Full Value Received
A WOMAN customer telephoned a leading department store in one of our largest cities saying she had purchased a mangle there some time ago and asking the company to send for it and see what was wrong with it. Of course, said the courteous adjuster, the store would gladly call for the mangle at her address in the city where it had been originally delivered. ‘Oh,’ said the customer, ‘I’m not living in the city now — I am at my summer home in the country.’ Although the country home happened to be fifty miles from the city, the store sent for the mangle, and, after a thorough examination which proved that there was absolutely nothing wrong with it, telephoned the customer that it was in perfect condition and would again be shipped to her country home. ‘But,’ said the customer, ‘I am now back in the city, so will you please deliver it there.’
Obviously it would have cost the customer ten dollars to express the mangle from her country home to her city home; she had the store’s assurance that there was nothing wrong with the mangle; and incidentally she saved the ten dollars.
A certain lady customer of another prominent store knitted a suit with materials purchased in the yarn shop, the yarn costing in the neighborhood of ten dollars. She was a schoolteacher, and claimed that she spent the entire summer knitting the suit; incidentally, she told the salesgirl that she had sacrificed many social engagements to do the work. After she had knitted the suit, she brought it into the store for blocking. The blocking job turned out to be a poor one, and the store, admitting that it was at fault, offered to refund the entire cost of the materials. The lady became indignant. The suit could not have been purchased for $125, she claimed, and certainly the reimbursement should be no less than that amount.
It would obviously prove ruinous for any store to pay people for the time spent in knitting, but the management offered to have another suit knitted for this customer. She agreed, reluctantly. Even though she liked the second suit when it was completed, she complained that the knitting had taken longer than it should have. She threatened boycott of the store by herself and her many friends. She threatened a lawsuit, and even brought her lawyer into the case. Eventually, to quiet a rather abusive tongue, the store let her have the second suit gratis, canceled all charge for materials, and in addition gave her fifty dollars in cash for her trouble.
While women constitute by far the larger number of those who add to the worries and — even more important — to the cost of retailing, men are by no means guiltless in making what mildly might be called unreasonable demands. One man had bought a rowing machine for which he paid twenty-five dollars. After four years of satisfactory service, it got out of repair. He complained to the store, which offered to send the machine to the manufacturer for reconditioning — at the store’s expense. Unfortunately, the manufacturer went into bankruptcy before the job was completed, and the machine was lost. Since the store had assumed responsibility for forwarding the machine, it felt liable, and offered the customer the original price of the machine, from which, may I remind the reader, he had had four years of service. But no; nothing but a machine costing sixty-five dollars would satisfy him. For once the worm turned, and the store was firm in its decision. He finally accepted a check for twenty-five dollars, but to the last he insisted that the store had been unfair.
These anecdotes could be multiplied by the hundreds in any major community of the country. Now, in my opinion, the customer is not always right, but I am only too happy to say that we believe that the customer is usually right and usually honest. Who knows how much it costs a large store to allow its women customers the privilege of changing their minds? Has anyone figured the real cost of a returned-goods rate running from 10 to 30 per cent, depending upon the department? Does the public realize that the retailer must incur the expense of selling three dresses in order to have two stay sold, and that every third dress sold is returned? This means that to the cost of making the first sale must be added the cost of delivery, in many cases the cost of sending for the goods to be returned for credit, the cost of putting them back into stock (often in a damaged condition), plus the extra investment in stock necessary when so much of it is off sale, and finally the cost of the necessary accounting accompanying all these transactions. The total of all these items is an important figure that gets little attention, scattered as it is through the different classifications of selling and accounting expense, markdowns, and stock investment. How much it adds to the store’s total expense no one knows, but almost all agree that any store that dared to eliminate the returned-goods privilege would suffer greatly in sales.
Credit departments, deposit accounts, monthly statements, collections, all cost money. No doubt about it. But these things are here, firmly established in the retail business because they satisfy the wishes and meet the demands of Mr. and Mrs. Customer. They bring and hold business that otherwise would not come. ‘Competition’ is usually construed as competition in prices; but actually retailers are just as much in competition in efficiency of delivery, in granting of credit, and in liberality of administering the exchange privilege.
In all these items there appears to be an element of waste and often abuse, but to-day these functions and services are necessary to attract and hold a desirable volume of sales. The necessity for such services is indicated by their increasing introduction in the grocery chains, which originated, grew, and prospered on a strictly price appeal. Now both large and small chains make deliveries and extend credit; and the practice is growing rapidly. The expansion of two large mail-order houses within recent years into the retail field, with charge and installment accounts, gives further recognition to the buying habits and demands of customers.
Day in and day out we are told that the cost of distribution is too high. But what is ‘ too high ’ ? Generally those who make this statement imply that there is too great a spread between the cost of producing an article and its final cost to the retail purchaser. This point of view portrays the retail distributor as a sort of public enemy instead of what he really is — an indispensable unit of the modern community.
What are the real facts of the case? A fundamental fallacy underlies all these discussions of production and distribution which has gone unchallenged too long. This fallacy, like so many others in economics, arises from the effort to subdivide economic activities into separate and distinct functions. In reality economic life contains no separate functions. To-day there is no thing we can call ‘production’ set apart from another thing called ‘distribution.’ There is instead a linked process of making and moving goods.
In that process, retailing has its wastes — just as wholesaling, transportation, and manufacturing do. It would be ridiculous to claim that any division of industry has yet appeared anywhere which can claim perfection. I do not expect to see the day of industrial perfection. Nor do I expect to see the time when one can point to any large and important item of expense and say, ‘This is waste,’ without arousing a million objections from others to whom the item is a positive necessity and a thoroughly justifiable expenditure. I do, however, believe that many of the complaints heard about ‘the cost of distribution’ are unjustified and caused largely by the failure to realize the extremely close connection, amounting actually to interweaving, of production and distribution.
In other words, the fault is that of accounting rather than of accomplishment. Indeed, were accounting practice made to conform to the realities of the situation, — that is, considering production and distribution as one function of doing business with proper allocation of costs, — I am confident that many costs now charged to the distributor would then be charged to the producer. Is n’t it obvious that, without wide distribution, large-scale production is impossible, and, from this point of view, that the cost of developing large-scale distribution might as well be charged to the manufacturer as to the merchant?
For the sake of clarity, let me put the chief points of my argument in summary form.
1. Low production costs to-day are largely a result of mass production.
2. Mass production is not possible without mass distribution.
3. To create the necessary demand and reach the necessary maximum number of consumers involves sustained effort and expense.
4. Such effort and expense are essential to mass production and the resulting low production costs.
5. This effort and expense, now charged to distribution, might with equal justice be considered part of the cost of production.
The meaning of the expression ‘low production costs,’ which has been used so much, is not clearly understood. A common use of the term, especially in recent years when the spotlight of public interest has been turned on striking technical improvements, is the unit cost of production as figured over a short period with equipment running at or near its maximum rate. But a more practical consideration is the unit cost of production over a period of years, which includes the costs of changing the productive setup, the necessary shutdowns for changing equipment, and low seasonal production as well as peak production, all of which have to be paid by the public in one way or another, often in the form of capital losses.
A striking example is furnished by the experience of the Ford Motor Company in changing from Model T to Model A. Indicated losses for the two years 1927 and 1928, during which the change was made, amounted to $115,000,000. If this amount is considered as part of the cost of discontinuing one model and getting into regular production of cars of the new model, of which approximately 5,000,000 were produced, the developmental costs for each Model A produced are about $23. Furthermore, indicated profits for 1929 and 1930 together only slightly exceed the losses incurred in 1927 and 1928.
The common idea that a great deal of waste exists in retail distribution arises partly from the misconception which has always existed in grammar-school mathematics as to retailer’s profit. This is illustrated by a common form of question such as ‘ A man buys a 100-pound bag of sugar at $4.00 and sells the sugar at 6 cents a pound. What is his profit?’ Of course, the fact is that, taking into account his expense of providing the clerk’s services, packaging, delivery, and a host of other items, he may be actually selling at a loss. But, without going into a detail of the items which contribute to distributing costs, I should like to mention a few fundamental considerations.
In the old days, when shoes were made by hand in little shops adjacent to New England farmhouses, the operator worked at the bench only when the season or the weather made farming impossible. His shop, which was little more than a box with a stove in it, cost him practically nothing even though it served also as a salesroom. The proportion of the price of the shoes which might be charged to selling was negligible. The customer, who was his neighbor, came to the shop, placed an order for the shoes, and took away his own purchase, so that there was no question of being overstocked or of markdowns, or return for credit.
How different is the present situation, where, in order to make possible the existence of the modern shoe factory, a consumer demand, a market, and a complete system of distribution to all corners of the earth have had to be developed.
Moreover, at the retail end, each pair of shoes must be individually fitted by the contact of one salesman with one customer at a time. No improvement in production methods will eliminate this selling requirement. Automatic vending machines and self-service are equally impracticable in this customer-merchant relationship, where the cost of selling has become a major part of the total cost of the article. As working hours universally decrease, the factory is able by better machines and better assembly methods to produce the shoes even more cheaply, but the retailer finds it impossible even to maintain, much less to decrease, the unit cost of selling.
From time immemorial the effecting of an economic exchange — that is, ‘selling’ — has been largely a personal matter. We say ‘largely’ because, of course, there are certain commodities and certain services which require no personal contact, and their number has grown with increasing mechanization; but the fact remains that we shopkeepers are still expected to provide courteous, intelligent, and well-informed salespeople to demonstrate and discuss the hundred and one types of merchandise we have on sale. It is true that we now sell cigarettes by coin-operated machines, but it is also true that we failed in a similar experiment, made a dozen years ago when we attempted to sell by machine things that people like to feel and handle such as stockings, gloves, and so forth. When we get away from the more or less standardized or packaged product we find that customers want individual attention by a human being in the form of a salesperson.
It has been said that merchandise well bought is half sold. This generalization is true at least in part; undeniably it is much easier to sell merchandise bought intelligently, with the wants of the consumer paramount. But how many customers know precisely what they want when they come into a store? A man may want a suit or a woman a hat, but the final decision as to what kind of suit or hat is the result of interpersonal conference between customer and salesman that may last anywhere from fifteen minutes to three hours.
The men’s clothing business offers a widely accepted illustration of the importance of the personal element in selling. Precedent has long made the payment of salesmen in most clothing stores a flat percentage on total sales volume, on the theory that a salesman of men’s clothing succeeds or fails in direct ratio to the number of customers who rely upon him for their wardrobes, and who, presumably, will leave one store for another should he change his affiliation. The same is true to a somewhat less degree so far as saleswomen are concerned. To thousands of customers, Blank’s Store means only ‘that wonderful Miss Smith in the Coat Department,’ and ‘I would n’t dare to buy a single stitch without Miss Jones’s advice.’ As an example of the ultimate in consumer desire for personal service, think for a moment of Mrs. Consumer’s devotion to her favorite hairdresser, and her husband’s allegiance to his barber.
During the NRA, when factory workers were given a reduced working schedule, employers reduced the hours of factory operation. Retailers, on the other hand, while required to reduce the employee’s working hours, had to maintain without any reduction the hours during which the store was open to the public, thus having to increase payroll expense. Since the NRA, retailing has shared with other occupations in a permanent reduction of working hours, but decreases in the length of store hours are strongly resisted by customers and appear, on the whole, impracticable. There seems, then, little hope that there may be a marked saving in distribution costs at this end. At any rate, this is clear: the retailer, because he must maintain a constant labor force to meet individual needs of individual customers frequently at peak shopping hours, cannot, as does the manufacturer, reduce his labor costs by increased efficiency and reduced personnel.
Retailing is at a considerable disadvantage compared to manufacturing in the matter of its freedom to run its own business. The manufacturer can and does close his factory on occasion, either because his warehouse is full of finished product, or for retooling, or perhaps to obey a government restriction of the work week. I am reminded of a manufacturer who was restricted to a five-day week by the operation of the NRA code. When the Blue Eagle left for parts unknown, I asked the man if he contemplated going back to a six-day week. ‘Certainly not,’ he replied. ‘Why should I? The only man I have around the plant now on Saturdays and Sundays is a watchman; 95 per cent of my workers are on piecework; I have been able to produce enough in a week of five days both to supply my customers and to give my employees practically as much income as they had in a six-day week; and I like that Saturday holiday myself!’
Of course he was right, but I suddenly realized how little control we retailers actually have of our own businesses on a comparable basis. Our bosses, obviously, are our customers; and, when they want to buy, either we or our competitors must open our doors to supply their wants, though we have made some changes in store hours as a concession to the modern idea of a shortened work day and a shortened work week. It happens that I am connected with an institution which started closing all day on Saturday during the months of July and August more than twenty years ago, when such procedure was far from the common thing it is to-day. We have also seen the store day greatly shortened, and in my city the majority of the large stores do not open their doors until nine-thirty in the morning, closing at five o’clock from June 1 to October 1 and at five-thirty the balance of the year, in addition to closing all day on Saturday during the two summer months.
This was not accomplished, however, without opposition, and we feel that the complaints which some of our customers make about their inability to shop during the shortened time our doors are open are often valid. Indeed, many an employee whose working day is not over until five finds the shorter working day a decided disadvantage, with no opportunity for shopping at all in the leading stores of the community. Labor wants a short day and a short work week, but Mrs. Consumer wants to be free to buy what she wants when she wants it. Between the two forces we retailers have a nice problem in balance and adjustment. Perhaps it is the fact that labor is also a consumer which prevents even more drastic changes.
During the depression, shrinking volume led many stores to open evenings until nine o’clock or thereabouts, and greatly exceed the normal working hours in the holiday season. Now that retail business is better — and it is better — the question as to retaining these long days is a moot one, and I, for one, sincerely regret the continuance and possible expansion of the idea, which looks toward a return to the gaslight era of store-keeping. Eventually the problem will be settled, as most problems of this nature are, by public opinion and consumer demand.
We in the retail field have been as eager to expand the volume of our business as anyone, and the persistent upward trend of our expense ratios well testifies to the price we have paid for volume. But I firmly believe that the great majority of our expense items are necessary. Our customers demand not only service by intelligent, tactful, and well-trained salespeople, but also the privileges of credit, delivery, and exchange, modern equipment in the store, and many things heretofore looked upon as luxuries.
Indeed, the multiple services demanded by our customers are nothing but a reflection of the constantly rising standard of living. With increase in incomes, and with the complexity of modern urban life, our middle classes are in easy proximity to shopping centres, deliveries, charge or deposit accounts, returns, and the other innumerable services covered by the term ‘merchandising’ in a retail establishment. It is nothing but an accident that, being closer to the great mass of consumers, the retailer is charged with the cost of these services.
It is argued that there is a tremendous waste because of the manufacture of a multiplicity of styles. Here again we may refer to shoes, for undoubtedly it would be much more economical — even if the monotony of sameness proved deadly — if everyone wore the same kind of shoes and owned at any one time two or three pairs at the most. But consider the limitation which would automatically be placed upon factory production under any such plan, where advertising and selling did not create a style consciousness in the wearer and thus build up the necessary market.
It could well be argued, also, that a considerable saving would result from the agreement of all breakfast-food eaters to accept and use the same article. Undoubtedly considerable expense could be avoided in connection with the stocking of goods in anticipation of customers’ requests, the window display to tempt the customer’s eye, and a certain amount of spoilage which is inevitable when a large variety of similar items must be carried. The same thing is true of many different lines carried in drug and toiletgoods departments. To mention only one of them, a single department in one store is carrying nineteen tooth pastes and fifteen tooth powders, which are only a fraction of the total varieties of these articles. That this is wasteful and uneconomical is beyond argument, but it would not be so easy to prove that it keeps up the price of tooth paste in general. The very competition in these items of which we see evidence in all national advertising probably tends in the other direction.
The point I want to make about such items as breakfast foods and tooth paste is that the creation of the vast markets which they now serve is something for which a great deal of credit must be given to the retail distributor. The latter is receiving altogether too much criticism for his sins, with a very common disregard on the part of his critics of the large and valuable part he plays in keeping business going.
It is sometimes said, also, that the cost of distributing automobiles is too high. It is reported that a certain inexpensive automobile can be taken from the delivery line with a production cost of less than half its customer price. Is this the fault of the distributor? Is he, in fact, to be blamed for his share of the cost of the car, or to be credited with making its quantity production possible?
Among the costs of distribution we must count the advertising in magazines, running to several million copies an issue, the cost of weekly broadcasts of the highest-paid musical talent in the world, and the setting up throughout the country of selling units so that the customer in Eastport, Maine, or San Diego, California, may receive not just an automobile from the assembly line, but the car of his choice, with the body style, the upholstery, the accessories, to say nothing of the service, which create in him the necessary desire to purchase. It should be noted that, in spite of the standardization of parts which the manufacturer of such a product as automobiles has been able to bring about with great economy in production, he nevertheless builds into his cars considerable variety of choice and makes it necessary for the dealer to handle many models.
This leads me to observe that a good deal of confusion exists between the terms ‘want’ and ‘waste,’ or ‘luxury.’ By way of illustration let me mention tobacco, silk stockings, and cosmetics. I need not recite the history of the development of the tobacco industry, nor attempt to classify it as a luxury or a necessity. No one can deny, however, that it is one of our important industries. Over a billion and a half pounds of tobacco are produced annually in this country alone. It is exported to 99 other countries. It employs over 100,000 wage earners in over 1000 factories. It contributes over $400,000,000 in federal taxes. How many people are engaged in selling it at retail I do not know, but the number must be enormous. By some, this whole industry might be classified as waste.
No better illustration of the development of to-day’s necessity from yesterday’s luxury can be shown than in the silk-stocking industry, and who is to classify such things as cosmetics, hairdressing, and other items of personal appearance? It has been said that furs, at least in this climate, are entirely unnecessary. I believe the Eskimo insists that they are useful only when worn with the fur inside. Consider the importance of the industries which depend on retail distribution of furs, perfume, jewelry. There is scarcely an article we wear which does not contain a good deal of the luxury element, but to say that this element is waste is to ignore completely the importance of the distribution of these products in the sum total of employment in the country.
President Roosevelt has indicated the desirability of reaching an annual national income of 90 billion dollars, which is nearly 9 billions larger than the highest previous income of the country and 20 billions higher than the figure for 1937. It is clear that if the increase of 20 billions, which would be required to raise the 1937 figure to the proposed amount, came simply from a general elevation of prices by approximately 30 per cent, there would be no more work done, no more articles made, and no employment benefit as a result. We must assume that the intent is to produce many more goods and services of all sorts. Even granting that a large part of this may well be in the form of necessities, I venture to assert that the total cannot be reached without greatly increased consumption of out-and-out luxuries and items which have a luxury element.
Finally, in these days when human freedom is at so low an ebb, who is there wise enough to decide for us what is luxury and what is necessity? Freedom of choice for the individual is the essence of democracy. Justice Holmes in an important decision once said: ‘But to many people the superfluous is the necessary.’ I do not know of any area of human relations in which the citizen enjoys a greater freedom of expression than that where the customer walks into her favorite shop, decides precisely what she wants to buy, states how she wants her purchase serviced and delivered, and, if she does not like it after it is in her home, asks that it be taken back.
The greater the variety of goods and services, — that is, the larger the element of style, — the greater, obviously, the range in freedom of choice. The customer is confronted with no penalties, no prisons, no concentration camps, no compulsions whatsoever except those modes of persuasion which we may call advertising and salesmanship; and these, however faulty, are part and parcel of values rated high in democracy — free press and free speech. Indeed, what better evidence can we have that these free choices meet both basic human cravings and the aspirations of democratic society than the statement so often heard that American stenographers can hardly be differentiated from American debutantes?
I am frequently amused when critics who hold a radical point of view politically take the merchants of the country to task for the so-called waste inherent in sales-promotion policies. They fail to see the inconsistency between the underlying philosophy they are advocating for greater political and economic freedom, and the denial of the same liberties in the relation between the customer and the merchant. The minute anyone begins to decide what is need and what is luxury, he is implicitly setting up a standard of what he thinks should be the mode of behavior for the mass of the people. The more he insists on his way of thinking, the more he must, to be logical, devise an apparatus for enforcing his standard. In this area of social living, as in others, we cannot, it seems to me, be half free and half slave.