Book excerpt

The Great A&P and the Struggle for Small Business in America

Marc Levinson

Farrar, Straus and Giroux

1
THE VERDICT
 
 
Judge Walter C. Lindley was no one’s idea of a flaming radical. Born in 1880 in the village of Neoga, deep in the corn and soybean country of south-central Illinois, Lindley had a reputation as a scholar: at a time when many learned the law as apprentices rather than as students, he earned not only a law degree but also a doctorate in laws from the University of Illinois. In Danville, a commercial hub 150 miles south of Chicago, he became a man of prominence. He built a law practice, won a seat on the city council, and became an attorney for Joseph Cannon, who served eight years as the ironfisted Speaker of the U.S. House of Representatives and represented Danville in Congress for almost half a century.
Lindley was a Republican, and shortly after Warren G. Harding, the great friend of business, became president in 1921, he named Lindley to the federal bench. As a judge, he drew more than his share of high-profile cases. In a 1929 jury trial that held Chicago rapt, Lindley’s court convicted sixteen candy wholesalers of terrorizing storekeepers who refused to buy their candy. Two years later, he upheld the near-dictatorial powers of the commissioner of major-league baseball, Kenesaw Mountain Landis. In the early 1930s, he oversaw the restructuring of the collapsed utilities empire of the Chicago entrepreneur Samuel Insull and survived an attempt by Insull’s henchmen to have him impeached by Congress. Suggested as a possible nominee to the U.S. Supreme Court in 1929, during Herbert Hoover’s presidency, Lindley was not beyond criticizing that court and, by implication, the Democratic administration of Franklin Roosevelt. In 1939, he commented acidly that for some new Supreme Court justices, “precedents may be of little avail and their lack no bar.”1
On a sunny Saturday in September 1946—the federal courts worked six days a week back then—Lindley issued what would be the most controversial decision of his long judicial career. Before a crowded courtroom on the second floor of Danville’s post office, he declared that George L. Hartford, eighty-one; John A. Hartford, seventy-four; their company, the Great Atlantic & Pacific Tea Company; and other company executives had conspired to violate the Sherman Antitrust Act. The fact that the secretive Hartford brothers, two of the wealthiest men in America, were deemed criminals was startling, but their crime was truly remarkable. Rather than being accused of acting like monopolists to keep prices artificially high, the Hartfords were found to have done the opposite. They and their company, Lindley declared, had acted illegally in restraint of trade by using A&P’s size and market power to keep prices artificially low.2
The victims of this unorthodox conspiracy were not families that purchased groceries. The evidence before Lindley’s court made clear that prices at A&P were below those at the competition; as John A. Hartford himself had testified nearly a year earlier, “We would rather sell 200 pounds of butter at 1 cent profit than 100 pounds at 2 cents profit.” While selling food cheaply was good for consumers, it was bad for the hundreds of thousands of retailers, wholesalers, and manufacturers who needed high food prices in order to make a living. U.S. v. A&P was the climax of decades of effort to cripple chain stores in order to protect mom-and-pop retailers and the companies that supplied them. The Hartfords’ real crime was to have endangered mom and pop.3
But it was the participants, not the legal issues, that made the Danville trial so notorious. The Great Atlantic & Pacific Tea Company was not just another grocery chain. It was, by a wide margin, the largest retailer in the world. Its footprint stretched from coast to coast, covering thirty-nine of the forty-eight states and parts of Canada as well. It collected more than ten cents of every dollar Americans spent at grocery stores. It was an enterprise so familiar that millions of Americans knew it as “Grandma,” so ubiquitous that when John Updike penned a short story about the eternal boredom of teenage life a few years later, he called it simply “A&P.” Its influence over America’s lunch boxes and dinner tables was so overwhelming that when an ambitious young Florida grocer decided to lower prices at his tiny store, he received one piece of advice: “Don’t make A&P mad.”4
A&P was at the center of a bitter political struggle that lasted for nearly half a century—a struggle that went far beyond economics. At its root were competing visions of society. One vision could be described with such words as “modern” and “scientific,” favoring the rationalism of cold corporate efficiency as a way to increase wealth and raise living standards. The other vision could fairly be termed “traditional.” Dating to Thomas Jefferson and his contemporaries, the traditional vision harked back to a society of autonomous farmers, craftsmen, and merchants in which personal independence was the source of individual opportunity and collective prosperity. The words of Judge Lindley’s ruling against the Hartfords and A&P embodied the conflict between those two visions. “To buy, sell and distribute … one and three-quarter billion dollars worth of food annually, at a profit of one and one-half cents on each dollar, is an achievement one may well be proud of,” he acknowledged, in a nod to the modern vision. Yet this achievement, he decided, ran afoul of the Sherman Antitrust Act by making it hard for smaller firms to compete with A&P. “The Sherman Act,” he ruled, “was intended to secure equality of opportunity.” Equality of opportunity could not be secured if big firms were allowed to pummel the small.5
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There may never have been a more improbable pair of convicts than the Hartfords. The elder of the brothers, George L. Hartford, was as predictable as they come. He lived in the same house for half a century and took rooms at the same New Jersey shore resort every summer. He left home at 9:05 every morning, wore a black suit with stiff collar to work every day, and made a point of tasting the company’s coffees at 2:00 each afternoon. His hobbies, when he was a younger man, were repairing cars and building crystal radios, activities that required him to utter hardly a word to anyone; in later years he did jigsaw puzzles. Few employees ever laid eyes on the man known throughout the company as Mr. George. The minutes of meetings of A&P’s top executives rarely cite his words. One of the few journalists to meet him said he could be taken “for a retired Polish general—bulky, stolid, rumpled, with a foreign air that his American drawl immediately belies.” No one who encountered him on the street would have imagined that he headed one of the largest, most powerful enterprises in the world.6
John A. Hartford, his younger brother, had an entirely different personality. A dapper dresser who favored custom-tailored gray suits, Sulka bow ties, and pocket squares, he enjoyed traveling, visiting stores, and pressing the flesh. In his thirties and forties he had raised horses that won prizes at the National Horse Show, a premier event of New York society. He lived in an eight-room suite at the Plaza Hotel and lunched alone on milk and crackers at the Biltmore. On weekends he commuted to his suburban estate, a Tudor mansion with a nine-hole golf course, stable, and polo field, and in the winter he went to The Breakers in Palm Beach. He was married three times, twice to the same woman and, in between, to a woman who came into his life modeling clothes for his wife. It was Mr. John’s job to motivate employees, spreading the company’s paternalistic management gospel through philosophical missives that often referred to “my brother and I.” In the 1930s, when A&P’s political troubles became life-threatening, John A. Hartford reluctantly became the company’s public face, sporadically meeting with the press, putting his name to the occasional folksy article, and making end-of-year pronouncements about the outlook for food prices in the months ahead.7
The brothers’ distinct personalities were displayed in the way they ran their company. Mr. George was cautious, favoring a rock-solid balance sheet, wanting each store and each product to pay its own way, distrusting new ideas. Mr. John was more aggressive, more open to new ideas, but always insisting that lower prices would make more money by bringing more customers in the door. The brothers met each morning to discuss the smallest details of their business, from the price of canned tomatoes to the profitability of the stores in Pittsburgh. They made a formidable team. It was Mr. John who engineered the company’s remarkable expansion in the 1910s, its climb to be the first retailer to sell $1 billion of merchandise in a single year in the 1920s, and its quick conversion from grocery stores to supermarkets in the 1930s. It was Mr. George who kept A&P solvent.
The Great Atlantic & Pacific lay at the center of both men’s lives. Neither ever worked anywhere else. Neither attended a day of college; in fact, neither finished high school. They learned business on the job, from their father, who ran the company before them and gave them meaningful responsibilities when they were still in their teens. They treated the company as their family, almost never dismissing employees, creating one of the first company pension plans, and shortening working hours simply because they could afford to do so. All managers had moved up the ranks, and almost every executive had worked at A&P for decades. Because they completely controlled the company, with no shareholders to please and no creditors to satisfy, they could run A&P however they wished, and they sometimes ran it in ways that drove their more short-term-oriented managers to despair.
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George and John Hartford were in the grocery trade at a time when selling food was an activity of enormous economic importance. There were literally grocery stores on every corner: in 1926, Kansas City, by no means the most densely populated of American cities, had 30 food markets per square mile. The first national survey, in 1929, found 585,980 food stores—one for every fifty-one American families. Richard Nixon, a future president, grew up working in his family’s grocery in Whittier, California, in the 1920s, and the family of Lady Bird Johnson, a future first lady, sold groceries from a general store in Karnack, Texas. These mom-and-pop stores were serviced by a thick web of suppliers. The United States boasted 13,618 wholesale distributors of groceries in 1929, or one wholesaler for every forty-three food retailers. This wholesale network, in turn, distributed the products of nearly sixty thousand canneries, sugar-beet mills, slaughterhouses, soap factories, and other plants making everything from brooms to baking powder. Mom and pop ran many of these operations, too. The typical food plant had fewer than fifteen workers.8
In 1920s America, every town of any consequence had its grocers, its food brokers and wholesalers, its bottling plants and flour mills. These enterprises provided a tax base for their communities, a cadre of owners and managers to serve as civic leaders, and a major source of jobs. Just the retail side of the food business provided livelihoods for 1.2 million workers on the eve of the Great Depression, many of them self-employed proprietors. Food retailers, wholesalers, and processors together engaged one out of every eighteen nonfarm workers in the entire country—more than apparel and textile factories, iron and steel plants, coal mines, or even railroads.9
Americans paid a high price to support this balkanized system for conveying food from farm to table. Food was hugely expensive, relative to wages. The average working-class family in the 1920s devoted one-third of its budget to groceries, the average farm family even more. Most households spent more to put dinner on the table than for their rent or their mortgage. And for the average housewife, shopping for food consumed a large part of the day. This money, time, and effort bought plenty of calories, but only moderate amounts of nutrition. With neither display space nor refrigeration, many neighborhood stores carried only token stocks of fresh fruits and vegetables. Fresh fish and poultry were rarities. The poorest third of American households consumed a sorely inadequate daily intake of vitamins and minerals, because there was little of either in the food that their neighborhood shops had for sale.10
The Great Atlantic & Pacific did much to destroy this world. The Hartfords were among the most rigorous managers of their day. At a time when many grocers consulted self-help books to figure out how to price their goods, the brothers pored over data to fine-tune operations, closing this store, relocating that one, dropping a product whose sales languished, adding another that promised better margins. They totally reshaped their business at least four times. At its peak, their company owned nearly sixteen thousand grocery stores, seventy factories, and more than a hundred warehouses. It was the country’s largest coffee importer, the largest wholesale produce dealer and butter buyer, the second-largest baker. Its sales were more than twice those of any other retailer. Their basic strategy was so extraordinarily simple it could be captured in a single word: volume. If the company kept its costs down and its prices low, more shoppers would come through its doors, producing more profit than if it kept prices high.
The Great A&P transformed the humble, archaic grocery trade into a modern industry, but its relentless expansion posed a mortal threat to a sector of the economy upon which so many families and communities depended. Those mom-and-pop grocers, local wholesalers, and small manufacturers understood the threat full well, and they fought back with a vengeance. The Hartfords were in no sense robber barons, yet they became the most controversial, and most reviled, American businessmen of the first half of the twentieth century. Had Mr. George tuned his crystal radio to America’s most widely heard station in the 1920s, he would have heard diatribes against the “childless brothers” who monopolized food retailing. When Senator Huey Long warned in 1934 that “about ten men” have “chained the country from one end to the other,” he was talking about Mr. George and Mr. John. When a lawyer working for the administration of Franklin Roosevelt called the country’s largest retailer “a gigantic blood sucker,” there was no question he had the Hartfords in mind: it was he who convinced Judge Lindley to convict them.
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A contemporary of the Hartfords, the economist Joseph Schumpeter, coined the phrase “creative destruction” in 1942 to describe the painful process by which innovation and technological advance make an industry more efficient while leaving older, less adaptable businesses by the wayside. For the economy as a whole, creative destruction is enormously beneficial, permitting a shift of labor and capital from sectors where less is required into areas where new products and services are in demand. It is precisely such shifts that make economies grow. For many individuals and many communities, on the other hand, creative destruction is painful, entailing business restructuring, job elimination, and the disappearance of companies and industries that have provided the economic base for a particular town or an entire region. Whatever its advantages, economic change inevitably leaves major losses in its wake.11
When creative destruction brings layoffs to autoworkers or closes coal mines across an entire region, the world pays close attention. When it means the closure of a family-run grocery store or the replacement of a failing supermarket by another store down the street, though, creative destruction does its work unremarked. This invisibility reflects the sheer lack of drama in the retail trade: a shuttered store leaves no gargantuan machinery standing idle, no angry workers milling around outside a padlocked gate. The building, torn down for parking or converted to some other use, will quickly fade from memory. The workers will be expected to find other jobs wherever they can. Displaced industrial workers, tough, rugged, and usually male, are presumed to have had important dreams and plans tragically destroyed by the vagaries of economic change and to merit public sympathy. Displaced grocery clerks rarely get such respect.
That neglect speaks to the prejudices of social thinkers of many ideologies. Thomas Jefferson, along with his contemporaries in the Enlightenment, saw special merit in the toil of the farmer, but very little in the work of the merchants who dealt in the farmer’s produce. Karl Marx and Friedrich Engels judged that the course of history would be shaped in vast factories by workers engaged in physical production; the labor of the merchant, they wrote, “is not labor that creates value.” Their near contemporary William Graham Sumner, one of the most influential American social thinkers of the late nineteenth century but decidedly no Marxist, fully agreed with their point. “Wealth comes only from production, and all that the wrangling grabbers, loafers, and jobbers get to deal with comes from somebody’s toil and sacrifice,” Sumner wrote.12
The effect of economic change on store owners occasions particular ideological confusion. After all, the independent grocers displaced by the growth of the Great Atlantic & Pacific were capitalists, even if their capital was only a few hundred dollars. Their wives, by extension, were capitalists, too, even if being capitalists did not absolve them from twelve-hour days totting up purchases and keeping the books. When larger competitors undercut their prices and decimated their businesses, these small-time capitalists received neither sympathy nor a mention in the unemployment statistics. They simply vanished.
In the first half of the twentieth century, the Hartfords turned their company into one of the greatest agents of creative destruction in the United States. Although shifts in the way the world buys food are far less heralded than innovations such as cars and computers, few economic changes have mattered more to the average family. Thanks to the management techniques the Great A&P brought into widespread use, food shopping, once a heavy burden, became a minor concern for all but the poorest households as grocery operators increased productivity and squeezed out costs. The proportion of workers involved in selling groceries plummeted, freeing up labor to help the economy grow. And the company’s innovations are still evident in the supply chains that link the business world together. Although the Hartfords died decades before the invention of supercenters and hypermarkets, they employed many of the strategies—fighting unions, demanding lower prices from suppliers, cutting out middlemen, slashing inventories, lowering prices to build volume, using volume to gain yet more economies of scale—that Walmart’s founder, Sam Walton, would later make famous.
The bitter political and legal battles surrounding the Great Atlantic & Pacific Tea Company were limited to North America, but they presaged similar conflicts around the globe. Under Japan’s “big store law,” in force from the 1970s, anyone seeking to open even a modest supermarket had to gain local competitors’ approval by paying them compensation. West Germany protected mom-and-pop retailers in 1956 by allowing stores to open only from 7:00 a.m. to 6:30 p.m. Monday through Friday and until 2:00 p.m. on Saturday; a worker with a daytime job was essentially forced to patronize grocery stores and butcher shops near home or workplace because there was no time to shop elsewhere. In France, a 1973 law to aid artisans and small merchants restricted the opening of large stores and prohibited manufacturers from selling more cheaply to big merchants than to small ones. Everywhere, the complaint was the same as it had been in America: the unchecked growth of large retailers threatened the traditional role of local merchants and destroyed opportunities for economic independence.13
Such restraints faded toward the end of the twentieth century, in part because consumers demanded lower prices, in part because as working hours grew more diverse, more people needed to shop at nontraditional times. Yet the century-old battle between independent merchants and large retailers was by no means over. In the United States and Western Europe, critics of “industrial food” advised consumers to avoid the processed goods at the supermarket and purchase locally grown foods from farmers and independent retailers; the Hartfords’ great achievement, making food affordable, was now looked upon with disdain. Merchants’ protests led Thailand’s government to halt expansion by grocery chains in 2006. In 2010, the Czech Republic required minimum price markups in order to keep chains from undercutting mom-and-pop stores—precisely the same obstacle A&P confronted in the United States in the 1930s.14
The Hartfords’ enterprise did not prosper without its founders. Within a few years of their deaths, the once-mighty A&P was a basket case, staggering from one failed strategy to another as better-run companies passed it by. Soon enough, the company that had decimated independent stores by the thousands became a victim of the creative destruction it had once meted out. But while A&P’s fortunes waned, the economic forces it helped unleash only grew stronger. It made the process of moving goods from producer to consumer impersonal and industrial, but also cheap and efficient, a job for the big, not for the small.


 
Copyright © 2011 by Marc Levinson

Marc Levinson has a gift for discovering business history stories that cut to the heart of how industries are transformed. He did so brilliantly with The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, which was short-listed for the 2006 Financial Times and Goldman Sachs Business Book of the Year Award.