CHALLENGES TO THE BAKING INDUSTRY IN .— THE "STARTLING SIXTIES" MASTERS THESIS ““w-”,—_ By Robert H. Jones Submitted To Dr. Edward M. Barnet Spring Term 1 960 +st ACKNOWLEDGE MENT The writer wishes to express his sincere appreciation to Dr. Edward M. Barnet, Director of The Programs in Food Distribution at Michigan State University, for his professional guidance in the preparation of this report. -- Robert H. Jones -- CHAPTER II III IV TABLE OF CONTENTS INTRODUCTION HISTORY AND GROWTH Baking in Ancient Europe Baking in Colonial America Baking from 1850 - 1900 Recap of Industry 1850 - 1900 Baking from 1900 - 1930 Baking from 1935 - 1939 CHANGING PATTERNS OF DISTRIBUTION Effective Market Areas The Chain Store Challenge Freezing Baked Goods Do It Yourself Baking Types of Chain Store Bakeries Central Bakery Leased Bakery In Store Bakery PAG E 19 22 24 26 28 30 30 31 32 POPULATION GROWTH, ECONOMIC GROWTH AND CON- SUMPT ION Population Growth Age Distribution Population Growth By States Economic Growdi Increase in G.N. P. Consumption of Bread Total Consumption of Baked Goods F leischmann's Report 10 Top Sellers In Food Stores Expenditure for Baked Goods THE BAKING INDUSTRY - IS IT PURE COMPETITION? Merger Regulation Robinson—Patman Act Discounts Food and Drug Administration Food Additives Food Standards THE "STARTLING SIXTIES" - PROSPERITY OR PRO- BLEMS? Is Today's Route Salesman Obsolete? Route Salesman in 1930 37 39 41 42 44 47 51 52 53 54 '— 35 58 61 66 7O 71 74 77 82 84 84 CH APTE R 2&9}? Route Salesman in 1960 85 The Industry Needs Two Types 88 How Can We Halt Rising Selling Costs? 89 Distribution Alternatives 9l The Problem of Out-of-Stock 93 Store Manager's Questionaire 95 Consumer Questionaire 9o BIBLIOGRAPHY * 104 INTRODUCTION In the next decade the baking industry will face many problems. Some of these problems are acute and possibly may decide the future destiny of this great industry. The title of this report is "Challenges To The Baking Industry In The Startling Sixties." I feel many of the problems facing the baking industry today are, in reality, the challenges of tomorrow. The purpose of this project is to enlighten management in the baking industrypon some of the major problems in distribution, personnel, labor re- lations, and government regulations. Time did not permit a discussion of such topics as profit analysis, product strategy, competitive structure of industry and production costs. Just as in many other industries, intense competition and product in- novation have made the baking industry the dynamic and exciting industy it is today. Executives of the large wholesale bakeries look to the decade ahead with an optimistic eye toward record sales and increased consumption. The story of the baking industry in Ame rica is the story of an age-old craft which grew slowly from a humble beginning and emerged into a dynamic industry. The value of total domestic consumption of baked goods in 1958 was $6,523, 680,000.1 Of this total, $3, 392, 270 was sold through grocery stores and bakery sales accounted for 7.44 per cent of the total store sales. 2 In a 1. ,What The Public Spends For Grocery Store Products - 19.56, 1957, 1958; Food Field Reportei - Iood Topics Annual Re— port, Food Publications Incorporated p. 2. 2. Ibid. -2- more recent report the value of all baked goods sold through grocery stores in 1959 was estimated at $4, 368,000,000.3 In American industry, baking ranks sixth in the value of products pro- duced, tenth in number of wage earners employed, and eighth in value added by manufacture . 4 Baking is the top-ranking industry among all of America's food processors from the standpoint of number of establishments, value added by manufacture, number of employees and size of payroll. 5 According to the U.S. Bureau of Labor Statistics, in January of 1960 there were 289,000 employ- ees in the baking industry. 6 Bread is still the "staff—of—life" and the backbone of the baking industry. Consumers spent about $1.75 billion for bread along in 1959.7 From the preceeding remarks it is evident that baking in America today is big business. In the following pages I will attempt to relate the history and development of the modern baking industry in the United States and some of the changing patterns in the distribution of baked goods. This is the story of the nation‘s industrialization of an age~old craft. 3. Kelly, E.E. Jr.; "Progress Through The Years", Modern Miller and_Bakers News, Oct. 31, 1959; pp. 23-26 4. Panschar, William G.; Baking In America - Economic Develop- ment, Northwestern University Press, Volume I, p. 5. 5. Ibid. 6. ,Bake 1." y Products SIC Group 205, Employment, Hours, and Earnings, U. S. Department of Labor, Bureau of Labor Statistics, Manufacturing Division Food and Kindred Products, p. 41. 7. Bechtel, W. G.; "The Future of Frozen Bakery Products", Baking M Mai/16. 1959; p. 40. _..._____ CHAPTER I. HISTORY AND GROWZH -4- The story of baking started when man first discovered he could supple- ment his daily diet of fish and game with cereal grains. For many years cereal grains were man's most economical source of food. Once man realized the food value of cereal grains he then found that by the application of heat he could com— plete the "staff-of-life" by converting grain into bread by baking. Prior to the discovery of cereal grains, man had to travel extensively in search of food. After man realized the food value of wild grains, whole communities settled around these wild grain fields and man stopped wandering for his food. The Swiss Lake Dwellers who lived during the Late Stone Age, some 8, 000 years ago, discovered and cultivated several kinds of grain. 8 The Lake people discovered by accident that the ground seeds we re mo re palatable if they were moistened. It was also by accident that the moistened coarse grain was left in the fire to bake. The Lake Dwellers had discovered bread -- the first the world had known.9 It was man's first systematically prepared food and the end of an orderly process of gathering. grinding, sifting and baking. This bread was extremely hard on the outside and very moist and "doughy" on the inside -- a "far cry" from our modern palatable loaf of bread. For over 3, 000 years this hard, tough mass of baked meal served as man's primary food. About 3, 000 B.C. this ancient baking process was radically changed by the momentous discovery of the art of leavening in ancient Egyptlo The art of leavening was probably also discovered by accident. According to baking 8. Panschar, Op. Cit., p. 7. 9. Ibid. 10. Ibid.,p. 8. -5- historians a batch of dough most likely was set aside and forgotten with amazing results. The dough soured and expanded due to the growth of yeast cells. These aerated loaves of bread found immediate favor. The new leavened bread also led to the discovery of the oven, which gradually replaced the open fire method. With leavened bread and the oven, Egyptian baking became a skilled craft and loaves were baked in numerous and varied sizes and shapes. The early Greeks improved the Egyptian oven when they introduced the bee-hive oven, a closed oven built in the shape of a sphere with a rather low ceiling.ll It handled a greater number of loaves and its low, rounded dome afforded much better retention of heat than the earlier conical ovens. The Greeks are also credited with the discovery of the milling process which ultima- tely made flour both whiter and finer. The milling and baking operations were generally combined at one location. . Baking reached its greatest development in ancient times in the city of Rome. From about 30 B.C. to 14 A.D. there were about 300 bakeries in Rome or about one bakery for every two thousand persons. 1‘2 In Rome each shop was a combination mill and bakery. Bakeries also sprang up in several other Roman cities such as Pompeii which had about 20 mill -bakeries. Baking flourished and diminished with the rise and fall of feudalism and gradually bake shops appeared all over Europe. Commercial bakeries began to spring up as early as 1640 in Plymouth 11. Ibid., p. 10. 12. Ibid., p. 12. -6- and 1645 in New York. 13 By the end of the seventeenth century commercial bakeries were located in many sections of the colonies. The baking in colonial times was very similar to baking in Europe. Among the several similarities were local bread laws regulating the size, price and quality of baker's bread. In Europe these various town regulations were offset by a guild monopoly which restricted entry into industry and regulated prices. Unfortunately for the bakers in the Colonies, these town regulations were not offset, as they were in Europe, by a guild monopoly. The guilds that existed in the Colonies were not anywhere near as powerful as the European guilds. There were local rules of apprenticeship which were enforced and prohibited peddlers and middlemen from selling bread products. Colonial baking was still a skilled handicraft type of operation. The baker‘s day usually consisted of 12-14 hours of work fashioning his products to suit the particular tastes of his customers. The baker limited the sales of his products to only those items which could be sold through a small salesroom in the front of his shop. He generally baked only those products that were ordered by his customers. After a period of time the colonial baker began to produce for the market rather than on order. Bread was baked extensively in the home in colonial days. The housewife was quite skilled in the preparation of such products as brown bread, corn pone, johnny cake,” hot biscuits, and corn breads . After 1800 Americans started moving west and whole towns sprang up around trading posts. Wherever there was a concentration of people bakeries also flourished. When Cincinnati was little more than a village of less than 2,000 in 1780, 13. Jaci- -7- it was served by two bakeries. 14 By 1850 the number of bakeries in Cincinnati had risen to 140 and the population to almost 140,000.15 Cleveland had one bakery in 1814 and by 1853 had fifteen bakeries and population of about 40, 000. [6 Columbus with 500 inhabitants and one bakery in 1815, contained 6, 000 people and seven bakeries in 1843. 17 In 1850 Detroit contained twelve bakeries and a population of 21,000.18 Although trading posts were growing rapidly into cities and commercial bakeries were "springing- up" all over the midwest, home baking was still very popular and the commercial. bakers supplied only a small portion of the baking needs of a population of about 23 million in 1850. 19 The baking process was still a handicraft operation and the baker still had no mechanical aids to make his job a bit easier. The baker in 1850 had two major production problems which had to be overcome before he could ever hope to supply a major portion of the demand for bread. One was to cut costs and the other was to improve quality. His costs were high because there was no mechanization whatsoever. The appea r— ance and taste of the bake r's product was never uniform and many times his entire output was ruined by conditions beyond his control. The basic patterns of the baking industry were changed quite radically 14. Ibid., p.29 15. 11119; 16. £9ng 17. Ibid. 18. Ibid. 19. 1pm., p. 31 -8- between 1850 and 1900. Home baking was still extremely popular during this period but the commercial baker was beginning to supply more and mo re of the family bread needs. In 1850 the commercial bakers accounted for only 10 per cent of all bread consumed, but by 1890 their share climbed to 20 per cent; and in 1900, to 25 per cent. 29 There'were three reasons for this trend away from home baking. One basic influence which increased the demand for all products was a growing popu- lation. The population of the United States increased from 23 million in 1950 to 75 million in 1900.21 This phenomenal growth meant greater bread consump- tion. The commercial baker also grew in importance as a result of urbanization and increasing real income. In 1850 only 15 per cent of the population lived in cities or towns of 2, 500 population or more.22 By 1900 the urban population had increased to over thirty million people representing 40 per cent of the total population . 23 Urbanization was important in the decline of home baking for several reasons. First of all the population was concentrated in small areas and mass distribution to grocery outlets was possible. Women were either working or busy with neighborhood or community activities. The higher percentage of Single women employed meant a decrease in the number of future housewives trained in the art of baking bread. 20. Ibid., p. 47 21- as; 22. Ibid. 23. Ibid._ -9- The industrialization that swept out country from 1850 - 1900 meant jobs and employment and formed a basis for a steadily rising income. Real income per capita increased from $250.00 in 1850 to more than $450.00 by 1900.24 With increased income, more and more families patronized the commercial baker. They were able to pay for the ease and convenience of buying bakers' bread. From 1850 - 1900 there were also significant changes in the average American diet. Americans began to eat more expensive foods rich in vitamins and minerals such as lean meat, milk, fresh fruit and leafy vegetables. Con- trast this diet with the food budget of 1851 which appears below. 25 Weekly_Food Budget For Familygoffive Philadelphia, 1851 Butcher's Meat, 2 lbs. per day at 10¢ per lb. $ 1.40 Barrel of flour, $5.00, will last eight weeks 0.625 Butter, 2 lbs. , at 31 .5c per pound V 0.63 Potatoes, .1/2 bushel 0.50 Sugar, 4 lbs. at 8¢ per pound 0.32 Coffee and Tea 0. 25 Milk, 2¢ per day ' 0.14 Salt, pepper, soap, yeast, eggs, etc. “0442 Amount for Food $ 4.265 Shelter, clothing, and other expenses Jai TOTAL BUDGET $10.375 K 24. Ibid., p. 49 25. I_bi_d_., p. 51 -10- The last half of the nineteenth century marked the beginning of the end of the traditional handicraft ways of baking. In this half century baking techno- logy experienced its first significant change in over 1, 500 years. This was the age of development of many types of machines. Continuous oven operation was the first step in meeting the production requirements of a rising demand. The make-up operations of mixing, fermen- tation, and moulding were also mechanized. Flour handling also became mechan- ized. Standardized machinery required more reliable grades of yeast and a more uniform quality bread flour. In 1868 Charles Fleischmann began the commercial production of compressed yeast.26 The advantages of compressed yeast were many. It had greater leavening power than the homemade yeast ferments yielding a more uni form dough fermentation. It had stability and dc- pendability allowing a more consistent operation. It also made a better quality, better tasting loaf of bread. The millers solved the problem of flour quality with their "patent" flour which was stronger, whiter and of better keeping quality than the previously common, winter~wheat flour. A recap of the baking industry around 1900 -- the dollar value of bakery products rose from $13 million in. 1850 to $176 million in 1900; the value added by manufacture increased from $5 million in 1850 to $81 million in 1900; and the number of wage earners increased from 6, 727 to 60, 192 during the same period. 27 The baking industry accounted for 20 per cent of the value of all. manufacture rs 26. Ibid., p. 63 27. Ibid., p. 86 -11.. in 1900 as against 15 per cent in 1850.28 THE BAKING INDUSTRY (Z of Census % of No. (X. of Value ‘2. of Wage Year of Establishments mdggt Xalge Addfleg” Earner: 1849 1.65 1.30 1.06 0.70 1859 1.37 0.90 0.74 0.50 1869 1.41 0.87 0.84 0.69 1879 2.52 1.23 1.18 0.82 1889 2.95 1.37 1.33 0.91 1899 7.15 1.54 . 1.66 1.28 Census of Manufacturers GROWTH OF THE BAKING INDUSTRY Value of Volume added Ave. No. Census No. of Product by Mfg. of Year Firms M _ (000) WESSEQIHEE 1849 2,027 $ 13, 294 $ 4,927 6,727 1859 1 , 930 16, 980 6, 346 6,514 1869 3,550 36,908 14, 696 14,126 1879 6, 396 65, 826 23, 213 22, 488 1889 10, 484 128, 422 55, 914 38, 841 1899 14, 917 175, 657 80, 817 60,192 ~~~¢_‘_‘ -. 28. Ibid. -12-- Census of Manufacturers In 1900 only the most optimistic bakers could have predicted the course the baking industry was to take in three short decades. In the years ahead the baking industry rose to the position of first place among food processors —- it was a giant on the American industrial scene. This change and rapid growth was dependent on three things. First, the change in the pattern of demand. Second the triumph of mass production. And third, the coming of mass dis- tribution. Before 1900, as stated earlier, more and more home-makers had be- gun to depend upon the baker for their family bread. This increasing accep- tance of the baker's loaf was still largely urban in character. With the spread of urban living after 1900, the baker's loaf became even more attractive. In 1900 less than four families out of ten lived in towns of 2, 500 or more.29 The American population was still located primarily in rural areas. By 1930, however, a little less than 45 per cent of the people lived on the farm. More than 38 million people had been added to the urban population since 1900. 30 The advent of the automobile ended the isolation in the home. Even for the farm wife, it brought the kitchen and the grocery counter closer together. In keeping with the change inpatterns, more women were also taking jobs. By 1930, married women accounted for about 12 per cent of the nation's labor force as compared to roughly 5 per cent in 1900.31 ~ 29. Ibid., p. 94 30. Ibnl- 31. Ibid . -13.. A survey made in 1922 of 3,000 urban and rural families gives a more precise picture of the relation between urbanization and baking in the home. Farm families were baking 94 per cent of their bread while in urban areas of 25,000 or more about 35 per cent of the bread was baked at home.32 By 1930, for the first time in the history of baking, commercial bakeries surpassed the home as the source of the nation's bread, supplying over 60 per cent of all bread consumed.33 In contrast to the last half of the 19th century, Americans did not in— crease their total food intake after 1900. By that time the limits of the average citizen to increase his consumption of food had apparently been reached. The total amount of food consumed by each individual varied by no more than 50 pounds around an average of 1560 pounds from .1900 - 1930.34 The largest decline came in the low cost, high energy-yielding foods, chiefly potatoes and wheat flour. The annual consumption of potatoes showed a sharp decline from 202 pounds per capita in 1909 to 141 pounds in 1930.35 Per capita consumption. of wheat flour, which stood at 210 pounds in .1909, fell to 165 pounds by 1930, a decline of about 21 per cent. 30 Figures on the per capita consumption of bread are unfortunately not available and so must be inferred from those on wheat flour, the principal 32,. Ibid., p. 95 33» 11:19., 34,. 11219;, p. 103 33- 11.39 36. Ibid. -14.. raw material of baking. This inferrence cannot be considered accurate be— cause wheat flour statistics do not tell the whole story. High speed mixing and formulas rich in milk, sugar, and shortening had raised the bread yields ob- tained from flour. One hundred pounds of flour in 1909 yielded an estimated 137.5 pounds of bread; by 1930, it produced over 150 pounds.37 These changes between 1900 and 1930 were primarily the result of in- creased family incomes. In meeting their energy requirements, people found that they could afford to substitute more expensive and varied foods for the low cost, high calories staples. Thus one of the very factors which helped bring bread making out of the home and into the bakery was, at the same time, causing people to eat less bread. The changes in technology from 1900 - 1930 were too numerous to men- tion. Bakeries were becoming more and more automated and the industry show- ced little resemblence to the handicraft type of industry Of Colonial times. Measured by any yardstick, the growth of the baking industry from 1900 - 1930 was impressive. By 1930 it could be numbered among America's major in- dustries. The principal dimensions of the industry's expansion are shown below. 38 GROWTH OF THE BAKING INDUSTRY 1899 ~ 1929 Value of Ave. No. No. of Product of Wage 32a; 13111111 11.99.91-.- Eerie; 1899 14,917 $ 175,369 60,192 1904 18,226 269,583 81,278 37. Ibid., p. 105 ml.— -———.— 38. Ibid., p. 175 Year 1909 1914 1919 1921 1923 1925 1927 1929 GROWTH OF THE BAKING INDUSTRY 1899 - 1929 -15- No. of Firms" 23,926 25,963 24,919 20,024 18,572 17,490 17,909 20,410 1, 1, 1. (continued) Value of Product .19_9.9__>__ 396, 865 491, 893 947, 876 902, 463 91.1,118 023,668 145,710 251,621 Census of Manufacturers Ave. No. of Wage Earncrs 100,216 124,052 107,251 117,026 127,496 128,034 139,013 166, 970 As in the preceeding f1 l‘ty year period, the overall expansion of the baking industry more than kept pace with the growth of manufacturers in general. eighteenth position, measured in dollar volume in 1900, baking rose to twelfth place by 1929. 39 In 1929 the industry ranked thirteenth in value added by manu: facture and in average number of wage earners and first in number of establish- ments.40 In 1929, baking accounted. for about 2 per cent of the nation's manu— facturing industry in terms of value added and number of employees. 39. Ibid., p. 177 w 40. Ibid 41 . Ibid. 41 -10.: The depression was indeed a period of crisis for almost all groups in the economy. Some groups of course, were hit harder than others. The durable goods manufacturers and farmers probably suffered the most. Farmers ex- perienced a 60 per cent decline in income as farm prices plunged by more than . . 42 50 per cent from their 1929 level. For the baking industry, the onset of the depression saw the long up— ward trend of demand wobble then turn downward. 43 Value of Index of Index of No. of Product $ Value of Physical Year Fi rm_s_ (000)___ $9192}. Vol 11 me__ 1929 20,410 $1,251,621 100.0% 100.07L 1931 17,718 979,904 78.3 89.5 1933 14, 830 770, 332 61.5 76. 3 U. S. Census of Manufacturers The reduced output of the baking industry between 1929 and 1933 was due primarily to a return to home baking. Income was so low during this per~ iod that the minor cost differences between homemade baked goods and baker's PI’Oducts became significant for many people. There was shift back to home baking of about 4 per cent/1‘4 While mo st of the problems of the industry were a result of the general 1311 in demand, several problems could be traced to price reductions. The lower- 42. Ibid_., p. 187 43. Ibid. 44. Ibid., p.188 —- -17- ing of prices had very little effect in stemming the fall of demand, but its effect on bakers generally was very disruptive. As soon as one firm cut prices, others followed suit, sometimes matching, sometimes exceeding the original reduction. With the demand for baked foods continuing to decline, balances were upset in market after market by cut-throat competitive tactics. Market wars, overt price cutting, hidden rebates and concessions of all sorts were common place. The years following 1935 were years of cautious optimism not only for the baking industry but for the nation as a whole. Except for a short-lived re- cession in 1937-38, the nation's economy surged back in absolute terms to the high levels of the late "twenties". The baking industry benefited from the general recover. Total output increased by more than 18 per cent between 1935 and 1939.45 In terms of dollar sales, it was still slightly below the 1929 high, but in term of output production was more than 30 per cent higher than in 1933 and 8 per cent above its 1929 -; value.40 Employment in the industry reached a record 201., 533‘. up some 7 per cent over 1935.47 THE BAKING INDUSTRY 1935 - 1939 Value of Index of Index of No. of Product Value of Physical Year Firms (000) Pr<>duet_* Volume ‘3‘ 193.5 19,068 $ 1,052,464 84.1 89.2 1937 17,193 1,217,865 97.3 99.6 1939 18,399 1,211,024 96.8 107.8 ’5‘ 1929 equals 100% R .- 45. Ibid., p. 203 46. Ibid. 47- 1.119. -18- In 1940 commercial baking was still an industry which depended for its growth upon enhanced economic activity in other industries to create the necessary favorable environment for expansion. Of specific importance to baking were increased consume r incomes and a rising number of women gainfully em- ployed. Needless to say, income and general economic activity has steadily increased, with the exception of a few brief periods of recession, from 1940 right up to the present. The activities of the industry during the past 20 years were so numerous that space does not permit a detailed explanation. Labor unions became active in the trade and forced significant changes in production and methods of distri- bution. The supermarket claimed a larger share of the grocery store sales forcing bakers to re-examine their methods of distribution and realign their selling forces. Profit margins narrowed and bakeries became more and more automated. The consumer could choose from a greater variety of baked foods than ever before. Quality and nutrition were the bywords of the industry. The baking industry has truly grown from an age-old craft to a dynamic industry. The results are shown in the introduction of this report. In general, the future trends in the baking industry seem to be an in- creasing level of output with variety baked foods progressively becoming more important. Up to this point nothing has been said about the distribution of baked goods. This subject will be taken up in the next chapter. -19- CHAPTER 11. CHANGING PATTERNS OF DISTRIBUTION -20- The distribution of baked goods remained virtually unchanged from colonial times up until 1850. The bakeshop was a combination operation where baking was conducted in the rear of a building and products were sold through a sales outlet in the front of the building. . Distribution was limited to those pro— ducts which could be sold over-,the-counter to customers who were within a reasonable radius of the shop. After 1850 the larger commercial bake rs started deliveries to grocery stores. Distribution through grocery stores greatly increased sales and en— couraged the substitution of baker's bread for homemade products. Push carts and baskets which were previously used for an occasional deli very were no longer adequate to transport larger orders greater distances from the shop. The distribution of bakery products beyond the confines of ship shop, meant that the commercial baker had to be something more than a skilled crafts- man . He also had to be an administrator, a sales manager, and an able negotia- tor. Salesmen had to be hired to drive the horse-drawn wagons and service the grocery outlets with fresh baked goods. Routes had to be carefully planned and sales territories outlined. The baker also delivered his wares to such outlets as hotels, restaurants, institutionsand even directly to the consumer's home. Prior to the expansion of distribution the bread baking industry in a prical market consisted of a relatively large number of small retail shops, each of which was virtually confined to a small neighborhood or community area, 48 There was little or no interference from other bakers because each baker was confronted with no more than one or two neighborhood competitors. \ 48. Ibid., p. 77 -21.. The larger industrial bakers, on the other hand, found themselves faced with a completely different situation. Not only did their market areas overlap: they were almost identical. Isolated neighborhood market areas became a thing of the past, for in most cases the entire city constituted the industrial bake rs' market. A typical market could therefore support only a few such wholesale bakeries. With two or more wholesale bakers servicing the same retail outlet, a new kind of competition was born. Since the consumer had a choice of products from several bakeries, the baker had to differentiate his products from those of his competitors. He distinguished his products throngh advertising, labeling, and trade-marks. From 1900 to 1930 wholesaling was the leading type of marketing opera— tion generally.49 From less than 25 per cent of total sales in 1900, wholesale- to-grocery delivery grew until it accounted for more than 50 per cent of sales in 1930.50 The larger firms dominated the field of wholesale distribution. Less than 5 per cent of the firms accounted for almost 59 per cent of the sales vol— ume .51 As early as 1899, a few bakers had experimented with the use of motor trucks, but the ave rage wholesaler at the time relied on horse—and—wagon de- livery. His effective market area was limited to the radius a horse could travel in one day. It wasn't too long and gasoline trucks had replaced ho rse-draiim- 49. gig, p.128 50. Ibid. 51. Ibid., p. 129 .a——._..— -22.. EFFECTIVE MARKET AREAS OF RETAIL BAKERIES /‘///X//.e’f jig}; 1,27,); ,) -——-* r799!» 60/ /‘/A»€ym ‘7' 6" V2: «2.4/0 [fans/e )/ an M, J ‘ . --' 1 . ,-73 1”"..3égf ”514/; ///”/I I" / -‘J -25— EFFECTIVE MARKET AREAS OF WHOLESALE BAKERS /’/flA’H'/.L;°' xiii/7 ,4 ”71/3 .1 )‘u .4559 I/ ‘ /"//}ri'/_.// .- (75.44. a,“ /‘//6W/rz: 7 ,/=//;/.// X/M/r. r r . . . t .- f a \ u . -: v n ‘ , D ,i n a ' I I. O I n ' e '. s v H v ‘- ‘Jmu" -24- wagons in many firms. Trucks were cheaper to operate, covered a wider market area, and were more efficient. The introduction of the gasoline truck encouraged wholesale bakers to enter and develop new channels of distribution. Larger-scale distribution was also facilitated by the gradual increase in the number of grocery outlets - both independent and chain - taking on the super market form of operation. The larger size stores made possible more sales per stop for the wholesale baker. The supermarket with its self— service and mass merchandising did much to create the impulse sale of bakery products but it a.‘ so forced the wholesale baker to stop and re-examine his distribution system. Is the wholesale baker prepared to meet the chain store challenge? The most important competitive changes in the baking industry since 1930 involve realignment of distributive systems . With the corporate chains and large independent supermarkets claiming an ever-inc reasing percentage Of the food dollar, wholesale bakers everywhere have stopped to re-examine their distribution system. If the wholesale baker cannot serve the supermarket he will soon perish. There are several methods available to the whole sale baker whereby he can maintain maximum distribution through larger outlets. The wholesale baker must recognize the radical changes in bakery dis- tribution which have come about since the evolution of the corporate chains, and choose the alternative of mutual benefit to baker and retailer. Seemingly, these changes in distribution come from the willingness of food retailers to assume more of the distributive functions for bakery products than before . There is a growing recognition that food retailers must supply more than just a place to buy foods. Distance from the. store is one of the deciding factors in Consumer selction of stores to shop in, Overall average cost pricing -25- with promotional leaders offered to attract trade has become very important in food store merchandising also. In order to differentiate their offering and supply one stop shopping chain food stores have asked the baking industry for (I) private or controlled label bread and other packaged bakery goods atprices that allow non—integrated stores to meet integrated food chain price competition, and (2) inclusion of service or self service pastry and in-sto re bakery products departments in large 8 to res . 5 2 These key demands have emerged during a period of rising labor costs which have increased the problem of maintaining the efficiency of older distri- butive systems. A further complication has been the existence of potential ex- cess capacity in existing plants. This has created a highly unstable marketing system and produced distributive changes. Here is some of the evidence now available. First, a number of multi-outlet retail bakeries have shifted their lo- cations from individual stores into space inside supermarkets. This has given them greater traffic at lower overhead. 53 A great many of the multi-outlet bakeries, both in individual stores as well as in supermarkets, have converted their operations to self-service. This is reported to have cut sales expenses by 10 per cent of the sales price of most items. Many supermarket organi- zations have established or acquired in-store bakery facilities to serve their stores. The relatively low capital out-lays needed and the absence of serious 52. , "2 Eagle-United Bake Leases to Heinemann, " Wet News, V017, No. 47, Nov. 24. 1958. p. 22- S 33» -, "On-Premise Bakeiy Set at Bohack Unit", )3 - _ ' _. -——-. . . , -"-.-.--—' . .. . £11-53 ma , l- -. ‘t Kev. s, -. t... ..,, Ll, NILH‘CH 9, l979, p. 43. ‘ ‘—.——- —.——.--. . -26.. distribution labor difficulties have facilitated chain store movement into this kind of operation. This type of operation has so far been restricted to the larger stores (over $25, 000 in retail. sales a week). The response of the baking indus- try has been orderly, and few wasteful costs have been incurred (such as price wars, or intensified promotion direct against competitors' positions rather than against consumers' indifference in face of extended product offerings). The competitive interactions that have resulted from food store demands for lower priced baked goods (with fewer distributive functions performed by the bakery) have been more complex. Freezing of Baked Goods . The techniques of bakery production have changed recently. The most notable advance has been in improvement in storage abilities. Of particular interest is the freezing of bakery products. Today many plants freeze finished 54 The primary advantage of freezing has been to equalize bakery products. work loads by producing to inventory rather than to the sharply fluctuating demands experienced day by day in the industry. The major part of freezing in baking is limited to non-bread items. Weekly antiCipated orders for varieties of cakes, dark breads and pastry items are assembled. Those items which can be successfully frozen are select- 8d for runs for the full week rather than for daily use. The baked goods are Produced for freezer inventory. Two immediate advantages are felt: first, the longer runs of these items cut the unit cost involved in set-up and clean- UP after each item is produced; second, the work schedule simplification cuts B k' 54. g» , "Quick Freezing of Bakery Products", WW Magazine, December 15, 1956, p. 42. -27- costs of overtime and permits better labor utilization. The freezer inventory of prepackaged products can be held for several days or even weeks without sharp declines in quality. The daily requirements are brought from freezers directly to defrost chambers. The defrost chamber used in many plants and in ”in-store" bakeries is a type that maintains low humidity and very precipitated moisture during the short time required to raise the temperature from about -10 degrees Fahrenheit up to room tempera- ture of 60 degrees to 80 degrees Fahrenheit.55 The defrost chamber is a special requiremtnt of large quantity defrost problems, small quantities of frozen bakery products can be defrosted in well ventilated rooms, of course, but large quantities require the conditioned air of defrost chambers. Although bakery technologists do not agree precisely on the shelf-life reduction incurred through freezing, the stopping of the clock for these perishable products compen— sates for the slight reduction in shelf—life experienced. From my own experiences, the freezing of pastries that have been baked are reduced in days of shelf~life after being frozen. To my knowledge the shelf-life on commercial pastry (chain store) isthree days. The freezing of pastry reduces the shelf-life by one day. Again Speaking from my own experience, frozen pastries tend to "dry-out" faster than the same pastry which has not been frozen. Freezing provides further advantages to Chain stores, even permitting the shipment of frozen products to distant Stores for defrost and baking at the store. The feasible radius of service for plants large enough to employ freezers has been expanded greatly by this tech- UOIOgiCal innovation. This last method of shipping the product frozen in the raw K . 55 - , "Chains Cash in on Tiny In-Store Bakeries", We, v01. 34, No. 6, June, 1958, p. 81. -28- state, and baking it at the store insures the consumer of fresher products.Db Many related inventions have been a necessary part of the modern techni- que of freezing of certain bakery products. Special freezer types of cellophane have corre out; research in cereal chemistry in the use of bakery ingredients other than flour under these different conditions is being explored. Trades, other than the bakery trades, have been much more active in the development of products and supplies useful in freezing. Growth of Do It Yourself Bakiggr The application of temperature controlled bakery products which are sold in a frozen state or a refrigerated condition has grown in importance rc~ cently. For example, frozen pies and refrigerated biscuits. Census figures reveal that manufacturers other than bakeries have grown in importance in the production of rolls, sweet yeast goods and pies from the period of 1947 to 1954. The table shows the growdi of output of selected bakery products by firms not primarily engaged in baking. _G'BQETH OF NON-BAKIhiC INDUSTRY OUTPUT OF SELECTED BAKERY PRODUCT_S_57 Dollar Value of Shipmcn t s 13991918111 825:9 1947 .1954 ‘ 1311 '_ ' 13:4 Bread Type Rolls 5 437,000 $1,589,000 $2,434,000 is 7,422,000 Sweet Yeast Goods 859,000 5,818,000 2, 410,000 1. 8,000, 000 56. ,"What' 3 cooking in the Stor'cs, ChiliJ—SLOI'C 138: V01. 33, No. 11, November 1957, p. 84. 57. ,Census of Manufacturers, [954, Bakery Pro- ducts, Table 6A Bulletin MC- 20E, Washington, D. C.: Department of Commerce, Bureau of Census l956, p. 15. -29- GROWTH OF NON-BAKING INDUSTRY OUTPUT OF SELECTED BAKE RY PRODUCTS - (continued) Dollar Value of Shipments Pounds Slapped 1947 , 1954 19.4]; _1954 Pies $ 284,000 $3,086, 000 $ 552, 000 $12, 607,000 Total All Bread and Related Products $10,170,000 $17,451,000 Major packers in this field of "do it yourself’ baking include soup manu- facturers (Campbells Soup‘ Swanson Division), canned milk producers (Carnation and Pet Milk Companies), poultry processors (Blue Star Foods, this was probably meat pies), and canners (such as Stokely, Van Camp), as well as a major bakery firm (Continental Baking Company, purchaser of Morton Frozen Foods.) / M140 rtati on of Products 0 Another change of primary importance employed by the baking industry is the increased use of transport trailers. While transport trucks represent no major technological change in the methods of operation available to the baking industry, except for trucks which are temperature controlled to handle frozen PTOducts: the importance of the transport trailers stems from new distribution methods. The importance of having fresh baked goods arrive at the stores in saleable condition is another reason why transport trailers have won out over the railroads as a means of transportation. The availability of truck transport and the I‘GdUCed cost of operating transports over great distances have favored large plants that enjoy lower costs and are therefore able to extend their market area ...l’|1l‘|’1l1lll JII1 -30- rather than fight more intensively to gain market share in their home market. ”8 Types of Chain Store Bakeries The recent period of high-income levels has undoubtedly increased the consumption of sweet yeast products and pastries. This has meant. a shift toward the products of retail bakeries and away from consumption of wholesalers' pro- ducts. And by capitalizing on high traffic location, chain retail shops are begin— i ning to tap markets that other chain bakeries have not effectively reached - the impulse-purchasing consumer. 59 A bakery item will have maximum appeal if the customer is confident it is made of the best ingredients, and if she can visualize it coming right out of the oven. To get these ideas across to customers, bakery operations in the food Chains are handled three wasy: (.1) Central baking, (.2) Leased bakery, (3) In~ store bakery. Central Bakery Chains of all sizes have this a popular arrangement, with the chain OWned bakery supplying all of its stores. The chain can control its quality, keep distribution costs to a minimum, and compete price wise. ()0 Outside suppliers of baked goods round out the bakery items with their merchandise to give the store a full variety. Providing top bakery appeal at store level is accomplished in several 58. August ll, 1950, special report. , "Bulk Handling”, Bakingr Industry Magazine, 59. No. 10, October 1957, p. 141. , "Sell it Today", Chain Store Age, Vol. 33 60, g , "Jewel Realigns Bread and Cake", Chain Store Age, Vol. 34, No. 2, r381.1958,_p. 88. -31... ways - Jewel Tea managers, to get extra bakery appeal, made sure of the flow of traffic in the store and displayed sweet goods such as coffee cakes, pies and cakes where they could be seen by the customer first. The customers therefore see these impulse items first and are tempted to buy before selecting any other bakery goods. Some chains use shelving in their bakery departments that is different from any other shelving in the store. The shelving is set at an angle, for cus~ tamer convenience in buying and for employee convenience in stocking from the rear . The bakery goods also face themselves with these slanted shelves.61 So me chains seem to be putting emphaSIS on their bakery departments to the extent that elaborate lowered ceilings set it off from the rest of the store. And lighting may be varied over the bakery goods to bring out the sparkle and freshness in the package. Some chains are shipping baked goods unwrapped, in cabinets, to the Stores to be sold in show cases or to be fancy wrapped and sold on self service counters. Other chains prefer to handle all packaging at the central bakery to keep costs down, figuring they can wrap by machinery an attractive package to please the consumer. W252 The turning of store space over to a concessionai re has the big advantage of trading on a strong local name. The local bakery that leases space in a chain (I) store makes its own deliveries of baked goods. The local bakery also hi res it own employees for the leased bakery concession. The chain store works out 6.1 . , "Slanted Shelving adding neatness, efficiency to Bakery", Chain Store Age, Vol. 34, No. 12, Dec. 1958, p. 49. -32- with the bakery a financial arrangement usually based on sales or space used. With a leased bakery department, the department itself, has the flavor of the familiar "home-owned" bakery. The leased bakery is a service operation, with customers taking numbered tickets as they walk in, and then being waited on in turn. Packaging does not enter into the picture, since baked goods are displayed unwrapped in the show cases. However, some wrapping is done in View of the customer in some chain stores.62 When wrapping is done, it is usually on a special for the week item. Sealing machines, scales, and other modern equipment are helping to make wrapping more efficient. Personal selling is a factor in this across-the-counter operation, but much of the bakery's appeal depends upon the baked goods themselves and the variety offered. Even though the lease—operator is expected to maintain his re- Sponsibilit‘y of serving the consumer the best possible product and in a courteous manner, the chain store manager must see that the bakery operation, in every detail, is satisfactory. In Store Bakery Baking on the premises is done in only a small percentage of food chain stores . But is has been effective where used. Where the baking is being done in one store, other stores in the chain are frequently supplied from this source. There are instances, however, where a unit will do its own baking to meet only its own needs.03 62. , "Quality, Freshness, visual appeal vital igligmfi table Bakery Operation",_(_3hain Store Age, Vol. 34, No. 9, Sept. 3 : P- 123. T.” ' 63. , ”Selling Bakery Freshness", Chain Store Age, Vol. 33, No. 7, July 1957, pp. 92-93. Y a ‘-__,_ - . ‘__._‘-_—_a_—+__—_— _., -33.. Frozen dough and small ovens make possible the in-store baking sys- tems used by several Eastern and Midwestern chains. These systems pro- vide in-store bakeries in locations where they would have been risky before. Experience has shown that, in most instances, a department offering freshly-baked goods does an outstanding job of attracting customers and build- ing sales. However, even the most aggressive chains would have to think awhile about the large investment in space and money required by convention- al in— store bakeries. The cost of setting up the production area will run from twenty-five (25) to thirty-five (35) thousand dollars. Fixtures for the sales area will run from (2) two thousand to (6) thousand dollars, depending on the . size of the operation. Even where store location is judged suitable, the risk is mostly against the operation because of high operating costs and profit con- suming leftovers. The solution found by ACF-Wrigley, in Michigan, and Stop and Shop, in Boston, is to have the work done attcentral production centers. Make-up materials aremixed, formed, and frozen in the raw state before being ship" Ped to the stores. Only a small amount of additional work is needed to make them ready for the oven. After delivery to the stores, small ovens that take up only a minimum Of Space are worked by easily-trained personnel who bake pies to order for customers who want to take home hot pastry. Each store has a holding freezer near its single oven, permitting the stocking of a sizeable variety of pies. — mostly fruit. Leftovers are practically eliminated by baking only as much as needed at any time. . A more elaborate system is used by Daitch-Shopwell stores in New York. Like the other two chains, Daitch-Shopwell uses a central production center and freezes its merchandise before shipping it to the stores. But it offers a wider -34.. line of fresh breads, cake, pies and cookies in addition to a full line of past ries. Because products are shipped to the. stores before the dough has risen, each store requires at least a partially trained baker. The trained technician has to know how to use the proofing-box which is used to bring the goods to room temperature. He also has to know how to control the rising of yeast raised products and know the correct oven temperature of the products car- ried by the chain. Daitch-Shopwell's procedure naturally has a higher labor cost than the system used by Wrigleys and Stop and Shop because of the partially train- ed bake r and the extra equipment necessary to bake the finished product. Daitch—ShOpwell would also require more feet of display space than that re- QLii red of the Wrigleys or Stop and Shop setup. In the finishing of baked goods, such as, icing pastry, cupcakes and cakes, a woman is trained to assist the baker in this job. The manager of the bake shop (he is also the baker) can have any product on his inventory ready for sale in less than two and a quarter hours. Due to the nature of the operation, 16‘ ftovers of store baked items are held to a bare minimum and actual shelf- STOCks of individual items can be held down to immediate sales potential with Considerable accuracy. Showing off the baking operation has a customer appeal, and where faci— lities permit, that technique has its advantages. Eavey's large unit in Fort Wayne, Indiana, has a "glassed-in" bakery on the premises that has attracted COIISiderable attention. Super Valu stores in Wisconsin and Minnesota also ' use this process. There are also some stores that limit their on-the-premises baking -35- to pies. A small oven baking pies can fill the air with a tantalizing aroma. This method is used by Kroger and Wrigley in the Frandor Shopping Center. In each ofithe three types of operation, the manager is working to sell freshness and quality to his customers. The manager wants to get the best possible turnover, at the same time controlling costs in labor, materials and waste . If the chain store does not wish to risk the large capital outlay required to provide an excellent in-store bakery, then the wholesale baker has one other alternative. Where chains have a skilled baker on the premise they have also exper- ienced difficulties when the bake r is absent because of Sickness. The latest answer to the chain's quest for in-store bakeries is the Daffodil Farm bakeries in several Kroger and Wrigley store in the Detroit area. Daffodil Products are baked by a wholesale. bakery and delivered fresh to the stores daily. The wholesale baker designs and installs the Daffodil department and provides sales Clerks for demonstrations and service to the chain. All the Daffodil pro- ducts are sold on a self-service basis and the chain receives compensation on a commission basis. Economics and market analysis are not precise tools for observation, and, equally important, they are not precise measures for analysis and judgements of perfor“lance. The economic results or performance of an industry must be mea- sured against the whole of society. Traditional producing centers seem not to be offering products that will attract higher income families to spend at a rate much higher than low income families Yet the number of new ' d “t‘ b>' T 1'3”] (1 b ' . , . pro UL, s cing (cvc ope y new entrants from the frozen food fields of bakery products are capturing a growing share -30- of food dollars. The supply is, then, adequate and with the entry of new forms of products the variety seems to be adapting to new wants. The baking industry, along with several other major food processing industries, faces changes that are induced by the profound revolution in food wholesaling and retailing of the last decade. New methods of distribution are emerging that better satisfy the pressures brought by integrated food warehouses and retail stores. The challenge to the food industry today lies in answering the changed and still changing wants of highly persuasive and critical consumers. Baking as an industry offers a wide line at a wide range of prices reflecting differences in service and quality. The industry as a whole is responding to these demands to change under the leadership of executives acutely aware of the problems and alert to other means. The pressures of price competition come primarily from food retailers (or consumers?) who are themselves em- battled over the whole range of food and non-food items in a struggle for the consume rs' business. The change-over to lower distribution costs will be passed through as the business of grocery retailing stabilizes as the number of superxna rkets reaches its peak and levels off. In turn, growth opportunities exist as new products and nearly forgottong fine old pastries grow to signifi- cant proportions . -37- CHAPTERIH DOES POPULTAION GROWTH Aug ECONOMIC GROWTH__ ' MEAN .—-'-”—— m-w gljgfiljjASED BAKED _ggoosconsumiftion'g ...—i _ - _._.___—_.__._ -38.. FOR THE GREAT BODY OF PEOPLE IN ANY MODERN COMMUNITY, THE PROXIMATE GROUND OF EXPENDITURE IN EXCESS OF WHAT IS RE- QUIRED FOR PHYSICAL COMFORT IS NOT A CONSCIOUS EFFORT TO EXCEL IN THE EXPENSIVENESS OF THEIR VISIBLE CONSUMPTION, SO MUCH AS IT IS A DESIRE TO LIVE UP TO THE CONVENTIONAL STANDARD OF DECENCY IN THE AMOUNT AND GRADE OF GOODS CONSUMER. _ THORSTEIN VEBLEN THE THEORY OF THE LEISURE CLASS .. 3L)- POPULATION GROWTH‘ -40- There are many changes in our economy that point to opportunities for a rapid surge upward over the next ten years. The era of spectacular growth ahead will bring with it an abundance of problems . The increase in population in the 10 years ahead will bring with it changes in income and spending power, shifts in place of living, and changes in family structure. Will the population increase bring with it a business bonanza or an economic misfortune? Du ring each of the past ten years, the American population has been increasing at a rapid pace of about 1.7 per cent. ()4 A continuation of this current rate of growth will mean a population in the United States in .1970 of 210 million by the year 2,000 a population of 350 million, and by the year 2100 a population of 800 rnillion.65 Thi s population tidal wave seems hard to comprehend when, not more than 10 years ago, most thoughtful observers were concerned that the United States Was facing a steady population decline. The 33 million addition to the population by 1970 comes to twice as many People as are now in Canada, more than half the population of Great Britain, £1Ud the equivilent of 10 new Chicagos.66 The annual increase in our population is currently about 3 million. The rise ' . - . . . 1“ OUI‘ population from 1940-30 was the largest increase in our history, and A x X ‘— . 64. ‘ Stolnitz, George 1.: "Our Growing Population Threat or Boon?" WOUS, Spring 1959, p. 37. 65. , "What the U.S. Will be Like 10 Years from ’ HiNews and World Report; No. 9, 19.59; p. 76. " Now 66- ea... — f-wm—a-p—MU"- - .-~ -41.. the 1950—60 rise will be about 50 per cent higher. Of particular importance is the anticipated changes in age grOups. How are increases in age groups predicted? Given two populations with the same over- all growth rate, the one with the higher birth and death rates is likely to have the larger fraction of its numbers in the younger ages and the smaller fraction in the labor-force years.(’7 The proportion of the population under age 15, which had fallen to 25 per cent, is today over 30 per cent. An opposite shift has taken place in the case of the 15 - 30 group. The number entering grade school has averaged 50 per cent higher than in the 1930's. On the other hand, the number reaching 18 to 21, the main ages of entry into the labor force, has declined by nearly 10 per cent.68 However, the number in the 18 to 21 group is expected to increase by 25 per cent by 1965.69 The 25 to 44 group will remain virtually con- stant during the 1960's, while the 45 to 64 group will increase by about 16 per cent. 70 The age group over (35 will rise to 19 million, from 15 million now - an increase of about 27 per cent. Also of significance is the probable geographical distribution of people in the decade ahead. Altogether our population is expected to increase 19 per cent, bUt this growth will not be spread evenly.7l The metropolitan areas such as New Yo rk, Philadélphia, Chicago, Detroit, Cleveland, San Francisco and Los K 67. Stolnitz, _ogggg, p. 38. 68. Ibid., p. 41 -———-.- 69- aid.- 70. Ibid. 71 , "What the U. S. Will be Like 10 Years from _ ) NOW": fifNews and World- E29911: Nov. 9, 1959; p. 81. Angeles will continue to attract more and more people. By 1970, more than 70 per cent of the population will be located in urban centers.72 The Far Western States of California, Oregon, Washington and Nevada are expected to increase their populations by 35 per cent in the next 10 years. California is expected to become the most populous State in the union by 1970, with more than 20 million people. That will top by a shade the expected population of New York, 19.9 million. Listed below are the 10 states expected to grow at the fastest rate in the next 10 years: Estimated Population Per Cent State ' . L950 l 969 JEEP—11:39 Nevada. 275, 000 451, 000 64.0 Arizona 1, 198,000 1,792,000 49. 6 California 14, 778,000 20,184,000 36.6 Oregon 1, 797,000 ' 2, 419,000 34.6 Maryland 3,035,000 3,948,000 30.1 Michigan 8,036,000 10,425,000 ‘ 29.7 Utah 9 888, 000 l, 145, 000 29 .0 New Mexico 869,000 1,120,000 28.9 Dist. 0 f Columbia 829,000 1,062, 000 28.1. Washington 2, 815, 000 3, 574, 000 , 27-0 Total U . s. 177,000,000 210,000,000 19.0 &So of importance to businessmen throughout the country are the states that are €Xpected to grow more slowly than the U.S. as a whole. Some of these A i. 7 2 . Ibid. -43- are: Estimated Population State 1959 1969 Arkansas 1,767,000 1,767,000 ' Oklahoma 2,311,000 2,311,000 Iowa 2, 855,000 2, 943,000 Rhode Island 888,000 926,000 Mississippi 13, 196,000 _2, 311,000 Kentucky 3, 115, 000 3, 304, 000 Maine 963, 000 1,024, 000 Per Cent Increase _— -._...-_ It is evident from all the data presented thus far that we will definitely experience a population "boom" in the next 10 years. The rapid increases in various age groups, the continued movement of our population westward and to our already over-crowded metroplitan areas will again make us the most mo- blle POPUlation in the world. Before examining the affects of this increased popu- latlo“ 0n baked goods consumption I would like to discuss economic growth. -44- ECONOMIC GROWTH -45... SINCE THE MIDDLE OF 1957 TWO EVENTS HAVE SHAKEN THE COM- PLACE NCY OF OUR CURRENT AMERICAN WAY OF LIFE. THE _SEUTNLES,_ As A SYMBOL AND PORTENT OF THE AGE OF PUSH-BUTTON ANNIHILATION, HAVE GONE PART WAY TOWARD DESTROYINO THE NOTION THAT OUR FREE ENTERPRISE SYSTEM WILL AUTOMATICALLY PROVIDE SUPERIORITY IN SCIENTIFIC ACHIEVEMENT OVER THE REOIMENTAL EFFORTS OF THE SOVIET DICTATORSHIP. AND NOW AFTER THE PAST RECESSION AND SWIFT RISE IN UNEMPLOYMENT, DOUBTS HAVE BEEN RAISED AS To WHETHER THE BUSINESS CYCLE REALLY HAS BEEN TAMED, AS TO HOW FAR OUR ECONOMY REALLY IS DEPRESSION-PROOF. MALCOLM P. MC NAIR -46- In order for any industry to prosper population growth must be accompanied by economic growth. The American economy has grown in many dimensions -- in to tal production, total employment, amount Of capital goods, and in the variety of its products and occupations. The aspect Of growth that affects us most as individuals is the continued rise in the standard Of living of the average American family. Right after the first World War, the average factory worker put in 46 hours Of work a week. In 1956 it was 40 hours. In spite Of this greater leisure, his income today will buy 8.130 ut twice as much in goods and services as his 1919 income.73 As recently as 1929, up to that time the most prosperous era in American history, only one-fourth of American families had incomes as large as $4,000 after payment of all taxes. Today three families out Of five -- 31 million families -- receive at least $4,000 income or more.74 The numerous studies which have been conducted by various government and public agencies all point toward a long trend of growth. Since the main causes indentified with growrh continue to operate, that trend can reasonably be expected to continue. The resulting conclusion would be that i f we conduct our economic affairs with intelligence, we can reach a general level Of material well-being higher than ever before . Family incomes in the United States averaging more than $7,000 are ex- tremely likely within the next 20 years. This would be after payment Of all taxes and in terms of the present buying power Of the dollar. How is economic growth measured?” One measure of economic growth \ 73- , "Economic Growth in the Uni ted States", CO - - mmi ttee For Economic Development, p. 11. 74. 221$» p. 12. -47- - is the gross national product. GNP, as it is Often called, is the sum Of the values of all the goods and services produced by an nation in a given period, including the services produced by any nation in a given period, including the services provided by government. The measuring stick which is used to com- pare GNP for different periods is the "constant dollar" —- this is, the dollar ad- justed for year-to-year changes in the price level so that one dollar mil always measure the same quantity of goods and services. The GNP Of the United States in 1929 , valued in constant dollars of 1956 purchasing power, was $186 billion. In 1956 it was $415 billion or an increase of 122 per cent.73 Real gross national product tells how much bigger the economy becomes from one time to another. This, however, may be no more than a reflection of a growing, population -- simply more people at work, and therefore more work done and more product. The most important thing to know is whether growth has been enough to make possible a better ave rage standard of living for all. This can be mea- sured by looking at real national product per person this represents each year's total output of the society, divided by the number Of persons in the population. Another measure Of economic growth is real disposable income per 5331-35; This represents the income received by individuals after payment of ta . . . , . . . . . . xes - ' Real disposable income' achIres additional meaning when it is trans- late: - - . . '. . . d 1T1 to real disposable Income per family Since we live and consume and own mo . _. . St possesswns as families. Since 1880 the real national product has, on the average, almost doubled CVe . ry twenty years, In terms Of a dollar of unchanged value. The increase has \ 75. Ibid., p. 14. -48- been at an average rate of about 3 per cent a year. As a result total real na- fional product has become thirteen times what it was in 1880.76 Population is more than three times as large as in 1880, so that the rise when measured per person is less. Real national product per person is about four times as large as in 1880. Since taxes have increased greatly, the rise in real (11 sposable income per person is smaller. This measure has about tripled since 1 880.77 It was $530 in 1880 and now is $1710 -- both figures expressed in 1956 prices. When the family is considered, average disposable income rose from $2, 200 to $5, 300 in those years.78 Unless the society we live in changes in some radical fashion, the trend of growth can reasonably be expected to go on. The main forces responsible for our economic growth up to the present time are still operating. . Some of these forces are even more portent today than ever before. This brief View of the forces responsible for our past growth and the knowledge that these forces are still at work seems enough to show that optimism is JUStified with respect to future growth. The record of the past is impressive -- the average rate of growth in gross nau'onal product since 1900 has been 3 per cent a year. The average growth in output-per-man-hour has been just over 2 per cent a year.79 In each of the past 9 years this rate of growth has been higher than average. If: w - . . __ . . -, - e malntam this rate, by 19/3 our gross national product Will exceed $x23 \ 76. Ibid., p. .15. 77. Ibid. 78. 'Ibid. 79. Ibid., p.43. -49.. billion compared with 415 billion in 1956. 80 One result would be that by 1975 the disposable income of the average family, after payment of all taxes, would be in the neighborhood of $7, 100, expre ssed in dollars of 1956 purchasing power. 81 The increase over the pre- sent family disposable income of' $5, 300 would exceed the amount the average family now spends on food and clothing combined. It is entirely possible that each of us will enjoy the material benefits of thi s unprecedented era of prosperity only if we heed the following danger signals: 1. Catastrophe (Nuclear War) 2. Policies weakening individuals' incentives to work, save, and invest. The spread of restrictive production or marketing practices. 3 4 . Waste of our natural resources 7 Failure of our educational system to keep up with our needs D. 6 . Policies and activities of the goVernmentfincreased or decreased federal expenditures) Thus far Ihave tried to present the two key elements in the formula for pro Sperity in the decade ahead -- population growth and economic growth. What affect will this era of prosperity have on the baking industry? \ 80 . Ibid. 81. Ibid. -30- GROWTH AND CONSUMPTION Many people are under the impression that consumption of baked goods has been steadily declining for a number of years now. Many people do not realize the true magnitude of the baking industry. Mr. William G. Panschar, in this book Baking In America, states "The Baking Industry in America today (1954) is a four and one-half billion dollar industry. In American industry, baking ranks sixth in the value of product produced, tenth in number in wage earners em- ployed, and eighth in value added by manufacture. In several respects, baking is the top-ranking industry among all of America's food processors. From the standpoint of number of establishments, value added by manufacture, number of employees, and size of payroll, it is second to none."82 But what about this supposed decline in consumption? Contrary to many beliefs, the baking industry has progressed at a rapid rate. V Since bread is the "backbone' of the baking industry, we will start with the industry production of yeast-raised bread as reported by the U.S. Bureau of Census . Here is what Mr. E. E. Kelly Jr. , President of the American 83 Bakers As sociation has to say on bread production: " We start off in 1923 with the industry producing nearly 8 l/2 billion pounds of yeast- raised bread. We might keep in mind that the industry received its bigge St Spurt during World War I, when home baking decreased at a rapid rate. The refore, 1923 gives us a rather high base to being with. In 1929 this figure increased to 9, 864, 000, 000 pounds. We were set back on our heels again in 1933 when tonnage was actually 203’000’ 000 pounds less than in 1923. Fortunately, this trend did not continue \— 82‘ Panschar, William G., Baking in America, Vol 1, p.3. 83. & Bakers NeKeHy’ E. E. Jr., "Progress Through the Years", Modern Miller Ws; October 31, 1959; PP. 23-26. and by 1937 we were up to slightly over 10 billion pounds -- an all time high as of that date. From 1939 to 1947 we went up 3,172,000, 000 pounds or slightly over 30 per cent. In 1954 we were up another billion pounds and in 1959 we will be up another billion pounds over 1954. All told, production of yeast-raised bread in 1959 is 85 per cent ahead of 1923 which figures out to an industry total in 1959 of 15, $25,000,000 pounds." A great deal has been said about a terrific decline in per capita con- sumpti on of bread. Figures used for showing this decline come for the most part, from the declining per capita use of flour. We are primarily interested in the progress in consumption of baked goods and not in the consumption of flour . How about the per capita consumption of bake rs yeast- raised foods? In 1923 the per capita consumption of bakers bread was 75 pounds per year. 8.4 In 1927, 79 pounds; 1929, 8.1. pounds; during the depression year of 1933 down to 65 pounds: 1937, 78 pounds; 1939, 80 pounds; and in 1947, 95 pounds.85 In 1954 this figure had slipped to 91 pounds and was the same in 1959. An important point to remember is that per capita figures can change quite rapidly by either an accelerated increase in population or a relatively slow increase 1' n population. In 1939 our population was 131 million, and 8 years later this had increased by only 12 million. This relatively slow increase, plus the 30 per Cent increase in tonnage in 1939, gives us a rather higli figure for this \‘ 84. Ibid} 85. Ibid. -53.. On the other hand, from 1947 to 1954 a period of only seven years, our population increased by 18 million so the per capita consumption of 91 pounds is still a very respectable figure. ° The Fleischmann's Consumer Panel Report of all baked foods purchases also gives evidence of no substantial decrease in bread consumption. The Fleis- chmann report only covers a three year period from 1955 through 1957. This report indicates the ounces of bread purchased per family per month for the 0.8 . as a whole increased in 1956 and declined in 1957 which would also re— fute the statements that bread consumption has been steadily declining for a number of years. Listed below is a table taken from page 25 of Fleischmann's Report; Ounces of Bread Per Family Per Month Total U.S. 12.52 1.95.6 . .1251 Total Bread 219 243 224 White Bread 153 167 156 Variety Bread ()6 76 68 Another measure of progress is the amount of flour used by the industry. Thisfi -. A -- -. ._ -86 gure increased from 90 nullion cwt. in 1929 to 166 million in 1959. Another interesting measure of progress is the dollar value of the ship- ments of bread and other baked foods. In 1923 the dollar value was $911, 119, 000 and in l 959 the dollar value was estimated at $4, 368,000, 000. Food Field Reporter in its annual article. "What The Public Spends For C . . . . rocery Store Products" lists as the value of total domestic consumption of all Ni“--__ 8 6. 1131 d_. -54.. baked goods in 1958 at $6, 523, 680, 000 or an increase of 3. 8 per cent over 1957 . This represents 7.44 per cent of all food store sales. To emphasize the importance of white bread the following was taken from Food Field Reporter187 GROCERY STORE 10 TOP SELLERS IN FOODS IN 1958 1958 % of 1958 Total (71 Change Grocery Store _Sa_l_<3_s_ From 1.957 Sales Fresh Beef $ 4,196, 270 Up 9.1% 9.21% Provisions ' 4,189, 630 Up 16. 6% 9.19% Fresh Vegetables 2,717,250 Up 2.4% 5.904 Fresh Fruit 2,172, 9.1.0 Down 1.7% 4. 77% Fresh Milk 1,698, 260 Up 2.7% 3.72% W ' 1,589,520 up 2 . 9% 3. 49% Fresh Poultry 1., 493,180 Up 10.2% 3- 23% Coffee (a) 1 , 254, 580 Down 6 . 4‘26 13 - 7393 Fresh Pork 989, 400 Up 7.5% 2 . 17% Canned Vegetables (b) 746,410 up 3.2% 1.64% (a) Excludes soluble ("instant") coffee 0» Excludes canned beans with pork or sauce But enough of past glory and a look to the future. What affect will this tre . . . . . mendouS population inc rease and economic growth have on consumption in the . . . ' . . . years ahead? Since populations are shifting and growmg more rapidly in N... 87 Store Proclu a: , "What the Public Spends For Grocery Food Field Reporter, Annual Report, p. 3. -55- some areas than others we should first determine who spends how much for baked goods and 2139:.- Expenditure Per Family Per Month For All Baked Goods By Re 0;. ion _1_9_5_5_ 1956 1251 Total U. S. 5.14 5.39 5.44 New England 6.71 6.29 6.40 Middle Atlantic 6.70 6.95 6.70 E. North Central 5.31 5.54 6.00 W. North Central 4.01 g 4.22 4.39 South Atlantic 4.35 4.70 5.00 E. South, Central 3.62 4.00 3.97 W. South Central 4.27 4.25 4.27 Mountain 3.68 ' 3.92 4.32 Pacific 5.30 5.85 5.78 By Income Group 1955” 1956 9 £9.23 Total U. s. 5-14 5'39 5.44 High - $7, 000 8l Over 5.79 5.93 6°13 gpgz’rglgdaddie - $5,000 5,55 5,84 5.88 Eggs/Sadie. — $2,500 - ' , 5.09 5.51 3'36 Low 3.42 3.49 N 3.55 T . . he above two tables were taken from Fleischmann 5 Consumer Panel Re 0 p rt on Baked Food Purchases from 1955 to 1957. A glance at the first table _fi—h_w—_—i—_———— __._ --_ .. ‘,—_._ . _ -56.. tells us that each of the top five geographic area's will be growing in population at a rate higher than the average for the nation as a whole which indicates even higher consumption in these areas in the next 10 years. Eagles Law certainly is justifiable in many respects -- especially where he relates food expenditures to disposable income utilizing the capacity of the human stomach as one of the limiting factors. Possibly there is a maximum expenditure on food in relation to the human stomach capacity however, as income increases there is gene rally a shift in the proportionate amount of ex- penditu re for various types of foodstuffs -- a general upgrading of tastes and preferences. The Fleischmann Survey indicates that as income rises expendi— tures for baked goods also increase. In the middle income group the dollar expenditure per family for baked goods was estimated at $5.88. In the upper income group expenditures per family we re estimated at $6.13 or about 8 per cent higher and about 12 per cent higher than the national average. It also could be argued there are several million Americans over-weight and thus a general increase in stomach capacity. (????) With the possibility of $7,000 becoming our average disposable income within 15 years it is also reasonable to assume that consumption will increase by 8 per cent or more per family. Once again I would like to emphasize the baking industry does not anticipate it will divert a greater portion of the food budget to baked goods purchases. The percentage of the dollar budget devoted to baked goods will not increase appreciably but as income increases do‘llar sales should increase and not percentage. I In conclusion it is agreed that we are presently in the midst of our biggest population increase in history. We are also riding the crest of a tremendous economic grOWth with assurance that the forces responsible for this economic -57.. growth will continue in the years ahead. It was also stated that per capita con- sumption of baked goods has steadily increased since 1923. It also pointed out some of the danger signals that must be watched by consumers and business- men alike if we wish to enjoy the many benefits of this era of prosperity. Thus, a simple formula for success in the "Startling Sixties": population growth plus economic growth plus increased consumption equals increased pro- fits and a lot of "happy bakers". -58- CHAPTER IV _THE BAKING [NQHSTRY _IS IT _"PURE" COMPETITIQNE "He Who LOVeS His Enemies Betrays His Friends" This Surely Is Not What Jesus Intends -------- " Blake - "The Everlasting Gospel" -60.. Today's market is dynamic and critical. It breeds intense competition and "active". trade practices; some good -- some bad. There are still a few naive wholesale bakers who believe quality merchan- dise and super—service are enough to gain maximum distribution and favorable consumer demand. But, is quality and service enough? The "profit squeeze" is on in all segments of the food industry. In the chain stores a 2 per cent net profit seems to be a reliable figure -- enter dis- tributor labels and "cheap-bread". In the baking industry a 2.5 per cent net profit seems to be maximum -- enter distributor labels and secondary loaves of bread to counter chain labels. Costs rise —- profits take~a-dive to a new all- time low . The cause and the result -- trade discounts, advertising allowances, cash di scounts, seasonal discounts, buying space, and cash under—the counter. Where does this money come from? It comes di rectly out of the cash register of the wholesale baker — a net deduction from profits. It is not enough ‘ just to meet variable costs, keep the mixers busy and the ovens running at capa- city. There has to be something left over for the "kitty" which we call profit. What is profit? It's the energizing force and the end objective of every whole- sale baker . It's profit that keeps the front doors open, the trucks rolling, the mixers happy, and the ovens burning. Profits are the report card of the bakery. Profits provide incentive to investors and measure the performance of manage- ment. Should we apologize for profit? Absolutely and positively :12. Are pro- fits socially unjustifiable or an economic waste? They are not. Profits mean growth and growth means opportunity for increased employment -- jobs mean income -- income means buying power -- buying power means money circula- tion —— Circulation means mo re money flowing in the blood stream to the heart -- -61.. the business enterprise. Wholesale bakers are very much aware of this "profit-squeeze". The rapid increase in distributor label breads and secondary brands is one reason for this decrease in profits. (one reliable bakery source stated that secondary brands account for 60 per cent of his bread sales) The second reason is the almost fantastic demands of labor and the resultant rapid increase in selling cost 3 . With profits and margins smaller and smaller, the retailer is looking for something more than quality and service. Many wh olesale bakers feel they have nothing to sell ELLE quality and service. Their only alternative is to sell at a discount "deal-merchandise" of possibly inferior quality. Price discrimination and allowances of varying degrees seem to be their last remaining competitive tools. Enter -- The Federal Trade Commission: This struggle for market posi- tion which has ”sparked" active trade practices has also "sparked" a group of men who comprise the Federal Trade Commission. Because of the importance of the Federal Trade Commission and its' regulatory powers, it behoves every member of the baking industry to know and understand some of the laws that govern operations and regulate competi- tion. Merger RCETUlaIZIOTI In the baking industry, just as in many other industries, competition might be classified as the "survival .of the fittest". The struggle for a promi— nant market position means that one firm loses to balance the gains of another -62- firm. 88 In 1932, two economists, Adolf A. Berle Jr. , and Gardiner Means, voiced their disapproval of the sudden rise of corporate power. In "The Modern Corporation and Private Prope rty" Berle and Means predicted that our 200 largest industrial corporations would control seventy to eighty-five per cent of all corporate wealth by 1950 . 89 This constant attack on monopoly and bigness has been continuous since 1900. It started with Teddy Roosevelt's attack against the trusts, followed by the effective work of William Howard Taft and Woodrow Wilson. Attorney Gene- ral Herbert Brownell, declared recently that the antitrust laws are "a part of the warp and woof of our economic life" .90 Another Roosevelt, Mr. James Roosevelt is the latest person to crusade against corporate growth thrOUgh mergers. Members of the baking industry should remember that the government is interested in one thing -- maintaining competition. Section 7 of the Clayton Act simply bans mergers where acquisition tends toglessen competition or create a monopoly.91 Until the 1950 antitrust laws were passed, the government couldn't pre- vent a merger from taking place and had been unsuccessful in unscrambling 88. Slater, Charles C.; Economic Changes In The Baking Industry, Northwestern University Press, p. ()1. 89. Childs, Marquis W.; Ethics In A Business Society, Harper & Brothers, May 1959, p. 104. 90. Ibid., p. 105. t ‘91. Silberman, Charles; "The Coming Assult on Bigness", Fortune, June 1957, p. 144. -03- / mergers years after they had gone through. In 1957 Crown Zellerbach Corpo— ration of San Francisco violated the Anti-merger law by acquiring a west coast competitor, St. Helens Pulp and Paper Company.92 The examiner ruled that Crown Zellerbach must divest itself of the plant and timber rights it acquired. This was the first court test of a major weapon in the government anti merger arsenal -- the authority to enforce the unscrambling of corporate assets after they have been put together. About the same time as the Crown Zellerbach case the government also reached a verdict against Bethlehem Steel. The verdict against Bethle- hem Steel and Youngstown Sheet and Tube means:93 1. It sets up a tough line against any merger between companies that significantly compete with each other. 2. It puts just as strict a ban on mergers that eliminate -- or threaten to eliminate an important source of supply or a significant sales ma rket for other companies. ~ 3. It makes clear that a single product of a company -— as well as the entire industry line -- can be used to test a merger's legality. 4. It demonstrates that a market area as small as a single state -- or as big as several states, a region, or the entire nation -- can be used to measure a me rger's effect on competition. 5. It underlines the importance of market-share figures -- both to de- fine markets and to show a me rger's impact. ‘w—_ _ W 9'2. __ , "Antimerger Law Starts to Bite", Business “ESE March 9, 1957; p. 23. M 93. __ , "Antitrusters Heft a New Weapon Against ergers , Business Week; January 3, 19.59. .04- The Bethlehem Case also sets out specific standards to Judge a merger's effect on competition.94 1 . Does it substantially increase concentration? 2 . Does it eliminate a substantial factor in competition? 3 . Does it sliminate a substantial source of supply? 4 . Does it create relationships between buyers and sellers that deprive rivals of either a fair opportunity to compete? lThe Bethlehem ruling certainly does not make aliiiergers illegal. Not only are many mergers legal, but the government just cannot handle all of the questionable ones. There is still no ruling that bars the acquisition of a failing corporation or a company that would haxe gone out of existance anyway. Present ‘ antitrust laws also say nothing about conglomerate mergers -- in which companies in unrelated fields join enterprises. What is the best defense against merger regulation? Certainly ignorance is no excuse. Arguements for efficiency through mergers are often stated in Vagile terms and do not hold much 'weight with antitrust legislators.95 The best defense against antitrust legislation is a knowledge of some of the factors which We mei‘gers legal. 1 - Lower costs and increased efficiency as a result of merging with 8110 tlier corporation, will not alone make a merger legal .96 6 N 9 4 . Ibid. p “4 95 - Edwards, Corwin D.; Maintaining Ct,)iiipetitioi_i_, McCraw-Hill, 9 6 - Cook, Paul W. Jr.; "Regulation of Mergers -- How Much, How Wis . . - . . . ,. e, HOW Come?", TillI‘IX'FlI'St Annual Boston Conference On Distribution ~-05— 2 . To grow through mergers simply to compete effectively with still larger companies will not make a merger legal. 3 . To merge simply to reduce supply and production problems will not excuse‘a merger.97 4 . Agressive competition through merger will not excuse a merger?8 5 . To improve the efficiency of management through a merger will not make a merger legal.99 6 . All the benefits from a merger will not make a merger legal if a violation is found in a single product. If none of the above factors or conditions will make a merger legal then what wi 11 legalize mergers? Many antitrust experts feel that enforcement of antitrust laws has been capricious and unrealistic and has brought about an econo- mic status quo in many industries. Experts feel that enforcement procedures lack pe rccption, understanding and comprehension. Paul W. Cook Jr. stated in his wri ti mg on merger regulation which appeared in the 1959 Boston Conference on Distribution Booklet the following.100 "The strictness of merger regulation is, however, capricious. The language Of the law, and mo re importantly, the language of the Congressional Reports On the bill, contain no reference to the worthwhile social and economic purposes which mergers have served, except for the alleviation of the distress \ 98' E12: 99- get- 100 ‘r (i (i - of bankruptcy. But mergers as ways of bringing about more efficient organi- zations, for lowering costs and prices, for providing dynamic and quick entry into new fields, for supplanting a tired management with a vigorous one, or for getting substantial capital to where it will do the most good most quickly -- these have no mention in the law or the Congressional Reports. Their only standing in enforcement derives from their ability to persuade the enforcement not to bring complaints. What remains is a concept of enforcement that is heavily weighted by what might be called static concepts. How many companies are there, how big are they, how long have they been so, how large a part did merge rs play in their growth to the size they have become -- not in the effect on competition these past mergers may have had. More companies are preferred to fewer and smaller companies preferred to larger. The nearest thing to a path of safety for a com- pany wi th, say, 10 per cent or more of a field is to merger for diversification Or not at all. " Members of the baking industry should merge only with considerable caution . Several mergers have appeared to have gone by without strict threat- ment but the Department of Justice may be building a strong case and preparing to "lowe 1‘ - the-boom”. WU - Patman Ac t The practice of price-cutting or price discrimination has been tolerated in many irldustrieséfor several years now. Legi slation against price discrimination and other unfair trade practices had its beginning in 1914 with the passage of the Clayton Act. SGCUO” 2 0f the Clayton AC t, better known as the Robinson-Patman Act, stated that it would be un- lawful fo r any person to discriminate in price between different purchase-rs of -O7- like quality, grade or quantity when the effect would be substantially to lessen competition or to create a monopoly. The Clayton Act was hailed as a great step forward in preventing unfair price practices, however as time passed the federal courts felt the Clayton Act was inadequate in many respects. 101 In an attempt to pIUg some of the loop-holes in the Clayton Act, the Robinson-Patman Act was passed in 1936.102 The Robinson-Patman Act went one step farther than the original Clayton Act in that only cost savings as a result of volume orders could be passed on to the retailer. Members of the baking industry should be aware of the various sections of the Robinson-Patman Act. Any sales manage r is interested in gaining additional sales and many times in his eagerness might overlook the con sequences of vio- lation of any section of the Robinson-Patman Law. The primary point to remember is that price-cuts should be offered to all buyers of like class, quantity and classi- fication . One prosecution could wipe out the profits of an entire year. The major purpose of the Act is stated in Section 2 (a) and it says "That It shall be unlawful for any person engaged in commerce to discriminate where the effect of such discrimination may be substantially to lessen competition or tend to Create a monopoly -- or to injure, destroy, or prevent competition -- nothing Contained herein shall prevent differentials which make only due allow- ance for the differences in the cost of manufacture, sale, or delivery result- in f . . . . . . . . g tom the differing methods or quantities in which such commodities are sold \ Ronald 101 . H. H. Maynard, An Introduction to Business Management, The PI‘ESS Company, New York, 1941, p. 057. 102. Ibid. -68- or delivered."103 This section of the Act, although it does not outlaw price discrimination, does allow the supplier to grant discounts by passing on to the retailer cost-savings as a result of volume purchases. There seems to be some degree of confusion regarding what constitutes \ . a "volume purchase" so Section 2 (a) of the Act also empowers the Federal Trade Commission to establish quantity limits as to particular commodities. 104 Before the Robinson-Patman Act was passed in 1938 some of the large food chains established their own brokerage organizations and collected discounts from suppliers in the form of brokerage fees. Section 2 (c) of the Act states "That it shall be unlawful for any person engaged in comme rce to pay or grant, or to receive or accept, anything of value as a commission, brokerage, or other compensation -- in lieu thereof, except for services rendered.105 Thus, passage of the Act, prevented food chains from collecting brokerage fees. Most famous if the antitrust case against A & P. There was also considerable confusion as to what constitutes "services rendered" . The two primary services offered retailers by vendors are co- operatj ve advertising agreements and promotional allowances. Sections '2. (d) and 2 (e) of the Act outline the manner in which these services may be offered. If a vendor offers a particular service to one retailer he must offer this same serVice to 8.11 competitive retailers or buyers on an equally proportionate basis. 100 —‘—\ 103. Brand, Edward A.; Functional Analy_sis of Food Distributing, p. 11. 104. Ibid., p.12. 105- 1329; 106.1ma -69* The retailer or buyer is also liable under the Act and should not accept any offer that is known to be discriminatory. Section 2 (f) of the Act is known as the Buyer' 3 Liability Clause and reads as' follows: "That it shall be unlawful for any person engaged in commerece, knowingly to induce or receive a dis— crimination in price which is prohibited by this section."107 The important word in this section is "knowingly" and the courts must prove the buyer knew of a price differential prior to acceptance. The effect of the RobinsonvPatman Act could be summed up as follows; "The re seems to be little doubt but that the Act has had the effect of making competition between the larger retailers and the smaller merchants more equitable . Large Distributors have been deprived of uneconomic and undeserved price discriminations and hence are unable to lower prices to their customers. Manufacturers are forced to charge higher prices when selling to large distri— butors, it has been possible for them to reduce prices formerly charged to their customers, thus tending to equalize somewhat the prices to all customers."108 When granting a price-cut to the retailer, either in the form of a dis- count or a service rendered, the wholesale baker should know and understand the limits as outlined in the various sections of the Act. In Case of a quantity discount the vendor must be prepared to defend his discount With proofthat sufficient cost differentials warranted such a discount. 1339£discounts are also given to different classes of buyers such as WhOIESalel—‘S, retailers, etc. The Federal Trade Commission considers trade N 107. nmr .— - ——v-4.—— 3 . . _ New Yoi‘gfi - Maynard and Beckman, Pl'll'lt‘lplt‘S of lvlnrkcting, The Ronald Press, a l.) . 753. Q ‘- -70.. discounts legal only if the vendor offers the same discount. to all buyers within each classification. Seasonal discounts must also be offered to all buyers on an equally proportionate basis. Cooperative advertising agreements and promotional allowances must be offered to all buyers on an equally proportionate basis to avoid prosecution under Sections 2 (d) and 2 (e) of the Act. In conclusion I might add that the Robinson-Patman Act pertains pri- marily to those buyers and sellers who are located in several states or those who engage in interstate commerce. What about the small bakers --.the corner bake shops? Many wholesale bake rs will agree that their price-cutting and dis- counting is done in an effort to compete effectively with the locally owned and operated bake-shop. There are many wealthy local bakery operators all over our country. Some of these local operators engage in excessive price discrimination and are not subjectto control under many of our federal laws. A suggestion -- why shouldn't all bakeries be subject to control under our present federal laws? The objective of the Federal. Trade Commission is to maintain com- -—.l————_ —‘- .—._ _.— \ petition. Competition stimulated innovation and promotion and generally af- fords the consumer a variety of bakery products at reasonable prices. Couldn't we maintain competition and still insist that all bakers, large and small, compete ethically subject to the same federal legislation? All powers not expressly delegated to the Federal Government are reserved to the states: however, are the states doing the same kind of enforcement job that the Federal Trade Commission is doing? -71- The Federal Food and Drug Administration Why should mention be made at this point about the Food and Drug Ad- ministration? Since the purpose of this chapter is to acquaint the members of the baking industry with some of the laws effecting this great industry, in the "Startling Sixties", what could be more appropriate than to wind-up this sec- tion with an explanation of what governs what we can or cannot put into our products. Ever since the 1959 "cranberry scare" the American consumer has become more and more skeptical of some of the chemicals added to food pro- ducts. Many consumers might wonder when they pick up a soft loaf of bread just what makes it soft. Consumers may even become skeptical and wonder if they are receiving a quality, nutritious, bakery product or a medical prescrip- tion. Because of this skepticism that might prevail in the minds of many cont sumers, I feel that every member of the baking industry should know a little more about food additives so that we can intelligently and successfully promote the true nutritious value of bread and other bakery products. The practice of adding "chemicals" to food is a very old one. No doubt it began when man first learned to preserve his meat by putting salt on it. _Th rough the centuries other methods of food preservation were invented. Eventually food Processors not only utilized chemicals as preservatives but attempted to conceal inferiority by coloring them with dyes that were sometimes highly poisenous. Thus, in an attempt to protect the American consumer against many poinsenous food additive, the federal government passed the first Federal Food and Drug ACt in 1906.109 The fact is, of course, that chemical additives, or food additives as they are now being called, have brought about great improvements in the Ameri- can food supply. Additives like potassuim iodide in salt and vitamins in enrich— ed food products are making an important contribution to the health of our people, and yet it is a fact both iodine and some of the vitamins would be harm- ful if consumed in excessive amounts. So an important thing consumers should learn about chemicals in food is not to be alarmed by the word "chemical". Food and Drug Administration inspectors knew that several food addi- tives we re being used. They knew also that some of those in use had not been thoroughly tested for safety. Under the Federal Food and Drug Law prior to September of 1958, FDA COUM not Stop the use of chemical additives simply because they were question— able 01‘ had not been adequately tested. It was necessary to be able to prove in court that the chemical was poisenous or delerterious. . This is generally not too difficu” ‘30 prove for chemicals which cause immediate, or acute illness. But today the big problem which concerns FDA scientists is the long-term effect -- What may happen in the body as a result of yea rs, or even a lifetime, of expo- sure to Iililltite amounts of a chemical additive. Proving what is poisenous un- der these Conditions is extremely difficult. ”0 This problem of how to protect the consumer from the long-term effects 9 - . , "What Consumers Should Know About Chemical -73.. I of chemical additives was studied intensively by congressional committees from .1950 to 1958.111 These studies culminated in the enactment of the Food Additives Amend- ment, Public Law 85-929, by the 85th Congress. 112 This amendment to the Federal Food, Drug and Cosmetic Act was signed into law on September 6, 1958 and became fully effective for all. new food additives six months from that date.113 An additional year was allowed for completing tests of chemicals already in use prior to January 1, 1958.114 Manufacturers are now required to run extensive animal feeding tests on any additives before they are marketed. Results of these tests must be sub- mitted to the Food and Drug Administration. If F. D. A. analysts are satisfied ' that the additive will be safe, a regulation called an "order" will. be issued per- mitting its use. This regulation places "tolerance limits" on the amount of an additive which can be used, and will specify any other conditions necessary to protect the public health. If the evidence submitted by the manufacturer is not convincing as to safety, the additive will not be permitted. This applies equal- ly to substances added directly to foods and to substances likely to contaminate food as a result of some incidental use in food processing. Food packaging ma- terials which may enter the food itself are also covered under the law. The law also applies to irradiated foods; and it. cove rs any residues which may carry over into meat, milk or eggs as a result of use in animal feeds. 111. Ibid., p.3. 112. £319; 1 13 . Ibid . 114. Ibid. -74- - The law specifically states that no additive may be permitted in any amounts if the tests show that it produces cancer when fed to man or animals, or by other appropriate tests. ”5 The law also specifies that only the small- est amount necessary to produce the intended effect may be permitted. The law also prohibits the use of any chemical which would result in consume r de- ception . We can best understand why additives are used and the benefits derived from them by considering some of the important classes of additives. Nutrient supplements are the vitamins and minerals added to foods to improve value, and sometimes to replace those removed in processing. For example, thiamine (vitamin Bl), riboflavin (vitamin B2), niacin (another B vita- min) and i ron must be added to bread if the bread is to be called "enriched". No n-nutritive sweeteners are the sugar substitutes permitted in foods for Per sons who must restrict their intake of ordinary sweets. The most com- mon example of a non-nutritive sweetener would be saccharin. fieservativcs are another class of food additives. The preservatives used in bread are called {11019 and £0.93 inhibitors. Those permitted in bread inCIUde SOdium and calcium propionat‘e, sodium diacetate, acetic acid, lactic acid, and Inonocalcium phosphate. ”0 Another type of preservative prevents phySiCal Or chemical changes which affect color, flavor, texture or appearance. These are called sequestrants. Sequestrants are commonly used in the manufac- ture of dad ry products. A different type of sequestrant is used in the manufacture of soft .. . . . ' C11lnks to remove traces of metals which would cause clouding or other \ “ lls.umi,ns. 1-1(3. and. undesirable effects. Emulsifiers are used in such foods as bakery products, cake mixes, ice cream, cottage cheese, and candies. They affect characteristics such as volume, uniformity, texture (in bread), smoothness, and keeping quality. Some common emulsifiersare lecithin, mono and diglyceride, and propylene- glycol. Stabilizers and thickeners are used to enhance texture, flavor, and uniformity of candies, ice cream, and beverages. Thickening and stabilizing - - , , . . - , . .. - 117 agents include pectins, vegetable gums, gelatin and agai . Acids, Alkalies, and Neutralizing Agents are important in many classes of processed foods. The acid ingredient acts on the leavening agent in baked goods, and releases the gas which causes rising. Neutralizing agents are chem- icals added to control acidity or alkalinity just as acids and alkalies may be added directly. Some common chemical additives in this class are ammonium bicarbonate, calcium bicarbonate, potassium acid tartarate, sodium aluminum phosphate, and tartaric acid. “8 Bleaching agents and bread improvers are another classification of food additives. Freshly milled four is yellowish in color and makes a very poor dough. As it ages, it whitens and reacts chemically with oxygen in the air, and gradually improves in breadmaking quality. This aging and bleaching can be speeded up to avoid long periods of storage by the addition of oxidizing chemicals. Some of the Pelfmissible oxidizing and/or bleaching agents are benzoyl peroxide, oxides 117. Ibid. 118. Ibid -76- of nitrogen, chlorine dioxide, nitrosyl chloride, Chlorine, and potassium bro- mate.119 There are of course other types of additives for other purposes than those named. Leavening agents, anticaking agents, hardening agents, clarifying and chillproofing agents, drying agents, antifoaming agents, pesticides and coal tar colors are examples of classes not listed above. 120 Most consumers know that the law contains a general requirement that food ingredients be named on the label. Many chemical additive which are com- monly used will not be. found in the list of ingredients on labels of foods in which they are used, and consume rs will not be familiar with them. This is not because certain of these additives are used improperly or because they are unsafe, or in any way undesirable. And it is not because of any intent to conceal the fact that such chemical are being used. One important reason is that the law does not require ingredient declara- tion of the labels of standardized foods -- that is, foods for which the basic ingredients are set by regulation. Since consumers can depend upon basic com- position, Congress did not require the main ingredients of standardized foods to be declared on the labels. If the standard permits optional ingredients, the standard regulation itself may require such optional ingredients be declared on the label. 121 119. Ibid., p. o. 120. Ibid. 121. ‘I_13_id., p. 8. -77- Three kinds of standards may be established by the F.D.A. :122 1 . Standards of identity- this kind of standard is designed to establish what a given food product is -- in other words, what the consumer expects to receive when she asks for the food by its common name. For example, the standard of identity lable statement of optional ingredients of white bread and white rolls is as follows: "Each of the foods bread, white bread, rolls, white rolls, buns, white buns, is prepared by baking a kneaded yeast -- leavened dough, made by mois- tening flour with water; or With one or more of the optional liquid ingredients specified in this section or with any mixture of water and one or more of such ingredients. The term "flour", unqualified, as used in this section, includes flour, bromated flour, and phosphated flour. The potassium bromate in any bromated flour used and the nionocalcium phosphate in any phosphated flour used shall be deemed to be optional. ingredients in the bread or rolls. Each of such ‘foods is seasoned with salt, and in its preparation one or more of the op- tional ingredients prescribed in the subparagraphs of this section may be used."1123 2. Standards of quality - these are minimum standards and establish specifications for such quality factors as tenderness, color and freedom from defects. Under these standards, if a food does not meet the qualtiy specifications, it must be labeled "Below Standard in Quality", followed by a statement showing 122. , ”What Consumers Should Know About Food Standards", U.S. DepartnTetit of Health, Education, and Welfare, Food and Drug Administration, p. 3. 123. __ , "Bakery Products", Definitions and Standards, Federal Security Agency, Food and Drug Administration, Service and Regula- tory Announcements; Food, Drug, and Cosmetic No. 2, Part 17, p. 3. ~78- in what respect the product fails to meet the standard, such as "excessively broken", or "excessive peel", and so on. 124 The standard of identity defines what the product is, and the standard of quality provides for special labeling for the particular product which is not up to the usual expectations of the con- sumer but is nevertheless a wholesome food. 3. Standards of fill of container - tell the packer how full the container must be to avoid deception of the consumer and to avoid a prosecution for "slack- filling" .125 They are particularly necessary for products that may shake down or settle after filling or which are comprised of a number of units or pieces packed in a liquid. Standards of fill container have put an end to a kind of cheat- ing that formerly was much more common than it is today. Food standards are based on factual data recorded at public hearings. The testimony, mainly given by trade experts, may run into thousands of pages. For example, the record on the hearings for bread standards runs over 17,000 pages and constitutes a virtual encyclopedia of knowledge on the art and science of baking. 126 \ Food standards are a storehouse of information on manyproducts. They tell what is in a product and a great deal about how it is made. This in— formation is of particular interest to professional people and affords the con- sumer adequate protection against inferior and adulterated food products. The job of insuring that these food standards are maintained rests With the Federal Food and Drug Administration. When the original "Pure Food and I 124. "What Consumers Should Know about Food Standards", op. cifit_. , 125. Ibid. —-—————— 126. End... 9. 7- A; ' +79- Drug Law" of 1906 was passed, enforcement was vested in the Bureau of Chemistry of the U. S. Department of Agriculture. 127 In 1927 the Food and Drug Administration was established as a separate unit of the Department of Agriculture. 128 The original Act was completely re- written and modernized in 1938.129 In 1940 the Administration was transferred from the Department of Agriculture to the Federal Security Agency, which be- came the Department of Health, Education, and Welfare in 1953.130 F.D.A. now has about 500 inspectors in the field, visiting factories and processing plants, and looking for samples of products that may violate the law.131 The inspectors stationed throughout the country are the eyes and ears of F.D. A. It is their job to cover the broad span from raw materials of the farm and sea to the market basket of. the American housewife. If members of the baking industry are aware of what goes into a product then in the future all members can speak with pride of the nutritious value of adding bakery products to our daily diet. Conclusion and Recommendations - I have presented some of the major laws which regulate and maintain competition and control production. Knowledge many times prevents a multitude of sins. Therefore, every member of the baking industry should know and understand those laws which pertain directly to their industry. 127. , "Food and Drug Administration -- What It Is, and D088", U. S. Department of Health, Education, and Welfare, Food and Drug Administration, p. 1. 128. 1931, 129- 1951: 130. lbki. .....— -_..~— 131. Ibid., p. 2. —~——-—— -80.. It may appear to many of the larger wholesale bakers that the Federal Trade Commission is "asleep at the switch" because several mergers have taken place in recent years without regulation. To these larger corporations I say bewarell The F. T. C. may be holding off and building a strong case before court action. It appears that the only safe merger is to merge for diversification and even now the F.T.C. is pressing to outlaw conglomerate mergers of companies in unrelated industries. Efficiency cost savings, competition, or even increased employment will not legalize a merger. Price discrimination is outlawed wherever it tends to lessen competition or create a monopoly. The supplier must offer the same discount or serv1ce to all buyers of proportionate quantity and of like classification. Food standards and the various food additive laws were initiated to pro- tect the consumer against inferior and adulterated foods. We cannot blame the consumer for being skeptical of many products. We can increase consumer de- mand for baked goods and promote the general welfare of the industry by k_np_\yi1g_ what ingredients go into our products and passing this knowledge on to the con- sumer. Certainly quality and service are prerequisites to increased sales. However, with profits declining the retailer needs something more as an induce- ment to buy. The wholesale baker must guarantee the movement of this product from retailer to consumer. In other words, the wholesale baker of today must -..—.-. be a bakery consultant to the retailer or chain. He must have the answers to increased turnover and sales per square foot. His answer need not be a dis- count or "deal-merchandise" of possible inferior quality. This practice certain— ly doesn't stimulate repeat sales. The retailer is interested in: .1. Idea's for dressing up and glamorizing the entire bakery department. -81- 2. Promotions that stimulate sales in the entire bakery department and in the entire store. 3. A program which will ultimately make the bakeiy department the "show-case" of the store, draw new customers into the store, and ultimately make his store truly a one-stop shopping center for _a.ll__of "Mrs. Consumer's" food needs . CHAPTtER v THE-STARTLING Sigrigs PROSPERITY: on PROBLEMS] -83- A SMORGASBORDOF PROBLEMS -84- The industry faces a smorgasbord of problems in the next decade. That is, a mixture of problems that must be met and solved if the industry expects continuous growth and prosperity. Some of the issues that will be discussed are: 1. Is today's route salesman obsolete? 2. Why is the route salesman obsolete? 3. What kind of salesman do we need? 4. Selection and. training 5. The problem of out-of— stock Is Today's Route Salesman Obsolete? Among those items for which the demand still exceeds the supply are We are in a period when it isn't the fashion to take up selling as a salesmen. career. :Numerous polls of college students show that only a few plan to go into sales work. Engineering, law, mechanical trades and other glamor vocations with their high pay, short hours, and small responsibility are attracting the majority of our college graduates. Good route salesmen are harder to hire than white collar salesmen, Route because of the peculiar combination of talents required on these jobs. But it is simply salesmen as a group earn more than the general public realizes. not a glamor job. Profile of a route salesman in 1930. The route salesman of 1930 was quite He Similar to the route salesman of 1960 except for personality and attitude. probably reported for work between 5:00 A.M. and 6:00 A. M. He checked his order, then loaded his truck in such a way as to best facilitate his own unloading. His territory included approximately 100 to 150 retail grocery outlets. The ma- jo rity of the grocery stores on his route were small, independent stores. Self- service was unheard of about 1930 so it was the job of the route salesman to sell .. 85.. himself and his product to the grocer who, in turn, sold or suggested this pro- duct to the consumer. His normal working day was about 12 hours from start to finish and his average pay was about $30.00 weekly. In 1900 we find several of these same route salesmen still servicing their territories. Have they changed with the changing times? Today the route salesman starts between 7:00 A.M. and 8:00 A.M. When he arrives at the bakery his truck is loaded and ready to go. He services approximately 35 to 40 outlets and of these 35 - 40 stores possibly 10 supermarkets account for 70 per cent of his sales. Many times he is finished and on his way home by 1:00 P. M. and his ave rage weekly salary is between $125.00 and $150.00. Is he a salesman? In most cases he is primarily a fibreglass His job consists of properly displaying his product in the store and keeping it fresh to insure repeat sales. With supermarkets claiming 70 per cent of food sales, self- service does the remainder of the selling job. Advertising creates consumer demand, and freshness and display moves the product from retailer to consumer. Why is today's route salesman obsolete? First and probably most im- portant is the fact that union demands have forced wages so high that. the average salesman has become complacent and has lost all incentive to "drive" toward increased sales. Second, advertising creates consumer demand and display sells the product hence, the route salesman feels all he has to do is display his pro- duct attractively and keep it fresh - many salesmen today do a poor job of these few remaining tasks. What is left then is a mere remnant of the energetic, rugged, enthusiastic salesman of 30 years ago. Every wholesale baker should ask himself the following question: Is my route salesman qualified to represent our company and speak intelligently of our products to a supermarket manager who manages a business enterprise doing as -86- high as $7 million in sales annually? Can our route salesmen speak with autho- rity about quality, freshness, display, distribution, development, turnover, and sales per square foot? With advertising and self-service doing the selling job the route salesman of today should, in reality, be the sales magager of his territory. He should know about quality and freshness and have a story to tell his customers as to why repeat sales are important. He should have the know-how to display his pro- duct attractively. People buLwhat they-see where they w_a_lk and the display must find the customer. He should be an expert on the subject of distribution. He should not only strive toward getting his product in every outlet in his territory but must know what products sell on what days and in what quantities. He must have the right amount at the right place at the right time. He must know the im- portance of developing new customers. He develops new customers first by con— stantly keeping his products fresh: second by sampling and special displays. Final- ly, when he speaks with his customers he must speak with intelligence about what his products can do for the retailer in terms of margin, turnover, sales per square foot, and profits from goods sold. The problem then becomes twofold. First what kind of a man do we look for to best meet our needs in the future? Second, what can we do about the un- qualified men we have on the payroll now? A successful route salesman who later became a sales manager once said: "I often wake up in the morning with a real eagerness for the day's work. No kidding! I just like being out there on my route meeting all kinds of people, beating the other boys' sales records when lean, and making myself some dough." I believe he was sincere when he said he was not kidding. Route selling is a game that grows on any man who learns to do it well and who has a zest for -87- living. With the right mental attitude the route salesman can find the sort of relish in his selling job that any healthy man gets from a stack of breakfast wheat cakes or a tight game of bowling. Each day is an adventure and no two customers or situations are the same. They tax your brain and develop re— sourcefulness and take the monotony out of any man‘s work. To make the most of this adventure and this Opportunity calls for two special qualities. First, is a healthy interest and curiosity about your firm and the business of your dealers, and about people in general. Second, the stamina to drive a truck and service the trade, rain or shine, hot or cold, for better or worse. That is not too difficult a combination. A route salesman who has this interest in his grocers and their customers will naturally learn and practice the late Dale Carnegie's advice in "How to Win Friends and Influence People". Without this effort to get along easily with people, top selling cannot be done. A route salesman making his rounds in a mechanical way, or with a chip on this shoulder and a frown on his face, is simply in the wrong business. Fact is, I don't know where he would find the right business, unless he wants to be a theater box-office attendent or a night club bouncer. To find this particular combination of character traits in an individual is not always easy. The job of preparing for the future starts with the selection and training of personnel. The industry needs two distinct types of individuals. Ihave suggested a separation of the sales department into a merchandising de- partment and a delivery department. Each department would require a specific type of individual. Inasmuch as this change will not take place rapidly, we will still need competent route salesmen to service the trade day after day until such time as a separation of the delivery and merchandising functions can be success- fully made . -88- First, as long as we'are distributing a highly perishable product we need competent men to service the trade day after day. We cannot have "all. chiefs and no injuns" therefore, we must first do a better job of selling the merits of being a route salesman. The man who is hired for a position of route salesman should first be told what his job will be and not be mislead in any way as to his future. Next we must proceed to sell him on the benefits of being a part of this great industry. Selection of competent personnel always involves the element of risk. Depth interviewing and testing have done much to reduce this element of risk but, at the time of hiring, the choice still becomes a matter of value judgement on the part of the personnel manager. The ultimate outcome can only be mea- sured by job performance. There are certain characteristics that every per- sonnel manager looks for such as health, pride, conviction, enthusiasm, self— . confidence and courtesy. The tasks of display, distribution, and development are fostered through sales training. The quality of enthusiasm must be fostered by management or it will never become second nature to the salesman. Management must make enthusiasm a dominant habitual feature of the salesman's job, by making it an integral part of managements’ job. The job of training them becomes a verbal contest between management and the teamsters union and the only answer is fre- quent re-training and strict insistance on job performance. The route salesman must be trained to realize that he doesn't draw his paycheck from the local union but only through his efforts to sell himself, sell his company, sell idea's, sell his products and sell service . Because the route salesman of 1960 is a sales manager of $50,000 to a, $100,000 in sales, we can and must demand a general upgradirg of personnel. '1 -89.. With the average supermarket doing over $1,000, 000 in sales annually, corporate chains are becoming more and more decentralized. This means the responsibili— ties and authority of the store manager have been elevated to a higher plateau and the store manager is making more of the puchase decisions for his store. Is the route salesman prepared to sell the store manager on all the merits of his products? A high school diploma is essential and one or two years of college would be extremely advantageous. The other type of individual the industry needs is the college graduate or professionally trained man. These men are the potential industry leaders of tomorrow. The industry must first start a promotional campaign and sell the baking industry to college graduates. The competition for manpower is intense and the industry must not 9.92.3192?“ offer a career in an exciting, rewarding 1n— dustry. The College graduate has an opportunity in the baking industry in such fields as production supervision, sales management, market research, advertising, and merchandising. The firm must offer a planned career to the college graduate. This career must start with a detailed, intensified training program followed by on-the—job experience and close supervision. We are not looking for the college graduate who "flashes his degree" and expects succes s . If he has the desire and enthusiasm for hard work then we should do everything to accelerate his career and take advantage of his management potential. How can we halt rising sellinchosltL? Distribution costs loom large in the outlook for many wholesale bake tics, -90- and on this point it is necessary to predict both the trend in distribution costs and the extent to which increased costs may be passed on to the consumer. In many industries it has been possible to pass additional costs on to the consumer, and in some instances these costs can be offset by technological im— provements and considered justifiable. For the individual firm in the baking industry that is facing competitive substitution of other products, it is no longer feasible to pass on additional costs to the consumer. Where is the competition coming from? It is coming from private label breads of the chains and secondary distributor labels. Automation and numer- our technological improvements have reduced production costs considerably in However, any reduction in production costs has been more the past ten years. than offset by the excessive demands of labor. Each time the wholesale bake r is forced to grant a wage increase his only method of compensating for this in- crease has been to increase the price of his product to the consumer. What has been the net result? The price—span between national brands and private label breads has become so great that the consumer is no longer willing to pay a 10¢ to 15¢ premium for a nationally advertised brand. To the consumer on bread is as good as another when there is a 10c or 15c price differen— tial. In other words, many wholesale bakers have lost their brand identity and can no longer offer the consumer 10¢ or 15c more worth of something that has become intangible in the mind of the consumer. The primary reason then for rising distribution costs is the excessive demands of labor unions and the resultant increase in salesmen salaries. What are the alternatives available to the wholesale bakery to curb or even reduce dis- tribution costs? The wholesale baker must innovate or perish. -91- l . As a first alternative he can produce a private-label product for the chain or a secondary label product for distribution to all retailers. In either case the net result is volume sales with little or no profit and an almost complete loss of brand identity. The only favorable advantage of contracting to bake bread for a chain under a private label is the fact that the bakery who r ceives the contract generally gets a better "spread" in the bakery department for his regular nationally branded products. Primarily, the end result of this alternative is just a lost of sales and no profit and the route salesman continues to "get rich" with little addi- tional effort. 2. The second alternative is to negotiate a contract with the corporate chain or independent retailer to lease an in~store bakery on premise. This would result in direct delivery to the retailer with an ultimate rapid increase in sales with a proportionately small increase in distri" bution costs. The various types of in-store bakeries were mentioned in chapter two of this report. This alternative has met with some resistence from the teamste rs union. I‘m positive that the remaining two alternatives will meet with consider— able resistence from the teamsters union but, since the future survival of the wholesale bakery is at stake, I feel they are worthy of consideration. 3. Inasmuch as the average route salesman today lacks the desire, in— centive, and capabilites 'to inc rease his sales, and give to management a fair return for a fair day's pay, then the industry might consider paying the route salesmat. on an hourly basis instead of on a commission basis. This means the route delivery man would be responsible only for the safe delivery of his products to the stores designated. Each bakery would -92- consist of a delivery division and a merchandising division. Any man who shows the desire and attitude to advance in the industry would be placed in the merchandising division. The merchandising division would be responsible first for the proper display of products in the store and second would be responsible for increasing sales through promotions and stop 0 by stop analysis of display position. There are three major problems connected with this alternative. The first problem is the question of whether sales would increase and, if so, would the resultant increase in sales cover the increase in costs as a result of adding personnel for a merchandising division. The second problem concerns the size of the merchandising division. How many men would be needed in the merchan- dising division to get into all the stores and display products properly and carry on promotional activities? Supermarkets and superettes, representing only 39 per cent of the total number of food stores, today do approximately 92 per cent of the total food store business. 132 This means that the major concentration of effort on the part of the merchandising division would be in the relatively small number of larger stores. The. remaining unaffiliated, small independents could be serviced adequately by the delivery man with periodic attention from a small percentage of the merchandising staff. The third problem with this alternative concerns James Hoffa and his teamsters union. I'm positive they will react violently and unfavorably. This leads me to a fourth alternative. 4. It may be necessary for the industry at some time in the future to - 32. __ , The Big Challenge in Food Marketing, This Week Magazine, 8th Biennal Grocery Study, p. .33. -93- to gke a stapg against the demands of labor. I do not say this just to fill up space in this report but I say it because I feel if the demands of labor continue to reduce profits and desrroy incentive then the future of a great industry is in jeopardy. This will require a united effort on the part of all wholesale bakeries, the American Bakers Association, management everywhere, and in fact any person who is interested in seeing the baking industry continue to grow and prosper. The problem of out-of—stock Through the years the many variable factors effecting the balance of supply and demand have been the basis for numerous problems in food distri- bufion. The optimum condition would be to have the proper supply of a product on display in the retail outlet at the proper time to meet the maximum demands of a customer or group of customers over a given period of time. When the demand for a certain food product, within a given period of time, exceeds the supply we have a condition existing known as _Out-of-Stock. In most cases an out-of—stock condition is a source of irritation to the ~ “w.—_ retailer, the supplier, and the consumer. However, under certain conditions, an out-of—stock situation in the bakery department may serve as a stimulus for for increased sales and we should ask ourselves the question, "Is an empty rack a silent salesman?" Possibly an empty rack or empty space might indi- cate to the consumer a fast seller. An empty rack might provide indirect ad, vertising for the supplier. The frequency of the problem of out-of— stock is usually much higher when we are merchandising perishables. However, corrective action can usually be taken rapidly because the source of supply is usually closer to the -94.. point of sale. In the merchandising of perishables the retailer not only must think of volume sales and adequate supply but he must also take into consideration spoilage, quality, freshness, and reoccurring sales. Why Does The Problem Exist? The problem of .PLLI'Of'PIQPR exists because no "marketing wizard" has as yet come up with a formula whereby we can accurately predict that W number of customers will shop at X store and purchase Y amount of Z_ products within a specified period of time. If this formula did exist we could attain what is known in the baking industry as perfect distribution. Perfect distribution would mean the last unit of a product is sold at the very instant the salesman arrives with another supply of the same product. Even under a system of perfect dis- tribution there could be variable factors that would influence the supplier and thus cause an out-of—stock condition. In order to arrive at some kind of conclusion or solution to this problem of out-of—stock in the bakery department, I thought I would investigate the pro- blem from the retailers' viewpoint, from the consumers' viewpoint, and from the suppliers' viewpoint. The Retailer Is the store manager concerned about an out-of—stock condition in the bakery department? Most suppliers know that the manager is interested in volume sales and rapid turnover with a minimum of cost and waste.133 The re- fore, the store manager is concerned about the bakery department since it 133. r, "Selling Bakery Freshness", The Chain.Store Age, july 1957, p. 9.2. -95- represents approximately 5.70 per cent of his store sales. The bakery de- partment has an annual turnover rate of 171; twice that of any other depart- mentin the store.134 The sales per square foot in the bakery department are second only to those in the meat department. 1‘35 If the bakery product is pro- vided by an outside supplier then the store manager need not concern himself with spoilage and cost of returns and he can concentrate his efforts on volume sales and rapid turnover. This is one of the basic reasons why the problem of out-of—stock occurs. In order to better understand the retailers' side of this problem Iprepared a store managers questionai re and talked to several store managers. The results are listed below. With regard to the merchandising of bake ry products whereby the bakery department is serviced by an outside supplier: l . What is your reaction to an empty rack? Almost 100 per cent of the managers were irritated with an 9.5113313:ng condition; sales-wise, out-of—stock meant out of business. 2. Do most suppliers explain their sales policies to you? 100 per cent of the managers answered no. 3. What is your policy on mass display versus the sellout theory? 70 per cent of the managers favored mass display. 4 . Would you throw the supplier out? 25 per cent answered yes if the out-of—stock condition was reoccurring. 5. Would the out-of-stock condition have an adverse affect on the ___- _Vb. l 34 . , "The Super Value Study", by Editors of rogressive Grocer, p. 23. 135. 931., p. 51. -90- customers attitude of the store? 100 per cent answered yes. 6. Do customers inquire about out-of—stock items? 75 per cent answered no . This survey indicates several pertinent facts. The store manager is primarily interested in mass display and volume of sales. He realizes that fresh bakery products are one of the best promotions he has in his store but, due to the supplier not keeping him informed as to sales policies regarding freshness, his primary concern is volume of sales. The Consumer The end objective of all the merchandising know-how of both the retailer and supplier is to satisfy customers. How do consumers feel about an out-of- stock condition in the bakery de- partment? I prepared a consumer's questionai re and contacted about 30 housewives. The questions and the results are listed below: 1 . If you we re shopping for a particular brand name item in the bakery department and the item was temporarily sold out what would your reaction be? 75 per cent thought the item was a fast seller. 2 . What would your reaction be to the store? ()0 per cent no reaction. 25 per cent would ask the manager to order more. 15 per cent some- what irritated. 3. Regarding the oitfli-stock condition would you: a. Ask the Manager - ~ 73 per cent No b. Buy another brand - 80 per cent Yes C. CO to another store - 20 per cent Yes d. Return later - 100 per cent No -97- 4. What features about a bakery product would most influence you to buy it again? a. Taste and Freshness - 55 per cent b. Eye appeal - 8 per cent c. Brand and advertising - 10 per cent (1. Weight and price - 27 per cent 5. Does television advertising influence your buying? 30 per cent Yes. This survey indicates that most shoppers are introverts. Because of the trend toward self- service and less personalized service, the consumer will usually say nothing about an out-of—stock item. Some may to to another store many may choose another brand. Consume rs want fresh bakery goods and television has a terrific impact on those with children. The Supplier The supplier is interested in maximum sales with a minimum of returns provided freshness is not sacrificed. When the bakery department is serviced by an outside supplier the retailer expects the supplier to maintain freshness. The ingredients used in the production of many bakery products are essentially similar in nature. Many products on the shelf in the bakery de- partme nt are of equal quality when they leave the production line. For this reason, one supplier must rely on a fresh product program or his distribution know-how to gain a competitive advantage over another supplier. Some suppliers feel an empty rack is indirect advertising and tends to stimulate demand. What is the most feasible method of arriving at a solution to this pro- blem of out-of—stock in the bakery department? The property quantity can best he arrived at by the manufacturer and distributor working it out together, thus -98- avoiding underbuying and overbuying.136 Both the retailer and the supplier are interested in maximum sales; both realize the importance of freshness and reoccurring sales. Many housewives are irritated with an out—of-stock condition but will say nothing. They may buy another brand or go to another store. This means both supplier and retailer are losing business to a competitive firm. Only by working together can retailer and supplier reach their common goal which is volume sales, rapid turnover, fresh baked goods, and higher pro- fits. “--.—w- 136. Willis, Paul; President, Grocery Manufacturers of America, Trade Practice Attitudes", gfléiiook of Grocery Advertisingr and Selli_n_g_, p. 171. -99- _liOOKING FORWARD - 100- Whiteho rse, Wyoming 1970 We have a note here concerning industry activity on the moon. It is quite interesting to note that Celestial Baking Incorporated, which started service on the planet Moon in 1966, is rapidly losing market share for several reasons. Celestial Baking had virtually ”cornered" the market and gained the complete confidence of the moon people with their low prices and quality. Celestial then became complacent and started to reduce quality and "hike" prices. Service was sporadic and unreliable. In 1968 Celestial Baking lost its monopolistic position on the moon. Com- petition for the food dollar of the moon people became intense. Interplanetary Bakeries Incorporated "hit" the moon market: first with soda crackers in Janu- ary of 1968 and won the immediate favor of the moon people. Just think of it! The moon consumers now had soda crackers to go with their abundant supply of cheese. Solar Supermarkets began to produce their own bakery products and market them at prices far below the prices of the independent bakeries. There is a moral to this story. Market position is never sggure; In- novation and competition indirectly protect the consumer and at the same time stimulate efficiency and exciting growth. Even on far off moon, Celestial Baking has been forced to examine its marketing procedure and ultimately must realign its goals and strategies, initiate an active advertising program, upgrade quality and stablilize prices, differentiate its products and maintain brand image. Here on earth the baking industry has enjoyed continued progress and growth through the years. A quick glance at the industry tells us that compe- tition is intense but there is still a place for the corner bake shop which thrives -101- on quality and service. The larger wholesale bakeries have gone extensively into baking for corporate chains and setting up elaborate in-store bakeries featuring quality, variety, and attractive display. Only a fraction of the food retailers remain solely independent and the majority of the food dollar is spent in chain and independent supermarkets or voluntary and cooperative stores. Production in the larger bakeries is fully automated. The old type proof-box has been replaced by the automatic wet proofing process that operates in absolute timing with the machinery in the oven and guarantees a consistent flow of baked products at a profitable manufacturing cost. [37 The standard gas-fired ovens have been replaced by automatic ovens electronically operated by their tapes or electronic computers. '38 Time, temperature, color of product and all other factors are electronically controlled. Fuel costs have been cut nearly in half. The automatic wet proofer, the oven, and the cooler are combined in one timed unit. The wet proofer is built on the main floor, the oven just above the proofer and the cooler is on top of the oven. The entire mechanism is about three stories high (to preserve ground space) and operates as a single unit with electronic controls that handle the automatic flow of baked products in such a manner as to proof them exactly right and send them into the oven -- do all the panning, tie-panning, in an electronically controlled atmosphere and -..—_. _-__ _—__'—_— 137. , Sperry's Personal Opinion 3210, American Bakers Association, October 1959. 138. Ibid. -102- send them into the cooler to be cooled to exactly the proper temperature. 139 The make-up operations of dividing, rounding, and moulding are also electronically controlled and synchronized with the rest of the production pro- cess. Products are electronically packaged without the attendence of a single human being. The wrapped products are then loaded into automatic electroni- cally wrapping containers and ready for distribution. 14’0 Production costs have been reduced to a minimum since 1960 but the story of distribution in the past decade has been a story of toil, strife and ultimate victory for the industry. Distribution costs continued to spiral upward until 1965. Collective bargaining became a power struggle between giant unions and giant employers and there was no resolution within the basic framework of economics. The softies and hitch—hikers in the industry could not compete effectively and soon fell by the wayside. The industry realized it could not reach its peak of efficeinty and have its progress throttled by a force which dictates not only wages and working conditions, but how to run the industry. In 1965 management. in the baking industry refused to submit to the re- lentless demands of labor. Management called a halt and entrenched them- selves to fight it out. After six of the darkest months the industry has ever known ~— six months which saw bakeries standing idle across the nation -— six months of terror, vio- 139. Ibid. .140 . Ibid. —-._-..__ -103— lence, hunger and unemployment -- management emerged the victor. The industry had to pick itself off the floor and advance to a new position of pres- tige and prominence in the eyes of the American public. Route salesmen were paid on an hourly basis and the industry emerged a merchandising industry. For the past four years the industry has been characterized by a variety of top-quality products, outstanding advertising programs and attractive, eye- catching promotions designed to stimulate sales. Today there exists in the food industry a feeling of spirit and cooperation between bakery manufacturers and retailers designed to accomplish the end objective of all which is —- the satisfaction of the discriminant American con- sumerthrough aggressive mte‘chandising of top—quality baked goods at a satis- factory price to the consumer. Members of the baking industry can point with pride to a past filled with progress through the years and look to the future with an optimistic eye toward continued success. —104— BIBLIOGRAPHY Book 8 Brand, Edward A.; Functional Analysis of Food Distribution, pp. 1.1, 12. Childs, Marquis W.; Ethics In a Business Society, Harper and Brothers, New York, May .1959, pp. 104, 105. Edwards, Corwin D.; Maintaining Competition, McGraw-Hill, New York, p. 114. Maynard, H. H.; An Introduction To Business Management, The Ronald Press, New York, 1941, p. 657. Maynard and Beckman, Principles of Marketing, The Ronald Press, New York, p. 755. Panschar, William G.; Baking In American - Economic Development, Vol. 1, Northwestern University Press. Willis, Paul C.: President, Grocery Manufacturers of America: "Trade Prac- tice Attitudes", GMA Book of Grgcery Advertising and Selling, p. 171. Periodicals Bechtel, W. G.; "The Future of Frozen Bakery Products", Baking Industry, May 16, 1959; p. 40. Kelly, E. E. Jr.; "Progress Through The Yea rs", Modern Miller aflBakeri News, October 31, 1959'. pp. 23 - 26. Silberman, Charles; "The Coming Assult on Bigness", Eogt'une, June 1957, p. 144. Stolnitz, George J.; "On r Growing Population Threat or Boon?", Business Horizons, Spring 1959, p. 37. , "What The U.S. Will be like 10 Years From Now", U.S. News and World Report; November 9, 1959; pp. 76 -81. , "Antimerger Law Starts to Bite", Business Week, March 9, 1957, p. 23. , "Antitrusters Heft a New Weapon Against Mergers", Business We_c_k, january 3, 1959. , "Selling Bakery Freshness", _Chllain Store Age, Vol. 33, No. 7, july1957, pp. 92, 93. ~105- Periodicals -(continued) , "Quick Freezing of Bakery Products", Baking Industry Magazine, December 15, 1956, p. 42. ' _ , "Chains Cash in on Tiny In-Store Bakeries", Chain Store Age, Vol. 31, No. 6, June 1958, p. 81. , "What's Cooking in the Stores", Chain Store Age, Vol. 33, No. 11, November 1957, p. 84. , "Bulk Handling", Baking Industry Magazine, August 11, 1956, special report. , "Sell it Today", Chain Store Age, Vol. 33, No. 10, October 1957, p. 141. , "Jewel Realigns Bread and Cake", Chain Store Age, Vol. 34, No. 2, February 1958, p. 86. A, "Slanted Shelving adding neatness, efficiency to Bakery", Chain Store :2" Vol. 34, No. 12, December 1958, p. 49. ' , "Quality, Freshness, visual appeal vital for Profit‘ able Bakery Operation", Chain Store Age, Vol. 34, No. 9, September 1958, p. 123. "2 Eagle-United Bake Leases to Heinemann", Super- ’ market News, Vol. 7, NO. 47, NOV., 24, 1958. p. 22. , "On—Premise Bakery Set at Bohack Uni t", Supermarket News, Vol. 8, No. 11, March 9, 1959, p. 43. Miscellaneous , Census of Manufacturers, 1954, Bakery Products, Table 6A, Bulletin MC-ZQEl Washington, D.C.: Department of Com- mCL‘Cti, Bureau of Census, 1956, p. 15. , Bakefl Products SIC Group 205, Employment, Hours, and Earnings: U.S. Department of Labor1 Bureau of Labor Statistics, Manufacturing Division Food and Kindred Products, p. 41. , What The Public Spends For Grocery Store Products - 1956, 1.957, 1958'. Food Field Reporter ~ Food Topics Annual Report, Food Publications Incorporated, p. 2. , "Economic Growth In the United States", Committee For Economic Development, pp. 11 - 43. 400- Miscellaneous - (continued) , "What The Public Spends For Grocery Store Products", Food Field Reporter, Annual Report, p. 3. ,: "Regulation of Me rgers - How Much, How Wise, How Come?" Tliirty-First Annual Boston Conference on Distribution 1959, pp. 58, 59. , "What Consumers Should Know About Chemical Food Additives", _U.S. Department ofHealth, Education, and Welfare; Food and Drug Administration, pp. 1 - 8. , "What Consumers Should Know about Food Stan-- dards", U.S. Department of Health, Education and Welfare, Food and Drug Administration, p. 3. , "Bakery Products", Definitions and Standards, Federal Security Agency, Food and Drug Administration, Service and Regulatory Announcements, Food, Drug, and Cosmetic No. 2, part 17, p. 3. , "Food and Drug Administration -- What It Is, and Does", U.S. Deliartment of Health, Education and Welfare, Food and Drug Administration, pp. 1 - L2. , "The Super Value Study"; Editors, Progressive Grocer, pp. 23, 107. , Sperry's Personal Opinion #210, American Bakers Association, October 1959 . ““v.‘r~‘v-l'—" ‘-- \ W/, v/ ~ ///,r/, ’42,, 'W/ "4274/ 'l/ w/ z z, ’4 4 ’/ ’0 .l// ’ I ’ /./r I ’1 . I ‘r .I’ .’ ." ’9, 4 .24 . .4; .Z/ 4 '1 '39, I 3.”, , , 3;, ' , ’4. I. , , I '/’ .V L, ,1: , / I, ’ ’ ’6,- /" 4 7 _W_ , a I [III . M l I W I) . n: minus"... m. '5. ,r , It “In" "I. no. 0354’ , I,‘ 1. 1", ,4 ,. I! ' ' -, a ’--'-‘ 'th rif’hé ”if". -~ with left hand ' 101 ‘ " “ Br m} BACK V/ REMOV' 7".th ,- " {cave/‘04 ’ innerfbig 8:115"; ”- I. / ' ' __,: 1 "f// Iiiitliiiitiiiiali 3 1293 0