetailed with the New Deal push to cartelize the economy by giving favored interest groups the power to limit competition to support their incomes. Small businesses, present in every legislative district, were ripe for sentimentalization and protective legislation. (Most of these companies were tiny, undercapitalized startups that rapidly went bust, often burning through New Deal-era subsidies such as Small Business Administration loans, but the small business job-creation myth still managed to persist into last year’s presidential campaign.)

Confiscatory state chain-store taxes penalized A&P for its low prices and prevented market-driven expansion. Rep. Patman’s signature achievement, the labyrinthine Robinson-Patman Act, legislated against “price discrimination” on the theory—repeatedly debunked by economists over the decades—that in the highly fragmented and competitive retail field, chains were selling below cost to drive small competitors out of business. By creating potential liability when chains sought volume discounts or ran sales, Robinson-Patman limited cost-saving innovations. 

(My grandmother found A&P’s cost advantage such that, rather than have her wholesaler deliver bulk sugar for her candy store’s homemade syrup, she walked a mile to the local A&P, paid retail, and dragged the 10-pound sugar sack back herself.) 

The anti-chain assault wiped out A&P’s cost advantage and profits, and kept inefficient small retailers in business, thus raising consumer costs. Between 1929 and 1939, retailers’ gross margins (the markup between wholesale and retail prices) on foods such as produce widened by 10 percent. The assault also distorted the urban fabric of the country, with dire future effects. In Great Britain, without anti-chain-store legislation, national retailers offered groceries on shopping streets, keeping neighborhoods livable. In the United States, taxes forced A&P to close 5,950 small stores during 1937-40; they were replaced by fewer, large supermarkets, often in automobile-dependent suburbs. The new format—completely self-service, and offering a far wider line of items—reduced costs even further, driving down prices. This made urban neighborhoods ever less desirable: Their expensive small grocers, featuring limited, low-turnover inventories, created the “food deserts” now bemoaned by progressives in low-income neighborhoods like East New York. 

As the tech industry and Walmart later found, firms in the government’s sights are inevitably drawn into regulatory rent-seeking and Washington’s pay-to-play culture, lest opponents have the field to themselves. In the wake of the anti-chain assault, privately held A&P began making political contributions and engaged Washington’s holy trinity of lawyers, lobbyists, and public relations firms.

The demands did not end there—as Levinson’s most explosive revelation, based on 1945 congressional hearings, shows. In 1939, while Rep. Patman pressed a national chain-store bill that would have devastated A&P, President Roosevelt let the Hartfords know that he wanted them to lend his ne’er-do-well son Elliott $200,000 (approximately $3.2 million in current dollars) to buy some Texas radio stations. Elliott and his uncle, Eleanor Roosevelt’s alcoholic brother Hall, met with John Hartford in the latter’s apartment. The Roosevelts got FDR on the phone, and the president assured Hartford that “it was a sound business proposition and a fine thing.” Hartford, who “did not want to do anything to incur the enmity of the President,” immediately agreed to the loan. When Elliott went into the Army Air Forces and the business got into trouble, the president arranged for Jesse Jones, head of the federal Reconstruction Finance Corporation, to meet with Hartford to settle the debt. In their December 1941 to March 1942 meetings—immediately after U.S. entry into World War II—Hartford, undoubtedly aware that Jones influenced access to credit and that administration rationing would control grocery supplies, agreed to write down Elliott’s loan (by 98 percent) to $4,000.

FDR was not one to stay bought, even when he was the salesman. Later in 1942, his Justice Department antitrust head, Thurman Arnold, filed a criminal monopoly suit against A&P due to its low prices and vertical integration. Arnold prevailed, despite A&P’s national market share of only 12 percent and the company’s longstanding policy of not pricing below cost. (As the subsequent founder of Washington’s Arnold & Porter law firm, Arnold made a lucrative career of defending corporations against similar claims.)

The antitrust suit didn’t stop A&P’s rapid postwar growth, though; poor corporate governance did. In 1951, the retail genius John Hartford died in the saddle at age 79, and his successors knew little of the postwar Western boom regions. Worse, company ownership was concentrated in the family’s foundation, and madcap nephew Huntington Hartford and other relatives demanded big dividends rather than reinvestment in the company. By the 1970s, when Walmart started its ascent, A&P was a shadow of itself. Today it hangs on as Manhattan’s semi-upscale Food Emporium chain, pricier than discounters but not foodie enough to compete with Whole Foods.

Over the course of 150 years, Joseph Schumpeter’s “creative destruction” worked. But along the way, under the guise of protecting small businesses, rent-seeking interests used regulation in a successful assault on consumer living standards. Today, anti-chain legislation dresses in the yuppie garb of land-use regulation, such as San Francisco’s Proposition G (2006) restricting chains outside the downtown core. So while the Financial Times’s mystery shopper admires “a black and yellow slash-neck, batwing-sleeved blouse with a contrasting Chinese garden scene on one-half for $920” in Hayes Valley, San Francisco’s beleaguered working class can either schlep to Union Square or annihilate its paychecks in the neighborhood boutiques.

Jay Weiser is associate professor of law at Baruch College.