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THEars

WHERE DC THE WHOLESALE BAKERS GO FROM HEPE---FETAIL?

by

Clarence Edward Denham

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF BUSINESS ADMINISTRATION

Department of Marketing

TABLE OF CONTENTS

PREFACE
INTRODUCTION.
Chapter
I. DEVELOPMENT AND STRUCTURE OF THE BAKING
INDUSTRY . . . . .
II. ENTRY OF THE CHAINS, THEIR BUYING
PRACTICES‘AND PROTECTIVE RESTRICTIONS
III. DISTRIBUTION OF BAKERY PRODUCTS
IV. MARKETING PROBLEMS AND TRADE PRACTICES.
V. CONCLUSIONS.
APPENDIX
BIBLIOGRAPHY.

ii

10

19
28

40

U1
[0

HT
\H

O‘\
U1

PREFACE

The wholesale baking industry is a sick industry.

*3

his is the concehsus of the leaders of the industry. The
major problem is considered to be the distribution costs
which currently average 30 per cent or more of the sales
dollar and are still rising.

The American Bakers Association is studying this
problem as are many of the member companies. In fact,
Continental Baking Company has assigned a vice president to
work exclusively on the problem of distribution costs.

Instead of attacking distribution costs directly as
the basic disease causing the industry's illness, I propose
that distribution costs are merely symptoms. The real issue
is to be found in the artificial barriers which generate
extra distribution costs. If this proposition be true, it
may well give new direction to the efforts and energies of
the industry and shorten the recovery period.

This is not a problem that is peculiar to the baking
industry. Several other major food processing industries,
”Rat and dairy in particular, are faced with a similar
Problem.

The food processing industries have witnessed a

tremendous evolution in food wholesaling and retailing,

iii

particularly since the turn of the century. This evolution
has demanded new methods of distribution to meet the needs
of the new marketing methoos and forces. At this point in
the evolution it is apparent that the food processors and
the wholesale bakers, in particular, have failed to keep
pace. As the evolution continues the pressures from the
integrated food warehouses and retail stores, as well as

' will increase and the

the so-called "discount houses,‘
pressures of price competition will become even more severe.

The pressures of price competition come primarily
from food retailers who are themselves embattled over the
WTMDIG range of food and non-food items in a struggle for
fine consumer's patronage. Lower distribution costs will, no
CKMJbt, be achieved as the bulk of grocery retailing shifts
to larger volume units. This transition will require the
wholesale baking industry to find and develop more efficient
methods of distributing its prouucts or perish.

The commercial baker through improved technology and
equipment has been able to maintain control of production
cost in the face of rapidly increasing labor costs and the
addition of numerous varieties of product. He has not been
able to do as well where distribution costs are concerned.
In fact, the commercial or wholesale baker has been losing
control of the distribution costs. This is where the oppor-

tunity to make a real contribution to the industry lies,

namely, controlling these mounting costs of distribution.

iv

I have been most fortunate in having been exposed first
hand to both the production and distribution operations of
wholmesale bakeries for the past eight years. Not only has
thiss exposure given me the opportunity to study these two
basil: operations, but it has allowed me to become acquainted
witki a number of people in the industry.

While making this study of distribution costs, I have
recesived a great deal of encouragement from members of the
belting industry and also from my classmates who represent
VEJTIOUS segments of the food industry.

I wish to thank Miss Ruth Emerson, Librarian for the
Akmerican Institute of Baking. Miss Emerson has been most
hGlpful to me as I searched for information.

I particulary wish to express my sincere appreciation
t0 the management of CCntinental Baking Company who gave me
Chm; Opportunity to make this study, and to my wife, Carolyn,

‘VhC> bore the burden of typing patiently and cheerfully.

Clarence E. Denham

INTRODUCTION

When we ask, ”What is the baking industry?” we are
hmneciiately faced with a number of fractions in describing
its rnany segments. Therefore, a common denominator must be
fourui before the industry can be described or segmented for
stuchy and comparison. One denominator that can be used is
the coustomer. By using the customer as a denominator we can
divixie the industry roughly into two basic categories.1

The first category would be that portion of the
indiistry that sells its products directly to the ultimate
COrlsumer. These are the retail bakeries in the truest sense,
Moetflier the sales are door to door or over the counter. It
WOqui also include instore bakeries in supermarkets whether
“363’ are owned by the supermarket operator or by a baker who
This some type of lease arrangement with the supermarket
CKDGIYEtor in regard to display and/pr production space.

The second category would be the portion of the
irlduBtry that does not sell directly to the ultimate consumer.
,TkKE IDakers in this portion generally consign their merchandise

t“) Ciistributors who, in turn, sell to the ultimate consumer.
\

IB . 1Russell E. Davis, HThe Depth and Impact oerupermarket
aKery Activities," Baking Industry (April 29, 1961), p. 9t.

2
This category could be called the manufacturing or wholesale
bakeries. It would include those bakers who sell primarily
to the retail food store or supermarket. Broadly speaking
it includes wholesale bakeries and chain store bakeries.

iany of these bakers sell also to institutional customers

H

such as restaurants, drive-ins, hotels, et cetera. In fact,
a few of the wholesale bakeries sell exclusively to the
institutional trade in the larger cities.

Another common denominator suggests that the industry
might be categorized by the degree of perishability of the
product. This would be the semiperishable products and would
include the biscuit, cracker, and cookie bakers. The average
shelf life of their products will average six weeks or longer.
The second category would cover the perishable bakery products
with an average shelf life of one week or less, such as
bread, cake, and pastry products.

By using these two common denominators the industry
Can be broken down into relatively homogeneous groups. By
far the largest of these groups in terms of tonnage produced
0? dollar volume of sales would, of course, be the wholesale
or manufacturer type bakeries producing perishable bakery
Products. This is the segment of the baking industry with
WhiCh this study is concerned.

There are many problems facing the wholesale baker such
as declining per capita consumption, increasing production
costs and increasing distribution costs. This is not a
Complete listing, but it includes the three greatest problems

facing the industry today.

3

The decline in per capita consumption is not as serious
as it might be because we have enjoyed a tremendous popula-
tion expansion. This rapid increase in population is giving
the baker an increasing demand in spite of the decline in
per capita consumption. Thus, he has a chance to work out
a solution to this problem before it endangers his chances
for survival.

The increase in production costs is being relieved to
a very large extent through technological improvements in
methods and equipment. The industry has developed high
Speed automated equipment as well as new processes such as
the "continuous mix" which have offset, to a large extent,
the increases in labor costs. High speed automated equipment
PeQuires the expenditure of large amounts of capital in
fixed assets. This is a serious problem but not the most
serious.

The problem pressing the wholesaler baker is one of
diStribution costs.‘ Distribution costs are increasing
faster than is productivity or sales. As a result, the
average distribution costs in the wholesale baking industry
today are in excess of 30 per cent of the sales dollar.1

Some of the contributing factors to this increase from 21

s.)

x

. 1Mr. George Graf, General Manager, Quality Bakers of
America, U. 8., Congress, Senate,Subcommittee of the
JUdiciary, Hearings, Study of Adrinistered Prices in the
EEEgQgIndustry, Seth Congr., lst Sess.,-1959, p. 606?.

 

Ll
per° cent in 19A7 to 30 per cent plus in 1958 are salesmen's

pa;7 per 100 pounds of product up 109.1 per cent,StaleS lOSS
peir ilOO pounds of product up 707.7 per cent, vehicle costs
peir 100 pounds of product up 124 per cent, pounds delivered

peir :route per week down 30.1 per cent.1

According to the 195A Census of Manufacturers, the
Q
errexrage wholesale price of bread was 15.2 cents per pound.“
'Thes net profit margins for the eighteen largest wholesale
‘balcing companies, operating #17 plants in 1955, was 3.6 per
(rerit.3 The return on investment averaged less than 10 per
(Eerit for these same companies. This data is given merely
tC> emphasize the seriousness of the industry's illness.

Host of the modern bakeries of today, if able to
Opearate at optimum capacity, can produce one pound loaves
0f \Nhite pan bread at seven cents per pound or less. This
WOLle include the costs of production, slicing, and wrapping
tflle' loaf in wax paper, cellophane, or polyfilm. The distri-
bthi.on costs of most modern bakeries, however, are averaging
f?\’€3 cents per pound or more, and the production costs are
avear‘aging nine cents per pound or more.

If the artificial barriers were removed, it would

k 0 1 ‘1 o " ‘
“9 E>c>ss1ble to produce, distribute, and sell one pound
\

I
Ibid.

 

Bku 2U. S. Department of Commerce, Census of Manufacturers,
C1fiery Products, Bulletin MCZOE, Table CA.

A _ 3Cost and Margin Trends in the Baking Industry,
nheuser-Busch Survey of Bread Prices, 1954.

5
loeuves of white pan bread at a retail price of 10 cents per
pound.1

In the past, many studies have been made by most of
thee rnajor baking companies on the subject of specific cost
facrtxors. These studies and cost reduction drives have been
airnead at such items as: stale returns, gas mileage, improve—
merit; of space and positions, route layout, and many others.
TTnesse are operational studies on a local level and are rarely
(iocwumented. For the most part, they are aimed at the surface
synnotoms such as stale returns and do not penetrate to the
bassic causal factors such as service restrictions. By
irnlestigating the causal factors of the wholesale bakers'
distribution costs, one might then be in a position to recom-
Inerui methods or strategies for increasing efficiencies.

An investigation of wholesale bakers' distribution
I"ethods shows that their products are sold primarily through
retail food stores. These products are highly perishable
3’16 aie usually delivered to the retail food store daily by

by“? lNholesale bakers' salesmen.

\

1"Two University of Nebraska agricultural economists
are poreparing a report for the U. S. Department of Agriculture
t3 Skdow that the baking industry, under optimum conditions,
CoLIlCi produce a lc-ounce loaf of bread to retail at 10 cents

S 14351f in supermarkets of the country. Economists Richard
waJ~Sk1 and Bert Evans said the report will be submitted in
June or July.

H '0“

K suA contracted with the University of Nebraska in
$957? to do a study on 'price-cost behavior in bread markets.’
the ‘Peport will not be made public through headquarters of
the .U. S. Secretary of Agriculture, the economists explained,
but Will be published in the University's Farm and Ranch
Joulfiflal." Supermarket News, March 12, 1962, p. A5.

6

The operator of the retail food store acts as a control
vaIXJe regulating the flow of these bakery products from the
whcylesale baker to the consumer. As the Operator of the
retzail food store regulates or restricts this flow, he has a
dirwact effect on the wholesale baker. If the operator of the
retxail food store places restrictions on this flow, the
wbuolesale baker will have to use more pressure to get the
saune volume of goods through the valve or store. This addi-
tixonal pressure may be in many forms such as additional
SGI“JIC€S, increased advertising, discounts, shelf rental,
armi many others. Whatever form it takes, it will increase
ccnsts of distribution, both on a unit and a total cost basis.

Because the bulk of bakery products are distributed
thruough food industry channels not owned or controlled by
thee bakers themselves, it is necessary to consider the total
fooci industry patterns in analyzing bakery delivery methods.
Thums, at least from the shipping dock onward, we find bakery
disiaribution inseparable from the total food distribution
Pleioure. It follows that what happens to the food industry
SUCkl as vertical integration and horizontal integration and
ccunoentration will probably be happening to the baking
irmfiistry as well, though not necessarily to the same degree.

In making this analysis the development of the baking
irmfidstry will be traced in Chapter I and then a brief review
of‘ the evolution of the food wholesaling and retailing
irKiustry in Chapter II. This will set the stage for a review

of‘ distribution practices in Chapter III and a study of the

7
nmrflcéting problems and ractices in the wholesale baking
indiistry in Chapter TV. It is necessary to review the
hisioorical development in the first two chapters so that
the' distribution and marketing practices may be more easily

lindesrstood.

Problan
The problem of this study is twofold: (l) to determine
true methods used by the retail food merchant to regulate or
coritrol the flow of bakery goods from the producer to the
ccuisumer, and (2) to determine the costs of overcoming
baorriers to entry to retail stores incurred by the counter-
vaifiling strategies of the wholesale baker.
This will require answers to questions such as:
1. Has the regulation or control of the flow of
bakery goods by the retail food merchant
resulted in equal or better quality products
at equal or lower costs to the consumer?

Has there been a shift in the balance of

R)

power between the wholesale baker and the
retailer?
3. Has this regulation or control fostered
unhealthy and possibly illegal trade practices?
A. Are there other factors such as excess capacity
or governmental intervention that have had an
important bearing on the health of the

industry?

otijective

The primary purpose of this study is to analyze the
hisstorical development of the wholesale baking industry and
true retail food industry in an attempt to understand current
prwactices and their effect as causal factors on bakery dis-

triJMItion costs and to determine possible alternative actions.

Hypothesis

 

It is hypothesized that--The wholesale bakers' oppor-
turiity to sell is being restricted by current retail buying
prmactfices and they must seek alternative outlets or svstans

of (distribution to survive.

Thee Approach

 

Historical, descriptive-analytical methods will be
useci in presenting and analyzing the facts as they bear on
or inelate to the verification or non-verification of the
hprDthesis.

Because of the shortage of detailed data and the
reltbotance of those close to the industry to allow themselves
to bus quoted concerning trade practices, a great deal of

relixance has been placed on testimony before the Kefauver

'0

l l . . .
Ccmunittee and rederal Trade Commlslion cases.
The wholesale baker and the retail food store operator

arms dependent one upon the other, and each performs a

 

 

C 1The Subcommittee on Antitrust and Monopoly of the
Johnnittee on the Judiciary of the U. S. Senate.

9

valuable service for the other. It is hoped that the final
solution will strengthen this relationship and enable the
two parts of the food industry to work more closely together

for mutual benefit.

CHAPTER I
DEVELOPMENT AND STRUCTURE OF THE BAKING INDUSTRY

The commercial baking industry has had a tremendous
growth during the last 100 years. This growth has encom-
passed all facets of the industry from the development of
thousands of small retail bakeries specializing primarily
in variety breads and fine pastries to the complementing
development of the modern industrial bakeries with their
large-scale operations.

In the early stages as the demand for bakers' bread
. increased, it was met by an increase in the number of
bakeries, but this was not enough. Between 1850 and 1900
the deveIOpment of better ovens, fuel, means of firing the

ovens, mixing, dividing, and moulding of bread made possible

the industrial bakers.l

Technological Developments
There were greater improvements in baking technology

during these fifty years than in the previous 1500 years

2

<oombined. The ancient Peel oven was not designed for

 

1William G. Panschar, Baking in American, Vol. I:
Ekronomic Development (Evanston, Illinois: Northwestern Press,

1956),ix 55.

 

 

2lbid.

 

lO

ll
continuous baking, and that was one of the most serious
problems. During the 1870's an indirect continuous firing
Peel oven was developed and this temporarily solved the
problem.

The next major development was the reel-type oven
which operated on the same principle as the ferris wheel.
It worked well for the biscuit and cracker bakers but not
too well for bread. .There were numerous modifications made
on these basic ovens, but none were satisfactory, and it
was evident that an altogether new type would have to be
developed. The next major improvements were the traveling
hearth or tray ovens and the automatic controls.

As a result of continuous research and development by
the industry and its suppliers, the last fifty years have
seen tremendous changes in baking technology and equipment.
A modern bakery today can produce 7,500-12,000 pounds of
bread per hour with only 12 to 15 bakers and helpers. This

type of bakery is not uncommon.

Development in Distribution

With the industrialization of bread production a new
pattern of distribution had to be developed. The baker
could no longer sell all of his production in his retail
shop. The larger and more progressive bakeries inaugurated
deliveries to grocery stores. This was the most precedent

I

shattering move of all. There were numerous other

 

llbid., 71.

l2
innovations such as drop shipments, institutional outlets,
house to house distribution,and multi-unit retailing. These
channels of distribution accounted for only a small share of
the total industry sales today. These channels of distri-
bution were utilized by the baker to encourage the housewife
to change over to baker's bread.

As the baker moved into these new channels of distri-
bution he was confronted with a multitude of problems. He
was now a manager, and the problems of finance, industrial
relations, and marketing took on a new light and increased
in importance. An effective delivery system required the
purchase of horses and wagons, outlay for stables, feed,
accessory equipment, the hiring of men to drive the wagons,
and men to take care of the horses and equipment. The baker
was also forced to adopt a system of consignment selling and
crediting the grocer with any unsold bread.1 Since he was
now selling at wholesale he had to increase volume and lower
costs because he was getting a lower price for his bread.

To meet these problems he had to buy new and larger
equipment designed especially for baking bread. The equip-
ment formerly used to produce a wide variety of fancy cakes
and specialty goods was not satisfactory for volume produc-
tion of bread. The bakers began merging as a means of
obtaining capital necessary for this new type of operation.
These bakers were now becoming highly specialized in bread

production.

 

1lbid., 7A.

14

Other bakers specialized in providing the many
specialty items as well as pies .and cakes for hotel and
restaurant trade. These bakers also specialized in hard
rolls, French bread, rye bread, and other hard crusted
breads, as well as the conventional white bread. This
market was very small, probably less than 10 per cent, com—
pared to the grocery service and only a relatively few of
the bakers were able to find sufficient volume to warrant
specializing in this line.

Today, however, with the tremendous increase in volume
in the food service industry this market is being catered
to more and more by the conventional wholesale baker. The
"food service industry" consists primarily of thousands of
restaurants, hamburger drive-ins, in-plant feeding units,
intransit feeding operations of airlines and railroads,
cafeterias, and the like. Such institutions as the hamburger
drive-in chains are considered choice business by quite a
growing number of the conventional bakers. These institu—
tions require a great volume and are frequently more
profitable to the baker than are large supermarkets. It is
not unusual for a hamburger drive-in to use as much as $1100
per week on a yearly average of one type of bun with no
returns and a minimum of service. They are highly efficient
mass merchandisers.

Another group of bakers started house to house delivery.
This type of operation has survived in a number of large

cities over the country such as Los Angeles, Dallas,

15
St. Louis, Cleveland, Indianapolis, Detroit, and New York
Citxy. There has been no great growth in this area because
of the many unsolved problems inherent to this type of dis-
trfiibmtion. The house to house baker has to have a much
lerrger sales force and, of course, a very large investment
irl delivery equipment. He must also grant credit to the
Idcnusewife and even with strict controls, the losses from
tkiis activity can be very costly. This type of Operation,
ENJen though it develops the greatest degree of consumer
lioyalty, has, by far, the highest selling costs.

The growth in the baking industry can be summed up by
lxooking at a few statistics. In 1849 there were 2,027
esstablishments doing $13,294,000. In 1958 there were
1f7,886 establishments with shipments values at $4,741,979,000.1
Trl 1954 approximately 5,000 wholesale bakers produced
"7,016,880,000 pounds of white bread, and approximately 175
ggrocery chain bakeries produced 762,171,000 pounds of white
bread. In 1958 there were 5,199 wholesale bakeries producing

6,536,376,000 pounds valued at $3,130,415,000. One hundred

enui seventy-eight grocery chain bakeries produced 924,719,000

POLUids valued at $382,499,000.2

Until 1900 the growth had been primarily by internal

(Expansion with very little expansion by means of mergers or

 

 

1U. S. Dept. of Commerce, Census of Manufacturers
(Washingtdn, D. C.: U. S. Government Printing Office, 1958),

p. 20 E12.

2
Ibid.

16
pulrchase. From 1900 to 1930 there was a tremendous amount
of expansion primarily through mergers. These mergers were
of two types--the local consolidations and the multi-market

mergers.

The American Baking Company, formed in 1907, was one
of the earliest examples of local mergers. Stock
promoters had a hand in the negotiations. Seven
firms—-each with its own p1ant--came into the new com—
pany. The basic aim of its founders was simply to
reduce competition and eliminate unfair trade practices
that had raised havoc in the St. Louis market.
Mkithin less than twenty years they had closed down five of
trie plants and were only operating two. While these local
rnergers reduced competition, the advantage was not of long
diiration. New competitors frequently established retail
txakeries. They gained easy entry and the market would be
irl turmoil again.

There were a number of advantages to the multi-market
mergers such as greater stability of total market, financial
strength, pooling of talent, greater buying power, and the
benefits of regional or national advertising. These mergers
wereemade with emphasis on broadening the market base with
very little consideration given to production or manufac-
turing efficiency.

Mr. William B. Ward, regarded as the most colorful and
influential individual in the multi-market mergers, created
three of the largest baking companies that exist in the

country today. They are Continental Baking Company, General

Baking Company, and the Ward Baking Company. Mr. Ward came

If

 

lPanschar, op. cit., p. 146.

17
from a family of bakers and had three major assets: money,
promotional ability, and sound bakery management plans.

His first major promotion was the United Bakeries
Corporation in 1922 with nineteen bakeries. He added 18
more in less than two years and by 1924 had over 40 bakeries
in 30 cities.

In 1923 he started still another holding company known
as Ward Baking Corporation with 17 bakeries.

In late 1924 he organized the Continental Baking
Corporation of Maryland as a holding company; it was
chartered to enter baking in all of its branches and also
flour milling and other lines of food manufacture. Contin-
ental's first move was to acquire the United Bakeries Corp—
oration, and it then began a vigorous campaign of acquisition.
By 1926 Continental controlled 91 plants in the United
,States, nine in Canada, and was the largest baking corpor-
ation in America.

In October of 1925 Ward formed the General Baking
Corporation of Maryland with 33 bakeries and by 1926 had
increased to 42 bakeries in 32 cities.

In 1926 Ward chartered the Ward Food Products Corpor-
ation as a super holding company. Its announced purpose
was to bring Continental, General, and Ward Baking Companies
under one banner. This huge companv would have covered
approximately 20 per cent of the commerical bread production
in the United States. On February 8, 1926, the Federal

government filed anti—trust proceedings against Ward and his

18
anpiie. On April 3, 1926, a consent decree was entered into,
arui the giant merger was completely blocked, and the Ward
Ikood Products Corporation lost its charter. Mr. Ward died
sflaortly after this and thus brought to an end the era of
gyreat mergers in the baking industry. There have been
:several changes in the charters and structure of these com-
IQanies, but they remain three of the largest baking companies
:in.America today.1

There were other developments such as the service com-
loanies which might be called a voluntary chain of indepen-
<ients, and some of these still exist today. However, the
local nature of the bakery operation prevents any effective
concentration by large companies and is one of the big prob-
lems of the industry today. .

The local nature of the bakery operation can be shown
lay the size of its relevant marketing area. The relevant
Inarketing area for a wholesale bread bakery has a perimeter
of about 60 miles and certainly no more than 100 miles around
each plant.2

This relatively small market area, combined with the

iharge number of wholesale baking companies, 5470 companies

irl 1954, plus the fact that the majority of these firms
OFMBrate small, single unit plants employing less than twenty
GHKDICyees,3 makes the industry vulnerable to any restrictive

tmuying practices by its customers.

11bid., 199.

 

‘U. 5. Congress, Senate, Subcommittee of the Judiciary,
Egaaggjg Study of Administered Prices in the Bread Industry,
Ctdl Cong., 2nd Sess., 1960, p. 119.

31bid., 132.

CHAPTER II

ENTRY OF THE CHAINS, THEIR BUYING

PRACTICES AND RESTRICTIONS

The growth and development of the wholesale baker is
c:losely related to the growth and development of the retail
.food store and the chain store. The wholesale baker repre-
sented less than 25 per cent of the baking industry's total
sales in 1900.1 By 1930 wholesale—to-grocery delivery had
ggrown until it accounted for over 50 per cent of the total
‘bakery products' sales.2

The retail food store has developed into the single
rnost important channel of distribution for the wholesale
tfifléeP- By studying the growth and structure of the retail
:food industry, we can obtain a clearer picture of the effects
oi‘:its buying practices, and other influences, on the whole-
salts baking industry.

The growth and development of the food industry in

Ameifiica, particularly as represented by the retail food

storms, may be arbitrarily divided into five stages.3 It has

 

1Panschar, op. cit.,p. 128.

2 .
Ibid.

 

3Wi11ard F. Mueller and Leon Garoian, Changes in the
EE£Z§5§_§tructure of Grocery Retailing (Madison, Wisconsin:
1he1Jniversity of Wisconsin Press, l9bl), p. 8.

19

 

 

20

been a continual evolution that, in some respects, has gone
full circle, from the early day general store to its modern
counterpart, the discount house.

The earlier stores were general stores stocking farm
tools and equipment, mercantile goods, and staple foods.1
These early stores did not extend credit and furnished few
services. The merchandise was piled high and was frequently
behind counters or in a stock room. You had to ask the
clerk to bring out items for you to inspect; you were not
allowed to serve yourself.

Later these general Stores began adding a few services
such as credit and some delivery, and they revamped their
stores so that some self-service was possible.

The second stage of the develOpment was the specialized
grocery store and the meat market.2 The grocery store and
the meat markets had each specialized in distinct food lines
and had few non-food items. The grocery store carried a
broad line of staple foods, and it carried a much broader
assortment of perishables than the general store. The meat
market, of course, specialized in meat products. The meat
market carried a broad line of fresh and smoked meats, as
well as some canned meat products. Generally, these meat
markets would handle a limited line of fish products, either

fresh, salted, smoked, or, in some cases, canned.

 

lIbid., 11.

 

 

21
These stores added a few more services particularly an
extension of credit on a limited basis and a delivery service.

They were still on a clerk service basis with very little

self-service.

The third stage was the self-service development.1

This innovation was started around 1900 and by 1912 a few
retailers in Southern California were advertising and refer—
ring to their stores as ”self—service” operations.2 These
stores were not completely self-service. They still retained
clerk service in certain sections of their stores. By 1920
the self-service operation was firmly established and
accepted by both consumers and grocers.

During this third stage there was another development
of major impact--the combination stores.3 The combination
store brought together groceries, meats, produce, and dairy
products all in the same store. In some stores the various
departments were leased out, and in others there was only
one owner.

The fourth stage might be called the era of the super—
markets. The supermarket was the result of combining the

11

self-service and combination store into one retail unit.

 

 

 

1Ibid
2

Ibid
éIbid
Ll

H
C

H‘
0..

 

22

Although the origin of the term ”supermarket" is
obscure, the first use of the term in a corporate or firm
name is associated with Albers Supermarket, Incorporated.l
Albers Supermarket started operations in Cincinnati in
November, 1933. Since that time the supermarket operation
has grown and spread from border to border. You can find
supermarkets today in almost every city and town in the
country.

In 1932 there were 300 supermarkets and by 1958 their
number increased to 29,920 and accounted for 68 per cent of
all food sales.

The fifth stage of development was the addition of
non-food lines to the supermarket and the development of
super-supermarkets called discount houses.

The expansion into non-food lines and to larger super-
markets has moved rapidly since 1955. There are very few
supermarkets today that do not have non-food sections and a
supermarket with l5-20,000 square feet of floor space is
common.

The so—called discount house of today is common to
all major cities and could be described as a shopping center
‘under one roof. These giant supermarkets frequently have
200,000 square feet of floor space or more. In these stores
you find as much as 80-90 per cent of the floor space

devoted to non-food lines.

 

 

 

23

Not only do these discount houses handle food and non-
food items, they may also have service departments such as
barber shops and beauty salons. This broad variety of mer-
chandise and service truly makes the modern discount house
a shopping center under one roof.

The grocery and combination stores numbered 260,050 in
1960 and had sales of $52.6 billion.1 Based on "household
population" this amounted to average per capita sales of
$324 in 1960.2 Of these sales, manufacturers' advertised
brands accounted for 70 per cent of all grocery purchases
in 1960.3 In spite of a tremendous amount of emphasis on
private or controlled brands by the various groups, the
Inanufacturers‘ advertised brands were still holding their
dominant position.

The period 1900 to 1960 has been a period of vertical
integration in the food industry. During this period there
has also been a strong shift toward centralization as the
various types of chain stores were formed and develOped.

There is a close correlation between the degree of
integration and control and the manner that a group handles
its bakery products department. This integration has been

accomplished in two major ways--contract and ownership. For

 

1Robert W. Mueller, Facts in Grocery Distribution (28th
ed.; New York: Progressive Grocer, l9cl), p. l.

 

2Ibid.

'2
“Mueller and Garoian, op. cit., pp. 72-73.

24

example, by 1920 Kroger operated 14 manufacturing plants
consisting of seven bakeries, two meat plants, a preserve
plant, and four other food processing and packing plants.

A & P, Grand Union, American Stores, and Jewel Tea had also
integrated vertically by 1920. In fact, the Federal Trade
Commission found that during the 1929-1932 period 13 grocery
and meat chains and 12 grocery chains operated manufacturing

plants.1

Although these 25 chains represented only 12 per
cent of all grocery and meat chains and specialized grocery
chains reporting to the F. T. C., they accounted for 91.6
per cent of the total sales of the reporting chains.

By 1958, 51 out of 165 grocery chains reporting to
the F. T. C.'s food inquiry operated 326 food manufacturing
plants producing $1.3 billion in sales. Forty—five chains
operated 147 bakeries with sales of $379.5 million. In 1958
the value of shipments of chain bakeries was 39.4 per cent
as great as the estimated wholesale bakery sales of all
chain stores.2

The retail food industry is not only the largest cus-
tomer of the wholesale baker but is now a competitor as well.
As a competitor of the wholesale baker the chain store is
faced with problems of distribution himself. Whereas the

wholesale baker considers all of the retail food stores in

his market area as potential customers, the chain store

g

 

1Ibid., 73.
2
341.2,”);-

25
bakery is restricted, at least by choice, to members of its
own chain in most instances.

The retail food stores of today may be classified in
four major groups: the corporate chain, voluntary chain,
cooperative chain, and the independents. Each group has
handled its bakery products differently.

The corporate chains tend to own and operate their own
bakeries. As a means of operating these plants as near
capacity as possible, the corporate chains tend to restrict
the sales potential of the wholesale bakers by artificical
barriers such as space and service restrictions.

The voluntary chains tend to buy their private or
controlled label bakery products on a contract basis from
wholesale bakers. Generally, the contract will establish
artificial barriers to restrict the sales potential of all
wholesale bakers who are not a party thereof. An example of
this would be that the best selling position and 40 per cent
of the space on the bread rack would be allocated to the
private label. The second best position and 30 per cent
of the space on the bread rack would be allocated to the
wholesale baker who has the contract for producing the
private label. The remaining 30 per cent of the space would
be allocated in some manner to all of the other wholesale
bakers.

This type of arrangement is usually made by the
voluntary group wholesaler and most of the profit advantages

So to him. As a result, the voluntary members frequently

26
choose to ignore the wholesaler's suggestions and allocate
the space and positions in whatever manner they see fit.
The voluntary group wholesaler frequently does not have the
power to force the members to comply against their wishes.

The cooperative groups also tend to buy their private
label or controlled label bakery products from a wholesale
baker by contract. The cooperative group has a stronger
appeal to its members, than does the voluntary, and thus has
better control. This appeal is the allocation of the rebates
or overcharges to the members periodically. The cooperative
members thus enjoy the major portion of the additional
profits obtained by the private label contract.

The independents tend to rely more on the whole bakers
and, in general, do not have private or controlled label
bakery products. The major exception to this is that the
independents have led the move toward in-store bakery de-
partments specializing in the premium quality pies, cakes,

and pastry.

Summary
In summation of this chapter we find that the wholesale

baker's best customer is frequently his strongest competitor
as well. Where the typical wholesale bakery is a small,
independent operation, its customers are generally organized
as buying groups or as chains. The nature of the wholesale
baker's product, corporate size, market area, and dependence

upon the retail food store for distribution to the ultimate

27
consumer makes him relatively defenseless when faced by
artificial barriers or restrictions from'his organized cus-
tomers.
In Chapter III, the distribution methods of the whole—
saler baker, will be discussed so that the restrictions on
space and positions, et cetera, and their effect on distri-

bution can be more clearly understood.

CHAPTER III
DISTRIBUTION OF BAKERY PRODUCTS

The high perishability, bulkiness, and extreme fragility
of bakery products dictate the distribution methods employed
and generally limit commercial bakeries to a local market.

The frequency of bread purchase, the great variety of bakery
products demanded by consumers, the patterns of brand loyalty,
and other demand factors all play a part in the several ways
bakeries are organized to distribute the output of their
plants. In addition, the desires of intermediate distributors
such as hotels, restaurants, and retail food stores must be
considered.1

The critical importance of certain changes in food
distribution must be understood before the methods of cis-
tribution can be analyzed. The organization and operation
of the retail food store are facts and conditions over which
the bakers have little or no control since baked goods are
only a small share, usually five per cent or less, of the
total food store volume. The food store influence is not

static but evolves over time and is in a constant state of

flux, a fact of particular sign ficance to the baker.

 

1Charles C. Slater, Baking in America, Vol. II: Market
Organization and Competition (Evanston, Illinois: North-
western University Press, 1956), p. 103.

28

 

29

Two major factors have had tremendous influence on
both the retail food store and the baker--they are the auto-
mobile and refrigeration. The automobile has given the
consumer much greater mobility, and, combined with refriger-
ators and freezers at home, have given the consumer much
wider choice with less frequent shopping. Their impact is
of importance to us as we consider the effects on retail
food stores and the changing share of business between the
independents and chain stores.

During the 1930's the chain stores were able to main—
tain a constantly expanding share of the market. However,
during the war years of 1941-1945 the chains lost consid-
erable ground to the independents. Since 1945 the chains
again have increased their share.1

During the war years the independents shifted rapidly
to the self—service type of operation. In 1941 less than
25 per cent were self-service whereas by 1952 over 75 per
cent were self-service.2 The advent of self-service has
forced the wholesale baker to make drastic changes in his
distribution practices. Prior to self-service the consumer
would order by brand name. If she failed to do so the order

filler would give her whichever brand he favored. The result

was that the wholesale baker concentrated on advertising his

 

lProgressive Grocer, "21st Annual SurveyH (New York:

Progressive Grocer, January, 1958), p. 3.

 

 

J

:Slater, op. cit., p. 105.

30
brand name and placed great emphasis on gaining the favor
of the order fillers by personal sales techniques.

Self-service changed this because the consumer was
forced to select his choice from a display of several brands.
The psychology of mass display, package appeal, and other
merchandising techniques assumed greater importance.

Both chains and independents have shifted sharply in
the average size of store and dollar volume. This sharp
increase in size and volume per store unit has had consid-
erable effect on the relationship between wholesale and chain
store brands or private label bread sales. The effects will
be more apparent as we review the ways that bakery products
are distributed.

There are four major methods of getting commercial
bakery products to consumers:

1. Selling bakery products through retail food stores.

2. Selling bakery products direct with home delivery
(house to house bakery operation).

3. Selling bakery products through specialized retail
shops(single and multi outlet retail bake shops).

4.. Selling bakery products to institutions, restau-
rants, et cetera.

Bakery products are only one of many lines of merchan-
dise carried by the retail food store or grocer and there
are distinct limits to the influence which baking companies
can have on how grocery stores handle these perishable foods.
In grocery stores all over the country consumers find a

nearly uniform display of packaged bread and bakery products.

31
The duPont survey1 showed that in supermarkets an average
.of ninety-seven different packaged backery items were dis-
played in an average space of 212 square feet. These 97
different items included brand variations as well as product
differences. The same survey showed that the average cus-
tomer spent only 35 seconds shopping the bakery section.
Obviously, this array of 97 different items must compete
for visual attention. Hence, the position on the shelf in
relation to traffic flow, the allocation of space (mass
display), the package design and the arrangement of the dis-
play are vital control factors in the selling of bakery
products. The grocers' increased awareness of the value
of these factors has had a strong influence on the wholesale
bakers' operations.

Wholesale bakers use driver salesmen who place the
products on the grocer's shelves. These salesmen, due to
the limited space and the high turnover of bakery products,
may call back several times a day to restock the shelves and
keep the display in an attractive selling condition.

In contrast, the chain store bakery delivers its
products on the organization's own trucks along with other
types of merchandise and the store's clerks then display the
bakery goods and keep the shelves stocked.

The wholesale bakery sells its products through the

grocery on a consignment basis, whereas, the products

 

1E. I. du Pont de Nemours and Co., Every Second Counts,
A Study of Consumer Bakery Shopping Habits (Wilmington: E. I.
du.Pont de Nemours and Co., 1953), p. 4.

32
received from the chain store bakery cannot be returned in
most cases. Either the grocer sells the chain store bakery
products or he takes the resulting loss on unsold goods.

The chain store grocer is under pressure from his
superiors to sell certain percentages of the chain store's
own brand of bakery products. In order for him to do so
the grocer, who is aware of the selling factors, will
naturally, if not by direct order, place the private or
controlled label bakery goods in the preferred position with
sufficient space to make sure that they will sell first.
This has resulted in certain chains taking 80 to 90 per cent
of the space for their own brands and leaving a maximun of
10 to 20 per cent for outside brands. The chain store
managers generally agree that this practice assures them of
guaranteed sale of their own products but it also causes
them to lose in total bakery goods volume and, in a number
of cases, causes them to lose customers where brand prefer-
ence is strong.

The reason for the wholesale bakers' delivery, con-
signment, and pick-up of unsold merchandise practices dates
back some 60 years. Around 1900, when the grocers were of
the opinion that bread would not sell, the bakers' earliest
arrangements were exclusive dealerships. The baker would
supply a glass case for the display of his products and re-
claim any unsold merchandise, giving the grocer full credit.
This arrangement persuaded grocers to become bread sellers

and was and still is the best way of assuring the grocer and

U)

3

his customers of fresh bakery products. The assurance of
freshness and quality is the best way for the baker to pro-
tect his name and reputation.

This system where the grocer has little expense,
except for space, fostered the development of several
bakeries servicing each grocery store and thus the bargaining
strength now lies with the grocer.

The competition among wholesale bakeries to maintain
their shelf position and space--vital factors for their
survival--has produced several of the key marketing problems
of the industry. This fierce competition among the wholesale
bakers plus the pressure on and desire of the chain store
grocer to sell his own labeled goods has created an unhealthy
situation. It is a situation fraught with many economic and
legal ramifications, particularly for the grocer who is

greedy and opportunistic.

House to House Delivery

 

Because their salesmen meet the ultimate consumer, the
house to house bakers must be prepared to satisfy all the
needs of their customers for bakery goods.

House to house distribution is feasible because of
the frequency with which bakery products must be purchased
by the average household. Home freezers and refrigerators
can prolong the life of bakery products, but home service
continues to be an important form of distribution today. By

offering the housewife a full line of bakery products and

34
regular service, as well as short-term credit of a week or
two, the house to house bakery has carved out a market based
primarily on service. This service, plus the potent factor
of being able to sell direct to the consumer, gives the
house to house baker advantages that no other distribution
system can offer. .

The house to house baker normally prices his bread at
the prevailing retail price charged by the grocers. There—
fore, he has two reasons for producing a broad product line:
(1) He wants to satisfy all of the customers' desires for
bakery products, and (2) He wants to sell as much as he can
of the higher priced and more profitable items such as cakes,
pies, and fancy pastry. However, he cannot compete fully
with the retail bake shop because of the rough handling the
products receive in his delivery trucks. The more delicate
and fragile items cannot stand this treatment,.and he cannot
economically handle those items that require refrigeration.

There are several problems unique to this type of dis-
tribution that seriously limit its expansion: (1) It requires
a large number of route salesmen and delivery trucks. It is
not a simple task to obtain the quality and quantity of man-
power necessary for a successful operation. Helms Baking
Company in los Angeles and Manor Baking Company in Kansas
City, both of which are house to house bakens, estimate
that they have a minimum of 10 per cent of their routes open
at all times because of turnover. They must maintain an
intensive recruiting and training program continually, and

this is costly.

35

Some of the reasons for this problem are that it is
hard physical work. The salesmen are out in the open in
all kinds of weather, and the pay is relatively low for
route work. The average house to house bakery salesman will
earn some 20-25 per cent less than the average wholesale
bakery salesman on a weekly average.

(2) The extension of credit to the consumer is a con-
stant headache because it requires a tremendous amount of
bookkeeping and a loss from bad accounts runs high. The
average house to house route will have some 250 to 300
or more customers and over 75 per cent of these will be on
credit.

(3) There are also the problems that develop between
the route salesmen and the female customers that cause
unusual costs for the house to house baker.

All of these factors and others sum up to make the
house to house operation costly and one that has appealed

to fewer and fewer bakers over the years.

Retail Bake Shop

 

The third method of distribution is the retail bake
shop. This may be the single unit shop or the multi unit
operation operating either from a central bakery with
multiple sales outlets or one with multiple producing units
with on premise sales area in each unit.

Because of the low volume and broad product line in-

herent in this type of Operation, they are rarely equipped

36
for high speed machine-type production. These operators
have changed very little over the years except to seek
better traffic locations. As a result, many retail bake
shop operators have leased selling space in modern super—
markets, discount houses, and department stores. Their
production costs are higher due to the lack of mechanization,
but the distribution costs are probably the lowest in the

industry.

Distribution to Food Service Institutions

The fourth method of distribution--to institutions,
restaurants, hospitals: schools, and others is utilized by
all three groups previously mentioned. The wholesale baker,
house to house baker, and retail bakeries all try to fill
up their surplus capacity by competing for the institutional
trade. Because of this intense price competition, there are
very few purely institutional bakers. The distribution
methods are quite similar to the wholesale to grocery store
methods except in product requirements.

This brief review of the distribution methods has
pointed out a number of symptoms and a few causal factors
concerning distribution costs. Perhaps by examining the
mechanics of the wholesale bakers' distribution methods
additional factors may be discovered.

The wholesale bakers' distribution is centered in the
driver salesman and his truck. The larger bakery may well

enjoy economies of scale to an appreciable extent in

37
production savings. The larger bakeries' economies of scale
are insignificant in distribution except where the net
volume of goods sold by the individual salesman can be
increased.

The individual salesman orders the goods he expects
to sell two or more days in advance. He checks the goods
after they have been loaded on his truck and assumes financial
responsibility for them. He leaves the bakery early in
the morning and starts serving the grocery stores on his
route, which is usually a rather compact, contiguous geo—
graphic area. He first checks the rack in the bakery de-
partment of the store and gives the grocer credit for any
stale merchandise and then restocks the shelves. He then
collects from the grocer or gets his invoice signed in the
case of charge accounts and then drives to the next store
where he repeats this procedure. After he has completed
his first round of stops he doubles back and makes additional
calls on the grocers until late afternoon. He then returns
to the bakery, unloads his truck, turns in the stale merchan-
dise and receives credit for same. The salesman then makes
settlement for his order of merchandise and makes out his
next order.

Due to the intense competition between the wholesale
bakers for the very limited space and positions in the
grocery stores, the salesmen may be called upon to perform
a number of additional duties such as: present sales promo-

tions to grocers, present new products to grocers and, by use

38
f various sales tools, try to gain selling advantages for
his merchandise.

The grocer may use this intense competition as a means
to play one salesman against the other with the selling
advantage going to the salesman who gives the most service
or other incentives. This cuts down the salesman's produc-
tive selling time and potential because he has to spend so
much of his time protecting his existing business. As a
result, distribution costs go up.

They go up because the average salesman is on a base
salary plus a commission. For example, a salesman may
receive $100 per week on the first $500 of his net sales
and eight per cent on all sales in excess of $500 per week.
As a result, on $500 net sales his salary cost would be 20
per cent, but on $1,000 net sales his total wage cost would
only be 14 per cent. This points out the importance of
increasing the productive efficiency of the individual route
salesman if distribution costs are to be reduced.

In addition to the route salesmen in operations of
five or six route or more, the need for route supervisors,

extJe.men for emergencies, and sales managers becomes more

imperative.

(I)
.5
Fl
:1)
"S

The wholesale or commercial bakers utilize several
ciifferent methods of distribution, and any one baker may use

(nae or a combination of two or more of these methods.

39

Because of the nature of the product and the relatively
small purchases made by the consumer at one time, the retail
food store has developed as the prime distributor for bakery
products. The development of fewer and larger retail food
stores has reduced the amount of display space available to
the baker. This has also increased the rate of turnover of
product per linear foot of shelf space, but the advent of
self-service has placed a premium on position and mass dis-
play and distorts this rate of turnover. If four bakers had
equal space on a given rack which had a strong first selling
position, the baker who had the first position could very
easily sell two or three times as much merchandise as could
the baker who had fourth position.

The route salesmen type of distribution is costly and
restrictions affecting his efficiency may increase the
baker's distribution costs sharply.

In Chapter IV the specific restrictions or artificial

barriers will be discussed in more detail.

CHAPTER IV
MARKETING PROBLEMS AND TRADE PRACTICES

To a large extent the discussion of trade practices
in this chapter will have to come from personal observations
made by the author as he has worked and studied in the whole-
sale baking industry. These observations have been made
during the last eight years and are primarily from the south-
western area of the United States.

In the previous chapters we have observed several
factors affecting increased distribution costs incurred by
the wholesale baker. It might be well to recapitulate these
and to look at the practices that have evolved from them.

First, the bakers‘ initial methods of introducing
bakery products to the grocery store some sixty years ago
have persisted to the present. These include the furnishing
of racks, delivery to the store daily, displaying and mer-
chandising the bakery products in the store, and the consign-
ment method of selling.

Second, the limited relevant market area requires the
wholesaler baker to operate and fight for survival in a
rather rigidly defined geographic area. These boundaries
have been expanded, in many instances, by use of drop

stations. A drOp station Operation is one where route

40

41

salesmen are stationed at a terminal point some considerable
distance away from the bakery; a distance of 100—150 miles
is not uncommon. The bakery products are hauled by trans-
port trucks to the terminal, the route men transfer and
break down the load according to their individual orders
and proceed to distribute the merchandise to their customers.
The drOp station is very expensive to operate in terms of
distribution costs, but it may provide sufficient volume to
lower total production costs appreciably. This trade off of
distribution costs for production savings may be the only
practical route open to survival for a baker in a given area
at a given time.

Third, the majority of the bakers are relatively small

intra-state operators and are usually Operating at 60 per

 

cent or less of total capacity. This excess capacity and
pressure of competition for survival frequently leads the
baker to resort to unhealthy and, at times, extra legal
trade practices. The result is that others follow suit and
meet his competitive action, and the market is in a state of
turmoil, either reducing or eliminating the profits of all
the bakers concerned. Of course,when the large inter-state
bakers become involved in meeting these trade practices such
as discounts, space rental, et cetera, the Federal Trade
Commission and the Justice Department usually make investi-
gations and attempt corrective actions.

Fourth, the route salesmen are, for the most part,

organized by the Teamsters Union and over the years have

42
develOped rigid and highly restrictive contracts. It is
easy to say that the bakers should resist these contractual
demands and only agree to demands that are economically
feasible and practical. However, when faced with competition
from the captive bakeries of the chain store groups and the
long term or permanent loss of volume that would result from
a strike, the baker usually chooses what he considers the
lesser of two evils. He prefers to operate at or near a
loss rather than be forced completely out of business just
for the sake of a principle. These union restrictions have
resulted in higher distribution costs and reduced the ef-
ficiency of the route man.

Fifth, the development of the chain store'organization
with centralization of buying and a "follow the leader"
attitude on the part of most grocers has resulted in what
might be termed oligopsony1 power. In almost every market
there is one food store group that is dominant and who is
follOWed by the majority of the other grocers in the market
in the acceptance or rejection of a baker's products. In
effect, one buyer controls the baker's destiny as far as
that particular market area is concerned. Since the leader
usually has his own controlled label bakery products, he is

interested in protecting the sales volume and profits of his

 

1Oligopsony is a market situation in which there are a
few buyers of a particular resource which may or may not be
differentiated. One buyer takes a large enough proportion of
the total supply of the resource to be able to influence the
market price of the resource. Richard H. Leftwich, The Price
System and Resource Allocation (New York: Holt, Rinehart, and
Winston, 19617, p. 306.

 

43
own merchandise and does not want any additional competition,
if he can avoid it. As.a last resort, the baker may make a
deal that is very costly and will have no bearing on the
consumer acceptance of his product except to get it into
the stores so that the consumer can buy it. The baker may
be forced to make such a deal just to keep his products in
the store even though he has good consumer acceptance and
a normal profit margin for the grocer. Again, it is not
just the one store that is the problem. The problem is that
to get into or stay in a given market, one generally has to
get in and stay in the outlets of the leader.

This power of oligopsony has become a double-edged
sword with the rapid growth of chain store bakeries and
private or controlled label bakery products.

In a sense, the baker himself is responsible because
he handed this power to the grocer some 50-60 years ago
when he placed his dependence for distribution on the grocer.

Sixth, the perishability of bakery products has
tended to keep the wholesale baker local in effect even
though several of the baking companies are national in over-
all scope.

Seventh, because the distributing arrangements for
other foods must be accepted as a set Of circumstances
beyond the control of the baking industry, distribution of
bread and other bakery products has develOped an unusual
pattern of techniques. Massive displays, both to assure

the supplying of all customers and to attract customer

44
attention to the product and brand have become customary.
The stale loss that results from this method, while a prob-
lem for both chain store and wholesale bakeries, is far more
serious for the latter. Retail food stores also set some
standards in the handling quality of bakery products which
limit their sale of fragile items, to those which can with-
stand fairly rough handling.

These factors make up a representative list of some
of the basic marketing problems facing the wholesale baker
today. These causal factors affect the wholesale baker in—
directly and in combination through the trade practices
which are rampant in the retail grocery and wholesale baking
industries today. They are not new and do not appear to be
unique to any one section of the country.

Some of these practices are:

1. Shelf space limitations

2. Shelf position limitiations
Service regulations
Product limitations
Promotion limitations

Discounts, et cetera

\loxmrw

Price differentials
The grocer, as well as the baker, learned long ago with
the advent of self—service that space and position on a
bread rack were elements of survival for the wholesale baker.
The battle for survival for the wholesale baker has

always been a tough one. It has been a battle against other

45
wholesale bakers, home delivery bakers, the housewife who
bakes, and more recently, the chain store bakery, the frozen
food processor, and prepared mix processor. Of these com-
petitors, the wholesale baker is currently least prepared
to compete with the chain store bakery because of the power
of oligopsony which the retail food store operator has.

It is an "accepted £333" that the grocers and, par-
ticularly the chain store operators whether corporate,
cooperative, or voluntary, have the power of oligopsony, at
least on a local market area. The questions are how much
oligopsonistic power do they have and is this power used?

The exercise of the power of oligopsony in the form
of the practices earlier stated in this chapter may be
legal, in some instances, and illegal in others, and quasi
or extra-legal in still others.

The Federal Trade Commission and the Kefauver Committee
have investigated and currently are investigating the activi-
ties, practices, and relationships between the retail food
store operators and members of the wholesale baking industry.
It is quite possible that the current investigations by the
F.T.C. may lead to more stringent legislation and/Or more
governmental regulation of these activities and relation-
ships.

Mr. Graf of the Quality Bakers of America, an indepen-
dent bakers voluntary cooperative, testified before the
Kefauver Committee in 1959 that the concentration of buying

power in the retail food field was fantastic. According to

46
his calculations, only 972 buyers controlled the purchase of

over 37 billion dollars in food products for the various

chains. This represented some 67 per cent of the total

purchases.1

He testified further about the prevalence of pressure
from the grocers which he termed ”hold-up demands for dis-

counts or contributions," also pressure from grocers for

"under the table payoffs for signs, shelf space, and posi-

tions;"

Mr. Graf was under the impression that the practice of
renting shelf or display space was commonly accepted prac-
tice in the cosmetic and cigarette industries.

Mr. R. N. Laughlin, President Of Continental Baking

Company, testified before the same committee that the chain

stores were "our toughest competitors, as well as our best
(Histomers," and "If you don't sell chain stores today, it

is difficult to do business at all because they control such

21 vast amount of the retail fie1d."2

"During the period of time under discussion (1947-58),
ifloe chain store bakers entered into the field quite strongly,

arki as they began to build bakeries they also began to

ststrict the products which the wholesaler might sell. Or,

if‘ they did not restrict them by not handling them at all,

trmay restricted the amount of space the wholesalers might

have-"3
lSenate Subcommittee of the Judiciary, Hearings, QE-

Cit-) 1959: p° 6047.
Rigid , 6114. 31bid., 6112.

 

 

47
These restrictive practices need a closer examination

so that we can have a better idea as to how they are used

and the results Of their use.

Shelf Space and Position Limitations

It is a common practice for a grocer to take the so-
called first selling position on the bread rack and at least
one-third of the shelf space for his own private or con-
trolled label. In some chains they will restrict as much
as 80-90 per cent of the space for their own label. The
remaining space may be allocated to outside bakers in any
one of a number of ways. The grocer may eliminate com-
pletely one or more of the outside bakers. This may be
done arbitrarily or on the basis of sales records of these
products or on the basis of who "offers" the best deal.
This offer may be presented in a sealed bid, private negoti-
ation, or a demand of a fixed percentage of sales or a
demand for a fixed sum of cash or services. Where the
elimination is arbitrary or on a basis of sales records,
the bakers may buy their way back in, in this case, the
(offer may originate from either party and in a variety Of
fkorms. These restrictions require much more frequent
:serwicing of the bread rack by the outside baker in order
‘to maintain his volume.

Grocers who do not have a private or controlled label

nuay utilize these methods of exacting a payment for space

cxr positions.

48

Product Limitations

Other common practices of grocers with private or
controlled labels is to eliminate many of the wholesaler's
varieties, particularly in the major white bread lines. TO
meet this the wholesaler has resorted to the lesser volume
variety items which increase his costs sharply.1

Other methods of product limitation are to restrict
the types and methods of wrapping materials. Examples would
be elimination or restriction of all items wrapped in cello-
phane, polyfilm, or poly bags. The grocer may require cer-
tain types of end seals on all outside bakery products, such

as end seals showing retail price.

Service Limitations

 

If by restricting the position and amount of shelf
space and/Or the varieties of products the grocer has been
unable to reduce the wholesaler's volume to the desired
point, the grocer may then restrict the amount of bakery
products that each outside baker may put in the store and
the number of times that the salesmen may service and main-
tain the bakery products display rack.

The grocer may also require that route salesmen of
the wholesalers service and maintain the display of private
lebal merchandise, thus avoiding the expense of having his

clerks stocking the private label bakery products.

 

 

49
The grocer may also require that the wholesalers
provide manpower and materials for decorating the store, or
for stocking shelves, et cetera during special promotions,
store Openings, or any other occasion.
The penalty for declining these privileges may well
be the refusal to handle the baker's products or some other

equally effective restriction.

Promotion Limitations

 

The grocer with private label or controlled label
bakery products looks with disfavor at any proposal for the
promotion of a wholesaler's products. If the product in
question is one that competes directly with a private label
item, the answer will usually be one of the following: "No,"
or "What is it worth?” or "It will cost you such and such."
Some of the chains will allow competitive promotions as long
as the wholesaler ties it in with the promotion of some

private label or high profit item”

Price Differentials

 

The chain store Operator normally sells his private or
controlled label bakery products at a lower price than he
does the wholesaler's products. Examples of the price dif-
ferential as recorded during the Kefauver hearings in 1959
(page 6127) were:

Utica, New York retail price September l,l958--wholesale
white bread one pound loaf--22.6¢'vs. private label at 16¢C

Waterloo, Iowa retail price September l,1958-—wholesale
white bread one pound loaf-—20.5¢'vs. private label at 15¢.

50
During price wars the chain stores frequently cut the price
of their private label to as low as five cents or ten cents
per loaf while maintaining the wholesaler's products at
regular retail price.

Since the grocer has complete control over the retail
prices charged for the merchandise, the wholesaler is at his
mercy. This is an extremely potent weapon that has caused
many small bakers with rather limited working capital to go

out of business.1

Discounts, Contributions, Et Cetera

These limitations or restrictions are closely inter-
twined with those restrictions previously discussed and
additional discussion in this area is not needed except to
state that rarely are these demands based on economic
savings. These demands are frequently made by large organiz-
ations as well as small, opportunistic operators. For
example, the Independent Grocers Alliance Distributing Com-
pany was found to have exacted and received either directly

or indirectly brokerage fees, commissions, rebates, and

f‘

other compensation in violation of the Robinson-Patman Act.‘

Another example would be the Giant Food Shopping Center,

Inc., which was found guilty of similar practices.3

 

l1bid., 6054.

2Independent GPCCGPS Alliance Distributing Company 1g.
Federal Trade Commission, Vol. V, p. 524, 1949-55, comm.
Harriette H. Esch.

 

3Giant Food Shoppigngenter,_lnc., lg. Federal Trade
Commission, p. 2059, 1958-59.

 

 

Summary

The effect of these actions by the food chains can
best be shown by looking at some comparative figures from
the Kefauver hearings.

According to the 1954 Census of Manufacturers, chain
store bakeries controlled some 7.5 per cent of the total
bakery products sold. "Most experts estimate that in 1959
chains were producing some 20 per cent of all white bread
sold," testified Mr. R. N. 1augh1in.l According to the

Chicago Tribune survey four chains had captured over one-

 

third of the total bakery goods market in Chicago with their
private label bakery products.2

The struggle between the chain store bakeries, with
their inherent marketing advantage, and the wholesale
bakeries has resulted in inflated distribution costs for
the wholesale bakers. There are many facets to this problem,
but they all seem to be related to basic weaknesses within
the wholesale baking industry. The dependence of the whole-
sale bakers upon distribution channels that they cannot
control, and where their strongest competitors frequently
are, is perhaps the most serious weakness. The other prob-
lems discussed in this chapter seem to develop from or

because of this basic weakness.

 

1Senate Subcommittee of the Judiciary, Hearings, 2E.
cit., 1959, p. 6110.

2Also see Appendix A, Summary Of White Bread Purchases
as Reported by Newspapers, 1961, comp. Ted Bates and Company,
Inc., New York, New York. -

CHAPTER V

CONCLUSIONS

The evidence collected from the Kefauver hearings and

Federal Trade Commission cases and other listed sources tend

to indicate that several unhealthy conditions and practices

exist.

U7

Some of these are:

Too much excess productive capacity in wholesale
baking industry.

The wholesale baking industry has no one to blame
for the present conditions except itself because
it created this monster by its own acts.

Oligopsonistic power is exercised and to a very
large extent by food chains.

The captive bakeries of the food chains represent
the most powerful force in the baking industry
today.

The chains and the independent grocers are guilty
of a number of practices which are extremely detri-
mental to the baking industry and may well be
illegal or, at best, questionable.

The bakers have failed to organize in a manner to
cope with the chains on an equal basis.

The weight of the evidence as found and evaluated tends to

show that the hypothesis of this study was verified.

Recommendations

 

The wholesale bakers must organize themselves, possibly

in a cooperative manner, so that they can use their collec-

tive economic power to survive in this battle with the chain

52

53
store captive bakeries. The wholesale bakers may find it to
their advantage to integrate downward and obtain a financial
interest and voice in the policy formation of the chain
stores.

The wholesale bakers should examine closely the
possibility and potential of opening multi-unit retail shops
through which they can sell their products as they may desire.

The wholesale baker should investigate the possibility
opening and Operating "bantam" type open-front stores
specializing in bakery products, dairy products, soft drinks,
beer, and a limited line of fast turning grocery items. The
wholesale bakers already have a small amount of first hand
experience in retail operations from the operation of "thrift
stores" where they sell their stale or returned bakery
products.

The dairies are slowly moving into this type of an
operation as they are squeezed out of the chain stores by
private label dairy products. The wholesale baker might
very well make a profitable alliance with the dairymen in
such a venture. It could develop to the point where they
might franchise the actual retail operation to a group of
chain stores and thus completely reverse the present
situation.

One small baker who serves the Oklahoma City, Oklahoma
market area under the "Sonny Boy" brand name was, over a
period of years, completely eliminated from the grocery

store market. This enterprising baker proceeded to open up,

a

\I1

over a period of eighteen months, some fifteen ”thrift
stores;" He stated that the best thing that had ever
happened to his business was his being denied space in the
chain stores. He stated further that through his own thrift
stores he was selling over three times as much merchandise
as he had ever sold under any previous arrangement. He also
stated that his profits were now at an all time high, and
his production and distribution cost were at an all time low.
If one baker can do this perhaps others can do equally
as well. This would not necessarily be the one best answer,

but it certainly merits further study.

APPENDIX A

A SUMMARY OF WHITE BREAD PURCHASES

AS REPORTED BY-NEWSPAPERS

\H
\D

A SUMMARY OF WHITE BREAD PURCHASES

AS REPORTED BY NEWSPAPERS

As a follow-up to the previous summary of 1961 data,
it was decided to show a comparison with similar data of
several years' previous. For most cities, the 1955 figures
were available and where they were not, the 1956 figures
were used.

In some cities when only special Trendex reports were

made in 1960, there was no data available for 1955.

:1>

BA
BN
BO

BR

CB
CK

CN

DA
DC
DE

DN

TED BATES & COMPANY, INC.

.OTHER WHOLESALE BRANDS

 

Arnold

Ark

Ann Palmer
Buchan

Mrs. Baird's
Butternut
Brownberry Ovens
Betsy Ross
Carpenter_

Cook Book

City Bakery
Conkling
Donaldson
Davidson

Di Carlo

Dunford

Dandee

LA

MA

MB

MK

Famlee
Franz
Fischer
Gal's
Holmes
Holsum
Ideal
Jaeger's
Julian
Keystone
Langendorf
Laub
Master
Manor
Magic Bake
Marc kx

NBC

57

NK

P

PF

PP

SC
SL

SR

Nickles
Pennington
Pepperidge Farm
Peter Pan
Royal
Sunlite
Schwebel's
Sterling
Southern
Star
Stein‘s
Tony

Table Queen
Town Talk
White

West

Qu
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BIBLIOGRAPHY

Books

Leftwich, Richard H. The Price System and Resource Alloca-
tion. New York: Holt, Rinehart, and Winston, 1961.

 

Mueller, Willard F. and Garoian, Leon. Changes in the Market
Structure of Grocery Retailing. Madison, Wisconsin:
The University of Wisconsin Press, 1961.

 

 

Panschar, William G. Baking in America, Vol. 1: Economic
Development. Evanston, Illinois: Northwestern
University Press, 1956.

 

 

Slater, Charles C. Baking in America, Vol. II: Market
Organization and Competition. Evanston, Illinois:
Northwestern University Press, 1956.

 

 

Slater, Charles C. Economic Changes in the Baking Industry,
Supplement to Baking in America.

 

 

Pamphlets, Magazines, and Newspapers

 

Bakers Weekly, August 8, 1960.

 

Davis, Russell E. "The Depth and Impact of Supermarket
Bakery Activities,” Bakingglndustry. Chicago:
Clissold Publishing Company, October 5, 1957, June 25,
1960, and April 29, 1961.

 

m
H

du Pont de Nemours and Company. Every Second Counts,
A Study Of Consumer Bakery Shopping Habits. Wilmington,
Delaware: E. I. duPont de Nemours and Co., 1953.

 

 

Mueller, Robert W. Facts in Grocery Distribution. 28th ed.;
New York: Progressive Grocer, 1961.

 

 

 

Progressive Grocer. "21st Annual Survey." New York:
Progressive Grocer, January, 1954. '

 

_§upermarket News, March 12, 1962.

 

.Wall Street Journal, October 23, 1961.

 

/

CR

.4/

Reports and Public Documents

 

Anheuser-Busch Survey of Bread Prices. Cost and Margin
Trends in the Bakingilndustry, 1954.

 

 

Federal Trade Commission DecisiOns. July 1, 1958 to June 30,

 

1959. Washington, D. C.: Government Printing Office,
1960.

Statutes and Court Decisions. Vol. V, 1949-1955. Comp.

 

Harriette H. Esch, 1957.

Ted Bates Company, Inc. A Summary of White Bread Purchases
As Reported by Newspapers. New York, 1961.

 

 

U. S. Department of Commerce. Census of Manufacturers.
Wasgington, D. C.: U. S. Government Printing Office,
195 .

 

U. S. Senate. Subcommittee of the Judiciary. Hearings,
Study of Administered Prices in the Bread Industry.
Part 12, 86th Cong., lst Sess., 1959.

 

C!
U)

Senate. Subcommittee on the Judiciary. Report, Study
of Administered Prices in the Bread Industry. 86th
Cong., 2nd Sess., 1960.