Dynamic Explanation of Industry Structure and Performance
Cotterill
vertical and horizontal scale economies for independent,
non chain store, retailers. These organizations also led
the independent grocery store operators quest for
government intervention via the passage of the
Robinson-Patman Act (1936) and other laws in an
attempt to ensure "a level playing field" for
independents. Picture 1 of the A&P grocery store in
Main Street, Mystic, CT in 1940 captures the
"consumers venue" during this era. Some may find it
surprising that nearly all of the economic issues related
to the organization and performance of the food sector
that we face today, surfaced when this was the typical
chain store. Technology has advanced but the issues of
efficiency and power remain unchanged.
Underpinning the advances in chain store and large
scale wholesaling was the rise in per capita income
during the 1920's and the migration of Americans from
farms and urban barrios to the suburbs of Jay Gatsby (F.
Scott Fitzgerald), that Walt Disney, and Hollywood
movies soon entertained. Refrigerators, gas or electric
stoves, and electric appliances now made cakes mixes
and others partially prepared or processed foods easy to
store and finish in the home kitchen. Home economics
grew in tandem with the industrial food system.
The third phase in the century, one of
internationalization of the food industries spans 1945 to
1980. Many leading food companies expanded
multinationally. Communication and exchange of best
practices increased. Migration to the suburbs rapidly
accelerated and supermarkets bloomed. The suburban
supermarket with a parking lot, self-service, and a much
broader product selection rapidly replaced the store front
on main street in cities. The automobile became an
essential cog in the distribution channel.
With the rise of commercial network television in
the U.S. this era can truly be described as the golden age
of manufacturer brands and mass marketing of food
products. Wholesaling and wholesale markets
commenced a long term decline in importance. Farmer
cooperatives, many initially organized in the 1920s or
earlier, and other forms of vertical coordination, e.g. the
broiler industry, rose to dominate producer processor
relations in many commodity industries. In many
instances the vertical coordination was complete to final
consumption via the creation of brands. Consider, for
example, Sun Maid Raisins, SunKist Oranges, Ocean
Spray Cranberries, Welches Grape Juice, Land 'O Lakes
Butter by farmer cooperatives; and, Purdue Chicken, and
Tyson Chicken by investor owned firms.
Mergers and acquisitions in food manufacturing and
among retail chains during the 1945-1980 era
contributed to the rise of tight oligopolies in many
processing industries and local retail markets (Connor, et
al.1985; Marion, et al. 1979; NCFM, 1966b). Branded
food manufacturers dominated the supply channels
during the 1945-1980 era, however new supermarket
chains with substantial turnover (over $500 million in
the 1960's) challenged for leadership. Their primary
move was to expand private label offerings by
integrating back into food processing (NCFM, 1966b,
ch. 4). Leading supermarket chains in the 1960s were
far more integrated than they are today.
The peak and demise of this bricks and mortar
strategy was the A&P WEO (Where Economy
Originates) campaign in the early 1970s (Marion, et al.
1979, p. 74). A&P had been the leading food retail
chain since pre-supermarket days in the 1930's. It's
national share, however, steadily eroded after the second
world war for a variety of reasons, one of which was its
overconfidence in its private label products in face of the
advance of advertised manufacturer's brands during the
era. In a final last hurrah for backward integration A&P
built a huge 40 acre plant in Horseheads, NY for the
production of private label products, expanded other
plants and committed to building relatively small,
expensive brick supermarkets that were primarily
stocked with low cost (and perceived quality) A&P
private label products. When the strategy clearly was
failing they instituted a nationwide price war (WEO) in
1972 and 1973. It was one last attempt to convince
consumers that their products and services were right,
and to gain much needed market share to sustain their
production systems. They failed because other
supermarket chains correctly perceived that consumers
wanted stores nearly twice as large, superstores with
more than 30,000 square feet, stocked with advertised
brands, nonfood items (health, and hygiene, kitchen
items, and floral) and service departments, most notably
a deli and in-store bakery. Ergo the end of vertical
integration as a strategy by retailers, and the advent of
broad assortment retailing by supermarkets and mass
merchandisers.
During the 1945-1980 period public policy, most
notably merger enforcement, became very active in food
industries. In the 1940's government leaders and
economists generally, and especially industrial
organization economists, harbored deep concern that the
great depression was at least in part caused by the trend
towards large corporations and tight oligopoly. There
was a fear that tight oligopoly was replacing and/or
subverting the price system of competitive markets
(TNEC, 1941; Roosevelt, 1948; Berle and Means, 1932).
Gardiner Mean's administered price hypothesis,
counseled that large oligopolists lay off workers rather
than cut price when faced with declining demand
Food Marketing Policy Center Research Report No. 53