Restrictive Labor Practices in the Supermarket Industry [Reprint 2016 ed.] 9781512805024

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Restrictive Labor Practices in the Supermarket Industry

Industrial Research Unit Department of Industry Wharton School of Finance and Commerce University of Pennsylvania Industrial Research Unit Study No. 44 The Industrial Research Unit is the business and labor market research arm of the Industry Department of the Wharton School of Finance and Commerce. Founded after World War I as a separate Wharton School Department, the Industrial Research Unit has a long record of publication and research in the labor market, productivity, union relations, and business report fields. Major Industrial Research Unit Studies are published as research projects are completed.

R E C E N T INDUSTRIAL RESEARCH U N I T

STUDIES

Gladys L. Palmer, et al., The Reluctant Job Changer. George M. Parks, The Economics of Carpeting and Resilient Flooring: An Evaluation and Comparison. Michael H. Moskow, Teachers and Unions: The Applicability of Collective Bargaining to Public Education. F. Marion Fletcher, Market Restraints in the Retail Drug Industry. Herbert R. Northrup and Gordon R. Storholm, Restrictive Labor Practices in the Supermarket Industry.

No. 40

No. 41

No. 42 No. 43

No. 44

Restrictive Labor Practices in the

by HERBERT R. NORTHRUP Professor of Industry and Chairman, Department of Industry Wharton School of Finance and Commerce, University of Pennsylvania

and GORDON R. STORHOLM Research Assistant, Department of Industry Assistant Professor of Management, Villanova University

assisted by PAUL A. ABODEELY Member, Massachusetts Bar, Research Assistant, Department of Industry

UNIVERSITY OF PENNSYLVANIA PRESS · PHILADELPHIA · 1967

Copyright ©

1967

by the Trustees of the

U N I V E R S I T Y OF P E N N S Y L V A N I A

Library of Congress Catalog Card Number

67-26220

7555

Manufactured in the United States of America

to G. F. Β. SCHOLAR,

EXECUTIVE,

AND

FRIEND

Preface

Union policies which inhibit the most effective utilization of labor have often been the subject of discussion, research, and public policy enactments. Commencing as a student of the late Professor Sumner H. Slichter, the undersigned has for many years been interested in this aspect of union relations, the understanding of which Professor Slichter contributed to so substantially. Most of the literature on restrictive practices, however, is confined to unions of blue-collar workers, particularly those in the railroad, maritime, building construction, printing, and amusement industries. Policies of unions with great growth potential, such as the Retail Clerks International Association, have remained largely unexplored. The potential for a contribution to the literature was, therefore, apparent when the significance of this area of inquiry was discussed with the undersigned in late 1964 by officers of the National Association of Food Chains. The Association personnel were frankly concerned about the status of collective bargaining in the supermarket industry, and particularly about the impact on industry costs and profits of the maze of work rules, and restrictions on managerial freedom which had become imbedded in supermarket collective agreements. Moreover, despite the significant role of collective bargaining in the industry, it was apparent by this date that the National Commission on Food Marketing would not include any aspect of either collective bargaining or union policy in its analyses of the food industry. The undersigned was therefore asked whether he would head a study of restrictive labor practices in the supermarket industry underwritten by the National Association of Food Chains.

vili

Preface

This was agreed to with the stipulation that an unrestricted grant be made by the Association to the Industrial Research Unit of the Department of Industry to cover research assistance and tuition support, clerical expenses, travel, and other miscellaneous expenses, with the undersigned performing his portion of the work as part of his general University research and teaching duties. It was further agreed that the University personnel would have complete control over all phases of the project—the procedures and methods to be used, the areas to be studied, the analytical techniques, and the conclusions—and that the study would be published, regardless of results, together with a clear acknowledgment of the fact of National Association of Food Chain support and of the conditions thereof. So many persons assisted in the gathering of research material and facts that it would be unfair to list any without mentioning all. Special thanks should, however, be accorded to the officers and staffs of the National Association of Food Chains and The Super Market Institute, to the executives of numerous companies, to officials of the unions involved, and to many government personnel who so freely gave us of their time. The manuscript was typed by Mrs. Helen S. White, Mrs. Anita F. Boney, Mrs. Barbara Humphreys, and Miss Joyce Rothman. Mrs. Marie Spence handled other secretarial functions associated with the project. Mrs. Margaret E. Doyle, Administrative Assistant in the Department of Industry and Secretary of the Industrial Research Unit, cared for numerous administrative details throughout the life of the project. Mrs. Marjorie C. Denison edited the manuscript and prepared the index. The manuscript was read by Professors William Gomberg, F. Marion Fletcher, and Marten S. Estey of the Department of Industry; Vernon H. Jensen of the New York State School of Industrial and Labor Relations, Cornell University; and E. Robert Livernash, Graduate School of Business Administration, Harvard University, all of whom offered constructive comments. Mr. Paul A. Abodeely did the research for and wrote an early draft of Chapter 8. Mr. Gordon R. Storholm did the bulk of the field work, gathered other research material and provided considerable insights into the problems of organizing the mass of material into understandable proportions. His work so far exceeded that expected of a research assistant that it was deemed appropriate to list him as co-author.

Preface

ix

The undersigned selected the staff, did some of the field work and research, is responsible for the basic research design, and for the writing. Any errors or shortcomings in the work must, therefore, be charged to him. The dedication commemorates a friendship and collaboration of twenty-five years. HERBERT R . NORTHRUP, Chairman Department of Industry Wharton School of Finance and Commerce University of Pennsylvania

January 1967

Contents

Part I: The Study Outline 1. Introduction

3

Part II: The Industrial Background 2. The Supermarket Industry Growth and Development Changing Industrial Environment The Antitrust Impact Concluding Remarks

9 9 19 27 29

3. Unionization of the Supermarket Industry The Supermarket Labor Force The Extent of Unionization The Teamsters The Retail Clerks The Meat Cutters Alliances and Disputes Concluding Remarks

30 30 33 35 36 40 41 42

4. Wages and Unionism Union Impact on Relative Wages The Fogel Study of Union Relative Wage Impact The Clerks' Differential Wage Policy Relative in Store Labor Costs Concluding Remarks

43 44 57 60 63 64

xli

Contents

Part III: Restrictive Practices: Nature, Impact, and Reaction 5. The Nature of Union Restrictive Practices: An Analysis of General Restrictions Introduction Union Control of Mahagerial Personnel Seniority Problems Past Practices Arbitration and Contract Enforcement Concluding Remarks

67 67 72 77 82 83 85

6. The Nature of Union Restrictive Practices: An Analysis by Departments Restrictions in the Grocery Department Restrictive Practices in the Meat Department Restrictions in the Warehouse and Trucking Operations Concluding Remarks

86 86 104 113 119

7. Strike Vulnerability, Bargaining Structure, and Management Labor Relations Policies Strike Vulnerability Multi-Employer Bargaining and Strike Vulnerability Managerial Policy and Union Restrictive Practices Short-Run Decisions—Examples and Results Management Policy—Final Comment

120 120 123 132 137 143

8. Public Policy, Restrictive Labor Policies, and the Role of the NLRB Government Control of Restrictive Policies The NLRB Background NLRB Organizational Aids to Unions Restrictions on Employers Protection of Union Tactics Concluding Remarks

144 144 147 149 158 165 166

Part IV: Potential for Change 9. Technological Progress and Restrictive Practices Technological Progress to Date Central Meat Cutting

169 169 171

Contents Other Retail Store Developments Warehouse and Trucking Concluding Remarks

xiii 176 177 178

10. Forging a New Relationship: A Philosophy and an Approach The Nature of Collective Bargaining Basic Philosophy and Goals The Need for Industry Cooperation Multi-Company Bargaining and Strike Insurance The Need for a New Approach to Unions and Bargaining Concluding Remarks

179 179 182 187 189 190 192

Index

195

Tables

2-1. Relative Market Shares of Total Grocery Store Sales, Corporate Chains and Independents 12 2-2. Ten Leading Corporate Chains, 1965 Sales 14 2-3. Ten Leading Affiliated Independents of Both Types, 1965 Sales 14 2-4. Ratio of Net Profit after Income Taxes to Net Sales for Leading Food Chains, 1956-1965 16 2-5. Net Profit after Income Taxes as a Percent of Sales, Equity and Total Assets for Retail Food Corporations, by Asset Size, 1938-1962 18 2-6. Net Profit as a Percent of Invested Capital, 1965 19 2-7. Expenses as a Percentage of Gross Sales, Typical Supermarket Industry Breakdown 21 2-8. Supermarket Store Rent, Real Estate, and Utilities Expenses as Percentage of Sales, 1954—1964 23 3-1. Part-Time Store Employees, by Sales Group and by Region, Supermarket Industry, 1966 33 4-1. Union Hourly Wage Rates, Grocery Clerk and Journeyman Meat Cutter, by City, 1965 45 4-2. Food Stores: Cumulative Percent Distribution of Nonsupervisory Employees by Average Straight-Time Hourly Earnings, by Enterprise and Establishment Sales—Size Classes, United States, Metropolitan and Nonmetropolitan Areas, June 1965 46—47 4-3. Food Stores: Cumulative Percent Distribution of Nonsupervisory Employees by Average Straight-Time Hourly Earnings, by Enterprise and Establishment Sales—Size Classes, United States, Regions, June 1965 48-49

χvi

Tables

4-4. Average Hourly Wage Rates by Size of Firm, 1954 through 1964 52 4-5. Operating Measures for Retail Grocery Stores, by Type of Organization, Portland, Maine, and Topeka, Kansas, 1964-65 54 4-6. Operating Data for Retail Grocery Stores, by Type of Organization, Portland, Maine, and Topeka, Kansas, 1964-65 55 4-7. Average Hourly Retail Grocery Store Wage Rates and Labor and Fringe Benefit Expense as a Percentage of Sales, by Size of Firm, by Region, 1964 56 4-8. Fringe Benefit Costs per Hour, Four Locations of a Major Chain, 1966 57 4-9. Percentage of Companies Providing Benefits and Incentives 58 4-10. Percentage of Companies Providing Benefits and Incentives 58 4-11. Comparison of Hourly Wage and Fringe Rates, Philadelphia Area, Philadelphia Food Employers' Association Chains vs. Two Guys from Harrison, July 1966 61 4-12. Comparison of Fringe and Overtime Provisions, Philadelphia Area, Philadelphia Food Employers' Association Chains vs. Two Guys from Harrison, July 1966 62 4-13. Relative In Store Labor Costs, Major Chain Typical Metropolitan Unionized Supermarket, One Week, 1966 63 6-1. Recap of Number of Errors Made and Loss Ratio to Sales by 97 Regular and Part-Time Checkers on 100 Orders Shopped in 11 Stores 101 8-1. The Purity Food Stores, Inc. Case 152-153

Figures

2-1. Definitions 2-2. Retail Operating Expenses as a Percent of Sales and as a Percent of Total Operating Expense 2-3. Retail Acquisitions by Grocery Chains, 1949-1964 3-1. Distribution of Personnel between Store Employment and Other, Supermarket Industry, 1966 3-2. Trend of Full- and Part-Time Employment, Supermarket Industry, 1951-1966 3-3. Extent of Unionization, by Sales Group, Region, and Department, Supermarket Industry, 1964 3-4. Why is the Union Afraid of a Free Election? 6-1. Three Examples of "Clerks' Work Clause" 6-2. Scheduling Checkout Employees 6-3. RCIA Service Clerk (Bag Boy) Contract Clauses 6-4. Sales by Day of the Week 6-5. Examples of Meat Cutter Contract Restrictions on Wrappers 6-6. Average Proportion of Employees' Time Used for Various Activities in Four Retail Meat Departments 9-1. Comparative Labor Costs for $6,250 Weekly Volume Retail Stores Serviced by Meat Backrooms or by a Central Meat Plant 9-2. Comparative Annual Construction, Equipment, and Labor Costs for $6,250 Weekly Volume Retail Stores Serviced by Meat Backrooms or by a Central Meat Plant

10 26 28 31 32 34 39 87 93 95 97 108 109

174

175

I.

Part 1· The Study Outline

• Introduction

The supermarket industry plays a key role in the shopping and eating habits of most Americans. What happens in supermarkets in regard to costs of operations, interruptions of service, and store hours open to the public is therefore of direct interest to the public. Numerous governmental studies of food costs, marketing methods, and relation of retail food costs to payment made to farmers attest to the public interest attached to the industry. The supermarket industry has also generated a wide literature on marketing and production methods, management techniques, and other business functions. Nearly all aspects of the industry have been discussed and analyzed in governmental, academic, and trade publications. The literature in these areas is voluminous and increasing. Yet little attention has been paid to the industry's labor relations. In investigating food marketing and costs, a special governmental National Commission on Food Marketing issued its report in 1966 seemingly after sedulously refraining from discussing labor relations in retail food stores or their impact on food prices, costs, or market structure.1 With the exception of a few studies by Professors Estey, Fogel, and Brody, books or articles on management written specifically for the industry confine their sections on personnel and labor 'The only recognition of trade unions as factors in increasing operating costs was glossed over on page 78 of the National Commission on Food Marketing, Food from Farmer to Consumer (Washington: Government Printing Office, 1966). One of the Commission's technical studies (No. 7), Organization and Competition in Food Retailing (Washington: Government Printing Office, 1966), investigated wages and fringe benefit costs and productivity in greater depth.

4

Restrictive Practices in Supermarket Industry

relations largely to a few broad principles of personnel management and a few paragraphs about unions in the industry.2 Academic research in labor relations has almost ignored the interesting labor problems and collective bargaining structure developed in supermarkets.3 This study does not attempt a complete analysis of the personnel or collective bargaining problems of the supermarket industry. Its objective is more limited—a study of the development, operation, and impact of the restrictive labor practices which have become common in the industry. In order to understand these practices, however, much of the personnel and collective bargaining practices and policies of the industry and the unions involved needed to be analyzed. This is done in Part II of the study which in successive chapters sets forth the basic characteristics of the industry, the rise and character of the pertinent unions, and some key economic aspects of the collective bargaining relationships. The study is also confined to the store, warehouse, and trucking operations of supermarkets. Many supermarket firms operate captive 1

See, e.g., Edward A. Brand, Modern Supermarket Operations (New York: Fairchild Publications, 1963). ' Significant exceptions include the earlier articles by Professor Marten S. Estey, "Patterns of Union Membership in the Retail Trades," Industrial and Labor Relations Review, Vol. VIII (July 1955), pp. 557-564; "The Strategic Alliance as a Factor in Union Growth," Industrial and Labor Relations Review, Vol. IX (October 1955), pp. 41-53; and the excellent article by Dr. Walter A. Fogel, "The Impact of Unions on Relative Wages in California Retail Food Establishments," Industrial Relations, Vol. VI (October 1966), pp. 79-94. Works which deal primarily with unions in the industry, but only incidentally with supermarket labor relations, include Ralph C. and Estelle D. James, Hoffa and the Teamsters: A Study of Union Power (Princeton: D. Van Nostrand Company, Inc., 1965); and two books written largely from the union point of view: David Brody, The Butcher Workmen: A Study of Unionization (Cambridge, Mass.: Harvard University Press, 1964); and Michael Harrington, The Retail Clerks (New York: John Wiley and Sons, Inc., 1962). Some relevant material is also found in Robert S. Welsh and Bruce W. Marion, Management-Labor Relations in Agricultural Marketing Industries (Columbus, Ohio: The Ohio State University, Cooperative Extension Service, 1965). Two unpublished Ph.D. dissertations should be noted, Richard E. Jay, "A Case Study in Retail Unionism: The Retail Clerks in the San Francisco East Bay Area," University of California, Berkeley, 1953; and John W. Allen, "A Study of the Nature of Collective Bargaining in the Retail Food Industry," Cornell University, 1966.

Introduction

5

canneries, dairies, bakeries, bottling plants, meat-packing facilities, and food-processing operations. These are not included in the study. The nature of the actual restrictive practices is detailed in Part III, in which not only union policies which have contributed to these practices are discussed, but also those of management and of the government. That restrictive practices are not easy to define is clear to sophisticated students of labor relations. Basically they involve attempts on the part of unions to force management to employ additional manpower, to reduce productivity, or otherwise to interfere with the most economic utilization of labor and equipment. 4 Carried to its logical conclusion this would indict nearly all contractual provisions affecting seniority, working hours, and other terms and conditions of employment. Obviously that would be both a meaningless and inappropriate definition, since it would ignore both reality and human aspects and needs. One must, therefore, apply a rule of reason. Does the benefit to the employees exceed the cost to the employer? The answer can be clear in some cases, subjective or a matter of opinion in others. For example, some seniority protection has considerable benefit to employees, in giving at least part of the work force either security against layoff, or a belief that layoffs will be governed by objective standards. Such a seniority provision may involve a very low cost to the employer. On the other hand, a seniority rule which requires each temporary transfer to be governed by strict seniority would add very little job security (benefit) to employees but would involve substantial employer added cost. Between such extremes are innumerable rules and regulations, some of which may be obviously restrictive, some of which may obviously not be, and others may be borderline. 5 Much of the labor relations problem involved in restrictive practices in the supermarket industry arises from the fact that substantial nonunion competition exists in most local markets. Where nonunion 4

For similar definitions and the difficulties inherent in precise definitions, see Paul A. Weinstein, "Featherbedding: A Theoretical Analysis," Journal of political Economy, Vol. LXVIII (August 1960), pp. 379-389; and Norman J. Simler, "The Economics of Featherbedding," Industrial and Labor Relations Review, Vol. XVI (October 1962), pp. 111-121. 5 We are indebted to Professor E. Robert Livernash in formulating the definitions used here.

6

Restrictive Practices in Supermarket Industry

competition is a factor, the benefit to employees may appear to exceed the cost to the employer, and yet the rule may still be restrictive if it adds to the union employers' differential wage costs. There is, of course, a reverse twist to this situation, too. On the West Coast, particularly in the major cities, the supermarkets are almost 100 percent unionized. An obvious and high cost restrictive practice in such a completely unionized area may not be a significant competitive disadvantage unless and until nonunion competition is attracted into the area. The avowed purpose of restrictive labor practice is, of course, to force employers to increase (or not to decrease) the number of jobs controlled by a particular union. That this purpose, running counter to economic forces, is often not fulfilled is obvious. That all disagreements between unions and employers over speed of work or complements of people are not based on union attempts to curtail efficiency is also obvious. But that restrictions do exist in many industries—building construction, railroads, printing, and amusement— has long been clear. This study will demonstrate that the supermarket industry's restrictive labor practices are often quite similar to those in industries like building, printing, and amusements in both their character and extent. The final section of the book is devoted to possible sources of relief from restrictive practices, either by technological methods or by changes in the character of labor relations.

Part

II.

II·

The Industrial

Background

• The Supermarket Industry

The supermarket industry accounts for approximately 71 percent of all retail food sales. Developed in the 1930's it grew rapidly, with sales rising from $150 million in 1935 to $46 billion thirty years later. Today the supermarket industry is one of the nation's largest in terms of employment, having had 1.5 million persons on its payrolls in 1965. It remains characterized, as it always has been, by relative ease of entry, intense competition, and net profits after taxes typically less than 2 percent of sales.1

Growth and Development The supermarket concept developed in the early 1930's. Retail food was merchandised prior to this through chain "economy stores" (many of which were operated by today's supermarket chains), selfservice independents and a myriad of smaller outlets. The leading retailers prior to 1930 were The Great Atlantic and Pacific Tea Company, Kroger, Safeway, American Stores (now Acme Markets, Inc.) and First National Stores.2 Through relative economies of scale which the larger chains were able to realize, their profit margins were greater and the consumer prices lower than those of independent operators. Agitation for antichain legislation then followed from certain agricultural sectors as well as from independent competi1

See The Progressive Grocer, April 1966, Annual Report Issue, for data on the industry. 1 R. J. Markim, The Supermarket—An Analysis of Growth, Development and Change (Pullman, Washington: Washington State University Press, 1963), p. 9.

10

Restrictive Practices in Supermarket Industry

Figure 2-1 DEFINITIONS

Supermarket—Any store, chain, or independent having selfservice grocery (and usually self-service in other departments) whose annual sales volume is $500,000 or more. (This definition has been upgraded from time to time. ) Superette—Any store having self-service grocery (and usually self-service in other departments) whose annual sales volume is between $150,000 and $500,000. Small Store—Any store having an annual sales volume less than $150,000. Independent—An

operator of 10 or less retail stores.

Chain—An operator of 11 or more retail stores. Cooperative Retailer—Retailers (generally independents) who are stockholder members of cooperative wholesale buying groups. Voluntary Group Retailers—Retailers who belong to voluntary merchandising groups sponsored by wholesalers. Source: These definitions are based on those of the standard trade publication. Progressive Grocer.

tors and resulted in a hostile business environment for the chains. Although the specter of unfavorable legislation was constantly present for chain stores during the 1920's, there seems to be little evidence of a significant reduction in sales by this group as a direct result of antichain agitation. Indeed, it was not until the early part of the 1930's that the pre-eminence of the chain was challenged by the independent. T h e vehicle for this new market force was, of course, the supermarket. The first widely acknowledged successful supermarket operations were launched simultaneously by "King" Cullen in the J a m a i c a area of New York City and by "Joe" Weingarten in Houston, Texas. 3 Characteristic of most early supermarkets, Cullen's operation began 3

M. Zimmerman, The Supermarket: York: McGraw-Hill, 1955), p. 35.

A Revolution

in Distribution

(New

The Supermarket Industry

11

in an abandoned warehouse. The store consisted of a lower-priced (billed as the "Price Wrecker") cash-and-carry, 30,000 square foot grocery section and a 50,000 square foot nonfood section which was leased to independent contractors. Cullen's operation met with unprecedented success and was followed by an even more spectacular operation, the "Big Bear" market, brainchild of Roy O. Davidson and Robert Otis in the abandoned automobile plant of Walter Durant in Elizabeth, New Jersey. The Cullen operation was advertised as the "Price Wrecker"; the Big Bear was billed as the "Price Crusher" and its advertising campaign was marked by an expenditure of $29,000 its first year. The Big Bear's first year sales volume was $2,188,000 and its net profit was $166,000 in contrast to its promoters' most liberal estimate of $50,000." The Big Bear was, in fact, such a successful venture that, not unlike the chains of the 1920's, it was threatened by competitors' efforts to bring pressure on suppliers and newspapers. When the newspapers eventually entered into a concerted refusal to carry Big Bear's advertising; one hundred thousand handbills were delivered from house to house and the sales for the following week totaled $82,000.5 During this period, the supermarket idea was spreading to other geographical areas. Southern California, with its relatively large number of automobiles and its temperate climate, lent itself readily to the open-air shopping-center type of supermarket operation and by 1936 there were twenty-five stores of this type located within the state. Some of the more successful supermarket operations introduced during this period were Von's Supermarket in Culver City and Alpha Beta in Los Angeles.0 In response to the successes of the new supermarkets, the chains converted their neighborhood stores to supermarkets. Among the earlier concerns to add this type of store was Union Premier, now Food Fair Stores. The gross volume of this concern's supermarkets averaged, after the first year of operation, $600,000 in comparison to a 1931 average volume of $60,000 for the small stores.7 In the face of conversion to supermarket retail merchandising by the chains, 4

¡bid., p. 43. Ibid., p. 45. 'Ibid., p. 17. Alpha Beta is now a division of Acme Markets; Von's remains as a very successful regional chain. ' Ibid., p. 5. 5

12

Restrictive Practices in Supermarket Industry

early successes by Big Bear and Piggly Wiggly faded into the background. Their innovation, however, had lent the impetus to the supermarket to remain as the primary channel for food distribution. By the end of the decade, supermarket gross volume was $2 billion.8 Through imaginative merchandising techniques and low prices the supermarket, by World War II, had established itself as the leading outlet for retail food distribution in the United States. By 1965, supermarkets accounted for 71 percent of all grocery store sales, superettes (see Figure 2-1 ) 13 percent, and small stores the remaining 16 percent. But the greatest gainers were not the corporate chains among the supermarkets, but a new and apparently more flexible group of supermarket operators—the affiliated independents who took over the leadership in the supermarket sales category.

Post-World

The grocery risen to grocers.

War II Trends

corporate chains in 1965 accounted for 41 percent of all store sales, but the affiliated independent group's share had 49 percent, with 9 percent going to unaffiliated independent Table 2-1 shows the trend in grocery store sales since 1949.

Table 2-1

Relative Market Shares of Total Grocery Store Sales, Corporate Chains and Independents

1949

Corporate Chains Unaffiliated Independents Affiliated Independents

41 28 30

Grocery Store Sales, 1949-1965 1963 1956 1960 1964

1965

Percent 37 38 19 13 44 49

41 9 49

36 29 36

41 10 49

Source: Progressive Grocer, Annual Report Issue, April 1966, p. 155.

The differences between the corporate chain store and that of the affiliated independent are not readily observable to the shopper. Stores of both types are usually comparable in construction, products offered for sale, prices, and services. The distinction between the two types ' N a t i o n a l Commission on F o o d Marketing, Organization and Competition in Food Retailing (Washington: G o v e r n m e n t Printing Office, 1966), Technical Study N o . 7, p. 9.

The Supermarket Industry

13

of operation lies in their respective financial and organizational structure. All corporate chain retail stores are company operated, whereas the so-called affiliated independent group is characterized by a wholesaler-retailer interdependence. The wholesaler and the retailer typically enter into an agreement whereby the retailer receives the advantages of purchasing power exercised by the wholesaler, as well as the right to use the name of the wholesale group. The wholesaler in turn receives the assurance of maintaining the retailer's business, not only for products purchased, but also for certain services provided by the wholesaler. These services include marketing counsel and business services of a wide variety. Affiliated independent groups are further divided into voluntary wholesaler groups and the retailer-owned cooperatives. The former companies' franchise independently owned wholesalers who in turn sponsor voluntary groups of independent retailers in their respective communities. The retailer-owned cooperative association is an amalgamation of retailers who organize for the purposes of achieving greater purchasing power and other services incidental to the relationship.® Tables 2-2 and 2-3 show the ten largest corporate chains and the ten largest affiliated independent groups of both types: A comparison of the sales figures in Tables 2-2 and 2-3 shows that the largest of the affiliated independents ranks below the tenth largest supermarket chain. Yet these data are somewhat misleading for the sales of the independent group do not include supermarket store sales of separately-owned, but affiliated or cooperating supermarkets. If these store sales were included, the sales data in Table 2-3 would undoubtedly be considerably higher. For example, Certified Grocers of California, the second largest retail-owned cooperative, is reputed to be, in fact, the fourth largest chain!10 Moreover, many of the firms listed as chains are also found in the affiliated independent group, or vice versa. Thus Red Owl Stores ranks in the first twenty * For a summary of the affiliated independents' approach, see "Independents Have Many Advantages over Chains," Illinois Food Retailer (Chicago: Associated Food Retailers of Illinois, February 1955), p. 18; and Seymour Freedgood, "Uncle to 1,700 Grocers," Fortune, Vol. LXXI (March 1965), pp. 130-133. " Statement of Robert A. Magowan, President of Safeway Stores, in talk, "Chains and Change in Agribusiness," Foundation for American Agriculture, 1965.

14

Restrictive Practices in Supermarket Industry

Table 2-2

Ten Leading Corporate Chains, 1965 Sales

Firm

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

The Great Atlantic and Pacific Tea Co., New York, N.Y. Safeway Stores, Oakland, Calif. The Kroger Co., Cincinnati, Ohio Acme Markets, Philadelphia, Pa. Food Fair Stores, Philadelphia, Pa. National Tea Co., Chicago, 111. Winn-Dixie Stores, Jacksonville, Fla. Jewel Tea Co., Chicago, 111. Grand Union Co., East Paterson, N.J. First National Stores, Somerville, Mass.

1965 Saks (000)

$5,118,978 2,939.043 2,505,109 1,205,000 1,200,750 1,161,948 978,000 874,700 779,683 684,492

Source: Food Industry Yearbook (New York: Profit Press, 1966), p. 40.

Table 2-3

Ten Leading Affiliated Independents of Both Types, 1965 Sales

Firm

Retailer-Owned Cooperatives 1. Wakefern Food Corp., Elizabeth, N.J. 2. Certified Grocers of California, Los Angeles, Calif. 3. United Grocers Ltd., Richmond, Calif. 4. Associated Wholesale Grocers, Inc., Kansas City, Kansas 5. Affiliated Food Stores, Dallas, Texas 6. Spartan Stores, Grand Rapids, Mich. 7. Associated Grocers of Colorado, Denver, Colo. 8. Associated Food Stores, Salt Lake City, Utah 9. Associated Grocers Co., St. Louis, Mo. 10. Associated Grocers, Seattle, Wash. Voluntary Wholesaler Groups 1. Super Valu Stores, Hopkins, Minn. 2. Fleming Co., Topeka, Kansas 3. Alfred M. Lewis, Inc., Riverside, Calif. 4. Scot Lad Foods, Chicago, 111. 5. Malone and Hyde, Memphis, Tenn. 6. Super Food Services, Chicago, 111. 7. Consolidated Foods Corp., River Grove, 111. 8. S. M. Flickinger, Buffalo, N.Y. 9. Wetteran Foods, Stazelwood, Mo. 10. West Coast Grocery Co., Tacoma, Wash.

1965 Sales (000)

$410,400 345,000 221,000 155,000 142,000 140,000 136,000 129,000 110,000 104,800 584,234 448,812 300,000 224,752 222,777 190,411 182,000 154,045 134,113 105,000

Source: Food Industry Yearbook (New York: Profit Press, 1966), p. 52.

The Supermarket Industry

15

of the chains in size, but was originally more important as a sponsor of independents. In 1963, the fifteen largest voluntary wholesalers owned retail stores with combined sales of $224 million.11 Even the chains which own their own grocery stores have realized the significance of cooperation at the wholesale level. Topeo Associates, Inc., is a buying cooperative for thirty-two food chains. This enables such chains to compete with larger ones, for only A & P, Safeway, and Kroger had greater retail sales in 1965 than the combined members of Topeo. Other such chain cooperative groups exist.12 Supermarket

Profits

Supermarket company profits on sales have traditionally been low. In 1965, General Motors netted 9.9 percent on sales after taxes, Ford Motor 6.1 percent, Standard Oil 9.1 percent, and General Electric 5.1 percent. An examination of the net profits after taxes as a percentage of sales of the 500 largest manufacturing companies listed in Fortune shows some with a lesser return, but most with more.13 In nonfood retailing, Sears, Roebuck and Company, the largest, earned 5.1 percent in 1965, J. C. Penney 3.4 percent, Montgomery Ward only 1.4 percent, but F. W. Woolworth 5.1 percent—all except Montgomery Ward substantially better than the ten largest supermarket chains made in any of the ten years prior to 1966 (see Table 2-4). Indeed only Winn-Dixie consistently made more than 2 percent on sales. The industry average, as Table 2-5 shows, has—except for the year 1946—also remained below 2 percent. Profits of the independents cannot be compared with the chains. In 1965, for example, Super Valu Stores, the largest of the independents, made only 0.7 percent profit on sales. But these figures are based primarily upon wholesale distribution operations and sales of services. They do not reflect store sales of affiliated independents. The general belief in the industry is that profits among the independent grocers include some as high as 7 percent on sales, others quite low, with the average profit probably not too much different from that of the chains. " National Commission on Food Marketing, Food Retailing, op. cit., pp. 64-65. 12 Ibid., pp. 68-69. 13 Profit data are from Fortune, Vol. LXXIV, July 15, 1966.

16

Restrictive Practices in Supermarket Industry

Table 2-4

Ratio of Net Profit after Income Taxes to Net Sales for Leading Food Chains, 1956-1965

Company by 1965 Sales Size 1956 1957 1958 1959 The Great Atlantic and Pacific Tea Co., New York, N . Y . Safeway Stores, Oakland, Calif. The Kroger Stores, Cincinnati, Ohio Acme Markets, Philadelphia, Pa. Food Fair Stores, Philadelphia, Pa. National Tea Co., Chicago, 111. Winn-Dixie Stores, Jacksonville, Fla. Jewel T e a Co., Chicago, 111. Grand Union Co., E a s t Pateroon, N . J . First National Stores, Somerville, Mass.

1960 1961 1962

1963 1964 196.5

0.9

1. 1

1. 1

1. 0

1. 1

1 1

1 1

1 1

0.8

0. 9

1. 3

1 5

1. 5

1 5

1. 4

1 4

1 6

1 7

18

1. 5

1 1

1. 2

1 2

1 3

1 3

0 9

1 0

1 1

1.2

1 1

1 2

1 3

1. 3

1 1

1 3

1. 3

1 2

1. 2

1.1

0. 8

1 6

1 6

1 4

1 5

1 4

1 .2

1 0

0 9

0.8

0. 9

1 1

1 .2

1 1

1 .1

1 .0

1 0

0 9

0 .9

0.9

0 8

2 1 1..7

2 .1 1 .7

2 .1 1 8

2 .1 1 .8

2 .2 1 9

2 .2 1 8

2 .3 1..7

2 3 1. 5

2.3 1.6

2 2 1. 5

1 .3

1 .4

1 3

1 .2

1 .2

1 .1

0 .8

1..1

1.3

1..3

1 6

1 .7

1 6

1 .6

1 .5

1. 1

1 0

1 0

0.8

0 6

Source: 1 9 5 6 - 1 9 6 4 : National Commission on Food Marketing, Organization and Competition in Food Retailing, Technical Study No. 7, 1966, p. 280; 1965: Standard and Poor, Retail Trade Industry Survey, Vol. 135, No. 6, Sec. 1 (February 9, 1967), p. R65.

When calculated as a percentage of invested capital, supermarket profits are more respectable, but still often below those in comparable industries. Table 2-6 compares profit as a percentage of invested capital in 1965 for the ten largest supermarket chains and the ten largest nonsupermarket merchandisers. Except for Winn-Dixie, the most profitable supermarket chain, and Montgomery Ward, the least profitable nonsupermarket merchandiser, the supermarket chains' return is generally lower for comparable size concerns. Comparison of return on investment between supermarket chains and nonmerchandising companies is not too illuminating, not only because of the different nature of operations, but also because of the prevalence of leasing in the supermarket industry. Most chains lease a considerable portion of their stores and land among other assets. If these leased assets were capitalized, the percentage of profits on net assets would appear substantially less.

The Supermarket Industry

17

Apparently, the ease of entry into the supermarket industry insures a continuation of intense competition and low profit margins. A recent study by Standard and Poor's credits "overstoring"—that is, an excessive number of stores located in an area—as a principal reason for low returns on sales.14 Others cite the entry of the "discount houses"—stores with reduced prices and services as a reason for low profit margin. Some of these discount food stores are departments of nonretail food dealers, including such discounters as E. J. Korvette and Two Guys from Harrison. Food departments of general merchandise discount stores are not included in census data on food stores. The sales of such food departments increased from $400 million in 1960 to $3.4 billion in 1965, up from 0.8 percent in 1960 to 5.7 percent as large as grocery store sales in 1965.15 Discount grocery stores which are "free-standing"—that is, not departments of other merchandising stores—accounted for $3 billion in sales, or 5.1 percent of all grocery sales in 1965. Most such stores are converted supermarkets. 16 Another bite into the sales and profits of the standard supermarkets has been made by the convenience stores, which between 1960 and 1965 increased from 1,500 to 6,000 and by the latter year accounted for 1.4 percent of all food store business. These are small stores, doing $100,000-$300,000 business annually, specializing in quick service, long hours, and prepackaged merchandise. Usually, these stores are franchised. Their sales of delicatessen items, the most profitable line in supermarket meat departments, has cut into supermarket profits in some areas.17 Although new developments are important, one must bear in mind that supermarket profits are not significantly lower than they were ten years ago. What apparently has occurred in the industry is that the ease of entry has maintained competition at an intense level; but the independents, by affiliation with wholesalers, or through the establishment of cooperative buying groups, have been able to outstrip the chains. The reasons for this are found both in the changing en14

"Retail Trade Chain Stores," Standard & Poor's Industry Surveys, 1965, p. R 73. 15 National Commission on Food Marketing, Food Retailing, op. cit., p. 164. "Ibid. 17 Ibid.

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Wages and Unionism

53

In all instances, the size of the enterprise and establishment affects the wage dispersion. For example, in metropolitan areas 47.8 percent of the food store employees of enterprises doing one million or more in sales earned less than $2.00 per hour, but 70 percent of those in enterprises with sales of $250,000 to $1,000,000 and 80.6 percent of those in enterprises with sales of less than $250,000 were in this category. The fact that the smaller the establishment within these enterprises, the lower the earnings is of course attributable to more than just degrees of unionization. Small enterprises may have fewer higher-rated employees, for example. Nevertheless, the rate of unionization is undoubtedly a significant factor.

Average Hourly Wage Rates by Firm Size The Super Market Institute also collects data on average hourly wage rates by firm size. These are shown in Table 4-4. Here again, the larger the store sales, the higher are average wages. Again, however, the data are likely to reflect factors other than unionization, but the union impact is undoubtedly involved and substantial.

Relative Labor and Wage Costs, Portland, Maine, and Topeka, Kansas As part of its general survey of the food industry, the National Commission on Food Marketing made a detailed comparative analysis of the retail grocery industry in Portland, Maine, and Topeka, Kansas. Table 4-5 shows "operating measures" by type of supermarket organization. Table 4-6 shows operating data, including average clerk and meat cutter wages. In each case the chains are at a substantial disadvantage as to wages and labor costs. Our investigation shows that the chains are unionized, the independents are largely nonunion in these areas. That fringe benefits, like wages, vary with the size of the firm (and presumably, therefore, unionism) is also shown in Table 4-7. Here average hourly wage rates and labor and fringe benefit expense are compared by firm size for three regions, again showing the higher labor costs for the larger firms. The complete unionization of the Pacific area obviates the need for a comparison there.

54

Restrictive Practices in Supermarket Industry

Table 4-5 Operating Measures' for Retail Grocery Stores, by Type of Organization, Portland, Maine, and Topeka, Kansas, 1964—65 Operating Measure

Affiliated UnaffiliFood National Local .4« Independ- ated Inde- DisChains Chains Firms ents pendents counters Percent of Retail Sales

Groes margin Total operating expense Labor expense Advertising and promotional expense Other expenses Net operating profit before taxes

21.3

19.6

18.6

16.1

15.7

19.0

21.0 10.2

18.1 9.7

18.3 8.1

15.4 7.6

15.2 6.6

18.0 8.8

2.8 8.0

2.4 6.0

2.6 7.6

1.8 6.0

1.0 7.6

2.3 6.9

.3

1.5

.3

.7

.5

1.0

1 Weighted within organizational types and within and between markets on the basis of relative sales volume. Source: National Commission on Food Marketing, Technical Study No. 7, p. 328.

That fringe costs associated with unions in the supermarket industry are substantial is shown by Table 4-8, which reproduces the actual average costs per hour of fringe benefits for one of the ten largest chains in four of the major cities in which it operates. Discussions with a variety of supermarket executives have convinced us of the representative nature of these costs for larger chains. They range from $.391 per hour for the poorly organized clerks in City D—a southern city—to $1.27 per hour for warehousemen in City Β—a midwestern city that is heavily unionized. By way of comparison—and definitions of what is a fringe cost becloud comparisons—we can look to the 1965 biennial survey of the United States Chamber of Commerce which included 1,181 employers, and which probably elicited responses more from larger than smaller concerns. The Chamber found that the average payment in 1965 was $.715 per payroll hour for all firms surveyed, $.466 for department stores, and $.567 for trade (which included wholesale and retail establishments other than department stores), and therefore presumably some supermarkets.5 Except for clerks and drivers in City ' Chamber of Commerce of the United States, 1965 Fringe Benefits (Washington, D.C.: The Chamber, I960), p. 13.

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