This article was originally published in Archbridge Notes.
I often hear people say that they dislike chain stores or chain restaurants, “big box” stores, or franchises. America has long had a love-hate relationship with the big chains. Understanding the chains, their role in society, and whether they are good or bad requires some context.
Hating Chains: A History
Business organizations with multiple locations date back to the Medici, Fugger, and other families in Europe hundreds of years ago. The first major retail chains in America evolved in the grocery store business in the late nineteenth century. The Great Atlantic and Pacific Tea Company (the “A&P”) had 200 grocery stores by 1900 and more than 14,000 by 1925, remarkable in a world without computers and a national paved highway system. In 1929, A&P was one of only a handful of billion-dollar companies in the world. Other big chains included JC Penney, FW Woolworth, SS Kresge, WT Grant, Kroger, and Safeway. The two big mail order houses, Montgomery Ward and Sears, Roebuck, also started opening physical stores in the 1920s.
The rise of chain stores created a great amount of controversy in the 1920s and 1930s. State legislatures and Congress began investigations into the “chain store evil.” Opponents argued that chain stores drove independent, local stores out of business, competed unfairly by selling things below their cost, sent the profits to fat-cat capitalists, and tended toward monopoly. The nation’s multitude of small merchants — “a nation of shopkeepers” — rallied behind these complaints.
At the peak of the movement, some states proposed very high taxes on chain stores, and measures along those lines moved through Congress. In 1923, Missouri was the first state to consider anti-chain legislation. In one year, 1933, 225 bills were introduced in forty-two state legislatures to tax or regulate chain stores. By 1938, Texas Congressman Wright Patman unsuccessfully tried to enact laws that would have taxed the chains so heavily that they would have gone out of business. His proposal dramatically increased the taxes per store based on how many stores were in a chain, so that taxes would have risen geometrically for the largest chains.
The arguments of the small merchants were similar to some of those heard today. North Dakota Senator Gerald Nye called the chain store organizations “a juggernaut of greed…..a cancer, spreading and devouring, as it goes, the whole tissue of the Nation’s economic body.” A small-town banker wrote Nye that “Chain stores infested our nation like a plague…these giant octopuses from the financial centers of the East…were extending their slimy tentacles into most every state in the Union.” Others, including Louisiana’s fiery populist Huey Long, used even more inflammatory rhetoric. (Abolishing chain stores was also a top campaign promise of Adolph Hitler, but he became busy with other priorities and never achieved that goal.)
The political reality ultimately had to reflect the position of the American people. By their spending patterns, the people voiced their love of the chain stores and the utility they provide. The battle against the chain stores died down and the big chains continued to expand and prosper up through the present day.
The Social Benefit and Economic Role of Retailing
Understanding retailing starts by asking, “Why does retailing exist? What is the economic function of retailing?”
The first purpose of our distribution system — including retailers and the wholesalers and distributors that often supply them — is to “break bulk.” Simply put, fifty thousand candy bars or smartphones at the factory dock have little value to consumers. Only by moving them from the factory to our homes and offices do products become useful. Companies in the distribution system try to figure out who needs what, how many, where, when, and at what price. And then how to get the products where they are needed (“logistics” or “supply chain”).
The Soviet Union and other Communist states proved that top-down planning by “experts” cannot achieve this task competently. There are too many variables in who needs what when. In the modern consumer economy, consumer wants and needs change daily. Effective distribution requires flexibility, adaptability, creativity, and tremendous effort.
The distribution of goods and services (including foodservice, lodging, and transportation) is an extremely complex process. The typical Walmart supercenter carries well over one hundred thousand different items from tens of thousands of suppliers. Having the right quantity of each item in every one of over four thousand U.S. Walmart stores is a massive task. Every chain retailer faces the same issues.
Retail Evolution
Until the late nineteenth century, retailing was entirely a “mom and pop” industry. In each town, the general store, sometimes owned by the town’s main employer (as in a mining town), served “all the needs” of the community. The process was labor intensive: you told the clerk what you wanted, and he fetched it from the shelves behind the counter. (Usually “he,” not “she,” back then.)
Product selection was limited and varied from store to store. Food like pickles and crackers were often sold out of unsanitary and sometimes insect-infested open barrels. Products went through multiple “middlemen” enroute from the factory to the consumer, increasing the costs of distribution and thus the selling prices of merchandise.
Ambitious entrepreneurs developed better ways of distribution, with less waste, better quality, more uniform products, and lower prices.
Alexander Turney Stewart led the development of the big city department store in nineteenth century New York City with his “Marble Palace.” This new idea brought many different types of merchandise under one roof, sharing staff payroll and utility, advertising, real estate, and other costs. Haggling over prices was replaced by fixed prices. Customers could return items and get their money back if not satisfied. Prices came down, quality went up.
The Hartford family began to build more of their A&P grocery stores. Founded to sell tea from China at low prices (by eliminating middlemen), the A&P soon entered the coffee and other food businesses, expanding their selection. Early in the twentieth century, A&P developed the “economy store” with much lower prices due to offering more self-service: the shelves full of goods allowed consumers to choose for themselves. More than fifteen thousand A&P economy stores were built.
Then, in the Great Depression of the 1930s, food retailers sought ways to lower prices even further. Credit for invention of the supermarket usually goes to Michael Cullen, whose King Kullen store in Queens, New York, broke sales records with its very low prices. The new supermarkets often leased old factory buildings or other under-utilized real estate. The stores were “bare bones” in order to keep expenses low. Existing big grocery chains including A&P and Kroger soon reacted and built their own self-service supermarkets across the nation.
While the grocery store industry was evolving, JC Penney figured out how to provide clothing and linens at low prices through his chain stores and FW Woolworth and other dime store operators made basic staple merchandise available in every town in the nation. Sears’ and Ward’s catalogs served farmers, ranchers, and small-town residents with better quality products at unprecedented low prices. (There was a political effort to limit the two big mail order houses, but farmers realized they had been overpaying at the local store and were happy to buy from Sears and Ward’s.)
The 1920s saw the rise of restaurant chains. Some of the early chains including A&W, Steak N Shake, and White Castle are still with us. By the 1960s, Howard Johnson’s became a huge chain with over 1,000 restaurants. Especially after World War II, when Americans began to travel around the nation in greater numbers, lodging chains including Best Western and Holiday Inns rose to prominence.
Many of these organizations adopted the franchising business model. Franchises were first created to distribute “capital goods” and heavy equipment by the McCormick reaper works, the Singer sewing machine company, and then the automakers with their local dealers. By combining the marketing and reputation of a powerful recognized brand with local investment and ownership, franchising proved an ideal vehicle for a business to grow. Today it is pervasive in lodging, foodservice, and some types of retailing like gasoline. The franchise system allows independent businesspeople to profit from the systems and marketing of big national or global organizations and brands. By applying proven business models, the franchise system also gives the local entrepreneur more chance of success than they might experience by “going it alone.”
More recent decades have witnessed a continuous flow of new retail concepts. The convenience store started as Texas ice houses. The general merchandise discount store took the low overhead, “no frills” concept of the supermarket and applied it to non-food merchandise of all types. In 1962, Kmart, Walmart, and Target were founded, Kmart going on to lead the industry for the next twenty years. The wholesale club (Costco, Sam’s, BJ’s) was pioneered by Sol Price in San Diego in the 1970s. Superstores or “category” killers then took the basic supermarket idea and applied it to specialty categories of merchandise, starting with Toys R US, then followed by Home Depot, Lowe’s, Best Buy, Bed Bath & Beyond, Staples, Barnes & Noble, ULTA, and others.
And today we see Amazon, eBay, Etsy, Casper, Dollar Shave Club, Warby-Parker, and many other companies that arose with the digital age. The most successful offer even lower prices and bigger selections than even the chain stores. In general, they do not create as many jobs (for the same revenues) as bricks-and-mortar stores.
And so, the trend of new retail models and concepts with lower prices has repeated over and over. That trend is unlikely to come to a sudden stop.
Death of the Independents?
All those retail concepts had one thing in common: they eliminated waste, used less resources, and thus delivered better products at lower prices to the end consumer. In effect, everyone in America got a raise, an increase in their disposable income, due to these retail innovations. Few consumers resisted and most loved the results.
In the process, the old, outdated methods of distribution went into decline. The country general store virtually disappeared. While independent drugstores and grocery stores still number in the thousands across America, their numbers and market shares have shriveled compared with fifty years ago. Big chains are not immune from the onrush of innovation and the “creative destruction” that results: just look at Kmart, Sears, Ward’s, JC Penney, Woolworth’s, and Grant’s, all gone or in bad shape.
The “bottom line” here is that Walmart, Home Depot, Kroger, and Walgreen’s were not individually responsible for the demise of so many local, independent stores. The decline of local stores has been going on since the 1870s and is a natural, organic evolution from wasteful, expensive distribution methods to more efficient ways of getting things from the factory to the customer.
The process is conceptually similar to Toyota beating General Motors with better, more efficient cars; Apple and Microsoft beating IBM with better, cheaper computing power; or the spreadsheet replacing the calculator replacing the slide rule replacing the abacus.
Independent merchants can survive these changes and prosper if they pursue one of these strategies:
- Sell products which are unique, such as locally made or luxury products not available in the big retail chains. Do not try to compete head-to-head on price with the more efficient big stores.
- Offer service levels that go beyond what the “supermarket” self-service type stores can offer.
- Serve markets such as small towns or urban neighborhoods which are not well served by the chains.
- If the market is big enough (in a large city or globally on the Internet), focus on a narrow customer or product niche. Especially effective for online retailers.
Some studies indicate that retail employment outside of Walmart actually rises when Walmart comes to town. More people visit the town to shop Walmart. Those specialty retailers who offer something different can prosper on this increased traffic.
As we continue along into the twenty-first century, the outlook for small stores and boutiques is positive. The rise of wealth in America and around the world means more people are able and willing to pay higher prices for higher service levels of independent stores. Our economic rise also allows more people to spend more money on niche products and interests. Digital technology (including services like Shopify for small sellers) makes it easier than ever for small firms to serve a global online market.
While the “rich” and “elites” can afford the more expensive independent stores, the low-cost chains are there to serve everyone else, especially those on a tight budget. It is also likely that people, rich and poor, save money on basics by shopping discount stores and websites. They then use those savings to finance their luxuries, large and small, from travel to dining out, from housing to automobiles.
In some communities, activists have stopped the construction of a Walmart or other big stores. These people seem to want to pay higher prices and to have little empathy for the less wealthy.
Our retail world is enriched by the presence of big chains, franchises, and independent stores. Yet only the best will survive. Retailers must stay on their toes and offer the public engaging in-store or onsite experiences if they are to survive and grow. As always, they must offer the consumer a “better mousetrap” than the competition.
Responding to Other Complaints About Chain Stores
The biggest charge against the chains has always been that they drove the independents out of business and hurt the local communities, as described in the preceding paragraphs. But other charges have been levelled at them; here are some of the most common ones.
Some say that the chain stores are the cause of the rise of Chinese imports and the loss of American manufacturing jobs. They are not.
The cause of the rise of Chinese manufacturing is that one billion people were not contributing to the global economy under Mao. Deng, who became leader of China in the late 1970s, then freed up the people, allowing them to find their “best use” in the global economy. “All of a sudden,” Chinese manufacturing skyrocketed. Every retailer, no matter how big or small, took advantage of this new, more affordable source. Today China as a major source of merchandise has been joined by South Korea, Taiwan, Thailand, Vietnam, Mexico, and many other countries.
Ironically, some of the people most vocal about the evils of chain stores were also among the first to buy Asian automobiles, contributing to the decline of one of our biggest domestic industries.
Walmart is often the prime case of “moving to China.” Yet Walmart, over the last thirty years, has shifted from being a non-food store to generating over half of its sales from groceries. Now the world’s largest food seller, Walmart buys less from China than it otherwise would have, since relatively few food and grocery store products (like toothpaste and toilet paper) come from China or other distant lands.
Others claim that the chains depress retail wages. That is also not the case.
Retailing, restaurants, and lodging have always been the place where people have their first job, where they learn to show up on time and handle responsibility. Waiting tables, stocking shelves, and operating cash registers are among the most common and easiest-to-learn skills, not requiring a college or more advanced degree. On any given day, millions of people work in these industries.
The labor market is a market, set by the supply of and demand for the relevant skills. When Walmart enters a new market, one of the first things they study is the labor market. Pay levels differ substantially from the Bay Area of California to rural Mississippi. There is nowhere where Walmart is the only employer in town.
As the economy has grown, wages have risen. Thirty years ago, something like 15% of all the Americans who were paid by the hour earned the federal minimum wage or less. Today that percent is down to 2%, as wages have risen while the federal minimum wage has not. Many big retail chains are now starting their employees at $12–15 an hour, about double the federal minimum wage. Continued increases in real wages can be expected in 2021 due to inflation in general and shortages of qualified labor.
Walmart is the biggest private employer in the world, with 2.3 million workers, most of them in the United States. Many of those retail workers left independent stores to go to work for Walmart. The reasons are many:
- Big companies are less likely to abuse employees because they are so visible and open to attack and because lawyers and regulators have more clout and oversight of big companies. That does not mean it never happens in a giant chain, but the chains work to stamp out misbehavior and “bad apple” managers.
- Big retailers offer far better benefits than most independent stores, using their size to get better deals from health insurance and other companies.
- The large chains offer people the chance to grow, to learn, and to move up. At most independent stores, there is no way to move up, and often the owner’s family (nepotism) takes precedence over other employees.
- The best retailers offer their employees the opportunity to buy stock at a discount or have stock option plans. Sears led the way in the early twentieth century when owner Julius Rosenwald gifted all employees a meaningful chunk of the company’s stock. Sears, JC Penney, and Walmart have created many millionaires, even among administrative assistants and frontline workers. Franchisors like McDonald’s have also created thousands of millionaires through their franchising systems. Many of those franchisees started “at the bottom,” working in a McDonald’s.
Most retail workers do it for a short period of time, or seasonally at Christmas. But a substantial minority actually love the work, and their “upside” is unlimited, especially in a chain that is big and growing. Unlike Google, Facebook, or Goldman Sachs, people do not have to hold an Ivy League or advanced technical degree to get ahead. Race, religion, sexual preference, national origin, and age do not matter to retailers. The only requirements for success are hard work, a desire to please the customer, honesty, and common sense.
A look at the common lists of “best places to work” such as the list compiled by Fortune magazine is always informative. It is easy for Google or Goldman Sachs to pay high salaries and offer comfy jobs and free lunches. Yet those lists also include Marriott, Hilton, Hyatt, Wegman’s food stores, Whole Foods Market, Publix supermarkets, Costco, and many other companies which employ hundreds of thousands of workers. Creating great places to work in the big service industries is a major accomplishment.
Few things are more important to our future than job creation. Walmart has on average created something like 100 jobs a day, 365 days a year, for over fifty years. It is possible that the company has created more jobs paying over $60,000 a year than any other company has created total jobs.
Aside from moving production to China and depressing wages, numerous other charges are levelled at the big chain stores. They pollute, they get special tax breaks for their new stores, they have ugly buildings, they leave no money in the local community. In none of these cases is the chain store itself the problem. Each trend was in place long before the rise of Walmart and Home Depot. Each of the challenges is also true of other industries.
As to local communities, chain stores make important contributions through job creation and lower prices. Every store also generates sales tax revenue for the states and localities that have sales taxes. Every store pays property taxes. Every store buys local utilities and a multitude of local services. The profits your local store generates often return to the community in terms of remodeled and expanded stores, more jobs, and a greater variety and quantity of goods on the shelves. Compare that to online sellers, who rarely contribute anything to your local economy (unless they are based there) beyond lower prices.
Every big retail chain is a potential customer for other companies in the community, like those which produce software, website services, and legal and other services. Many smaller businesses depend on big businesses as the customers.
Summing Up
Chain stores, discounters, and franchise organizations are among the great blessings of the modern age. Whether we study the Sears catalog in 1900, supermarkets in the 1930s, Kmart in the 1970s, Walmart at the turn of the century, or Amazon today, consumers love to save money. Great merchants will always find ways to better serve the public, to lower prices and improve quality. They innovate every day, with new concepts from Tractor Supply to Five Below springing up. In 2021, Dollar General will build and open three new stores every day, seven days a week. TJ Maxx, Marshall’s, Ross Stores, Target, and Home Depot are other chains which are booming even in the age of Amazon.
The only constant is change.
We will all be better off and have a better understanding of the way the world works, if we can recognize the wonders of our distribution system, taking a wider and longer view of the chains and franchises and their role in society and the economy.
This article was originally published in Archbridge Notes.
