Each year at The New York Produce Show and Conference, we take pride in showcasing authors doing important work. Last year we featured Joan Nathan and, here at the Pundit, we provided a “sneak preview” of her presentation last year in a piece we titled, Famed Food Writer Joan Nathan To Speak At New York Produce Show And Conference.
This year we turn to a writer specializing in business and commerce but also one who seeks to draw bigger lessons from the history of discrete technologies and companies.
We knew we wanted Marc Levinson to present as soon as we read his latest book: The Great A&P and the Struggle for Small Business in America
Partly the fit was perfect because A&P, though now operating under Chapter 11 of the U.S. Bankruptcy Code, is still the largest single retailer in metro New York — with banners that include A&P, Waldbaum’s, Food Emporium, Pathmark and Food Basics.
But also because the author examines the issue in the context of American ambivalence about size. This ambivalence has manifested itself in recent years in the context of Wal-Mart, with Americans simultaneously loving the deep discounts it has brought across the land and bemoaning the impact of Wal-Mart on small town, mainstreet retailing.
With the future of NY metro retailing to be significantly affected by what happens to A&P — will it be sold, broken up, continue as an independent company? — we thought a deep dive into the rise and fall of the Great Atlantic and Pacific Tea Company, with a gaze into the possible future was an absolute winner for The New York Produce Show and Conference. We asked Pundit Investigator and Special Projects Editor Mira Slott to see if she could learn more about what Marc Levisnson would present at the event:
Marc Levinson
Author
The Great A&P and the Struggle for Small Business in America
The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger
The Economist Guide to Financial Markets
Q: You’ve said that although you have opinions about almost everything, you specialize in trade and international economics, finance and financial regulation, transportation, and energy and environmental affairs. That’s quite a comprehensive portfolio.
Using your latest book as a stepping stone, could you give attendees a sneak peak of your talk at the New York Produce Show and Conference? What are a few of the compelling issues most relevant to produce industry executives at retail and throughout the supply chain?
A: A fair amount of produce-related issues are connected to A&P historically in the book, although I didn’t go into detail. Produce played an integral role in the A&P story.
Let me start chronologically because that’s how my mind works. Chain grocery stores started developing in a small way in the 1890s, made possible by two developments that seem pretty prosaic today. One was achieving an efficient way to make cardboard boxes and the other was canning. Once you had cardboard boxes and cans, you had a way to put on labels. Selling in bulk, there was no way to brand them. Now there were canned tomatoes and boxed soap powder, and consumers could go into the store and ask for product by name. It made grocery chain business possible.
The canned industry goes back to the Napoleonic Wars. Canning was very expensive, made by skilled can makers, cutting by hand. With the development of new technology, it was possible to make cans by the thousands and tens of thousands that could become accessible to consumers in the store.
The canned goods weren’t always healthy to eat because of nasty things getting in, like a good dose of lead in tomatoes because it leached into the can during the canning process. Consumers could now get fruits and vegetables all year round canned, where up to that point, it was just seasonally. Now you could have efficient groceries and buy fruits and vegetables in large scale. Developed in the turn of the century, chain grocery stores were fairly common in the northeast but not the rest of the country.
Q: What was happening with fresh produce?
A: At this point, chains didn’t handle fresh produce for a couple of reasons. First, it was difficult to handle and get delivered with no refrigeration except ice. There was no way to ship produce across the country and expect it to arrive in good condition. Transportation systems were inefficient.
At the wholesale produce terminal market in Chicago, produce had to be picked up by horse cart and moved from incoming railheads, but motor trucks couldn’t get to train tracks to pick it up. So the horse carts would take product to the produce market a few blocks away. It was laid out in the open with no refrigeration. If it wasn’t sold quickly, it wasn’t sold. This was a very inefficient distribution system.
Starting around 1920, Atlantic and Pacific began to change this system. It already had a cannery to produce juice. It was trying to find ways to get fresh produce into the store. The wholesale distribution system was inefficient. Produce would end up at warehouses along the way, and by the time it got to the store it was in bad shape.
Another reason chains didn’t like to sell produce was because there was no way to guard against theft by store managers. They could calculate inventory with cans. They could see if they sold a full case of ketchup, but with produce, the manager could say product was bad and he had to throw it out and management had no way to know if that was true.
Q: How did A&P get the upper hand?
A: A&P set up its own subsidiary in 1925 called the Atlantic Commission and it was going to control its supply chain. It didn’t want to deal with brokers, wholesalers and jobbers it regarded as very inefficient. So Atlantic Commission would go out to an auction, go to the fields and sign contracts with growers, buy large quantities for its own use, ship in its own rail cars and trucks and go through its own warehouses.
It didn’t have to go through a Terminal Market. It could get produce into stores faster and at lower costs, not paying commissions to brokers and jobbers. This was crucial because you can imagine a lot of people in the industry didn’t like this. Brokers, wholesalers and jobbers didn’t have much use for A&P because they were cut out. This is one reason that created a backlash against big grocers.
In 1929, A&P had nearly 16,000 grocery stores, and Atlantic Commission was supplying almost all its produce; this was more than a tenth of the industry, which was not going to these middlemen’s livelihood.
Q: This sounds eerily familiar to many of the issues Wal-Mart has confronted. Is history just repeating itself?
A: Almost everything Wal-Mart is accused of doing these days, A&P was doing in the 1920’s. It was alleged unfair for A&P to go to Yakima, Washington, and buy up the apples. Distributors felt that was unjust. Its size allowed it to operate in ways distributors couldn’t. It could send agents to Washington and also to the Chicago wholesale market and get the best prices. Other distributors felt this was market manipulation. But it was really just about getting products in the cheapest way.
A&P became a flashpoint. Adding to the controversy, it ended up selling to competitors, which is inevitable if you think about it because the produce market is inconsistent. The product wasn’t getting any fresher, so a small percent of their sales was to these smaller grocers: ‘We have a load of tomatoes we have to get rid of, how much will you pay for it?’
This also became a subject of attacks. A&P was accused of selling inferior produce to its competitors.
Q: If that was the case, wouldn’t the smaller grocers stop buying it if the value wasn’t there?
A: The critics didn’t think much about the economics. It’s as if these smaller grocers were required to buy this product. It was somewhat the same people screaming.
Many farmers liked signing contracts in advance because they would have less risk then selling in a spot market. A&P was the biggest buyer by a large margin.
Q: Did A&P’s buying requirements lead to consolidation on the grower side?
A: A lot of business was with farm cooperatives. If you go back to the 1930’s, a lot of coops were being formed.
Q: When did the first legal challenges to A&P’s retail dominance in the marketplace occur?
A: During World War II, the government filed an antitrust suit, and A&P was found guilty of essentially selling food too cheaply. The judge found Atlantic Commission particularly suspicious. The judge didn’t like that Atlantic Commission was selling to competitors, buying so much quantity. The suspiciousness was because it was so different from how everyone else did brokering. A&P was convicted in 1946 and it was upheld on court of appeal.
As soon as the conviction was upheld, The Truman Administration filed a civil antitrust suit asking that A&P be broken up in pieces. The government wanted Atlantic Commission separated from A&P, and A&P broken up into seven different chains.
And that dragged on until Eisenhower became president.
A&P agreed to shut down Atlantic Commission. So it was in business 26 or so years, but then it was forced to close because supposedly it restricted business in the produce industry.
Q: How did this impact A&P’s vitality? Did it continue to remain a stronghold?
A: So that was 1953, and A&P was still the biggest retailer in the world.
Q: But didn’t A&P expand globally?
A: A&P was also in Canada, but its sales were bigger than any other retailer in the world.
Once A&P closed down its Atlantic Commission company, the government stopped investigating it for the first time in three decades.
Q:What led to A&P’s fall from its pedestal?
A: A&P went down quickly on its own, from an enormous powerful retail giant it became slow moving, not adapting to change, and other folks in the retail business started to pass it by.
Discount retailers were gaining momentum. A&P didn’t want to get into discount retailing. It was a very conservative company with an attitude: groceries are us and we don’t want to do other things. So when you had companies coming along in the 50’s doing discounts, and then in the 60’s Kmart, Wal-Mart and Target, there was no way A&P could compete.
A&P was slow to pick up on people moving to the suburbs after World War II. More affluent customers moved to the suburbs, but most A&P stores were in urban centers.
Other retailers were more astute with changing customer tastes.
Q: In what ways? When you say tastes, are you referring to product selection?
A: Customers expected to drive to a very large store, 40,000 square feet or 50,000 square feet, with a wide variety of food. Supermarkets have been around since the 1930s but started getting big after World War II. Especially after suburban development started, there was no longer a constraint on space.
By the 1960s, A&P already was becoming a basket case.
Q: So the company was in need of serious intervention. Did anyone rise to the cause?
A: A&P took action, but much of it unwise. For example, in the 1960s, it built what was at the time the largest processing plant in the world near Corning in Horseheads, New York. It built this plant thinking it would bring more efficiencies with things like canned goods.
We’re talking early 1960’s now, with the arrival of television in people’s homes on a large scale. Television increased the power of brands because brands could advertise. Consumers were excited about brand names like Dole and Del Monte and no longer just interested in A&P brands.
Q: Yet in the produce department, brands don’t play the same kind of role as in other areas of the store.
A: Still, there’s a place for brands as a symbol of quality.
Q: Do you see a future for A&P?
A: My book in regard to A&P ends around 1979, when it was sold into control of a German company. As you know, A&P is now operating in Chapter 11 bankruptcy.
There is not much hope for it to survive as an independent retailer.
Q: With your historical perspective, could you discuss the current retail environment?
A: I’d say this about the retail environment. Part of the reason so many independent merchants fell by the wayside is that they had nothing special to offer. People have these romantic notions of what mom-and-pop stores were like. The fact is they sold the same canned goods as A&P for more money.
The lesson here, for a small store to survive, it has to come up with a unique concept.
We have some trends now that work in favor of smaller stores and against the large retailers. One of them is that you’ve got consumers who don’t want to drive so far. They want a smaller store, and you’ve seen the average size of supermarkets come down for several years now.
Big companies lose a lot of their competitive advantage if they have to supply smaller stores. Big companies have big cost advantages supplying a relatively small number of large stores. And they don’t have a big cost advantage when trying to provide differentiating product. Their efficiencies don’t fit with finding local farmers or bringing in niche items. The economics of that don’t work out for the chains. This is an area where smaller merchants can gain a competitive edge.
Q: Your book, The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger
A: The container made it possible to think of international trade in produce; it’s brought a whole host of issues with it. Yes, you can get produce cheaper and produce in the winter. But there are new challenges with food safety and traceability. Retailers are even more disconnected in many cases from where produce is grown, and it puts new burdens on the industry.
Certainly, if you don’t think your business is under threat from changes in the industry, you’re crazy. A&P shook up the produce industry in the 1920’s just as Wal-Mart shook up the industry in the 1990’s. These are just examples of the pressures to cut costs throughout the distribution system.
One of the questions you have to ask yourself constantly in today’s economy is where are you adding value, and if people in an industry think that a competitor is not providing sufficient value to customers, it’s up to them to show that.
What we like about this book is that it portrays the rise and fall of A&P in the context of American ambivalence about size. On one hand, we yearn for the economies of scale size can bring, but on the other we celebrate the independent shopkeeper as an authentic America original, with his independence building the kind of character indispensible for the success of the American system of self-governance.
We see in this dispute the battle for the American soul waged between the Jeffersonians and the Hamiltonians. Thomas Jefferson imagined an America composed of sturdy Yeoman farmers and saw avoiding the piling in big cities as indispensable for developing the traits of character necessary for self-governance. In contrast, Hamilton envisioned a great commercial Republic with a powerful central government facilitating its rise.
In the end Americans love Jefferson, but they live in the world Hamilton created.
So Americans loved the independent shopkeeper, but the lure of better living standards through the efficiencies brought by A&P and similar chains became the world Americans actually lived in.
Even while New York unions, intellectuals and many businesses stage efforts to keep Wal-Mart from New York City, it is very clear that if and when Wal-Mart does enter the City, the very protestors will be the best customers.
The one question with this narrative, certainly where produce is concerned, projecting into the future is that it is not clear that large organizations have a price advantage to offer.
As we chronicled both here and here in Pundit sister publication, PRODUCE BUSINESS, in markets such as Los Angeles, big chains have abandoned hundreds of stores as unprofitable. Yet these same exact locations are now being operated profitably by ethnic retailers.
In produce, these retailers often buy less expensively off a terminal market than large chains can buy FOB. Freed of expensive union contracts, these retailers are both more flexible and have a lower cost structure.
We also note that they often fly under the regulatory radar and thus can gain economies not available to big chains.
In any case, the issue is an exciting one, and we look forward to being at The New York Produce Show and Conference and learning from Marc Levinson.
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