17. A Strange New Definition of "Monopolize"

17. A Strange New Definitionof "Monopolize" In the year ended February 28, 1950, the A&P, with all its corporate children, sold about $2,900,000,000 worth of groceries and earned, on this, a "consolidated net profit" of about $33,400,000, or about l}t cents on each dollar of sales. These figures on sales mean only sales to the public. They do not mean what might be called A&P's imaginary "sales to itself," that is, from one division to another. The profits, also, are for "the whole business." The accountants got them by taking the whole $2,900,000,000 rung up in the cash register and subtracting from it all the costs: buying, manufacturing, retailing, administra tion, taxes, and so forth, which came to about 98% cents on each dollar of sales. For "accounting control" pur poses, however, A&P broke down its profits into those of different departments. It is a vertically integrated firm and it wanted to know how it was doing at different levels.

The accountants used, as near as possible, the usual accounting method, as sketched in Chapter 14 on Integra tion. They priced the goods transferred from one de partment to another at as near as possible the going "market." This is not too easy in the food business, 134 A NEW DEFINITION OF "MONOPOLIZE" 135 since food is handled in a very 'imperfect' market. The results indicated, as they have been doing for years, that A&P makes rather lush profits in its manufacturing, but almost paper-thin profits in its retailing department. By and large these figures would say that A&P ought to do more manufacturing, where it seems to make the most money, and less retailing. This is not so certain though. One of the things that helps manufacturers most to lower costs is steady, uninterrupted operation for an assured mass market. And this the A&P manufacturing divisions have, because A&P is a mass retailer. They might not find it if A&P were broken up, unless they tied up with some other mass distributor, in another integration.

They also save by not having to have sales departments. Nobody knows how far A&P's big manufacturing profits are due to this tie-up with its retailing. But it looks as though A&P might almost go so far as to take a book-loss on its retailing in order to give its manufac turing divisions this steady mass outlet. Few people, however, used to worry about this. It was a nice ac countant's problem for a long winter evening. The im portant .thing was that the big-volume total operation made a profit as a whole. When the Antitrust Division people saw these figures on division profits, however, they expressed what some people might call horror and others, elation. They said in the closing argument at the Danville trial: The very heart of the government's complaintis, in effect, that the company uses the profits from what the government calls its non-retail operations to lower its retail prices. And the government contends by such practices, the A&P made it difficultif not impossiblefor others to compete. Without these advantageswhich permit A&P to reduce gross profit, no competitor can hope to remain long in business. . . .

Profits from all operations of the system are siphoned 136 A NEW DEFINITION OF "MONOPOLIZE" into its retail stores in order to offset uneconomic retail profit rates. . .. By 1942 the crediting of non-retail profits to retail operations enabled A&P to operate its stores with inconsequential profits on retail sales. . .. The profits from the non-retail end ... subsidized the retail business, so that the latter could operate at an uneconomic profit rate, a privilege not possible to A&P's competitors. This, the government contends, is an inherent abuse of the vertical integration of A&P's system.! [Italics added.] This is perhaps the most astounding charge ever brought against any company under the Sherman Anti trust Act in its entire 60 years. One might expect A&P to be attacked for having gouged the housewife with its high manufacturing profits, then to be forgiven for having disgorged and passed them on to her through its retail divisions. Instead it is attacked, not for making so much money on manufacture but for making so little on retailing. The phrases "uneconomic profit rate"

and "inconsequential profits," in their context, indicate that, in the government lawyers' opinions, A&P did not charge enough for its groceries. By old-fashioned stand ards, the government is attacking A&P for its virtues. Moreover, when the government lawyers call this type of operation "an inherent abuse of the vertical integra tion of A&P," they have forged a two-edged sword, which can, as successfully, cut down any other integrated operation, as easily as that of the big chain. "Inherent" it is, not only in A&P's operation, but in any other in which some divisions or departments make larger profits than others. But if it is an "abuse," then virtually any integrated operation can be found to be an illegal abuse. Another bombshell for American businessmethods was exploded by the government lawyers in their attack on the lowering of prices to get more volume. The classic instance of this was the action of the Ford Motor ComA NEW DEFINITION OF "MONOPOLIZE" 137 pany around 1910, when it determined to build a car "which the American workman could afford." It cut its prices sharply, then hoped this would bring in a volume of orders heavy enough to get production costs down to a profitable level.

This has been characteristic of American industry in the last generation. or more. Twentieth-century indus trialists are looking for a profit just as were the earlier capitalists. But they go at it in a more roundabout way, via low prices and mass production. The idea is some what as follows: If you charge $10,000 for an automobile you may sell only a hundred of them. You may make them at a cost of only $5,000, but this will give you a profit of only $500,000. But if you charge only $1,000 apiece, you may get orders for a million cars, which you may be able to make at $900 apiece, due to the savings on mass production. Then your profit is $100,000,000. There is, however, a speculation involved here, for there is no real way, except trial and error, to determine, when you cut prices, how much of a cut will bring how much of an increase in volume, which will permit how much of a decrease in costs. And the price of an error is a loss.

In the grocery business, this process consists of cutting the markup on goods, or the "gross profit rate," in the hope of getting more customers, hence lower store costs, hence more net profits. This is what the government lawyers had to say about it in the A&P case. In speaking about how meat business . . . had increased from $200 to $1,200 per store, .he [John Hartford, chief defendant] pointed out: "This was accomplished by re ducing the gross profit rate until the volume was built up to a point where the expense rate was low enough to permit 138 A NEW DEFINITION OF "MONOPOLIZE" the store to operate at a profit." We know of no more clear and concise words with which to express the govern ment's charge. . .. [Italics added.] . . . The evil . . . inherent in this pattern lies in the selection of an arbitrary gross profit rate chosen without regard to the expense rate and fixed at a figure which de fendants believe. will produce the chosen figure of desired volume.2 Of course, the lowering of gross profit rates nlay ultimately result in increased sales and hence in increased profits. But [this] ignores the restraining effect upon A&P's retail competition during the interval required for increased sales to reduce the expense rate.3 At another point the government brief remarks that an "honest retailer" would try to "price his merchandise in the traditional American way, that is, cost, plus ex penses, plus a profit."

It has been said of John Hartford, one of the A&P founders, that "he would rather sell 200 pounds of butter at one cent per pound profit than 100 pounds at two cents a pound profit." The A&P's policy, here condemned, is akin to what the late Wendell Willkie, when he was a power-company president, used to call an "objective rate." The TVA claimed to have pioneered it and there was quite an amusing controversy, with Willkie retorting "Don't teach grandmother to spin." It consisted in lowering rates to get more customers in order to decrease unit-costs, which increased profits. How the autolnobile industry still follows this policy may be seen from the following remarks of President Charles E. Wilson of ·General Motors. Question: In making your prices, is there such a thing as a stabilized profit? Answer: It can't be stabilized because it keeps changing all the time. . .. A fair price, I've always thought, is a compromise between what has been paid for similar articles, A NEW DEFINITION OF "MONOPOLIZE" 139 what your competitors are willing to sell comparable prod ucts for, and what your costs are. It's when you compro mise on those things that you finally decide on your price.

If it's too high, you wonder how you can get the cost down so you can cut the price. Or, if you lose the business, you go ahead and take an abnormally low profit or even go into the red awhile until you gain enough time to reorganize your designs and your production processes to try to make a profit.4 [Italics added.] The Antitrust lawyers had one more basic criticism of A&P's operations along the same lines. It followed the same reasoning as the previously mentioned assump tion that suppliers, who sold to A&P at a lower price, made it up by charging other people a higher price. So the government lawyers claimed that, when A&P sold lower in some areas to get business, it then made it up in other areas with higher prices. Thus, they claimed, in the civil case filed after the criminal case, that "As was found in the criminal case, A&P expanded its retail.sales, and eliminated competition from independent grocers, meat· de~lers and local food chains by temporarily selling food at a loss in selected retail areas in order to expand its sales outlets in such areas, and recouping these losses by charging consumers higher prices in less.competitive areas."

Here again the reductions were facts, while the ad vances to "recoup" them were assumed. The Circuit Court, discussing A&P's sales in "Area X" and "Area Y," said, "When the gross profit rate is reduced in Area X, it is an ahnost irresistible conclusion that A&P had the power to compensate. . . by raising the gross profit rate and retail prices in Area Y. . .. There 1tlUstinevitably be a compensation somewhere in the system for a loss somewhere else, as the over-all policy of the company is to earn $7 a share per annum on its stock." [Italics 140 A NEW DEFINITION OF "MONOPOLIZE" added.] Here again, the increases are assumed and the assumption is merely that A&P made money in some places, while it lost it in others, and the gains enabled it to keep afloat financially. This is essentially the argu ment against vertical integration, turned horizontally. This has never been a violation of the law before. It is the normal course of business. If this argument were carried to its logical conclusion, A&P could be condemned for recouping from the buyers of cabbages for its losses on turnips, or from buyers on Saturday for its losses on Wednesday.

It is hard to guess where these hypothetical markets might be where A&P ~an arbitrarily raise its prices to make up for lossesincurred elsewhere. It does very little business at rural crossroads. There is vigorous price competition everywhere it operates. Probably the best way to describe A&P's retail price policy would be to say that it tries to keep its gross profit rate at the lowest practical point-lower than competi tion, if possible-everywhere. That makes it especially low in some areas, either because of stiffer competition, or in order to build necessary volume. The Circuit Court, in its decision, said, "we will con sider this case as a whole." And that is the way it should be considered. The whole case, from government briefs to court decision, reeks with criticisms of price cuts. It is immensely concerned with the actual or potential fate of A&P's competitors, but gives only the merest lip service to its customers. The steady refrain, like a steady rain, of the government lawyers' criticism and the court's findings against A&P was that it cut, cut, and then cut prices.

In many of the cases previously discussedin this book, one could draw a fine point of distinction on the followA NEW DEFINITION OF "MONOPOLIZE" 141 ing question: did the defendant company intend, want, or hope to get ahead by killing off competitors, or was it merely driving ahead to expand its own business,while disregarding the fate. of competitors? In the A&P case the question is pointless. The A&P management must be assumed to have economic sense. And in the food busi ness, to try to kill off all competition or competitors is like trying to sweep back the ocean. Or as two economists have put it more specifically: "Even granting the possibility of eliminating rivals by means of local price-icutting, the retail field is so easy to enter that, when this purging process had been raised, new rivals very likely would enter the field again almost immediately, with the result that all the effort would have gone for naught. This... situation is particu larly true in the grocery field, since normally stocks of merchandise and facilities are easily obtained. . . ." 5 In this connection the Circuit Court made the incredi ble statement that "the inevitable [sic] consequence of this whole business pattern [of A&P] is to create a chain reaction of ever-increasing selling volume and ever increasing requirements and hence purchasing power for A&P, and for its competitors hardships not produced by competitive forces and, conceivably, ultimate extinction."

Yet at the beginning of the period reviewed in the case, A&P did only about 11 per cent of the country's retail food business and at the end only about 7~ per cent. In recent years, other national corporate chains have been gaining on A&P; "voluntary" chains like Red &White have been gaining on the corporate chains; local chains have been gaining on national chains; and inde pendents have been gaining on all chains. The "ulti mate extinction" ofA&P's competitors seems a long way off.

142 A NEW DEFINITION OF "MONOPOLIZE" Two of A&P's biggest chain competitors, Kroger and Safeway, were indicted a few years ago on almost the identical Sherman Act charges of monopoly and re straint of trade. They did not fight the charge and so pleaded "nolo contendere" [which is Latin for "I do not choose to fight"]. They paid their fines and got off. But it does not make much sense that three competitors could each be charged with having a "monopoly," espe cially in the food business. The reason so many of A&P's competitors have come to its defense in the public prints seems to be a rather simple one. They are not concerned over the particular fate of A&P in the Antitrust Division's pending suit for A&P's dissolution. Nor would the public need to be concerned about it, if the suit were merely brought to "get" A&P for some political sin or error. But A&P's competitors are concerned because of the business methods that have been outlawed, directly or indirectly, in the recent suit. The housewife should be even more concerned, for if A&P is broken up for using these methods, other firms will have to stop using them and her ten-dollar bill at the grocery store will return her a good deal less change, or a good deal less groceries, or both.