From the opening pages of Marc Levinson’s admirable The Great A&P and the Struggle for Small Business in America, one is struck again and again how this story is being played out today. For, as Levinson writes “The enormous forces [A&P] helped unleash only grew stronger. It made the process of moving goods from producer to consumer impersonal and industrial, but also cheap and efficient for the big, not for the small.”
In its day, A&P was the colossal force in retailing, forever changing the way things were bought and sold. It spurred state and federal governments to legislation, drove unions to distraction, altered the nature and importance of branding, elevated the quality of products and provided consumers with healthier and cheaper nutritional options than they’d ever had before. And it did all this during a civil war, two world wars, a depression and the post-war boom that made America the world’s dominant economy.
A&P’s game-changing insight was to eliminate the wholesalers who stood between retailers and the farmers and manufacturers. This eliminated the fees these wholesalers charged, allowing A&P to drive down the price, which they did. No, really, they did. A&P’s strategy – their brand strategy – was to always be the lowest price option and they so jealousy guarded this approach that they never let profits (as a percentage of sales) rise above certain pre-set levels. When it happened, A&P knew that somewhere along the line someone was charging more than they should be – so they slashed prices again.
The ramifications of this were enormous. Because prices were lower at A&P, consumers flocked to stores, allowing A&P to open more (by the 1930s they had 16000; by comparison, in 2011 Walmart had fewer than 9000 worldwide). Because they had so many stores, producers competed mightily to be included. That drove quality up, making it a selling point, paving the way for branding. As Levinson explains:
The most important feature of grocery stores in the 1880s, from the perspective of a chain-store merchant considering the pros and cons of selling groceries, was the near-total absence of brands. Without brands, stores were limited to selling generic products indistinguishable from what was for sale down the street. Competition was based almost entirely on price: a store’s advertising circular might tout molasses at sixty-give cents per gallon, leaving shoppers no way to know whether the store was offering a better deal or just a lower-quality product than a competitor with a higher price. Brands would eventually offer consumers at least the promise (often unmet) of consistency and quality. They would allow market segmentation, enabling grocers to offer higher-priced versions aimed at the mass market. Over time, brands would permit major economies of scale in food processing as national companies manufacturing millions of units of well-known products supplanted small firms making small quantities for purely local markets. (p. 40)
And the downside? Unemployment. Not only did A&P put out of business all those wholesalers they bypassed (and who they were teaching other retailers how to bypass as well), and all those local manufacturers who couldn’t bang out millions of units, but every time an A&P opened, a local mom-and-pop shop shut its doors (sound familiar Walmart, Home Depot, or for that matter, Amazon?).
Which is why statehouses across the country enacted legislation prohibiting chain stores like A&P from expanding into their communities (although to be fair, there weren’t any chain stores “like” A&P; in 1929 A&P was the US’s largest retailer – almost two and a half times the size (in sales) of the number two retailer (Sears) and had more sales than #2, 3 and 4 retailers combined.).
But what lifts Marc Levinson’s fine work from simple history lesson to cautionary tale that every company should heed are his observations about the great company’s demise. For, Levinson writes, after the deaths of the two brothers who had run it for decades:
They left behind a corporate structure under which the new chief executive reported to a board of directors that never challenged his decisions because its members all reported to him. A company that desperately needed new blood and new thinking was put in the charge of leaders more concerned with conserving the past than with shaping the future. From that point on, A&P’s downfall was assured. (p. 270)
As the fine print on investments reminds us, past earnings are no guarantee of future success. A&P succeeded because it had visionary leaders who knew what the company’s point of difference was and how to continually adapt it to the changing times. When those leaders were gone, and the company stopped looking forward, it was a goner.
Whether you become as successful as A&P was or not, make sure it doesn’t happen to you.
The Great A&P and the Struggle for Small Business in America by Marc Levinson was published by Wiley on 09/06/11 – order it from Amazon here or from Barnes & Noble here – or pick it up at your local bookseller (find one here).