THE SYDNEY GROCERY

INDUSTRY, 1955-1965;

A STUDY OF

COUNTERVAILING POWER

Being a thesis submitted for examination

in fulfillment of requirements for admission

to the degree of Master of Commerce in the

University of New South Wales.

John Jeffries Nightingale, B.Com.NSW.

University of New South Wales, March, 1969.

CERTIFICATION OF ORIGINALITY

I hereby certify that this work has not been submitted for any degree in any other University or institution.

J.J. NIGHTINGALE SUMMARY

Chapter 1 defines the hypothesis to be investigated in terms of an extension of J.S. Bain's theory of industrial organisation and various theories about retailing.

Chapter 2 describes the Sydney grocery industry as far as is relevant for the study. Chapter 3 sets out the behaviour of the Consumer

Price Index in Sydney for selected times within the period.

Chapter 4 analyses the industry as at 1955, positing initial conditions of an unstable equilibrium re­ sulting from the post war decade. Chapter 5 shows how the unstable equilibrium of price and outputs began to break down over the 1950-56 period.

Chapter 6 sets out the technical possibilities open to various parts of the industry during the period of change, including some possibilities which have not been taken up.

Chapter 7 follows the pricing revolution up to the entry of the countervailers, Woolworths and Coles, which destroyed the balance which had been emerging up to 1958.

Chapter 8 shows how the entry of these two large firms affected the industry and how a new equilibrium began to emerge in the middle 1960s.

Chapter 9 sets out the changes in summary, puts

iii forward some predictions of future industry behaviour and notes the limitations of the study and its possible significance for studies of other parts of the economy.

iv TABLE OF CONTENTS

Page

Summary...... iii

List of Tables...... vi

List of Figures...... vii Chapter 1 Introduction ...... 1

2 Some Comments on the Industry... 24

3 Price Index Behaviour, 1955-1965. ... 34

4 Initial Conditions...... 41

5 The Causes and Progress of the Pricing Revolution ...... 57 6 The Technical Possibilities ...... 75

7 The Pricing Revolution Completed ... 90 8 Countervailance, 1958 onwards... 99 9 Conclusions ...... 140 Bibliography ...... 155

v LIST OF TABLES

Facing Page

Table 1 Number of Largest Plants accounting for Eighty Per Cent of Employment in Selected Grocery Industries, 1948-9 and 1963-4 ...... 30 2 Percentage Change of Consumer Price Index for Sydney, 1955-6 to 1965-6, by groups. . . 34 3 Average Productivity Growth Rates, 1949-1959 ...... 37

4 Ten Largest Re-Sellers of Groceries, 1966 ...... 111 5 Some Co-operative Advertising Charges in N.S.W., December, 1962 ...... 118

vi LIST OF FIGURES

Facing Page

Figure 1 A Three Level Industry ...... 4

2 Cost and Demand in Lewis' Model...... 10

3 Possible Cost Functions of Service and Self Service Shops...... 76

4 Average Yearly Price Increase, 1955-6 - March 1963-1965-6 ... 148

vi i CHAPTER 1 INTRODUCTION

During the decade 1955-65, the organisation and be­ haviour of the grocery trade in Australia and, in particular, in Sydney changed very considerably. It is my thesis that entry, motivation change and shift of consumer preferences caused changes in organisation and market power that resulted in a lower relative price level for groceries in Sydney. This thesis will be supported by the interpretation of events and opinions gained from analysis of behaviour of some parts of the Consumer Price Index over the period, a study of various trade journals, and interviews with a number of people. The interpretation will be in terms of a model in which vertical as well as horizontal market relationships are important deter­ minants of market behaviour. The model has been developed specifically for the present thesis from those used by a number of theorists. The direct background of the model consists of two distinct parts. First there is the analysis of the organisat­ ion of the industry and second, the analysis of the retail shop. Some of the writers to be cited below are concerned only with one or other aspect, while some are concerned with both. 1 J.S. Bain's Industrial Organisation develops a general

■^New York, Wiley, 1959.

1 2 model of market behaviour for industries, "competing groups 2 of firms’, in the nonfinancial sector of a capitalist economy.

His model is built around his conception of the market, ”a 3 closely interrelated group of sellers and buyers". Each member of the group is either a seller or a buyer.

Bain's thesis is that market structure and market 4 conduct determine market performance.

Market structure refers...to the organisational characteristics of a market;... those character istics which determine the relations of sellers in the market to each other, of buyers in the market to each other, of the sellers to the buyers, and of sellers established in the market to other actual or potential suppliers of goods, including potential new firms which might enter the market.^

Specifically, he narrows the concept to include four measurable variables, namely:

1. the degree of seller concentration, 2. the degree of buyer concentration, 3. the degree of product differentiation, and 4. the condition of entry.^

Market conduct refers to the patterns of be­ haviour which enterprises follow in adapting or adjusting to the markets in which they sell (or buy).^

^Ibid., p.vii.

^Ibid., p.7.

^Ibid., p.3.

5Ibid., p.7.

^Ibid., p.8.

^Ibid., p.9. 3

Market performance refers to the composite of end results in the dimensions of price, output, production cost, selling cost, product design, and so forth, which enterprises arrive at in any market as the consequence of pursuing whatever lines of conduct they espouse... (That is), the character of end adjustments to the effective demands for their outputs which are made by sellers (or adjustments made g by buyers to the effective supplies of outputs).

Under Bain's definitions of industry and market the present study would be of a number of markets. A particular firm could be part of each market or part of only one. This is because some firms are processors of groceries, "original sellers", who sell to wholesalers, retailers and occasionally final consumers, some firms are wholesalers, "re-sellers" who buy from processors and sell to retailers and some final con­ sumers, and some firms are retailers, also "re-sellers", who buy from wholesalers and processors and sell to final con­ sumers. Some firms combine two or more of these roles. Figure

1 illustrates the situation.

For this study "grocery industry" will refer to the group of processors, wholesalers and retailers, competing at each level, and between levels, in the production and distri­ bution of groceries. This industry sells in a market where final consumers buy from, mainly, retailers. Important characteristics of this market will be discussed below. Bain's concept "market structure" is useful in the present study in

^Ibid., p.11. FIGURE 1

A THREE LEVEL INDUSTRY

RE-SELLERS 4 a form which takes account of the multi-level nature of the industry. Market structure in this study is defined as (a), the size distribution of firms at all levels (cf. in Figure 1, the sizes of blocks representing firms), size being defined in terms of volume of turnover in retail value terms, (b), the pattern and size distribution in retail value terms of flows of goods produced and distributed (cf. in Figure 1, if the lines joining the blocks were of widths proportionate to the values represented by the goods flows), (c), the degree of differentiation within and between the flows of goods, (d), the pattern of entry possibilities, and (e), the pattern of g retail shop ownership and location. It may be noted that this definition extends Bain’s in that first, a firm’s re­ lationships with both customers and suppliers are taken into account, and secondly, the peculiar characteristics of retail trade are taken into account.

The list of five factors making up the concept of market structure are all measurable in principle. For the purpose of this study interest will lie in the observation of changes in structure, imperfectly observed without actual quantitative measurements, but observed none the less with a

9 It can be argued that (e) refers to the same organ­ isational characteristic as does (a) in part. However, a retail chain store with ten branches each selling $lm. of goods each year is not of the same significance as one with 100 branches, each selling $100,000 of goods each year. This will become clear in discussion below of theories about shops. 5 precision sufficient to support the limited objectives of the s tudy. Following Bain, the concept of market structure ex­ cludes considerations of technology and motivation or value patterns.^ These are certainly important to an explanation of market performance, but they can more clearly be seen both as influencing structure and conduct and as determinants of performance along with structure and conduct.

As noted above, retail shops are distinctive economic units, and the selling of goods through retail shops, rather than in undefined markets where seller (producer) meets buyer (consumer), demands some special consideration. The following is a brief review of a number of theories about shops or studies involving shops. Shops sell a vast number of different products, and the value added by the shop to any product is generally a small proportion, often less than twenty per cent, of its price. Heflebower^ suggests that for explaining the distri­ bution of goods through shops the appropriate unit of analysis may be the market basket of goods purchased from the shop, in other words, money value units of turnover, while the price is

^Ibid., p.9.

Heflebower, "Comment" in A.R. Oxenfeldt (ed) , Models of Markets, New York, Columbia University Press, 1965, p . 5 5 . 6

"the gross margin in a value added sense, and ... the margin is for the "basket" as a whole".^

A simple but systematic use of some of the Heflebower suggestions is the study by D.H. Briggs and R.L. Smyth of the

distribution of groceries 13 in Western Australia. Their model of the working of the industry is based in a conception of

"competition" as the pressure on achieved profits of the desire to increase profit.^ while they use this as the basis of a

laymen's guide to economic analysis, it can be understood in a

rather more subtle sense as a model: price level of goods to

final buyers depends on the strength of competition. What makes competition stronger or weaker (larger or smaller if we want to quantify it) is a vast combination of circumstances which must be judged one by one as they appear. Whatever their intention, it is competition constrained by various factors that determines, for them, what the consumers have available at any particular time.^ It is in their attempts to test the hypotheses that (1) the larger the firm, (not necessarily shop) the lower are costs per dollar turnover, and (2) the lower the price, the larger (or faster growing) is the firm, that they

12Ibid. 13 Distribution of Groceries Perth, University of Western Australia Press, 1967.

^Ibid. , p . 24 . 15 Ibid., Chapter 2 passim, especially p.41. 7 use the market basket and gross margin variables.

The variables used are expenses (i.e. wages, rent, etc), cost of goods sold, gross margin .Turnover less cost of goods solds M . (------t------5------—) x 100) and turnover. Net v turnover J J profit margin as defined by each particular store's account­ ing records is also used. As might be expected, the statis­ tical results obtained are not very compelling in any direct­ ion. There seems to be a negative relationship between cost of goods sold and the expenses to cost of goods sold ratio, up to the limit of a one man store.^ Only slightly more interestingly, there is some relationship between gross margin and change in turnover from 1962-3 to 1963-4. Theyindicate numerous differentia between shops which, if taken into account, may strengthen the relationships which their data hint at: for example, 'convenience traders' as against market 18 19 basket providers, high income area as against middle or low, 20 with or without a liquor licence, near to 'strong competition’ 21 as against isolated. Another important differential which could not be accounted for is the difference of prices paid by

^Ibid., pp.76-78.

^^Ibid., p.110 .

^^Ibid., p.Ill.

19 Ibid.

^9Ibid., p.97n. 21 Ibid., p.84. 8 retailers.^ Briggs and Smyth thus indicate that better explanat­

ion of retail grocery behaviour requires closer specification of market and industry, including some account of structure.

Their study adequately presents something about the present state of the growing retailing business in Western Australia - that it is competitive, that chain and non-chain stores have to work hard to make any profit, that non-chain stores may continue to find it harder to make profits, and that the breakdown of resale price maintenance (r.p.m.) has allowed consumers to choose between chain and non-chain, low service- price, high service price. However, they provide neither an

explanation of how this came to be, nor yet a very satisfactory argument about how it may develop. 23 Their predictions are based on structural and market growth considerations, but their 24 treatment of these is not systematic. 2 5 W. Arthur Lewis, writing in 1945, used a very particular monopolistic competition model, derived from "a combined knowledge of theory and of the structure of retailing".

While his price concept is the average price of goods sold,

22Ibid., p.27.

25Ibid., pp.185-187 24 Z4Ibid. 25 "Competition in Retail Trade", Economica, new series XII, No.48, November 1945 , pp . 202 - 234. 26Ibid., p.202. 9 formally equivalent to average gross margin for that part of his analysis where shops’ costs are assumed to be the same, his output concept is simply turnover. 2 7 His analysis is of two kinds of single shop firm,

the first being the isolated shop, the second, the shop amongst competitive shops. The particular assumptions used throughout

are (1) that shop owners maximise profits (2) that shop owners judge costs identically, (3) that shop owners and potential

owners judge profits identically, in particular, that there

is a normal level of profit, (4) that there is freedom of entry of potential shop owners seeking above normal profits, (5) that customers are utility maximising, noting particularly the disutility of shopping. Disutility is in proportion to 2 8 the distance the shop is ’out of the customers way’. Formal analysis is centred on the isolated shop. It is found, under even more strongly simplifying assumptions, that under price competition, there will be too many shops. In other words the average cost of operating, plus the average (disutility) cost to customers for all shops, is higher than the minimum. His 2 9 Figure I can be redrawn in more conventional manner (see 2 7 His analysis can be viewed as being of single shop firms, since each shop is assumed to maximize its profits, or as being of individual shops, however owned, assuming each shop operates to maximize its profits. Since it is intuitively clear that a chain store firm may maximize profits without each store maximizing profits, the former interpretation is pre­ ferred. 2 8 T i . j Ibid., passim.

29Ibid., p.204. FIGURE 2

COST AND DEMAND IN LEWIS' MODEL

Disutility cT

Revenue = eT - gT = (e - gT) T = (e - 2cT)T

Proof that g = 2c and thus that Revenue function is as shown

For maximum profit, MC = MR

e - 2gT = b o - K T = 2g

But Lewis' result is that M C AR

b + 2cT e gT e b T 2c + g e - b e - b Therefore 2c+ g 2g

g 2c 10

Figure 2). Social costs are the sum of shop operating costs and customers’ disutilities. Average operating costs (AC) are ever falling, but customer disutility is ever rising, due to the assumption that consumers maximise utilities, thus the more customers, the higher their costs, since they are spread evenly about the shop: the marginal customer is always the one who lives furthest away. In this situation, the shop faces a downward sloping average revenue function, since a lower price enables new marginal customers to purchase from the shop. Since entry is free and entrants always available, no excess profits can be made. Shops are all somewhat too small depending on how steeply customer costs increase, and thus on how both average revenue (AR) and average social costs (ACs) are shaped. The relationship used by Lewis is that a one unit fall in price brings a two unit increase of 30 turnover, and thus competitive output is half ideal output.

Competitive output will be nearer to ideal the smaller the slope of AR for reasons other than customer disutility, i.e. if a one unit fall in price brings a two unit increase of turnover due to new customers, plus an increase in spending by previous customers (in terms of Figure 2, if AR = e -

(Zc - d)T, where d > 0). The numerical value of e would of course be smaller, due to competitive pressure of freedom of entry.

30 Ibid. 11

For shops which are not isolated, for which there is no difference in disutility for customers, the AR function is no longer downward sloping, since a unit fall of price would attract all rational customers. Complete freedom of entry 31 32 will, however, keep shops down to minimum optimal size. *

Lewis also considers the situation where there is 3 3 universal free delivery. Customer disutility does not exist but shops incur delivery costs such that, say, delivery cost = hT^, so that AC = ^ + b + hT. AR will be perfectly elastic and thus the competitive price = minimum average cost, and shops’ turnovers are ideal.^ If we let h = c, the price will always be higher than where customers incur disutility of getting the goods. If h < c, then price may be lower. It seems unlikely that h < c, for this implies that shops can deliver more cheaply than customers. Lewis makes the point that any service provided such as free delivery which acts as price discrimination, which tends to make AR more elastic, 3 5 will increase the turnover of shops towards the ideal.

^Ibid., p.210 3 2 Minimum optimal size is not defined under the operating cost function of Figure 2. It would be pedantic to criticize Lewis’ exposition on this point.

33Ibid., p.208 3 4 Unless h = c, the ideal output will not be the same where shops deliver as where customers incur disutility. "Ideal" should always be defined, however, as minimum AC cf. ibid.,p.209 . 12

Shops compete by offering services as well as by offering goods at prices. Where price competition is used, the implication about competition in services for isolated 3 6 shops of Lewis' analysis is not clear. Non discriminatory services, for which consumers pay if they want it, can simply be treated as part of shop turnover. Discriminatory services, however, affect both cost and demand functions in the manner described above. If one shop only decided to offer free delivery it would cause its demand to become infinite at the . . 37 prevailing price, but to fall rapidly at successively higher prices. The value of h in the shop AC function will determine whether it is profitable to offer free delivery at any price. If it is not profitable, no shops would offer these services, if it is profitable for one shop, it would not be profitable for all shops existing, but would be profitable for some, which would follow the leader, while others close down. But under Lewis' assumptions a given market will always be able to support the right number of shops offering free delivery. This suggests that isolated shops will always offer free delivery, especially since in the real world some shop ownas are often willing to operate at profit levels less than others, and shop costs can hardly be thought identical.

36Ibid., p.217. 37 Costs are identical, demand is identical, for all shops. 13

Lewis’ analysis is of considerable relevance for the model being used in this study, since it appears clear that isolated grocery shops in Sydney are different from most non­ isolated shops, and possibly in the direction implied by Lewis.

His framework requires considerable modification and develop­ ment, in particular to define relevant classes of shop, and also to take account of (1) the existence of multi-shop firms,

(2) differences in ease of exit relative to entry, (3) differ­ ences in satisfactory return levels between firms especially multi-shop firms, (4) difference in cost functions, (5) the extent to which customers can perceive differences in price

(value for money).

The best classification of shops for this study has three classes--first, the isolated shop, second the non­ isolated shop managed by its owner (non-isolated independent) and third the chain store. Chain stores are never isolated.

'Non-isolated' means amongst other shops of whatever type.

The other shops need not be competitive with the grocery shop in question, though very rarely will no other shop sell no competitive goods. This definition of non-isolation differs from Lewis’, which is a shop amongst competing shops. The difference between behaviour of isolated and non-isolated shops here will thus differ from that in Lewis. The remain­ ing modifications of the Lewis model can be said to be ’’irnper-

38 Ibid., p.214. 14 fections of the market", and are ’explanations’ of observations that shops are not the same size but fall into not very well defined size categories, that profit levels vary both absolute­

ly and around different satisfactory levels. Thus, as well as

Lewis' ’rational’ monopoly power, there is irrationality, in terms of owner and customer behaviour, informational barriers and price discrimination by original sellers.

An attempt to provide a more realistic analysis than 39 Lewis, but for retail level alone, is that of Henry Smith.

Smith is concerned to analyse ’’the factors determining retail margins".^

Quite clearly the normal operation of the pricing process will determine the cost of production of the goods which ultimately pass through the hands of the retailer. We may assume for our present purposes that the same proviso may be made concerning the process of wholesale distribution, in­ cluding therein transport up to the door of the retailer. Therefore it seems desir­ able to isolate the process of retailing in order to examine the various services of which it is composed, and to investigate the causes at work in determining the reward which the retailer receives for performing them.41

Thus Smith sets out to analyse retailing alone, separate from the manufacturing and wholesaling functions producing the goods

3Q H. Smith Retail Distribution 2nd ed, London, Oxford University Press, 1948.

^0Ibid., p.2.

41 Ibid. 15 which retailers sell. He clearly regards retailing as merely a rendering of services, since it is defined as the rendering of these services. Thus it is useful to analyse retailing not only as a distinctive part of economic activity, but also as a part which can be analysed without any reference to the rest of the economy.

The services rendered by the retailer are (1) repre- senting final demands to producers 4 2 (2) "supplying a given set of consumers with products which they require at places 43 convenient to them"; but only the second function is a direct service to customers, and only this is paid for by 44 customers. The relation between demand for and cost of these services of convenience then determine the price or retail margin offered and achieved by the retailer. The inverse relationship between price and turnover and the importance of location, rent and turnover in explaining price differences between shops are the principal relations seen in determining prices.43 But the determination of margins of shops selling particular kinds of goods requires knowledge of the nature of

demand, e.g. people buying furniture want a greater variety of qualities in a furniture shop than if they were buying

42Ibid., p. 3.

43Ibid., P • 4. 44 Ibid.

45Ibid., p.9. 16 groceries in a grocery shop. While Smith's analysis may be sufficient to assess the performance of retailing in general and to explain the phenomenon of retailing as part of the economy, it cannot ex­ plain the behaviour of a particular market over time without going beyond the retailer to the industry producing the goods the retailer sells. Thus Smith's "service provider" depends on the behaviour of the group of firms providing the goods for him to sell. Much of the ’realism' of Smith's approach will be seen in the present study, and similar arguments will be used where necessary. But the purpose is different: to explain the price-output behaviour of a particular industry rather than explaining behaviour of final re-sellers of all types. B.R. Holdren has provided a highly sophisticated analysis of the supermarket and the market in which super­ markets operate.^ He develops his theory by (1) determining the nature of the retail unit's demand function and (2) deter­ mining the nature of the cost function (a) in the internal technology of the unit and (b) in the factor markets faced by the unit. The context was that of a small American city, isolated to the extent that the population available to the retailers of the city was clearly defined. His model is

46 The Structure of a Retail Market and the Market Behaviour of Retail Units Englewood Cliffs, Prentice-Hall, 1960. 17 multiproduct - supermarkets sell a vast number of lines - with a cost function of the form

C “ XI + X2 + X Ch + bi^i l — l where C is total cost in dollars, X^ is fixed cost, X^ is discretionary fixed cost, i.e. costs which can be varied by management in the short run but which do not vary with output,

1^ is the purchase price to the seller of the ith line, b^ is the variable cost of selling unit of the ith line and q_^ is the quantity sold of the ith line. The demand function can be generally written

q. = f.(P1....P ,a,....a ) for i = 1 to n where q^ is amount of ith line sold, P^ is the price of the ith line, a. is the jth variable aspect of the sellers non­ price offer. X^ is thus a function of the a... These demand functions are given considerable extension and elaboration, especially with respect to recognition of non zero cross elasticities between sellers.

Holdren found that "supermarket cost functions are nearly horizontal in the short run and their variable costs are very little greater than the ’cost of goods sold’. Scale economies result from both expansion with an unchanged product 4 7 and expansion by means of widening of the product line".

Optimization procedures involved both price and non-price offer variables, while "optimum response to an increase in

47 Ibid., p.179. 18 any form of competitive activity includes a price reduction"^

Thus no unique set of prices is optimal. The oligopoly prob­ lem, however, is further compounded by the imperfect behaviour of buyers and of sellers. Easy entry for sub-optimal firms is the main way in which competitive pressure is maintained in the long run, while ignorance, spatial differentiation and continuous parameter change mean that short run competitive 49 pay-offs are always sufficiently high to obstruct collusion.

This approach provides many insights into the behaviour of retail units. But, for an isolated market as large as that of Sydney, supply of goods to retailers cannot be assumed to be a parameter. For an explanation of retail behaviour I. must be considered in some form such as l

Tk I. . —) i = J l T k=l where T^ is turnover of kth retailer, ^T is turnover of all retailers. Even this form is very limited in use, since not only is inter-retailer competition important, but inter­ processor relationships will also affect the spectrum of re­ tailer buying prices. Thus where processors are selling a large proportion of their output through a single set of retailers, analysis of behaviour of that set of retailers can

48Ibid., p.178. 49 Ibid., p.182. 19 be integrated with analysis of processors to yield better predictions of retailer behaviour.

All the models reviewed above have in common a par­

tial equilibrium framework, conceptually explaining either reaction of equilibrium to external shock‘d or using analysis of equilibrium conditions to judge real world situations.^

However from P.W.S. Andrews comes the idea of analysis not of 5 2 static equilibrium, but of change, adaptation--a micro­ evolutionary approach it could perhaps be called.

Andrews rejects the necessity of building a theory of industry behaviour from the behaviour of a set of individual firms. The conventional theory of the firm implies that each firm moves toward a static or, at least, stable equilibrium.

When all firms in a group are considered, the group is moving towards an equilibrium comprising the equilibria of each firm.

However, if the group is considered the basic unit, industry performance variables are not aggregates and the logic of equilibrium is not falsified by observed disequilibrium of 53 particular firms in the group. The analysis of change and

*^cf Smith, op . cit.

51cf Lewis, op.cit. 5 2 P.W.S. Andrews, On Competition in Economic Theory, London, Macmillan, 1964, especially Part 2, pp.65-138. See also P.W.S. Andrews, Manufacturing Business, London, Macmillan, 1949.

53Ibid., pp.90-93. 20 the empirical development and testing of hypotheses about in­ dustries’ performance become the clear paths of economic , 54,55. research. 9

Andrews presents a model of retailing which embodies his ideas about what a theory should be. In Part 2 of Fair

Trade ^ he puts forward a model with average gross margin as 5 7 the price variable and thus cost of goods sold as the output variable but with three more, namely location, scope of shop

(to distinguish types of goods mixes sold--general store, 5 8 specialist, department, etc), and ownership. The value for 59 money given by any shop depends on what sort of shop it is, what sort of market basket the shop sells, while the price of every particular item will be constrained by competing sellers of that item, in the working of the ’balance of competitive , 60 power ' .

^Ibid., p.92

^Bain's Industrial Organisation (op.cit.) appears to be doing something of what Andrews wants: the basic unit is the industry (p.vii), hypotheses are set up (pp.viii, 2-3, 12-13, Chapter 2 passim.) and are empirically tested (p.viii, Chapters 3-11 passim.) r (L °P.W.S. Andrews and F.A. Friday, Fair Trade, London, Macmillan, 1960.

**7Ibid. , p . 42 .

^Ibid., p.43.

^Ibid., p.42. 60 Ibid., pp.46 -47. -21-

The most important elements of this theory are first, the recognition that "retail competition should be seen as working through a network of oligopolies which probably should be conceived as specifiable from the point of view of any individual consumer"^ and secondly, that "demand depends on 6 2 stocks". By this latter he means that because customers typically purchase a number of commodities from any shop, the demand for any particular commodity depends on the commodities with which it is stocked in all shops stocking it. Thus a change in commodities stocked by any shop will affect the demand for goods which have not changed from being stocked or not. Total market demand for the product of a processor depends, then, on the structure of the market, as "structure" is defined above. The balance of competitive power, that is, industry equilibrium with the various shops existing together 6 4 in a "steady state", can be upset by external or internal shock, but the most important to Andrews is innovation, which enables one shop to offer something new or some things more cheaply, or to change the offer of goods in a manner more attractive or convenient to customers.^

^Andrews, op . cit. , p.107.

62Ibid,, p.108.

63Cf. Ibid., p.119.

^Ibid. , p. 17 .

^Andrews and Friday, op.cit. , p.48. 22

Andrews’ theory provides for the present study both a useful methodological base for the study of an industry undergoing change and a number of insights into the analysis of behaviour at the retail level. Thus the analysis to follow will not be in terms of individual firms’ or shops’ adjust­ ments in response to external and internal events but in terms of the direction of change in sections of the industry. Again, the "network of oligopolies" conception of the retail market is basic to an understanding of the pattern of competition and its development in the grocery industry in Sydney.

To bring together the strands which have been out­ lined above the model or set of interrelated analytical conceptions can be summarised:- The grocery industry consists of firms producing and distributing groceries. Their relation­ ships in terms of goods flows is illustrated in Figure 1. The market they exist to profit from is of final consumers of groceries. At the final re-seller level, this market is served by shops which are owned by either their own manager or by a company which operates a very large number of shops. In the case of the former, independent shops, they may be isolated from other shops or they may be amongst other shops.

Their owners may be "professional" in the sense that they re­

gard the shop as an enterprise whose performance is to be as

good as possible, in terms of profit, or their owners may be

"amateurs", in the sense that the shop is not operated effic­

iently with respect to profitability or income, and is often 23 seen as a semi-retirement activity. The stability of the balance of competitive power in the industry depends on stability of internal and external parameters. Changes in this balance can stem from internal changes, for example, of values and conduct or of technology and structure, or from external changes, for example, of raw materials’ supply to processors, of other factors’ supply at all levels. CHAPTER 2 SOME COMMENTS ON THE INDUSTRY

"Processors", or original sellers, produce goods tech nically ready for final buyers. "Wholesalers" are buyers and

re-sellers of goods. They sell generally to non-final buyers.

Their function is to assemble the products of many processors so that many processors' products can be purchased, and in units often smaller than those which processors prefer to sell

"Retailers" are final re-sellers, and they assemble the pro­

ducts of many processors and sell them in single units to con­ sumers .

The market for any processor is the set of buyers at each level. That is, processors sell directly or indirectly to wholesalers, retailers and final consumers. They are all buyers, or potential buyers of any processor's goods. For the processor, however, the important buyers are final buyers of his goods, since without final buyers, his goods will not be purchased by intermediate buyers. The market for any wholesaler is the re-sellers to whom he is willing to sell and who are willing to buy from him. Wholesalers use two methods of selling:

(1) delivery vans can be used to transport goods from

a central warehouse to shops (these shops may

previously order from travelling salesmen or by

telephone or they may buy on the spot from the

24 25

van driver).

(2) buyers can travel to one of the warehouses and

make their purchases as in a retail shop.

Thus in the first case the market depends on where the whole-■ saler will send his vans, and in the second case, on the dis­ tance buyers are willing to travel.

The market for any single retail shop depends on density of population both living near and passing nearby his shop, and on the proximity of other shops and groups of shops.

If a shop is isolated from other shops, then its market depends on how far people are willing to travel. The Lewis isolate conception'*' is relevant here. If a shop is amongst other shops, then its market is delineated mainly by the proximity and size of other groups of shops. The idea of a shop’s market is not a clearly defined one, since both actions of the shop, such as variation of trading hours or credit facilities, and factors not related to the shop itself, such as a new bus service, can alter the number of potential buyers and the amounts they buy. But, as Andrews emphasized, the 2 retail shop is essentially an oligopolist.

Isolated shops, additionally, fulfil a somewhat different function to non-isolated shops for many buyers.

^Lewis, op . cit. , p.205 ff. 2 Andrews, op.cit. , p.107. See also above, Chapter 1. 26

They provide against

(1) households' unexpected needs--out of stock situations

which cannot await the regular weekly shopping trip;

(2) the small daily needs of households--bread, milk,

confectionery etc.

To demonstrate that these are especially the functions of isolated shops it will be shown that isolated shops are generally small, and that they tend to remain open for business during times other than "normal trading hours", i.e. after

5.30 p.m. on weekdays, Saturday afternoons and Sundays:- 3 With respect to smallness, the Lewis argument can be used, reinforced by the following considerations:

(1) wage costs of isolated shops are seen as being lower than the opportunity cost of the labour used; (2) rent cost is likely to be considerably lower than in a shopping centre, especially where the family lives on the premises or where the site is owned by the operator; (3) the acceptable return on funds invested will generally be lower than oppor­ tunity cost, due to the lack of knowledge of alternatives, the enjoyment of being a shopkeeper, and barriers to exit, for example, a middle aged man would very often find it hard to get a job, his family would often have to move, their capital loss would be so great that actual living standard would fall in moving to a smaller or older house, or to a

^Ibid., pp.203-206. 27 less esteemed area. Casual observation of isolated shops between 1956 and 1968 gives the strong impression that most isolated shops are smaller in physical size than grocery shops in shopping centres.

With respect to trading hours, the above listed functions of the isolated shop require trading outside normal hours if households are likely to run out of stock outside normal hours, if some small daily needs are best met similarly and if demand for confectionery and ice cream exists on week­ ends. That small shops in Sydney desire to trade outside normal hours can be seen in the agitation^ leading to the 1966 amendment to the Factories, Shops and Industries Act which defined a class of shop: "small shops", and allowed them to sell most things nearly all the time. Previous to this, a narrow range of foods was permitted to be sold after 5.30 p.m. and on Saturday afternoons, only if all other stock was completely shuttered off.^ That larger, non-isolated grocery stores did not share in the desire for longer trading hours is shown by the attitude of the Grocers and Storekeepers Association of New South Wales (hereafter referred to as the G.S.A.) to the agitation. In 1967 and throughout the 1955-65

^The Independent I No.I, April-May 1965, pp.3,5,6-7, 15-17,18. I No.2, July 1965 , pp.5-7,9,27. 34-35,39,40,44. I No.-3, Sept. 1965 , passim. I No.4, November 1965, pp.36-38. ^The Independent 1 No.2, July 1965, pp.9,27. 28 period the G.S.A. membership was comprised mainly of non­

isolated independent retailers (who can also be named

"professional independents") using paid labour.^ According

to the Amalgamated Independent Traders Association,publishers of The Independent, the G.S.A. opposed the extension of trading 7 hours beyond the limits defined by the 1962 Act.

Thus it can be said that isolated shops fulfil a significantly different function to non-isolated shops and

that their markets can be co-extensive without as much direct competition as otherwise would be thought.

Figure 1 in Chapter 1 illustrates the existence of selling and bargaining points between processors and both

types of re-seller, wholesaler and retailer. In terms of the Sydney grocery trade, direct selling by processors to retailers takes place in two situations. The first is the bypassing of wholesalers by processors, in which case pro­ cessors deliver direct to individual shops. This occurs generally where the goods being sold are perishables, and in other situations where the wholesalers’ margins exceed the cost of direct distribution.

The second situation is where the retailer can take over wholesaling functions. Chain stores are the most ob­ vious example. They buy in as large quantities as wholesalers.

^V. Dowell interview, 6 April, 1967. Mr. Dowell is the General Manager of the G.S.A.

7The Independent I No.1, April-May 1965, pp.3,6-7. 29

The processor then either delivers to a central warehouse or directly to the chain branches. Other examples of this second situation are co-operative buying groups of independent grocers where processors deal with, for example, a co-operative society formed by the co-operating grocers. The important point is that no independent firm is involved as wholesaler. The co-operative buying group is thus distinguished from the sell­ ing group sponsored by a wholesaler.

Very few processing firms also operate as wholesalers or retailers. Permewan Wright is exceptional in that it is an Australia wide group of firms involved at all levels. In

Sydney they own P.D.F. processing and retailing units and what has been Grocery and General Merchants Ltd: D. Mitchell

$ Co., wholesalers, and the "G § G" chain store. Their managements are entirely separate, but they are under a o unified financial control and do exchange information.

Woolworths Ltd., is exceptional, since its entry in 1958-59, in that it is a retailing firm which sees profit in control- q ling its supply by direct ownership where necessary. The general pattern of operation of processor firms is of diver-

g M. Anelzark interview, 23 November, 1966. Mr. Anelzark is the chief buyer for D. Mitchell § Company, third largest wholesaling firm in Sydney (1965) , owned by Permewan Wright. 9 H. Gordon interview, 1 December, 1966. Mr. Gordon is General Manager of Grocery Wholesalers Pty. Ltd., Woolworths* wholesaling unit. TABLE 1

NUMBER OF LARGEST PLANTS ACCOUNTING FOR EIGHTY PER CENT OF EMPLOYMENT IN SELECTED GROCERY INDUSTRIES, 1948-9 AND 1963 -4

INDUSTRY 1948-9 1963- 4 Pharmaceutical and Toilet Preparations 64 58 Soap and Candles 9 15 Matches 3 2 Flour milling 96 56 (a) Cerial foods and Starch 28 29 Animal and Bird foods 33 68 Chaff cutting and corn crushing 99 33 Biscuits 13 9 (a) Confectionery (including chocolate and icing sugar) 62 27 (a) Jam fruit and vegetable canning 34 32 Pickles, sauces and vinegar 20 15 Bacon curing 27 23 Butter 132 100 Cheese 46 34 Condensed and dried milk 2 12 Margarine 11 5 (a) Meat and fish preserving 19 32 Condiments, coffee, spices etc. 84 71 Ice and refrigerating 153 96 Salt 5 5 Aerated waters, cordials etc 234 188 (a)(b) Bottling 32 39 Tobacco, cigarettes, cigars 10 3 (a) Dehydrated fruit and vegetables 35 12 Ice cream 22 12 (a) Arrowroot 6 3 Other (including sugar mills and refineries) 43 60

Source: P. Brown and H. Hughes, op.cit., Table 1. (aJ These industries appear to nave had an important in­ crease in concentration. (b) This industry is included in (a) in the light of the finding of R. Ashe that small optimal size of bottling plants still allowed relatively small country towns to support a plant, while in the cities brand preference strengthening led to a fall of small city plants and brands at the expense of the stronger brands. See R. Ashe An Economic Study of the Carbonated Beverage Industry 1945-6 to 1960-61, un- published Master's thesis, Faculty of Commerce, University of Newcastle, 1965, pp.70, 73-75, 158-162, 163-174. 30 sification over different products.

With respect to concentration at processor level

Karmel and Brunt found that in 13 per cent of their food

industries four firms employed at least 50 per cent of work­

force in each industry, 29 per cent had more than four but not more than eight, 15 per cent more than eight but not more

than twenty, 40 per cent more than twenty.^ With respect to

some specialised product groups and individual lines, for

example, ice creams and other confectionery, biscuits, washing powders, soap, soups of various kinds, etc. the

Neilson surveys, for firms’ benefit, estimate market shares.

These figures are not generally available, but the few publish­

ed in the trade press indicate that four or five firms tend 12 to dominate, as at the mid 1960s. Brown and Hughes compare

the number of largest plants accounting for 80 per cent of employment in various industries in 1948-49 with that in 1963-64

(Table 1). In seven of twenty seven relevant industries the number of largest plants increased. Of the remaining twenty

in which the number of plants decreased, only seven appear to have experienced important increases in plant concentration,

i.e. increases which, when investigated, seem most likely to

^P.H. Karmel § M. Brunt The Structure of the Australian Economy Melbourne, Cheshire, 1962.

^Ibid., p.80. 12 P. Brown and H. Hughes, The Market Structure of Australian Manufacturing Industry, 1914-1963-4, 40th ANZAAS Congress, January, 1968. 31 show concomitant changes in grocery industry performance.

However, important changes not accounted for in this table concern the ownership of plants. It would be surprising to find that the control of more individual brand-name owning plants had not fallen to fewer holding companies, for example,

Unilever, Marrickville Holdings» the Petersville group,

Permewan Wright, British Tobacco, etc. Thus while processors tend to be under the control of fewer owners, the number of firms contesting a particular product market has probably not become smaller and may have increased as firms have diversif­ ied their ranges of outputs.

At wholesale and retail levels considerable change of both structure and technology took place during the period,

Specification of initial structure and technology will be undertaken in Chapter 4.

Casual inspection of any retail grocery will show that nearly all goods sold are packed under a brand name such that buyers purchase specifically a particular brand of each good thus identified. No quantitative evidence is available regarding the proportion of grocery turnover that is so identified, nor, which is more important, the change of such proportion over the 1955-65 period. But it can be said from personal recollection that such products as flour, sugar, rice, became brand identified during the period, while no types of product seemed to lose brand identification general - 32

13 ly. The importance of general processor brand identificat­

ion is that the processor has the opportunity of exploiting

and creating demand for his own products. Thus competition between processors is seen as competition between different brands for consumer demand.

But re-sellers do not in general have an interest in

the sales performance of particular processors' products,

only in their own performance re-selling any processors' products. Thus products are purchased, displayed and sold by

re-sellers not necessarily in the manner optimal to processors.

There is, therefore, a conflict of interest between processor

and re-seller that is not present between re-seller and re­

seller .

Andrews emphasizes this in his treatment of the role

of stocks in demand for commodities.^ The survival of small brand owning processors depends on the existence of shops willing to stock their products. In particular, if the

grocery industry came to be dominated by high turnover super­ markets, only leading brand processors could expect to survive,

and thus the competitiveness of processing be placed in

13 Mention can be made here of "Health Food Stores". These sell most types of dry groceries but especially nuts, spices, herbs, exotics of a healthful nature, and sell them unbranded and not prepackaged, except where this is unavoid­ able. They appear to be independently owned but members of a voluntary chain sponsored by Associated Health Foods Pty. Ltd. They represent a reaction, ideological and commercial, to the trends to be analysed below (see Chapters 4-10). 14 Andrews, op.cit., pp.105 -106,113,118-119,132-134. 33

15 jeopardy. However, Andrews neglects the importance of oligopsony and of retailer brand products, both of which will maintain pressure of competition on the few surviving brand owning processors, the second of which will ensure the survival of rather more processors than Andrews expects.

The trade press gives evidence of the importance attached by processors to "selling" their products to retailers.

Both trade newspaper and trade association journal advertising content is overwhelmingly placed by processors. Examination of

The Trader,^ The Independent,^ Self Service Merchandising,"^ 19 and Retail World showed that only about 10 per cent of advertising space was placed by retailer service providers: shopfitters, refrigerator and cash register manufacturers and similar firms.

^Ibid., pp.105-106, 106n. The existence of r.p.m. is not in question with respect to groceries.

16XXVIII 1950 - XXXVIII 1960, sampled. Variously and inconsistently volume numbered. For the purpose of this thesis the 1966 Volume No (44) shall be taken as correct, since the 1966 issues claim 44 years of publication, and 1950 Volume is numbered 28. It is the journal of the G.S.A. 17 Op.cit., passim. 1 8 I No.1, May 1958 - VII No.1, January 1964 , the last number published.

■^XIX, 1966 - XXI 1968. This is owned by Consilidated Press . TABLE 2

PERCENTAGE CHANGE OF CONSUMER PRICE INDEX FOR SYDNEY, 1955-56 TO 1965-66, BY GROUPS, (a)

Group Food Unpro- Food Cloth­ Hous - House­ Misc. Total cessed less ing 6 ing hold Meat (b) Unpro- Drapery Supplies cessed Meat (c)

Per­ centage Change 25 54 15 14 34 10 35 26

Per­ centage Weight 4th. series 32 8 24 29 11 13 25 100

(a) Table is compiled from Labour Report, No.49, op.cit. , pp.29-35, and from Commonwealth of Australia, Bureau of Census and Statistics, Official Yearbook of the Common­ wealth of Australia, No. 52 , 19 66 , Canberra, Government Printer, 1967, p,. 334.

(b) Letter from K.M. Archer, Commonwealth Statistician December, 1966.

(c) 54. % + x.f = 25

x = j(25 - 4J

15I. CHAPTER 3

PRICE INDEX BEHAVIOUR, 1955 - 1965

A preliminary view of the effects of change that took place in the grocery industry during the 1955-65 period can be gained by examination of the Consumer Price Index for Sydney.'*'

From Table 2 it can be seen that food prices rose about twice as fast as Clothing and Drapery and Household

Supplies, but only about three quarters as fast as Housing and Miscellaneous (public and private transport, tobacco and cigarettes, beer, personal services, postal services, enter­ tainment) . To gain an impression of the behaviour of prices of goods sold through grocery outlets allowance must be made for the behaviour of unprocessed meat prices, and for the part of Household Supplies that are groceries.

Unprocessed meats comprise about one quarter of the weight of the Food group, but are sold mainly in butchers shops, their prices basically dependent on supply conditions in the beef cattle, fat lamb and pig raising industries.

Since unprocessed meat prices rose by twice as much as the

Food group, the Food group without unprocessed meats must have risen by less than 25 per cent, in fact, by about 15 per cent.

■*"This index of retail prices is compiled for each state capital and Canberra. For a description of the index see Commonwealth of Australia, Bureau of Census and Statistics, Labour Report No. 49, 1961 Canberra, Government Printer, 1962.

34 35

Similarly, nearly one third of the weight of Household

Supplies are soaps, cosmetics and proprietary medicines. These are sold increasingly through grocery outlets and are very much part of the industry. They are now considered normal grocery lines, have the same distributive structure and in many cases are processed by firms connected with processors of food lines. The most notable examples are in the Unilever organization. Since Household Supplies had only a 10 per cent increase over the period, but without further knowledge of the behaviour of prices of fuel and light, household appliances, floor coverings, household and garden hardware, and school requisites, it can be assumed that price behaviour of soaps, cosmetics and proprietary medicines was very probably similar to that of processed foods.

Calculation from the mimeograph Average Retail Prices 2 in Food and Groceries, March 1963 shows that between 1955-56 and March 1963 unprocessed meat prices rose by 26 per cent, while from the published consumer Price Index, Food group had risen over the same period by 11 per cent, and the whole index by 18 per cent. This indicates that Food group, allow­ ing for unprocessed meats, rose by only about 6 per cent, or one third of the overall index rise. For the period from

March 1963 to 1955-66 the average rate of increase of the

Consumer Price Index increased slightly over the average rate

2 Commonwealth of Australia, Bureau of Census and Statistics. 36 of the earlier part of the period. Food without unprocessed meat increased probably slightly faster than the whole index, but slower than meat. The impression gained from this data is that the rate of price increase of groceries in Sydney during the period 1955-65 was slower than that of the overall Consumer

Price Index, and that this retardation took place before 1963, but probably not thereafter. There are three main ways in which this retardation

7 could have taken place

(1) through decreases in the relative prices of unprocessed food inputs, (2) through increases in the technical efficiency of food

processing relative to the other industries represent­ ed in the Index, whether by technical change, learning or work study schemes and similar methods of improving productivities, (3) through a decrease of gross margins over cost obtained by processors, wholesalers and retailers.

The first possibility offers little scope for analysis

3 There are other minor ways, notably falls in prices of other factor inputs, e.g. wages, rent, interest. It is unlikely that these would be distinctive to the grocery industry, especially over a ten year period. Labour employed by re-sellers is most likely to have distinctive movements in its wages. However, wage costs are rarely more than 10% of turnover for grocery retailers. See below, fn2, Chapter 6; fn73, Chapter 8. TABLE 3

AVERAGE PRODUCTIVITY GROWTH RATES, 1949-59

(a) Thomson______(b) Herr Labour Capi­ Mater - Total Labour Capi - tal ial tal

Food Processing 2.34 -3.7 0.49 0.69 2.3 -1.73

Rest of Secondary - - - - 4.4 -1.77

All Secondary 2.82 -3.9 -0.09 0.62 4.0 -1.72

All Economy 1.32 - - 0.36 - -

Value of Production Notes 1. Factor Productivity Quantity of Factor 2. Value of Production is valued at 1949 prices by means of (a) for Secondary: parts of the Wholesale Price Index, a wages index developed by Thomson; for Primary: an index of rural and mineral prices developed by Thomson; for Tertiary: the Thomson wages index. (b) for Food processing: Consumer Price Index Food group (2/3 weight) and Wholesale Price Index (1/3); for all Secondary: Consumer Price Index (2/3), Wholesale Price Index (1/3) . 3. Labour:- No. of workers, including working proprietors in each industry as reported in annual bulletins on Secondary and Primary industry, (a) uses estimate of total employment to reduce Tertiary. 4. Capital:- (a) Land and Buildings and Plant and machinery in use, average at 30 June 1948 and 1949, plus re­ ported additions. Depreciation of for land and buildings and \% for Plant and machinery, deflated by composite of Wholesale Price Index, Import Price Index and Thomson wage index, (b) 30 June 1938 book values of land and buildings and Plant and machinery plus additions, deflated by the Wholesale Price Index. Depreciation estimated by deflation by the Whole­ sale Price Index averaged over the previous 10 years, amounting to approximately 51 per annum. 5. Materials:- (a) At cost, deflated to 1949 by Wholesale Price Index, and for some industries, Thomson wages index. 6. Total Productivity is a weighted average of Labour, Capital and Materials productivities, the weights being in pro­ portion to Wages and Salaries, Depreciation, Material Cost, in each industry of the secondary sector. 37 in the present context due to the lack of information about behaviour of contract prices paid by food processors to producers. For meat processors the indication from the above data is that their input prices have increased faster than prices overall, while for bakers and biscuit makers the whole sale price of flour increased by 30 per cent over the periodf One way in which the second possibility can be evaluated is by comparing production to factor input ratios for food processors with the rest of the economy over the period. Two studies which have done this, buy only up to

1958-59, are those of E.J. Thomson^ and W. McD. Herr.^ The relevant results are summarised in Table 3. Thomson and Herr agree that labour productivity in food processing has not been as fast as in other secondary industries, but strongly disagree as to the difference. They also agree that capital productivity has not fallen quite as fast in food processing as in other secondary industries, but disagree very considerably as to the extent capital

^From unpublished wholesale price series, Bureau of Census and Statistics office, Sydney. ^"Growth § Productivity Change in the Australian Economy, 1949 to 1959", Productivity Measurement Review, No.34, August 1963 , pp.10-30.

"The Changing Structure of the Food Processing Industry", Economic Record XV, No.91, September 1964, pp.412-425. The only data examined with respect to structure is that from the Census of Secondary Industry which classified establishment by number of persons employed,p.420n The important distinction between plant and firm is not made. 38 productivity has fallen. This is due to differences between their measures of capital. Thomson further claims a better materials productivity increase in food processing than secondary and twice as high on increase of total productivity than the economy as a whole. In absolute terms, however, this is only a small amount: that is, where in 1949 one average factor input could produce one hundred units of food, one hundred units of G.N.P; in 1959 one average factor input could produce one hundren and seven units of food, but only one hundred and four units of G.N.P.

On the other hand, Herr, using a Cobb-Douglas two variable production function with coefficients a + 3 = 1, while making no claim about overall efficiency of food pro­ cessing relative to non-food manufacturing industries computes 7 an index of technical change using Solow’s method, which shows food processing making technical progress at a cumulative annual rate of approximately 0.02 per cent, while the non-food rate was 0.18 per cent, the overall rate being g 0.15 per cent.

^Ibid., pp.416,418. g While the meaning attached by Thomson and Herr to their respective results is fairly clear their validity is rather less so. First, the assumptions made about the industry production function are difficult to sustain in both cases. Herr uses the two factor Cobb-Douglas model with constant returns to scale. From this is derived his estimate of technical change. If in fact returns to scale are greater or less than unity, technical change has been over--or underestimated. Thomson uses a three factor model for secondary industry, but does not distinguish between output: input ratio changes due to (i) changes of factor proportions 39

Ceteris paribus, assuming unit elastic demand for G.N.P. and for processed foods, Thomson's total productivity change would imply a fall of some 3 per cent in the prices of food relative to other prices. In other words assuming unit elastic demand, Thomson implies that a 3 per cent fall in prices of processed foods can be explained as productivity change, over the period 1949-1959. Other changes, e.g. in amounts of factors used relative to whole economy (outward shifts of supply relative to demand in a perfectly competitive

Australia), in competitive structure of the industry relative to the economy, would then account for any difference of the

(ii) economies of scale and (iii) technical change. His "total productivity" results depend on his inputs being all the inputs to the industry. However, he admits that this is not so, due to the existence of inputs of services, e.g. personal, transport, postal (Thomson, op. cit. , p.14). Thus changes in the proportion of these services will affect 'total productivity' even if the output: services ratio remains the same. For primary and tertiary industries, where only labour inputs were effectively measurable, the preceding analysis applies even more strongly. Secondly, the value deflators used to estimate quantum of value of production, capital inputs and materials inputs are very imperfect. In particular, the Wholesale Price Index, used by both, is a very old and imcomplete attempt to measure a macro-variable. Changes in relative importance of goods in the regimen and changes of relative prices over the period since 1928-35 when the index was constructed (Labour Report, op.cit. , p.39) have been considerable. Thirdly^ the measures of the quantity of capital are arbitrary, measuring only the historical cost, less arbitrary depreciation, of the capital goods valued at a particular date, plus reported cost of new capital goods over the period, arbitrarily deflated both for changes in price and depreciation of capital goods. The meaning that can be attached to the result of this measure is obscure. Fourthly, the year to year consistency of the value of production data of the Commonwealth Bureau of Census and Statistics is unknown. 40 price change from 3 per cent. The Consumer Price Index shows Food Group increasing in price by 117 per cent between 1949 and 1959, while the total index increased only by 90 per cent.

Clearly many more important things than productivity change were taking place in the food processing industry over this period, even when allowance is made for unprocessed meat price changes. Thus, quite apart from the deficiencies of Thomson's analysis, it appears that productivity changes have not been important in the food processing industry during the 1950s. Lacking further evidence, it could well be assumed that this also applies to the 1960s. The same conclusion applies to

Herr's results, bound to a more restrictive set of assumptions about production than Thomson's which was a three factor model not pretending to be able to distinguish output changes due to changes in technique from those due to changes in factor proportions. The third possibility, of decrease of margins at some or all levels of the industry explains the change in relative prices in a manner consistent with the experience of the industry during the period. The changes in the structure and technology of the Sydney grocery industry will be seen to have led to the decrease of retail, wholesale and processor gross margins. CHAPTER 4

INITIAL CONDITIONS

Grocery industry performance in 1955 was conditioned by events prior to 1955, and in some respects as far back as the 1920s. The 1920s and 1930s had seen considerable change in the industry, as for the economy overall. The events which were later to have consequences for the period under study are itemised as follows. First there was an increase of the number of chain store firms and a growth in the number of branches owned by them.^ Secondly, 1924 saw the formation of what was to be­ come the G.S.A. This was specifically designed to protect 2 independents against chain stores. Thirdly, self-service was introduced, and though accepted by some independent 3 grocers, was rejected by the chain stores. Fourthly, a bitter price war ensured, caused by the slackening of demand in the Depression. This was accompanied by exit of indepen- 4 dents and entry of lower cost chain store branches. Fifthly,

1The Trader, XXXI, No.1, January 1953, p.20b ff. 2 Dowell, op.cit. , The name of the association was the N.S.W. Traders Protection Association from 1923 to 1944. Its structure and functions were more complex than is implied in the text. See G.A.J. Simpson-Lee "The N.S.W. Traders Protection Ass. 1923-1944", Economic Record XXIX, No.57, November 1953 , pp.231-244.

3The Trader, XXXI, No.1, January 1953 , p.20b ff. ^Ibid. It was said here that owners of independent stores would sell out to chains in order to gain employment from the chain. It is not known whether this happened in few or many cases, if at all. 41 42 in 1937 the Industrial Commission of N.S.W. fixed the proport­ ions of female to male shop assistants, reportedly taking away the means by which chain stores kept their costs low.^ Sixthly, buying groups were formed and certain processors were boy­ cotted by independents to counter competition from the chains.^

The Second World War transformed the conditions under which the industry operated to such an extent that the 1945-

1950 period was one of supply constraint, a seller’s market, 7 and as such meant prosperity for virtually all concerned.

During the war years entry at all levels was controlled, as g were prices and production. Demand increased. After the war controls were gradually eased. Price control, however, and, 9 to a lesser extent, rationing were still important at 1950.

Price cutting was rare at that time. H.J. Book,

Secretary of the Federation of Retail Grocers § Storekeepers

Association of Australia remarked in 1950 that "...the position is not quite today as it was in the past, in the days of 'tooth

^Ibid. See also Industrial Arbitration Reports,N.S.W. 1937, pp.456tT87.

^Ibid. 7 Briggs and Smyth, op.cit. , p.l3n. g E.R. Walker, The Australian Economy in War and Re­ construction , New York, Oxford University Press, 194 7 , p.339 , Part 2, passim.

^The Trader, XXVIII, 1950 passim. 43

and claw'..In the 1949-50 annual report of the President of the G.S.A. 11 mention was made of an approach to the Prices

Minister to complain about the proprietor of a small mixed business who cut the price of tea: the Minister had made it

clear he was interested only in cases where the maximum price was exceeded, not where the maximum was under cut. Two aspects of this are interesting, first, that the action of one small mixed business should be noticed, and second, that the President of the G.S.A. affected not to realise that price control referred to maxima only. Both aspects point to a lack of experience of the phenomenon. Some months later, an article

appeared in The Trader 12 which advocated selling better ser­ vices at the standard prices. However, it conceded that there were situations in which price cutting was justified, viz, (1) when it resulted in increased efficiency and (2) when funds were needed quickly to pay overdue debts. The liberality of 13 these concessions was not equalled in The Trader until 1958. It may be inferred from this that as that writer was not so alarmed at price cutting to react to it in an entirely emotional way, as later shall be shown to be common, price

10The Trader XXVIII, No.5, May 1950, p.8. 11The Trader XXVIII, No.3, March, 1950, p.ll.

"^"Competing with Price Cutters", The Trader, XXVIII, No.8, August, 1950, p.6.

13The Trader XXXVI, No.8, August, 1958, p.6. 44 cutting was not seen as threatening to himself. Reinforcing 14 this inference, the December, 1950 issue noted that slight price reductions in limited circumstance could be useful.

As late as 1952 a grocer whose practice it was to cut the prices of three lines only, changing the lines every fort­ night, could write to The Trader, defiantly calling himself a "cut price grocer".^

Another indication of the prosperity of retail grocers up to the early 1950s is in the small part The

Trader devoted to shop-efficiency and technical developments in selling means. The first mention of display methods and 16 in store product promotions was in September 1953. "Store promotions today play a very important part in food retail­ ing". Both retailer and processor initiated promotions were mentioned. The impression gained is that store promotions have become important enough to warrant comment in The Trader.

The only other items of any relevance to store efficiency are the numerous little homilies directed to the grocer and his employees showing the virtues of honesty, a cheery smile and a fair days work. It was not until 1955 that store efficiency became an important theme, when in September the first

~^The Trader XXVIII, No.12, December, 1950 , p.35

~^The Trader XXX, No.8, August, 1952, p.20c. 16 The Trader XXXI, No.9, September, 1953, p.5. 45

’personality of the month’ was introduced, 17 and in November, 18 the "Around about our Store" serial began. The weakest inference which can be made about this is that the world facing grocers changed in a direction indicated by an increas­

ing concern with store efficiency and selling methods, i.e. to gain a reasonable income, owners had to work more efficient­ ly. Concern about price cutting, in particular the initiation of such practice, can only come about where there is a situation of standardised retail prices. It is evident that the early 1950s was such a situation. Strict resale price maintenance was probably never the policy of all or perhaps the majority of processing firms, but it was a policy of enough of them to encourage the G.S.A, to ask all firms to 19 institute such a policy. G.S.A. policy has continued to favour minimum price maintenance up to the present time. 20 Advertisements in The Trader stressing the profit margin or mark-up available on particular lines were common in the early

17The Trader XXXIII, No.9, September, 1955, pp.14-17, He was, predictably, a full service "corner store" grocer.

±öThe Trader XXXIII, No.11, November 1955. 19 The Trader XXVIII, No.4, April 1950, p.16. 20 It is sometimes stated less bluntly. See The Trader XXXVIII No.4, April, 1960, p.6. 46

21 1950s. Other instances show the attitude of the profession­ al orthodoxy of independent retailers to price setting: in

February 1950 the editor requested the manufacturers of de­ controlled lines to "advise of any alterations in the price of their products"; 2 2 in April 1952 the behaviour of Samuel Taylor (Mortein, etc) in advertising retail prices which left a gross margin to retailers smaller than independents pre- 2 3 ferred was condemned. In August 1953 at a special meeting of the Federal Association "delegates agreed that it was not the province of the manufacturer to notify the trade of a retail price without first consulting the State Association concerned and agreeing on the adequacy of the profit margin 24 concerned". In April 1954 considerable comfort was being taken from Clause 35 of the Trade Marks Bill about to come before the Commonwealth Parliament which would enforce resale price maintenance at the discretion of the owner of the trade mark under which a good is sold. As late as March 1956 Edgells* (canners and preservers of fruit, vegetables, jams,

2^~The Trader XXVIII, No.l, January, 1950, passim, See also The Trader XXIX - XXXI, 1951-1953, passim. 22The Trader XXVIII, No.2, February, 1950 ,p.26. 25The Trader XXX, No.4, April, 1952, p.7. 24 The Trader XXXI, No.9, September, 1953, p.15.

2^The Trader XXXII, No.4, April, 1954 , p.32. Clause 35 was eventually omitted from the Bill. See The Trader XXXIII, NO.3, March, 1955, pp.5-6. 47 sauces, soups etc.) complete price list of prices to retailers from Edgells, included retail recommended prices "in response 2 6 to many requests from storekeepers throughout the State".

The need for most grocers to be told what prices to set is shown by the commencement in February 1955 of the 27 publication, monthly, in The Trader of a complete price list. This has continued in publication, despite its considerable cost to the G.S.A., without interruption to the present day.

The introduction of the price list was seen, according to the 2 8 minutes of the G.S.A. Council as an added attraction to membership. Prices were determined by accepted convention and by processors, and were adjusted in line with changes in wholesale prices. In later years at least, they were also adjusted when price cutting of certain lines became general and accepted. 2 9 However, it can hardly be said from the evidence of grocers' attitudes and actions cited above that the role of processor fixed or recommended prices was only that of informing grocers about prices, even before the pub­ lication of The Trader's price list.

26The Trader XXXIV, No.3, March, 1956, p.10 (Advt. pp.). The gross margins implied by the prices were closely bunched around 20%. 22The Trader XXXIII, No.2, February, 1955 , pp.51-68.

28Ibid., p.4. 29The Trader XXXXIV, No.7, July, 1966, p.64. 48

The reduction of short run risk effected by orderly 30 marketing agreements and resale price maintenance would not seem to be an important factor in the grocers’ desire for price maintenance. For any particular shop, stock in­ volved in short run competitive moves would not be a large part of working capital, and would not be lost, only reduced in liquidity, in most cases of price cutting by rivals, assuming the particular shop did not retaliate. In the strongly inflationary situation of the 1950s, short run movements of prices were always upwards on average. Only on stocks of goods which did not sell or were rendered obsolete would much loss be made, but this problem is not one which could be solved by resale price maintenance. An indication that the association was never success­ ful in having all original sellers nominate re-sale prices is the list of suggested margins on recently decontrolled lines in The Trader of February 1950.The suggested margins are extremely conventional, 25 per cent, 33^/3 per cent and 50 per cent, and considerably higher than actual margins overall either at that time 3 2 or later in the period, as shall be shown. This list was intended first, to fill the

30 P.L. Cook, ’’Orderly Marketing or Competition", Economic Journal LXXI, No.283, September, 1961, pp.497-511.

31The Trader XXVIII, No.2, February, 1950 , p.20.

52The Trader XXVIII, No.l, January 1950, p.3. 49 gap between decontrol of the prices of these items and the establishment of prices by original sellers, and secondly, to suggest price levels. Whether original sellers did eventually fall into line and establish prices is not known.

Because the G.S.A. was originally founded as pro­ tection for independents against chain stores, and went through a period of bitter struggle between chains and independents, it will be seen that historically the G.S.A. has been an organisation of independent grocers opposing chain stores. However, during the early 1950s some chain stores belonged to the G.S.A. There was until February 1957 a "multiple stores" division of the association with a member on the G.S.A. Council. * More significantly, in August

1954 the Chain Store Grocers’ Association expressed its 3 solidarity with the G.S.A. regarding the adequacy of margins.

33The Trader XXXV, No.2, February 1957,p.l. No in­ dication can be found concerning the disappearance of this division from the list of G.S.A. councillors subsequent to this issue. J. Barcham, later proprietor of a progressive chain, remained a councillor until April, 1958. See The Trader XXXVI, No.4, April, 1958, p.l. 3^The multiple stores thus represented were the 2-4 store "chains" owned by a few of the more successful small traders. l'he only exceptions to this were F. Monte’s "Oram's Stores", a chain of 17 stores at the time it was taken over by Franklins in 1958 after the death of Mr. Monte, and Barcham's firm which later grew as the partnership Broadhead and Barcham (Dowell, op.cit). Significantly, Monte and Barcham were the only "multiple stores" councillors during the 1950s.

^The Trader XXXII, No.8, August, 1954, p.3. 50

In October of that year the General Manager of Moran § Cato,

Lionel Brailey, was reported as saying that self service did not provide what customers want and was thus not likely to 3 6 become predominant in the trade. Performance at the wholesale level during this per­ iod was characterised by a tendency to a decreasing share of the volume of groceries sold. During the 1930s the rapid growth of chain stores along with the beginning of direct selling by processors to retailers began to affect whole- 3 7 salers. The 17% per cent margin which traditionally wholesalers had achieved 3 8 was high enough at this stage to encourage processors to sell direct to retailers. Processors able to do this would be those for whom direct selling is cheapest, relative to other processors. Distribution costs as a percentage of production cost depend on the bulk of the goods and the distance they have to be taken. Direct distribution relative to distribution to wholesalers will be profitable if the extra cost is less

56The Trader XXXII, No.10, October, 1954, p.29. Though BraileyTs comment has respect to a technical change rather than to pricing policy, it will be seen below that conservatism with respect to one generally accompanied conservatism with respect to the other. 3 7 J. David, Address to grocers and storekeepers, mimeographed. February, 1955, p.2, Mr. David is Managing Director of Davids Holdings Ltd., the largest grocery wholesaling firm in Sydney at 1965.

38Ibid., p.l. 51 than the extra revenue. The extra revenue will be the difference between the price to wholesalers and retailers times quantity. MR = Q.(Ret.p - W ). The extra cost will depend on the extra distance and the bulk of individual deliveries relative to the size of the delivery vehicle, as compared to the bulk of deliveries to wholesale relative to vehicle size, i,,e. MC = g(A distance) + h (A bulk),

3MC 3MC The larger the processor in terms of dg ' u> ah u* turnover, relative to other processors of similar goods, the less the decrease of bulk of average delivery. This will not of necessity bring about a relative increase in distance travelled., Since the larger processor will have a higher turnover on average in individual shops, these will tend to buy either larger quantities as frequently as from other processors, the same quantities more often, or some combination of larger quantities at more frequent intervals It is not clear that even if the larger processor delivers more frequently his change in distance travelled will be greater. However, economies of scale in the purchase and maintenance of delivery fleets would generally outweigh any negative effect of larger processors having to increase dis tance travelled more than smaller ones. It is likely then that there are economies of scale in distribution for pro­ cessors of any particular type of good. The capital required for a delivery fleet would also tend to discourage 52 smaller processors from direct delivery.

This suggests that the larger processors would be first to sell direct to retail. Wholesalers were then vulnerable to the loss of larger turnover brands first.

David39 claims that "by the 1950's WHOLESALE VOLUME had been drastically reduced" by the combined effects of chain store development and direct selling to independents.

Nevertheless, independent grocers, with the exception of members of buying groups still were purchasing a large proportion of their stock from wholesalers: in April 1950 the G.S.A. advocacy of "minimum price maintenance" was in the following terms:-

It must be remembered that the yardstick for the measuring of a retail price is that of the service grocer who largely purchases from the merchant and who must seek a margin on the wholesale price. In the case of chain stores, retailers who purchase through groups or co-operative wholesale houses, it must be remembered that they have overheads in purchasing, distributing and picking up, storing and paying prompt cash, all of which are services to the manufacturer.40

Matthews Thompson, one of the largest wholesalers of the 1930s, did integrate backwards and forwards in the early 1950s with the purchase of a small canning firm,

Carter Bros. Pty. Ltd., and a number of retailing firms

39 David, op.cit., p.2. Emphasis in original.

40The Trader XXVIII, No.4, April 1950, pp.17-18. 53 including S.R. Buttle § United Groceries, the former a 41 retail chain, the latter, both retail and wholesale. Group profits did not benefit immediately from these acquisitions. More spectacular was the career of Grocery § General Merchants

Ltd. G § G was formed in 1949 by the amalgamation of North

Western General Stores Ltd., a country chain of 12 large stores, David Cohen $ Co. Pty. Ltd., a Newcastle Wholesaler, D. Mitchell Ltd., a Sydney wholesaler and Bussell Bros. Ltd, a Sydney based chain retailer. 4 2 G § G built up a deficit of $800,000 by 1954, when the appointment of a receiver began a recovery which was to lead in the early 60s to take 43 over by Permewan Wright. The difficulties both these groups experienced can be attributed to both organisational problems and trading difficulties. Almost certainly the main problems were in respect of wholesaling activities. These were initially perhaps one third of G § G trading activities and possibly a higher proportion of Matthews Thompson’s. 44 Both groups tended to dispense with or reform 45 wholesaling activities in the later years of the 1950s. 41 J.A. Bushnell, Australian Company Mergers, 1946-1959, Melbourne, Melbourne University Press, 1961, pp. 156-157. 42Ibid. 45Ibid. 44 These estimates are derived from Bushnell’s pur­ chase value data (ibid.). Wholesale units of G § G are valued at $874,000. Total value is $2,318,000. Mafthews Thompson was originally a wholesaler but purchased mainly retailing units. 45 Anelzark, op.cit. 54

Even in 1957 there were still over 20 important

wholesalers in Sydney.^ However, change was rapidly trans­ forming the few of them that were to survive.

Competition between wholesalers in general is probably more ’perfect’ than at other levels in the trade.

First they sell a more homogeneous product than processors because of the need to stock all brands of differentiated products. 4 7 Secondly, buyers are more informed than buyers from retailers. 48 Thirdly, entry in a variety of forms, as

wholesaler and as wholesaler substitutes e.g. processors direct dealing retailers co-operative buying, is easy and

sensitive to opportunities for gain. The trade association of wholesalers at no stage during the period under study appeared to exercise any restraint on wholesalers’ behaviour. Mr. Harvey implied that the association had early in the period lost any role it may have had, and attributed this to ’’changes in the trade" which drew apart the interests of wholesalers, some to self service wholesaling, some to take­ over and/or liquidation, one to voluntary chain sponsorship

(Davids).^

^W.O. Harvey interview, 31 October, 1966. Mr. Harvey is Secretary and a Director of A.G. Campbell Holdings Ltd, probably second largest grocery wholesaling firm in Sydney at 1965. 4 7 Mr. Anelzark mentioned this as one of the incon­ veniences of wholesaling, Anelzark, op,cit.

48Ibid.

49 Harvey, op.cit. 55

Processor brand reinforcing advertising was the dominant promotion method used during the early 1950s.

The other form of grocery advertising, advertisements placed by shops, generally chain stores, advertising goods at particular prices available, were uncommon.^ The practice of retailers buying advertising space and subletting it to processors, though part of David Jones methods since 1945, had not spread to groceries until the 1950s.Thus pro­ cessors competed to sell their products by causing consumers to demand their products. As shown earlier in this chapter this went so far as having the processors advertise retail prices. Further evidence of the processor dominant nature of relationship is seen in the system of discounts tradit­ ionally used in the trade. Processors set selling prices to wholesalers and retailers, and sometimes retail prices, using a system of discounts: wholesalers', retailers', semi-wholesalers', with variations for various reasons.

Each processor accorded buyers the status of one of these 5 2 levels of discount. A growing chain store would not automatically buy at a lower price because of the amount

*^B. Holt interview, 6 July, 1967. Mr. Holt is General Secretary of the Australian Association of Adver­ tising Agencies.

51Ibid.

52The Trader XXXIV, No.11, November, 1956 ,p.6. 56 purchased - he would have to negotiate his accession to a higher discount. This system did not break down finally for powerful processors such as Lever Bros, Kitchens and

Nestles until 1959.^ To summarize this chapter, it can be said that in the first half of the 1950s retailers especially independent retailers were fairly easily able to make profits at a level acceptable to themselves. Wholesalers were experienc­ ing a continuous gradual fall of market share due to growth of wholesaler substituting arrangements, but they were not acting to protect their existence to the extent that might have been expected. Processors were emerging from the co­ ordinated market of the 1940s with the conception of them­ selves as competing for consumers' demand, their distributors being more or less agents providing outlet for their goods.

^Self Service Merchandising (SSM) II, No.7, July, 1959, pp.22-27. CHAPTER 5

THE CAUSES $ PROGRESS OF THE PRICING REVOLUTION

By 1955 considerable change had taken place. The initial conditions set out in Chapter 4 define a quasi­ equilibrium from which stems the significant observable changes in what may be called the Pricing Revolution.

During the period up to 1955 a number of factors, both external and internal to the industry meant that the

"quiet life" could not sustain itself:- 1. The financial difficulties in which many wholesalers, and especially Matthews Thompson Ltd., and Grocery and General Merchants Ltd., found themselves meant that recovery efforts were being made. Both firms were integrated forward,'*' and both saw their recovery in the development of chain store retailing. G $ G in fact opened a self service Super Market in 1950 at Hurstville, large even 2 by 1965 standards, and spectacular in promotion methods. It is not known whether price cutting was used initially. Quite clearly G § G saw self service as a way of recovery, whether simply through increased turnover or by lowering costs as well, for, while their difficulties culminated in the appoint-

■^Bushnell, op . cit. , pp.156-157.

2SSM III, No.7, July, 1960, p.40.

57 58 ment of a receiver in 1954, their progressive retailing policies were unchecked throughout the period. 2. Processors were adopting a strongly optimistic motivation that saw increase in turnover and of share of market in particular lines and product groups as the basis of their firms’ prosperity. The causes of this optimism are partly related to the continuously optimistic state of the Australian economy. Entry by overseas firms, four from the 3 United States , and cross-entry to new product groups took place. The relaxation of post war constraints on capital and raw material supplies allowed processors progressively to increase their production to levels where the constraint was no longer how much they could produce but how much they could sell. The progression from the absolute supply con­ straint, usually with price control, to demand constraint was not sudden or uniform. By 1955, however, the great majority of goods could be purchased by consumers in whatever quantity or brand they desired. The implication for price of such change in supply conditions in a one level model, where producers sell directly to consumers, is that price should fall. However, when producers sell to re-sellers, price will only fall if re-sellers pass on the price decreases they get. More

3 See D.T. Brash, American Investment in Australian Industry, Canberra, Australian National University Press, 1966, p.24. 59

importantly for this situation, re-sellers need accept no decrease of margin as long as no re-sellers do so: an

increase of competition amongst processors does not necessarily

imply an increase of competition at other levels. However, if competitive processors can persuade some re-sellers to sell their products at lower (cut) prices, and demand is such that re-sellers cutting price gain considerably price war could easily break out. Permanent decreases in re-seller margins may result. In 1952 there is mention of such a price war, said to have been initiated and encouraged by the processors of the products involved, between two self-service shops in Hurstville.^

3. Entry at retail level took place, especially of isolated independents, because the post war period was one of relatively easy selling and good profit, despite price control.^ People with the small amount of capital necessary, perhaps as little as $1000, seeing a way to independence, were willing to buy 'mixed businesses' and grocery businesses amongst the other small enterprises

^The Trader, XXX, No.3, April, 1952, p.ll.

^The Trader, XXVII, 1949 passim. Quite hysterical attacks were made on the Prices Commissioner, alleging that grocers were being bankrupted by the low margins available on controlled lines. This hysteria had died down consider­ ably by 1950. It is hard, therefore, to believe that the situation was as bad as the grocers made out. 60 available. By the end of the 1940's it is clear that many of these were facing difficulties.^ Two practices demonstrate this:-

(1) after hours trading: in 1950 the G.S.A. secretary and the secretary of the Shop Assistants Union customarily spent part of their week-ends 'booking' after hours traders (their associations collecting half the fines).

In February they complained that the number of offenders

"clearly indicates the extent to which this illegal trading has grown, and yet, in spite of the proof which we are continually bringing before the Government, we cannot obtain 7 any redress"--presumably a tightening of the regulations.

After hours trading continued as an issue between the larger and the smaller shops until the end of the period.

(2) price cutting: this practice appears to have begun with isolated shops, unsanctioned by neighbourly suasion but seeing the possibility of increasing turnover enough to make a reasonable living, merely by selling tea at a cut price. It was a small mixed business that attracted g attention in March 1950. The price cutter mentioned in

^Actual numbers of bankruptcies would not be likely to show this because of the small proportion of owners whose businesses would not be sold up before bankruptcy to another hopeful small business owner and possibly because of changes of social attitudes to bankruptcy.

7The Trader, XXVIII, No . 2, February 1950 ,p.28.

8The Trader, XXVIII, No.3, March 1950, p.ll. 61

Chapter 4, who explained how he cut two or three prices each 9 fortnight, was clearly not a large grocer by standards of the time. The effect of even one isolated shop breaking the rules, either of trading hours or, more important, of prices, would be to precipitate action by nearby isolated shops and, perhaps very rapidly put pressure on the turnover of non­ isolates in adjacent shopping centres. Thus an initial breaking of the rules of the game could spread like an epidemic throughout the metropolitan area.

4. Retailers were becoming aware of the self service technique of selling, of in-store promotion methods, of the American supermarket, and of the positive value attached by society to almost everything new with respect to goods and services. The resurgence of self service in Sydney has no simple explanation. Early references in The Trader to ’’cash and carry self service stores" attributes their existence to "unfair price control". 10 It notes that they often reduce the prices of leading lines to encourage trade. It is doubtful, however, whether price control can be con­ sidered an important cause. Innovation more akin to that of the Schumpeterian model almost certainly took place. It is hard to explain the early involvement of G $ G with self

^The Trader XXX, No.8, August, 1952, p.20c.

10The Trader, XXX, No.4, April, 1952 , p.4. 62 service without long run profit considerations being important

W.G. McClelland described the beginning of the move of his chain, in England, to self service as an experiment. In fact, the first one failed: "If we had not been conscious of the possible need to exploit a breakthrough....we might 11 never have undertaken (further) self service conversions”. 12 Acceptance of self service by consumers meant that self service rapidly became indentified with success, thus re­ inforcing the positive value of newness in this respect.

The situation can be summarised as follows:- For the latter years of the 1940s retailers were making profits relatively easily, as were processors. This attracted retail entry, from small capitalists buying small businesses to hard pressed wholesalers buying chain stores. Processors were strongly conscious of the need to re-establish monopoly power through brand promotion and expansion of turnover. As retail entry went beyond the capacity of the market at pre­ vailing price levels, rule breaking for survival spread. As external constraints on production eased, some processors began to encourage rule breaking retailers. Cost saving innovations such as self service, traditionally linked with lack of credit and delivery services, reappeared. Pressure

^W.G. McClelland, Studies in Retailing Oxford Blackwell, 1963, p.154. 12 See below, Chapter 6. 63 on orthodox grocers increased. Unlike the 1930s, chain stores were involved in the adoption of self service. The

Prices Commissioner, it is alleged, used as a norm the 13 cutters' prices in some few consistently cut lines. Unorthodox selling techniques appeared briefly, as in August

1952 where The Trader reported markets after the style of

Paddy's Market at Parramatta and Lakemba on Friday and

Saturday morning respectively."^ Orthodox grocers discussed a dual pricing scheme for all lines with a gross margin of less than 20 per cent:- a cash-over-the-counter price and a delivered price but decided against it. 15 * 16 What was even more important, orthodoxy hardened into an antipathy to self service and price cutting as solutions to the problem of excess capacity in grocery retailing.

The attitudes and behaviour of the conventional orthodoxy of independent retail grocery in Sydney, as seen in The Trader, give an impression of fear. They feared for

13The Trader, XXXI, No.6, June, 1953 , p.l.

■^Individual stall owners selling goods of many types in hall, at lower prices than usual operating only on one day each week. See The Trader, XXX, No.8, August, 1952 , p.20 . 15The Trader, XXI, No.3, March, 1953, p.8.

■^N.S.W. law provides for enforcement of the home delivery of groceries, fruit, vegetables, meat, and any other goods proclaimed as "home delivery commodities", subject to certain 'reasonable' restrictions. S.R. Carver, Government Statistician The Official Yearbook of New South Wales, No.54, 1955, Sydney, 1956, pp.688-689. See also The Trader, XXX, No.4, April 1952, p.15. I have found no reference to the enforcement of this law. 64 their way of living, for the survival of what can fairly be called the full service ethic. This maintains that the re­ tail grocer provides groceries as the humble servant of his customers. The grocer is bound by convention to provide courteous civility in and out of the shop. On request he should give credit, delivery and provide any unusual lines from his usual sources of supply. He must show personal interest in his customers’ requirements. At the special meeting of the Federal association in August 1953 the follow­ ing statement was made:

It is...the considered opinion of your delegates that after again hearing the discussions concerning the most suitable type of trading, the full service store­ keeper appears to be the one that will most permanently establish himself as he never loses sight of the vital necessity for successful trading - namely, personal good will established by his willingness to undertake all the necessary service for the greater comfort of his clients.d?

In May 1955 the editorial stated that ’’the full service grocer is essential to the well being of the community and the housewife in particular... The full service grocer... is still responsible for handling 75 per cent of the total grocery 18 trade in N.S.W." In September of that year the secretary of the G.S.A., Mr. Osborn, wrote that self service was "here to stay... However, the best majority of housewives cannot

17The Trader, XXXI, No.9, September, 1953 , p.17.

18The Trader, XXXIII, No.5, May, 1955, p.l. 65 and will not, be made into "pack horses" and the ’service' grocer would be wiser to develop the individuality of his shop and concentrate on that friendly personal side of his business rather than try to compete with the self service stores", 19 by which competition was meant price competition.

The threat to the full service ethic came, in the view of the G.S.A., from the inadequate margins available. 20 These poor margins caused the "unethical and unsound" practices such as price cutting, and the retreat to self 21 service as it seemed to many older grocers, who remembered 22 the 1930’s when self service had first appeared in Sydney. Thus, the progress of self service and the "pricing revolution", the change from an emphasis on selling each item to cover costs (i.e. with a gross margin on each line sufficient to cover proportionate overheads) to an emphasis on selling enough goods to make a sufficient profit may be followed in The Trader. As noted in Chapter 4, it was in 1950 that price cutting was condemned, but not universally. In December of that year it was said that slight price reductions in limited

19The Trader, XXXIII, No.9, September, 1955, p.24. 2QThe Trader, XXXI, No.6, June, 1953, p.l.

2^The Trader, XXX, No.4, April, 1952, p.4, where conversion is seen as the result of "unfair price control".

22"A Survey - Thirty Years of Grocery Trading" The Trader, XXI, Nos. 1 and 2, January § February 1953, pp. 20b ff and 7. 66

23 circumstances can be useful. After that date references to price cutting are uncompromising. In April 1952, with reference to the cutting between two Hurstville self service 24 2 5 stores, it was called a "wholly unethical business practice'.' 2 6 The very minor price cutting of the "cut price grocer" brought rebuke, as to an unrepentant sinner. The June 1953 editorial is typical of this period:

There is a tendency with the rising activity of self service only grocers to adopt the unethical and unsound method of selling such high turnover items as butter and tea at cost price in order to gain what can only be a temporary advantage over ethical and sound business methods. Competition is also so keen among manufacturers that some are allowing and even, in a few instances, we believe, encouraging certain retailers to make big displays at cut prices...(The Prices Commissioner has lowered some margins due to these,) penalising the fair and sound traders, who are greatly in the majority... (These self service stores previously) failed to displace those sound and efficient traders who wished to, and had the will to, remain in business. The only thing that must not happen is to enter into a price cutting war and probably add fuel to the fire of your own destruction....27

Price cutting and self service are virtually identified in

25The Trader, XXVIII, No.12, December 1950, p.35. 24 See above, fn4, this chapter.

25The Trader, XXX, No.4, April 1952, p.ll.

26The Trader, XXX, No.8, August, 1952, p.20c.

27 The Trader, XXXI, No.6, June, 1953, p.l. 67 this as in many other statements. The aid of processors is 2 8 often called for to stem the tide of price cutting. But the cutting continued, as did the growth of self service.

The first constructive step taken by the G.S.A. was its 2 9 advocacy of buying groups in October 1954 and its help in 30 establishing a number of the, e.g. in Wollongong, but the 31 full service ethic held its ground for another year. While in September 1953 there were still hopes of eliminating price 32 cutting from trading, these had completely vanished two years later: buying groups, said the editorial, are "the only method whereby the independent grocer can continue 3 3 to trade. In December 1955 it was claimed that price cutting had the industry in chaos" on a national level, and in January 1956 members were enjoined to "Watch Your

Expenses...Also remember to display and feature the more profitable lines and these extra sales will help to cover the 35 steep increases in expenses". The pricing revolution had

? 8 The Trader, XXXI, Nos.9 § 12, September § December, 1953, pp.3 and 1. 29 The Trader, XXXII, No.10, October,1954 ,pp.5-6. 30 The Trader, XXXII, No.11, November,1954 ,pp.31-34.

^See below.

^The Trader, XXXI, No.9, September, 1953 ,p.3.

^The Trader, XXXIII, No.9, September, 1955, p.l. 34 The Trader, XXXIII, No.12, December,1955 ,pp. 27-28. 35 The Trader, XXXIV, No.l, January, 1956, p.l. 68 not penetrated The Trader as yet.

The deep suspicion with which self service was re­ garded was not overcome fully until March 1956 when it was stated that "in future, in addition to our regular articles... for the counter service grocer we will also include articles 3 6 designed to help the self service operator." Perhaps it is significant that the non-self service grocer is not called "full service", with its emotive overtones, but

’counter service’. The earlier suspicion has been obvious at many points in the present study. Examples are (1) in 37 the moral to the "Survey", that there is nothing new in self service, and that the public is obviously not ready to become "unpaid shop assistants and beasts of burden", especially in view of the rising standard of living; (2) in 3 8 the editorial quoted above; (3) in the report of the special 39 meeting of the Federal Association referred to above; (4) in the report of the secretary to the G.S.A. annual general meeting in March 1954;4^ (5) in the editorial of May 1954 where Australian grocery is warned not to follow America

56The Trader, XXXIV, No.3, March, 1956, p.l. 3 7 See above, fn22, this chapter.

^See above, fn27, this chapter. 39 See above, fnl9, this chapter.

4QThe Trader, XXXII, No.3, March, 1954, p.9. 69

into low margin self service;44 (6) in the reception favour­

able reports on self service by delegates to the Federal 4 2 conference received from The Trader in October 1954; (7)

in the favourable reception of Lionel Brailey's remarks

about self service not providing what customers wanted;*4 *^ * and*

(8) in Mr. Osborn's sober appraisal of September 1955, that

self service is "here to stay... However, the vast majority

of housewives cannot and will not, be made into "pack horses"

and the 'service' grocer would be wiser to develop the

individuality of his shop and concentrate on that friendly personal side of his business rather than try and compete with self service stores".^ This was one of the last times

that the anti-self service cry was raised. In December of

that year the "Personality of the Month" was a self service 45 grocer, and by March 1956, as has been shown, the G.S.A. had officially converted. 46 It has been shown in Chapter 4 that a number of

41The Trader, XXXII, No.5, May, 1954, p.l.

4 2 The Trader, XXXII, No.10, October, 1954, p.5.

4^Ibid., p.29.

44The Trader, XXXIII, No.9, September, 1955, p.24.

4 5 The Trader, XXXIII, No.12, December, 1955, p.9.

46 See above, fns33-36, Chapter 4. 70

the chain store firms were conservative organisations,

no more willing to experiment than the majority of independent

grocers. Lionel Brailey, advocate of counter service in 47 1954, was general manager of one of the most important

chains in N.S.W, Moran and Cato. However, some chain stores,

in particular G § G, were active innovators from as early as

1950. The G § G Hurstville Super Market has already been 4 8 4 9 mentioned. In 1952, while investigating the "markets",

The Trader also noticed G § G's "Superette" and a hastily

set up shop next door, complete with turnstile and checkout,

selling "£25,000 worth of Bankrupt stock" (while all the

grocery shops around were selling specials).^

1954 was said to be the year in which the chains began to bring their prices down, according to a corres­ pondent, possibly the editor, of Self Service Merchandising

in a report on the history of self service wholesaling in

Sydney. ^ But even so, in January 1955 , when The Trader re­ ported on a promotional campaign of considerable size in

47 See above, fn 43, this chapter.

^See above, fn.2, this chapter. 49 See above, fn.14, this chapter.

^The Trader, XXX, No.8, August 1952, p.20. The name "Superette" survives for G § G's smaller stores even unto the end of the period. All are self service.

^SSM III, No.1, January 1960, p.33. 71

G § G’s Hurstville Super Market, the general manager of G § G,

Norman Tieck, felt it necessary to explain that self service prices had to be lower than those of a grocer providing delivery in order to make it worthwhile for housewives to 5 2 carry their parcels. It was in 1954 that Tieck and Cornock purchased the moribund Franklins chain and began its trans­ formation into the cheapest grocery retailer in Sydney (Tieck was not involved in Franklin’s management until 1957). The pricing policy of this firm from 1954 onwards was to set a price on each line sufficient to provide a gross margin of not more than 10 per cent, while abiding by minimum price maintenance agreements only where they are completely enforced 5 3 throughout Sydney. Thus low price level chains were in existence by 1955, undercutting the orthodox grocers who maintained conventional margins of the early 50's. They did so on overall gross margins which were perhaps only half the conventional margins.

Wholesaling firms had begun to initiate changes in methods in 1954. Group Buyers and Distributors had opened

^The Trader, XXXIII, No.1, January 1955, p.48.

53SSM III, No.7, July 1960 , pp.30-44.

^Briggs and Smyth found the two major price cutting chains in Western Australia had gross margins of about 10%, while some of the independents had gross margins of up to 16%, and this in the 1960-64 period when independents in Western Australia could be expected to be hard pressed. Briggs and Smyth op.cit, pp.96-113 , 122 , 150 , 158. 72 a self service warehouse in that year,*’*’ while in January

1956 The Trader reported enthusiastically on the Norma Trading

Company's self service wholesale warehouse, with prices at least 5 per cent better than the usual channels.^ However, it was not until the late 1950s that the self service whole­ salers and the voluntary chain sponsors, a later and belated wholesaling innovation in Sydney, effectively remained as 57 sole survivors. A.G. Campbell, the largest of the self service wholesalers, did not open its first self service 5 8 warehouse until 1957, and completed conversion in 1961.

By 1956, a Neilson survey put 5 per cent of

Australian grocery stores as self service, but 31 per cent of chain stores (defined as 4 or more under common ownership) 5 9 were self service. Since the proportion of turnover sold by chains was higher at all times in Sydney than in other states, perhaps excluding Western Australia in the mid 1960s, the proportion of self service stores in Sydney could well

55SSM III, No.1, January 1960 , pp. 33-36.

^The Trader, XXXIV, No.1, January, 1956, p.6. Apparently price cutting at wholesale was ethical and sound, while not being so at retail. The long established co­ operative wholesaling firm, Amalgamated Wholesalers Ltd., previously enjoying the support of The Trader, reacted con­ servatively in complaining to the G.S.A. A.W.L. did not receive a conciliatory reply. See The Trader, XXXIV, No.4, April 1956, pp.34-35. 5 7 David, op.cit., passim. 5 8U Harvey, op.cit. 59 The Trader, XXXIV, No.3, March 1956, p.6. 73 have been considerably higher than 5 per cent. By 1955 the structure of the grocery industry was ~ -— ------— facing considerable stress. Inter-processor competition was heightening, due to growth motivation and entry. A number of chain stores, including the Matthews Thompson group and G § G were both overcoming their earlier problems.^ Flemings Food Stores were similarly motivated and were converting their stores to self service, which was being seen as acceptable and "progressive", by consumers. They were all adding stores to their chains, while new firms such as Franklins, were beginning their growth. Professional independents were taking action to protect themselves and were being seen as fighting for survival. Isolated independents were, by a constant flow of exit and entry, maintaining pressure on the professionals at the other end of the scale. Extremely poor information and low capital requirements kept up this flow long after the halcyon days of the *40s and early ’ 50s were over. Growth of chain stores, the practice of direct selling to retail and, in small measure, the growth of retailer buying groups had begun the elimination of traditional wholesalers. New technical possibilities for distribution methods were being copied, and developed, from mainly American sources, with the support both of the successful experience of innovators and of, for example, the virtual monopolist in cash registers,

^See above, fns.42-46, Chapter 4. 74

National Cash Register.^ To the extent that these technical possibilities were cost saving and preferred by, or accept­ able to, the buying public, the capital requirement of the viable grocer's shop would rise. To the extent that the professional orthodoxy of both independent and chain stores refused to accept these innovations, they would decline further in turnover, profitability and numbers. The next five years saw this decline take place.

61 ±As early as January 1953 a National Cash Register executive asked the G.S.A. for opportunity to evangelise their members for self service. See The Trader, XXXI, No.l, January 1953, p.13. CHAPTER 6 THE TECHNICAL POSSIBILITIES

It is fairly clear from Chapter 5 that self service became seen as the progressive and efficient way to sell groceries. At a margin of encroachment^ counter service gave way to self service. The technical possibilities open to both chain and professional independent grocers involved, first, decision about self service, but other possibilities existed along with self service. These also are to be ex­ amined below.

The cost advantages of self service relative to counter service are in its lower wage cost. The present writer is unaware of any other writer, academic or otherwise, who would question this. However, there are not many instances of the proposition being tested in the available literature. Fulop claims that in England the service shop of 1957 had wages as percentage of sales of 7 to 8 per cent. For the less than 1500 sq.ft, self service shop it was 6 to 7 per cent. For larger shops, up to supermarket size

(evidently shops of more than 3000 sq.ft.) it was down to

4-5 per cent. The economies of scale in labour usage are 1 That is, where self service came into competition with service, self service tended to dominate. It is likely that many self service stores failed in the face of counter service opposition, but overwhelmingly self service was re­ placing service.

75 Fi pure 3

Possible Cost Functions of Service

and Self Service Shops

EXPENSES PER UNIT OF COST OF GOODS SOLD

SELF SERVICE

UPPER LIMIT OF COST OF GOODS SOLD 76 said to flow from more specialised staff, more continuous use of staff and heavier capital investment in equipment of a 2 labour saving kind. The heavier capital cost of self service stores does not seem to have been great enough to offset the labour cost saving. It is probable that comparative costs would be like those depicted in Figure 3.

The Briggs and Smyth study, with both service and self service stores in its sample, showed an exhaustion of 3 economies of scale at the upper limit of the "one man" shop.

Holdren, studying supermarkets, found some evidence of 4 economies of scale, but somewhat stronger evidence that chain supermarket branches did not achieve any better cost ratios than independent supermarkets.^ This would indicate that the overall cost advantages of self service accrue to quite small firms, but are not increased as firm size increases. This does not mean there are not other advantages of size, for

2 C. Fulop Competition for Consumers, London, Unwin, 1964 , p.25, quoting ’’Report on Self Service Trading, Census of Distribution, 1957", Board of Trade Journal, 4 September, 1959 , and ’’Labour Costs in Self Service Stores and Super­ markets", Self Service, October 1962, p.62. See also McClelland, op♦cit., p.26, who points out that even a 2% cost saving can allow spectacular price cutting on price levels pertaining before conversion. 3 Briggs § Smyth, op♦cit., Chapter 4. 4 Holdren, op.cit., pp.42-46.

^Ibid., pp. 62-63. Cf. Andrews, op.cit., p.117. 77 example, buying advantages (not shown in Figure 4 nor in Briggs

§ Smyth) and promotional advantages.

The almost universal association of counter service with credit and delivery and of self service with the lack of these indicates that substantial costs are simply trans­ ferred onto the customer when self service shops replace counter service. There is no inherent reason for this assoc­ iation, and later in the period there are examples of its violation. Nevertheless, the spread of self service depended on the acceptance by the consumer of what conventional grocery called the "packhorse" function.^ It would be expected that the timing and progress of the re-introduction of self ser­ vice would depend on (1) the progress of wage increases and award changes with respect to conditions of employment, (2) the observed success of self service operators indicating the nature of consumer preference for self service, (3) the availability of technical knowledge of how to operate a self service store, and (4) the cost and availability of equipment such as cash registers, open top refrigeration etc. The cost and availability of capital is also of importance if there was a long run change from scarce to plentiful capital between

^The Trader, XXI, No.2, February, 1953, p.7. 78

7 1950 and 1958 or so. The importance of internal financing means that the money market by itself does not necessarily measure the change relevant to either chain or independent grocers. The trade journals are remarkable for a neglect of the first factor in discussion of self service. Self Service

Merchandising did not throughout its career mention the cost­ saving advantages of self service. The award rates over the period may well reveal significant points at which it may be expected that decisions to convert would be precipitated. It is unlikely however that there is any single point from which it can be said self service became economic. The evidence seems to indicate that self service has always been cost saving (cf. the view that grocers were initially forced into o self service due to price control ) but that the cost saving motive was by no means a dominant one compared to the possibilities for increasing turnover promised by advocates of self service from the early 1950s and achieved by enough self service operators to justify the claims, at least in the eyes of the trade press.

In the case of McClelland's "Laws' Stores" in 7 All the interest rates listed in the Reserve Bank Annual Reports increased over the period. See Reserve Bank of Australia Report and Financial Statements, Sydney, 30 June , 1968 , p.48. However, the capital market developed very dramatically during the 1950s, and thus it can be said that the availability of capital increased. See R.R. Hirst and R.H. Wallace (eds), Studies in the Australian Capital Market, Melbourne, Cheshire, 1964, passim.

^See above, fn.13, Chapter 5. 79

Newcastle on Tyne, England, the main factors involved in the decision regarding self service seemed to be first, the

American example showing self service to be dominant there; secondly, the end of "the non-expansionist atmosphere of rationing and the feeling that priority had to be given to 9 doing better what we are doing already", and thirdly, the development of experimental data through a number of years of trial and error culminating in the eventual feeling that sufficient knowledge had been accumulated to allow a full programme of conversion and rationalisation to take place.^

Both a changing world and a changing view of the world were necessary to the final decision to convert fully.

Acceptance of self service by consumers rested on a number of sociological factors, the importance of each of which is at present unknown. The following can be listed:-

(1) increasing ownership of motor cars; (2) increasing

leisure with shorter working week, especially free Saturday mornings; (3) increasing proportion of working wives, which means that delivery during the week is often inconvenient;

(4) identification of the cut price grocer with self service;

(5) increasingly positive societal value attaching to newness

(6) anonymity of self service shopper allowing more flexibil­

ity of purchasing patterns, thus increasing price elasticity

^McClelland, op.cit., p.147.

10Ibid., pp.147-150. 80

of turnover and thus rewards to price cutting; (7) increasing incomes and continuous prosperity, along with the development of consumer credit for durable goods allowing a decrease of demand for credit for non durables.

It seems reasonable to conclude that self service was in general a more efficient method of selling at retail

than counter service. Costs appear to be lower per unit of turnover, and demand generated by even moderately skilled management of self service shops to be higher than the equivalent use of skill in the equivalent counter service shop.

The advantages of chain store operation over in- dependents is very fully dealt with by Fulop. 11 Without substantiating cost data it cannot be known to what extent she is idealising the chain store, showing the advantages of the efficient firm, and to what extent all the advantages she lists are in fact realised by the average chain store. The advantages seen can be summarised as, first, those of integrating wholesale and retail functions, and second, those

of specialisation of productive factors. 12 Speed of inform­ ation flows from retail to processor level via the central buying section of the chain store firm are stressed as reduc-

11 Fulop, op. cit. , Part I, Chapter 2, passim, especially pp.13-15, and Part II, Chapter 2, passim.

^2Ibid., pp.76-81. 81

13 ing speculative risk. Eliminating of the need to persuade retailers to buy since the "retailers" are under direct con- 14 trol, eliminates a certain cost of the independent wholesaler.

Flexibility of shop location and method of operation means 15 that profit possibilities are more easily taken advantage of.

Fulop's "model" in this argument comprises two functions, wholesale and retail. The control of these functions can be separate, the independent wholesaler and retailer, or unified, the chain store firm. It cannot demon­ strate that independent wholesalers cannot be more profitable in a rate-of-return sense than the chain. As Andrews points 16 17 out, and as the present writer has stressed, it is en­ tirely possible for continuous losses to be made, in oppor­ tunity cost terms, on the same retail site for an indefinite period. Fulop does demonstrate first that, if her enumeration is exhaustive, the cost of efficient wholesaling and retail­ ing is reduced if wholesale and retail functions are integrated,

13Ibid.

14 Ibid■

15 Ibid. This is not inconsistent with Holdren’s observation (op.cit., pp.62-3) that chain store cost ratios are the same äs independents'. He was only referring to individual branch costs, not to overall cost and demand possibilities.

°Andrews, op.cit. , p.136. 17 See above, Chapter 2. 82 and secondly that the efficient chain store can sell more cheaply than the efficient independent store. There seems little reason to doubt this conclusion, but considerable reason to doubt whether in Sydney the confrontation of efficiencies occurred, at least before 1963 or so.

Further technical possibilities than simply the panaceic self-service are open to independently owned whole­ sale and retail stores. The techniques of the voluntary chain have been developed from the early 1920s in the United

States when the I.G.A. and Red and White Stores groups were formed.

The buying group is the least sophisticated version of this technique. A number of retailers agree together to buy direct from processors on the same account. Thus, weekly or fortnightly, each member sends his order to a central point. This may be a member who acts as administrator of the group, or in more developed cases, a warehouse owned by the group with part or full time employees of the group adminis­ trating. One order is collated for each processor, who delivers, generally to the central point. Cost of adminis- tration is shared by members. A variant of this is a retail­ er owned wholesaler. Examples are the (now defunct) Sydney firm Amalgamated Wholesalers Ltd., and in England, the well

1 8 SSM III, No.10, October 1960, p.28. 19 This type of scheme was used in Sydney in the 1930s. An example is the St. George District Grocers Assoc­ iation . - 83 - known Co-operative Wholesale Society.

A development of the buying group involves the integration of members’ selling policies as well. Members agree to co-ordinate what they sell and how they promote their sales. The group thus can appear as much like a chain store operation as it thinks fit, but without either the possibility of much more specialisation of labour in the shops than in non-members’ shops or the flexibility of shop location with which a chain can ensure its survival. 19

Selling groups are more typically sponsored by an independent wholesaler or, as for example in England and 21 the United States, by a group of wholesalers. Retailer members agree first to buy through the sponsoring wholesaler, more or less exclusively, this varying from group to group, secondly, to sell particular lines at particular prices at particular times, sometimes all lines at all times, thirdly, to co-operate in all special promotions, gimmickry etc., fourthly, to maintain stores above some acceptable minimum of cleaness, well paintedness--often in particular colours etc. Generally, prospective members have to come up to some standards with respect to physical size or turnover, actual

20in his own small chain store firm McClelland notes that in one five year period more than two fifths of branches used at the beginning had been replaced by the end. There were fewer stores at the end than at the beginning. McClelland, op.cit., pp.6 , 149 , 154-157.

21 Fulop op» cit., p.155. 84 or potential as assessed by the group management. Management problems of voluntary chains are in many respects likely to be greater than those of corporate chains, due to the lack of power of management over the actions of retailer members. The importance of this as a problem is seen when it is recalled that the attributes of an independent grocer have an almost common denominator in the desire for independence, dislike of the "wage rat race" and subservience 2 2 to superior authority.

Though it can be considered that all these possibil­ ities were known generally to the Sydney grocery industry well before even 1955 active consideration of the more radical forms, for example, the voluntary chain, had to await the development of considerably stronger pressures on profits and 1ivlihoods. As a technical possibility for profit making the development of supermarkets in the 1950s was not confined to the already existing chain stores, nor was successful operat­ ion seen to depend on the development of a chain. The defining characteristic of "supermarket" is size relative to some average size of (self service) shop. What would be

2 2 R. Nicols, claims these to be among the factors influencing buyers of small businesses in Sydney during the 1955-65 period. Letter from R. Nicols, Secretary of the A.I.T.A., 28 October 1966. See also above, Chapter 2. That this spirit of independence created problems for voluntary chains in Sydney is evidenced below, Chapter 8. 85

called a supermarket when it opens in 1956 may not have much in common with even the average shop opened by any one of the progressive chains in 1963, and certainly not with the

ill fated Big Bear of 1959. Important in the supermarket conception is the en­

abling of the customer to buy all of her weekly needs in the

one shop behind the one set of checkouts, and enticing her to do so by rivalling in all ways the offers of specialist

shops. The capital requirements of such shops are relatively much greater than those of even the well fitted self service

grocery. The prices of goods in such shops and the services

available must balance up to a mix at least as good as those available in other shops. In the context of Sydney post-1955 this meant prices at least as low over the whole range, as other shops, and the availability of parking, though not necessarily, and not often, provided by the supermarket. Supermarkets had shown their competitive possibilities by reputedly becoming dominant in the selling of weekly goods in many parts of the United States. In summary, the technical possibilities for grocery retailing in 1955 were first, to further develop self service, secondly, to concurrently experiment with price-

service mix, thirdly, to develop viable chain store organis­

ations both corporate and voluntary, and finally, to develop

"one stop shopping" with the supermarket.

The relative importance of these possibilities for 86

the continued development of the Sydney grocery industry, while dependent mainly on more or less subjective prejudices

and biasses of retail firm managements, on the efficiency of

their firms in carrying out policies, and on consumer accept­

ance of one or other possibilities was also dependent on the

action and reaction of processors and wholesalers to changes

in technique and consequent or implied changes in structure.

For wholesalers the technical possibilities were

first to embark on the formation of voluntary chains, secondly,

to use more efficient goods handling techniques, and thirdly,

to set up self service warehousing and compete actively for

custom after the manner of a retailer. Survival of the

independent wholesaler was and is dependent on the survival

of the independent retailer. All these possibilities express

this dependency. But the survival of independent retailers

does not depend entirely on that of independent wholesalers,

since methods of direct dealing between processor and retailer . . 23 exist.

For the survival of any wholesaler at least one of

the possibilities had to be taken up. The relative profit-

2 3 It is likely that wholesalers were more conscious of the second relation than of the first. This is to be expected in a society where there is prejudice against the middleman, whose function is not as obvious as processors' and final re-sellers' and is generally suspected of unfair profiteering. An example of wholesalers' fear is in Grocery and Storekeeping News, 15 February, 1955, p.69, where the Victorian wholesalers' trade association ridicules the idea of "cutting out the middleman". 87 ability and "growth potential" of each possibility was directly linked to the development of retailers. If not enough retailers would join a voluntary chain, or be suffic­ iently loyal, then this possibility would be closed. If small retailers disappeared, then the self service warehouse would be bereft of customers. If most processors could deliver direct, and continue to change to direct delivery despite increases in wholesaler efficiency, then the in­ dependent wholesaler would be dominated, and decline to extinction.

For processors the possibilities were less obviously spectacular. But some possibilities for structure would certainly affect processor and industry performance. In particular the growth in concentration of buying, if either chain stores extended their market share or independents coalesced into a number of voluntary chains, could affect the power of processor owned brands through development of stronger store identification, such that shoppers no longer demanded a particular processor's products, but instead trusted the judgement of distributors.

Chain stores were already using the technique of co-operative advertising to finance their growth. 24 Regular press, radio and later television advertising by retailers, paid for in large part by processors of lines being advertised,

24 Holt, op.cit., See also below, Chapter 8. 88 was an important part of retailers' store promotion. Without processor finance the burden of promoting would probably have slowed the growth of retailer self-identification.

The strengthening of unaffiliated independent selling, would ensure that inter-processor competition would not be complicated by oligopsonistic tendencies at other levels. This could occur through the development of inde­ pendently owned supermarkets. Continued growth of national media advertising rather than retailer advertising, for example, in national women's magazines, in press, radio and television, of such sophistication and cost that it could only be useful if used in all states would strengthen processor brands and thus processors' power relative to 2 5 retailers still further. Considerable importance for development of distrib­ ution techniques by large scale distributors depended on the extent to which processors would co-operate. The development of more flexible trading terms, as exemplified by co-operative advertising, willingness to allow particular promotional techniques such as "loss leading", dual line offers (i.e. two products, not necessarily from the same processor, taped together and sold for the price of one, or one and a half), give aways, etc., which could be such as to decrease sales of 2 5 The difference between retailers' and major pro­ cessors' advertising in the mid 60s, especially in television and the womens magazines, shows that national processors can afford far more sophisticated advertising than all but the largest one or two retailers. 89 some lines (the not-given away etc) in the short run, or to lead to fear of adverse reaction over a period, were all more favourable to large scale re-selling than small scale.

Packing of distributor owned brands represents the most dangerous of all these retailer-based practices for the brand owning processor, but it has a number of short run advantages to the processor involved. For example, unused capacity could be filled up during slack periods while processor brand takes precedence in production schedules, sub-standard batches could be sold to distributors under distributors’ labels, compromise of a national brand could be avoided in periods of low quality materials, e.g. fruit and vegetables spoiled by weather conditions.

Inter-processor competition and the ambitions of individual processors would both be important elements in determining the extent to which processors would foster large scale selling in any of these ways. The stronger a processor’s brands and the weaker his short run ambitions, the less willing he would be to promote particular distri­ butors . CHAPTER 7

THE PRICING REVOLUTION COMPLETED, 1955 - 58.

Between 1955 and 1958 the continued growth of ex­ perience in the use of promotion methods by both processors and chain store retailers maintained pressure on profits of the technically backward at all levels.

During 1956 The Trader became very much concerned with store management, the necessity for modernisation and the benefits of self service.^ In July, the first convention of the G.S.A. was held, to promote knowledge about merchan- 2 dising trends, new developments in products and equipment.

In September the editorial was devoted to the "rapid growth 3 of chains and monopolies" and the dangers thereof. There is evidence that opinion about low margin trading was still divided. In August 1956, it was noted that a system of differential resale price maintenance, such that the self- service price is lower than the counter service price, was advocated by certain processors and distributors. They claimed that only with such a dual system could resale price

^The Trader, XXXIV, 1956, passim., especially No.8, August, 1956, p.l, when self service is editorially commended to all grocers’ consideration.

2The Trader,XXXIV, No.7, July, 1956, p.l.

^The Trader, XXXIV, No.9, September, 1956 , p.l.

90 91 maintainance be operated successfully.4 5 This system was introduced after 1960 by the G.S.A. to their retail price list, published monthly in The Trader from February 1955 onwards. The South Australian President of the Retail

Grocers and Storekeepers Association of Australia, 1955-56, expressing opinion rather more conservative than that characteristic of The Trader at the time, saw four reasons for the ''dangerous and pernicious practice"^ of price cutting

(1) Some traders think price cutting useful; (2) self service operators are forcing price levels down "with an almost total disregard for profit margin"; (3) Department stores and variety chains are using selected grocery items to draw traffic, (4) "'Opportunist' manufacturers (are) seizing the chaotic conditions prevailing to spread un­ realistic propaganda through the medium of some so-called

'grocers' publications.

Price maintenance was still effective throughout this period, and indeed into the 1960s,on a number of lines of a number of processors, mainly the more powerful, such 7 8 as Lever Bros. and Nestles.

4The Trader, XXXIV, No.8, August, 1956, p.12.

5The Trader, XXXIV, No.11, November,1956, p.4.

^ Ibid..

^Ibid. , p.38 .

^The Trader, XXXVI, No.2, February, 1959, p.5, Nestles experimented with a scheme where price was main­ tained within a certain range. 92

It is doubtful whether processors of less importance than these, Lever Bros., a subsidiary of Unilever and challenged independently only by Colgate-Palmolive for the soap powder and powdered detergent market; Nestles, a Swiss firm in a similarly commanding position with respect to con­ fectionary lines--universally price maintained until 1966-- and to for example its "Reduced Cream", and "Nescafe", both 9 lines later to become especially popular with price cutters.

In July 1959 when both Nestles and Lever and Kitchen announced open quantity discount trading terms, one "prominent retailer" said that two or three years ago, i.e. 1956-57, words like "happy, honest partnership", "sharing of benefits" and "completely open terms" from a manufacturer would have been laughed at.^9 10This gives some idea of the intensity of competition between distributors and between processors and the difficulties at bargaining points faced by processors, trying to maximise number of oitlets through which their goods are sold, when distributors realise their power. Chain stores began to build distinctive images during this period. Flemings, for example, began to be seen as aggressively cheap, willing to match any price, providing no customer services--a very stark contrast to the full

9SSM, III, No.4, April 1960, p.ll.

10SSM, II, No.7, July 1959 , pp. 22- 27 . Perhaps two or three years later they were again to be laughed at. 93

11 service grocery. Franklins, using the technique of uniform margin, was establishing its claim to be the cheapest grocer in Sydney, 12 relying entirely on high turnover generated by good location, without any advertising external to each shop. Broadhead § Barcham began building large and modern super­ markets with an entirely different appeal from the often dingy crampedness of both Flemings and Franklins. 13 In March 1958 an advertisement appeared in Retail

Week for ambitious young men (21-32 years of age), experienced in grocery selling, for training as grocery managers for

Woolworths. 14 It can well be said that from this time onward the possibilities for the structure of the grocery industry were transformed beyond the extent of the pricing revolution, for Woolworths was in size considerably larger than any chain store selling groceries at that time, and with the other variety chain, Coles, which could hardly be expected to let Woolworths go in alone, would double the investible funds available to grocery selling in Sydney. Wholesaler action in this period was aimed first at maintenance of the status quo with the help of more

nSSM, III, No.2, February, 1960, pp.26-38. 12 The earliest substantiation of that claim to be found is in SSM V, No.8, August 1962, p.12.

~^SSM, III, No.l, January 1960, pp,23-28. 14 Retail Week, XI, 28 March, 1958, p.9. 94 efficient handling and accounting methods, and secondly, at self service wholesaling. It was not until 1958 that Davids

Holdings Pty. Ltd., now the largest of three major independent wholesalers in N.S.W, moved to its present one floor ware­ house, essential for low cost turnround of groceries, given that transport and rental costs (per sq.ft, working area) are indifferent between multi floor and one floor arrangement.^

No move to set up a voluntary chain had been made at this time in Sydney except for an attempt by Mitchells in 1957 to set up the "Family Grocery Group" for relatively large independents, those with turnover of $1500/week at least.

This attempt failed through lack of support from retailers^

In 1957 Mitchells’ financial situation, as part of

Grocery and General Merchants Ltd., was very weak indeed, but swift conversion to self service enabled profitability and turnover to improve from then on, with very stringent economies in the use of funds, none the less involving take- 17 over of two small self service wholesalers.

The third important Sydney survivor is A.G.

Campbells, who began conversion in 1957, but did not complete 18 conversion until 1961. Up to 1957 Campbells had had a

15 David, op.cit., p .4. 16 Anelzark, op.cit. 17 Ibid. 18 Harvey, op.cit. 95 small positive rate of turnover increase. From 1957 to 1966, however, turnover grew from $2million/year to about $15 19 million.

Other suppliers of metropolitan shops either con­ verted to self service but did not achieve the same growth rates, e.g. P.D.S., Group Buyers and Distributors, probably because of less efficient management, or did not attempt to compete and either became insignificant or were taken over

(by 1962) by Davids (e.g. John Bardsley, Northern Grocers 2 0 21 Wholesale), by Mitchells (e.g. Norma Trading Co § Merchants) and sometimes by a processor (e.g. W.C. Douglass).

The period up to 1958 saw wholesalers in general at their least important, with direct delivery still extend- 2 2 ing. Wholesalers had not begun "to think and act retail" 2 3 but were seeing that this would probably be necessary.

Independent retailers were beginning to take 24 positive action in the face of competition. However, buy-

19 yIbid. 2 0 uDavid, op.cit. , p.4.

^Anelzark, op. cit.

^David, op . cit ♦ , p.3. 23 Mitchells venture into group sponsorship in 1957 shows that the example of the Victorian industry especially was not being entirely ignored. 24 See above, this chapter. 96 ing groups were the most radical innovation of the period.

Selling for turnover rather than margin, though it was the basis of progressive chain store policy, was not openly espoused in The Trader. The most open reference to it is in a Kelloggs advertisement, urging retailers to allocate space on shelves to products on the basis of sales, thus if four feet of space was available for breakfast foods, Kelloggs ought to get three since Kelloggs sells three times as much 2 5 as the rest. It is doubtful whether many retailers of the

G.S.A. membership changed their spacings as a result, especially as few were actually self-service even at this time. A year later The Trader claimed (hindsightedly) that this principle had been used for many years but in a context which made it clear that the self-service application of the 2 6 principle was not generally in use. More consistently with past policies, advice was given to display lines of high profitability, especially of those processors who supported 2 7 minimum price maintenance. The idea of selling groups, though not mentioned in The Trader until October of 1957 2 8 was doubtless being

25The Trader, XXXV, No.12, December 1957, p.27. It was obviously in Kelloggs interest to advocate this method, since Kelloggs was and is a market leader in many breakfast cereal lines.

26The Trader, XXXVII, No.4, April 1959, p.l.

27The Trader, XXXVI, No.2, February, 1958 , p.3, XXXVII, No.9~ September , 1959 , pp . 5,8 .

28The Trader, XXXV, No.10, October, 1957, p.l. 97 discussed long before this. Even in 1950 there had been some attempt to form an I.G.A. group, no doubt some wholesaler licensing the name from the American voluntary chain of the 29 same name. In August 1952, F.S. Boorman, later G.S.A.

President (1955) and organiser of the Four Square selling group in the late 1950s and 60s, wrote in The Trader that independent grocers in N.S.W. were "selfish, egotistical and ignorant", that their poor share of market was due to their own failings, and that only wholehearted adoption of the Four Square group buying and selling methods would save 30 them from extinction (Four Square is the name of the dominant selling group in New Zealand. At the time and for the next 10 years, New Zealand was a very "well controlled" market for grocers, with no price cutting in 1955, 31 small chain store influence, and, in 1966, too difficult a market to enter for Woolworths to wish to try. 3 2 Four Square and New Zealand was during the 50s, the idyllic island paradise of N.S.W. independents' dreams). In October 1957 Four Square began its development in N.S.W. under the patronage of the G.S.A. But it took only a year and a half for it to collapse,

^The Trader, XXVIII, No.l, January, 1950, p.8. See also above, fn.18, Chapter 6. 30 The Trader, XXX, No.8, August, 1952, p.20b. 31 The Trader, XXXIII, No.5, May, 1955, p.9. 32 Gordon, op.cit. 98

33 its wholesale warehouse bankrupt.

The reason for this collapse is generally seen as

first, apathy on the part of independent grocers in Sydney,

who were mainly willing to allow themselves to die quietly,

their independence unfettered, and secondly, disloyalty on

the part of members. Many were unwilling to confine their

purchases to their group warehouse but would continue to pick

up the specials at the nearby self service warehouses and

take advantage of direct dealing processors who were too

myopic to see that the group was in their interests to pre­

serve and promote.

A significant aspect of Four Square’s promotional methods was, of course, "specialling" i.e. selective price

cutting. This aroused some criticism from the more con­

servative G.S.A. members. The then G.S.A. President (Arthur

Ford of Bexley) admitted the progress of the pricing revol­

ution when he replied ’’let us not blind ourselves to the fact 34 that we are living in 1958" thus even the G.S.A. believed

that to attract custom, to sell enough to make a profit, it

was necessary to offer at least some goods at cut prices and

low margins.

55The Trader, XXVII, No.5, May, 1959, passim. It is perhaps noteworthy the Four Square was given barely any mention in S.S,M. during the period of its formation and difficulties in N.S.W. 34 The Trader, XXXVI, No.8, August 1958, p.6. CHAPTER 8 COUNTERVAILANCE : 1958 ONWARDS

By the beginning of 1959 it was clear that non chain retailers in Sydney were not capable of exploiting the tech­ nical possibilities open to them. However, it was equally clear that certain chain store firms were eager to exploit their own possibilities very considerably. But the formation of a buying group by six of the major chain stores and the determined entry of Woolworths and Coles into the market for food implied more than a decline of the importance of the independent.

Multiple Grocery Buyers Pty. Ltd., was formed in 1958^ to enable the members, six of the large chain stores, to gain maximal discounts and the best of possible deals from processors. The members were Derrin Bros., Franklins, Moran and Cato, G § G., Mcllraiths and United Groceries (Matthews Thompson). In July 1960, Eric Stephens, editor of one or other trade journals throughout the period (Retail Week (owned by Consolidated Press) Self Service Merchandising

(his own venture). Foodworld (ditto), Retail World (owned by Consolidated Press))said of them "their firm voice has ? done much to stabilize the trade in N.S.W.

1SSM, I, No.6, October, 1958, p.27.

2SSM, II, No.7, July 1959, pp.22-27.

99 100

The meaning of "stabilize" is not obvious in most contexts in the grocery trade press. In this context the meaning is an important indicator of the nature of competition in the industry. Retail price stability was not favoured by the most dynamic of the chains in the group, Franklins, nor, probably, by any of the others. Since one of the main weapons available to chain stores in retail competition was price, in a price conscious consumer market, price stability was against their immediate interests.

Stability of price paid by re-sellers to processors, open discount lists dependent on quantity, frequency and growth of purchases, would to a certain extent be pursued by a group such as the "Big Six". But how much farther this would go than protecting themselves against some greater or more skilful bargaining power or more preferred buyer is not known. When Nestles and Lever Bros., and Kitchens both announced such open terms they were welcomed by many re­ sellers (unnamed in the article) but not by some others who argued that such terms meant the skilful bargainer was unable to gain over the unskilled, and so, as bargaining skill is part of efficient management, there is less incentive to efficient management.^

The incidence of promotional efforts by processors

3SSM, II, No.7, July 1959, pp.22-27. 4Ibid. 101 is an aspect of the trade which has explicitly been seen as in need of stabilizing. There have been demands for the elimination of some practices that cause inconvenience to retailers. For example, in 1955 the G.S.A. protested about free gift bonus labels^ on the grounds that they created a nuisance with customers searching through stock to find particular labels. In July 1959 Stephens attacked retailer display competitions because of the trouble to which retailers go and the very subjective manner in which they were judged.

In 1963 the NARGA^ Code of Trade Practices was published in

Self Service Merchandising: five of thirteen recommendations were with respect directly to the means of processor- 7 re-seller co-operation in promotion.

The co-owner of Franklins, Norman Tieck, has been particularly outspoken against processor and re-seller promotions that involve "unnecessary” cost and thus "raise the price to consumers". He sees all but the simplest product advertising as not necessary to make the consumer buy, partic-

5The Trader, XXXIII, No.7, July, 1955, p.27.

^National Association of Retail Grocers of Australia, a new name for the Federation of Retail Grocers and Store­ keepers Associations of Australia.

7SSM, VI, No.7, July, 1963, pp.20-21. See also below this chapter. 102 g ularly at his shops. These shops are all placed in the path 9 of people shopping, especially next door to Woolworths. The use by re-sellers of other competitive weapons than price is thus more threatening to Franklins than to most other chains.

"Stability” in terms of the diminution of the use of these weapons has thus always been attractive to Franklins. Stability in terms of collusive selling does not seem a likely outcome of Multiple Grocery Buyers. Overt competition between chains from the mid 1950s onwards was very considerable in two respects: (1) specialling and retailer advertisements trying to create a low price image for each particular chain; (2) in-store image building: the creation of distinctive identity by each chain by means of uniform layouts, paintwork, staff uniform, service availabil­ ity or inavailability, employee control and supervision and resultant morale. Selling price levels were found to vary in a survey of prices on offer for 42 high volume items. The cheapest was Franklins, the dearest, Derrin Bros, 10 both g Tieck writes to the daily press occassionally, complaining about the extra burden added to price by elaborate sales gimmicks involving vast expenditures. His call has been for housewives to revolt against these practices, i.e. shop at Franklins where this doesn't go on. His letters never mention the world trips and lesser prizes available to branch managers and other staff for winning turnover com­ petitions which are used as staff incentives in Franklins. See Retail World XIX, No.15, August 3, 1966, p.4. ^N. Tieck interview, 11 April 1967.

10SSM, V, No.8, August, 1962 , p.12. 103 members of Multiple Grocery Buyers at the time.^ The differ- 12 ence in price level could have been up to 10 per cent.

Price differences between Franklins and Derrins can be account­ ed for by differences in levels of capitalisation, in desired rates of return, in management policy, and in differences of buying prices for some lines, since the buying group would not have been used with respect to all the purchases of members.

The minimization of inter-shop competition by means of agreement about expansion plans is one possible collusive outcome of the existence of the group. The desirability or undesirability of such collusion would depend on the outcome in each instance, on whether it led to a decision to not com­ pete by means of a new store where it would or would not have created excess capacity of shops without any significant in­ crease of consumer satisfaction. If firms decided on store locations on the basis of whether the new store's expected ability to draw off existing turnover, rather than on poten­ tial or expected turnover, then such collusion could hardly exist, let alone allow the continued existence of stores with excessive turnovers and profits. Since this existing turnover criterion seems to have been significant, the furthest extent

^Ibid., p.3. 12 Briggs and Smyth found a 7% difference between the cheapest and the dearest chain store in a similar survey carried out in Perth in 1964. Briggs and Smyth, op. cit. , pp.86-95. 104 of any collusive action would probably have been restricted to agreement not to render stores useless by drawing traffic off to a new store.

This sort of agreement would have been welcome to the less progressive chain stores, since excessive entry by the technically progressive almost inevitably led to the embarrassment of existing shops, rendered obsolete in their location by the newness of entrants. Consumer acceptance of innovation in shop design and merchandising methods was only limited by the basic price consideration which led to the massive failure of the Big Bear and the unimpressive results 13 of Woolworths’ and Coles’ initial experiments. Thus the entry which such collusion could restrict would be of a desirable kind for the individual consumer.

It is, nevertheless, hard to reconcile the exist­ ence of such collusion with the location and selling policy of Franklins as publicly stated by Norman Tieck. This policy is of selling a small range of fast selling lines in shops located as near as possible to some large and powerful store, latterly Woolworths or Coles supermarkets, but previously simply in the maximum traffic section of large shopping centres.^ The growth of Franklins was entirely dependent

13 See below, this chapter.

"^Perhaps only \ to 1/3 the number of lines sold by Woolworths’ supermarkets. Tieck, op.cit. 15 Ibid. 105 on the number of suitable sites which could be found, that is, the number of heavy traffic situations which could be exploited by the low average price on a small range. To agree to not enter particular sites because of the presence of one or more of the other members of the buying group would imply a very considerable restriction of the number of available sites. The period 1959-64 was one in which Franklins expand­ ed from about 30 stores to about 50 stores, including one purchase of a 10 store chain in 1960. In the light of these considerations a non-competing agreement would seem unlikely.

The effect of Multiple Grocery Buyers on the trade would seem to be in discouraging the excesses of inter­ processor non-price competition, in some information flows between members with respect to processor conduct and possibly with respect to expansion plans of members, and in encouraging the members in the days of Woolworths' and Coles' growing dominance by means of comparable buying prices.

The success of Multiple Buyers in this last role is attested by a short note in Self Service Merchandising of August 1962 to the effect that Woolworths had requested suppliers not to recognise it as a group but to sell direct to individual members.

The success of chain stores and of new types of shop attracted entry. The most important entrants were the

16 SSM, V, No.8, August, 1962, p.3. 106 two variety chains, Coles and Woolworths. The most notable failure, however, was the F.J. Palmer "Big Bear" venture at

Neutral Bay. A number of department stores were showing their willingness to try the supermarket idea. None, however, were on the immense scale of Big Bear. The floor area was 50,000 square feet, where the largest Woolworths’ market in 1965 was

20,000. Capital invested in equipment was reputedly $400,000. Net loss in eleven months of trading was $171,998, although loss per week began at $5742 and fell steadily to $1457.

Opinion of more successful grocers was that it was too big and over capitalized. The volume of turnover needed to make a profit at prices comparable to nearly chain stores was larger than the turnover which it proved able to generate, 17 despite extremely heavy promotion and considerable free publicity.

Woolworths and Coles both were similarly experienc­ ing the same difficulties with their initial ventures into food retailing. These were in mixed variety-food stores, food being a subsidiary to variety, a creator of traffic through the variety store. Prices were just too much higher than Flemings, Franklins, G § G, Food Fair, prices for the food sections achieve the necessary turnover. 19

17SSM, IV, No.2, February, 1961, p.9. 18 Whether traffic drawing was the reason for these initial moves is doubtful. It is, nevertheless, a view still commonly held, even up to 1966, for example, by W.D. Harvey. Harvey, op.cit.

19SSM, IV, No.2, February, 1961, p.ll; III, No.2, February, 19ÜÜT" pp . 21 - 24 . 107

The significant difference between the Big Bear failure and the initial difficulties of the variety chains was that while Big Bear broke his owner, the variety chains were experimenting. Their determination was to successfully enter grocery selling and their resources implied the ability to do so in an optimal fashion.

The reasons for Woolworths' and Coles' entry were probably some mixture of the following: (1) The expansion of self service operations into variety lines and the potential development of supermarkets by existing food chains; (2) the cautionary example of more or less stagnant American variety chains in the face of supermarket competition; 20 (3) size of potential market and strength of competitors in terms of (i) absolute size and (ii) availability of funds for prolonged war; (4) personal rivalry between Sir Edgar Coles and (now Sir) Theo Kelly, the respective chairmen of directors of Coles 21 and Woolworths, which meant that a move towards expansion by one was matched by the other, an exaggeration of oliogopolistic interdependence. Both Woolworths and Coles began in 1958 by purchasing 22 grocery chains. While Woolworths bought out BCC in Brisbane,

20SSM, IV, No.7, July, 1961, p.29. 2^SSM, V, No.l, January, 1962, p.7. It is not certain that this riväTry arose before tne entry to food selling, and thus it is not certain that this is a cause. 2 2 Gordon, op.cit. , Bushnell, op.cit., p.207 . 108

23 Coles bought the Dickens Supermarkets in Melbourne. Both were very modern and efficient firms. In Sydney, however,

they began by installing self service (i.e. check out) sec­

tions in some of their variety stores. As noted above, this policy was not outstandingly successful. Both began in 1960

to takeover existing firms. Their policies were rather

different. Coles bought a number of old established firms

such as United Groceries and Derrin Bros, none of them more

than converters to self service, many of the shops unconverted,

and thus relatively cheap acquisitions. Woolworths bought

two very progressive and profitable firms, one, Flemings, a

low cost, low price image, aggressively price cutting and 24 trade agreement breaking operation, the other, Broadhead

and Barcham Food Fairs, a chain of large (8000 sq.ft +) modern supermarkets, relatively highly capitalized but com- 2 5 2 6 petitive in price and spectacular in promotion. *

Coles absorbed all their N.S.W. purchases into Coles

Food Markets, except for Goodlands (Canberra) Ltd., and

2 3 Z^Ibid.

24SSM, III, No.2, February, 1960, pp.26-38.

2^SSM, II, No.9, September, 1959 , pp.21-27 and III, No.l, January, 1960, pp.23-28. 2 6 woolworths also purchased Mcllraiths, however, this acquisition was absorbed into the other parts of the organisation, see SSM, IV, No.7, July 1961, pp.29-31. 109

Goodways Pty. Ltd., in Newcastle. The resulting chain was more brightly painted but similar in management to the firms it comprised. Further growth than available from this avenue came from the development of a chain of sipermarkets, under the guidance, if not the management, of the Victorian acquis­ ition, with new branches called New World Supermarkets.

Woolworths, on the other hand, maintained Flemings as a division of the organisation. It retained its own management, buying and selling policies, subject to restrict­ ions about competing with other Woolworths units, but was able to draw on Woolworths' resources, under the direction of Woolworths with respect to expansion plans, and able to co­ operate with the rest of the organisation where necessary to improve performance. Food Fair became Woolworths' front line food outlet under the name Woolworths' Food Fair. Other shops, generally conversions of variety stores, were simply called supermarkets, but operated under the same management as Food Fairs. In size they now vary from 1000 sq.ft, at the back of a variety store, as in the early experiments, to 20,000 ft. Hornsby Supermarket of 1965. Food Fairs tend to be larger than supermarkets, but many Supermarkets are now larger than many originally at least Food Fairs. Since 1963-4 a third distinctive shop has been used, Safeways. These were used as a completion of market coverage, to allow those who wanted to buy at the cheapest prices and with a minimum of service a relatively small range of fast selling grocery items. The 110 method of selling was as similar as possible to that of Franklins. Shops were originally small. However, policy

changes have blurred the distinction between all of these types of unit. The three distinctives, Woolworths, Flemings

and Safeways, are used to cover the market as thoroughly as

possible. Particular sites are operated with a particular

name only as long as it is though one of the other names could

not do better. For example, the long established variety

store at Penshurst was converted to a supermarket, then to mixed variety-food, then repainted and moderately refitted

as Safeways. Some sites have probably been used b y each 2 7 division, but very few seem to be abandoned altogether.

The results of Coles' grocery policy has been the creation of a chain of self-service shops plus a growing chain of very large supermarkets. The results of Woolworths' policy has been the creation of two distinctive chains of self service shops, with both chains extending into large scale supermarket operations. Woolworths is now the largest food selling firm in Australia. Coles is the second largest food retailer. Accord­

ing to very rough estimates compiled by the trade journal 2 8 Retail World with respect to 1966, chains in N.S.W. sold 2 7 Gordon, op.cit. , supplied the above information about Woolworths, except where otherwise acknowledged. ? 8 Retail World Facts Manual, 8th March, 1967, pp.M11-M13, Ml 5. TABLE 4

TEN LARGEST RE-SELLERS OF GROCERIES, 1966

Organisation $M Cumulating

Woolworths 90 90 (a) Supa Valu is a group of large retailers who buy through Davids wholesale firm and co­ ordinate selling to some extent. Coles 50 140 (b) Foodland is a group of smaller but still not small, retailers. The group is managed completely by Davids. Supa Valu^a^ 40 180 (c) Mainly G § G, but turnover figure may also include Mitchells wholesale turnover. Franklins 25 205 (d) A buying group of a number of small chain stores, Warmans, R. Owens (Savemores) of Newcastle, J. Meagher, Huthwaites, Gerard § Co Foodland 16 221 (e) Not involved in selling (C) in N.S.W. but as a Permewan Wrightv J 15 236 buyer Burns Philp is of obvious quantitative importance. N.S.C. ^ 12 248 (f) This may understate Burns Philp^e^ 14 262 Campbells turnover in retail equivalent, since the number (10) Moran § Cato 10 272 is attributed to their "group" Allfoods, but A.G. Campbell 10 282 may or may not refer to A.G. Campbells total 282 turnover. Ill approximately $250 million of groceries, of which Woolworths

sold $90 million and Coles $46 million, independent's in

groups, excluding chains who are also group members, sold approximately $100 million, while unaffiliated independents

sold approximately $84 million. Thus it appears that 29 Woolworths alone sold about one fifth of grocery turnover

in N.S.W. during 1966. 30 Table 4 shows large grocery selling organisations' 31 approximate turnover as estimated above giving some idea of the concentration of buying power in N.S.W.

The total of 282 doubtless bears little relationship

to the actual total turnover of these nine organisations

(counting Supa Valu and Foodland as one). However, it is to be expected that the proportionate relationship between this number and the similarly estimated total N.S.W. turnover (430)

is not misleading as to the actual situation. Thus, nine organisations seem to account for 65 per cent of turnover.

Four organisations account for 50 per cent.

2 9 The definition of groceries is that of the Commonwealth Statistician, and covers perhaps only half the turnover of a self service shop, according to Retail World Facts Manual, 8 March 1967, p.Mll. 30 Organisation is meant here to denote the least formal grouping in which information about prices and "deals" (a common term in the trade) can be said with reason­ able certainty to flow freely. 31 Retail World Facts Manual 8 March 1967, pp.Mll-13, M15 . 112

Two examples of special treatment illustrate 32 Woolworths’ power as early as December 1961. It was alleged that Woolworths had been given a special deal by both Colgates and Lever Bros., soap duopolists and intense rivals. The one firm had followed the other in a special

"triple pack" deal on toilet soap, whereby three cakes, taped together, sold for something like 6d. less than three cakes separately. However, Woolworths and Flemings were soon seen by the trade to have the same deal for single cakes. It was explained, probably truthfully, by Colgates that Woolworths* policy is to not sell a multiple for less than the number of singles appropriate, therefore the deal was on singles for

Woolworths. Lever Bros., had sold Woolworths ordinary stock to sell at 2d. off while the rest of the trade took triple packs at 6d. off, allegedly because Woolworths refused the triple pack. Lever Bros., replied, perhaps less truthfully, that production difficulties had run them out of "deal packs" before Flemings order was filled, and so ordinary stock had to be sold to them, but that this was solely due to the pro­ duction difficulties, apart from which no straight stock would ever have been sold as a deal.

The significance of these incidents is that both

Colgates and Lever Bros., are very much market leaders, so much so that Lever Bros., in 1967 and probably for a consider-

32 SSM, IV, No.12, December, 1961, pp.18-19. 113 able period before claimed to not enter into co-operative advertising schemes but only to offer promotional discounts during advertising campaigns. 33 Yet both complied with a

Woolworths policy that was in conflict with their own.

The absolute buying power of Woolworths was claimed to mean at least 2 per cent better buying prices than

Franklins in 1967. 34 However, this type of advantage is not as important as is the widespread use by Woolworths of their own brands. It is in the development of these that a dis­ tinctive competitive challenge is laid before all levels of the grocery trade.

The challenge to processors lies first in the flexibility of Woolworths’ buying possibilities. Virtually any food line can be produced identically by any processor of similar goods. 35 The appropriate knowledge can be purchas­ ed quite cheaply to produce even sophisticated lines such as accelerated-freeze-dried vegetables and fruits. Thus Woolworths, and other less significant firms following

■^A. McCall interview, 8 May, 1967. Mr. McCall is Sales Director of Lever and Kitchen. 34 Gordon, op.cit., The real basis for such claims is not known. The present writer would not attach any value to them, except that no other information is available with respect to this variable.

35 B. Frances interview, 13 July, 1967. Mr. Frances is Sales Manager of the Nestle Company in Sydney. He stressed this factor as an element in the competitiveness of the industry. 114 similar policies, are not committed to any one processor for supplies of a particular line. The second aspect of the challenge to processors is the willingness of Woolworths to set up their own processing units in lines where they believe that existing processors’ price-quantity-quality offer can be improved. The major factor involved in a decision to produce seems to be the possibility of improvement in quality control. Though only a very small number of lines are being produced by Woolworths, the possibilities of extension by the organisation seem con­ siderable enough to constrain existing processors in the development of profit protection practices. The power of Woolworths with their own brands is seen by the leading position which own brands take in turn­ over amongst direct processor brand competitors. An example of the power exercised by own brands against processor brands, that is, of any favoured line over other directly comparable but unfavoured lines, is seen in the performance of one of Woolworths' own smallgoods lines. When initially introduced, sales were only about one quarter of the two leading processor brands, despite heavy press advertising. The Woolworths’ line turnover was $4000/week as against $20,000/week for both the others. However, after branch managers were instructed to allocate space to their own brand and to the others on the basis of four own to one each other, the own brand began outselling the rest almost in the same ratio as the space 115

3 6 allocations. Woolworths' experience seems to indicate that consumers' choices are more affected by offers made in store displays, overspacing as in the example, at comparable prices, than by mass media advertising of particular lines. Almost any processor seems threatened by entry of a highly advantaged competitor which can claim perhaps one fifth of the Australian market within months of entry.

The challenge to re-sellers lies in the development of consumer demand specifically for Woolworths' own lines.

About one quarter of Woolworths’ retail turnover, including 3 7 variety lines, is made up of their own branded lines. The proportion of food turnover would be lower, but probably about 3 8 10 per cent. Brand loyalty, and shop loyalty, is being built by a continuous effort to ensure that the quality of 39 40 the own brands is at least as high as that of competitors. * The prices of own brands are generally lower than those of

T C' °Gordon, op.cit. ^Ibid. As at the end of 1966. 38Ibid. 39Ibid. 40 There have been rumours, in the trade, that Woolworths have occasionally removed their own brand labels from a quantity of some line and replaced them with those of the processor of the line due to failure of the batch to pass some quality control test. It seems a rather far fetched rumour but illustrates, if nothing else, the extent to which firms feel threatened by Woolworths. 116 processor brand competitors, though whether because of the considerably smaller marketing and promotion costs or because of a conscious policy of selling them at lower standard margins than processor brands is not known.^

Integral with quality product image building is quality shop image building. If consumers remain merely price conscious then public companies such as Woolworths can be forced into low profitability by non profit-maximising firms such as Franklins, in 1967 Woolworths most important competitor with respect to constraining profit: 42 consumers will buy their market basket from Franklins and then go nextdoor to Woolworths for the current ’specials' and any exotica which they may want. Woolworths' model customers require spacious, attractive, piped music supermarkets selling all manner of food and variety lines, with ample parking space, men to pack and carry goods to the car, home delivery services for those without their own transport, entertaining and enlightening demonstrations of new and unusual culinary delights etc. The creation of such model customers has been through a process of improving own brands, as shown above, of building more sumptuous supermarkets, of establishing a reputation for careful handling of perish-

41 SSM, III, No.8, August, 1960 , pp. 28-32 ,especially p. 30. 42 Gordon, op.cit. 117

43 ables and of treating customers with very considerable civility.^

Coles appears to be following Woolworths' "trading up" 4 5 with their "New World Supermarkets". Many other firms are similarly expecting the increasingly affluent consumer to be willing to buy more services with the groceries. The department stores of the "Supa Valu” group have in some in­ stances gone further than the ex-variety chains. The develop­ ment of integrated shopping centres is accelerating this movement as relatively cheap space is available in large units to the firm which is willing to lease it while the centre's plans are yet to be fully drawn out. It is significant, how­ ever, that in each of these centres regulated competition is consistent with generally three different and often independent­ ly owned grocery outlets, one within a department store, one generally a Woolworths or Coles supermarket of 8-10,000 sq.ft, and one small low cost outlet, often a Franklins, a Safeways 43 All perishables must be delivered in accordance with strict conditions to the central perishables warehouse. From there they are transported to branches in refrigerated vans, claimed to be the best available. Ibid. Handling within the branches appears from casual observation to be the weakest link. It is clearly the most crucial. 44 Ibid. The story was told of the buyer of an Embassy (Coles own brand) shirt, who, finding it faulty, re­ turned it to a Woolworths' branch, claiming to have purchased it there. After some unsuccessful explanations the organisation supplied the customer with a St. Mark shirt in exchange. 45 Lewis, op.cit. , pp.216-217. SOME CO-OPERATIVE ADVERTISING CHARGES IN N.S.W, DECEMBER 1962 Z Oft •H ad Oft ad •H S aj £ O O CD CD CD P CD O 0 aj - • co P Pi CD p -to--to--to- •H ■aj- •r-j < '"ft PQ CNJ o 42 ad 4ft H•H •H rH rH rH rH £ 0 £ aj £ CD CD £ aj P U o aj CÖ CD P ft Oft p • •

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Oft Oft 1 • • • • • • • 118 or Flemings or some other smaller chain branch, of 2-3^ thousand sq.ft. All these outlets seem to prosper in the heavy traffic generated by the centre. The centres are often owned by the department store which takes up to 60-70 per cent of the area of the centre as a whole.

The development of store identity has been an important item of policy in the management of both corporate and voluntary chains. Much of the finance supporting promot­ ions comes directly from processors in the form of co-operative advertising schemes. This is true especially of mass media advertising, which is aimed directly at the development of store identification, developing the impression of cheapness associated with the store's name, trade mark, characteristic decoration etc. Under these schemes, processors pay a certain fee in order to have some product promoted as a special in the stores of a chain or group, which also put the product in their regular advertising during the relevant period. Table 47 5 is taken from Self Service Merchandising in December 1962.

Fees are based on many different criteria, for example, (1) fixed amount per store; (2) to yield revenue equal to some proportion of advertising costs, sometimes greater

46 In the centre, the department store faces com­ petition to nearly all its departments, not only to its groceries. 47SSM, V, No.12, December 1962, pp.20-21. 119 than 100 per cent; (3) as much as they can get from each processor; (4) in proportion to turnover of the product and its speed of stock turn; (5) in proportion to the amount of promotional support to be given to the product; (6) on how much a competitor charges for the same sort of product. As well as the fee, processors are generally expected to sell to the promoting retailer at some extra discount of S-7h per 48 cent. Claims about Woolworths’ behaviour are made:-

The heaviest fees are set by Woolworths and suppliers are unable to recognise a pattern in their fees. Woolworths and its sub­ sidiary, Flemings, will sometimes give a special feature and heavy promotion to a market leader without demanding any fee. At the same time, they will ask a high price for promoting a slow seller and give it less support. They will insist that some promoted lines be sold at a cut price. At other times, they will refuse to trim the price of another line being promoted, yet they will require an extra discount as well as the advertising fee.49

Processors judge each retailer’s offer on the basis of sales performance and so some retailers find them­ selves with heavily booked promotion schedules while other do not. The pressure on processors, however, to promote in all stores at some particular time, in line with their own adver­ tising programmes means that retailers with relatively unattractive offers will nevertheless have to be used. Thus

4 8 IbidT1 . j . 49 Ibid. Emphasis in original. 120 an upward spiral effect, claimed at that time by disgruntled suppliers,^ would be a rather strongly expected feature of the situation, as retailers saw some competitors getting higher fees on the same promotion.

Many processors, unidentified except for some large firms not at the time feeling as pressured as others, complain - 51 ed to Self Service Merchandising:- One national processor spent 4.2 per cent of his advertising budget on promotion fees

in 1961 and 8.5 per cent in 1962. Another detailed his adver­ tising budget as follows

1961 1962

General Media 71'o 52%

Subsidies 10 22

Discounts and off deals 9 20

Point of Sale 10 6

100 100

Another complained of independents who could not sell enough of his products, whose promotions failed, and of chains whose promotions are successful but whose charges are continually rising. A smaller processor felt that the charges made for promoting his lines were '’unreasonable". The very large and well known firm of Samuel Taylor (owners of "Pressure Pak" brand and Mortein) saw (1) Processors losing control of their

50Ibid.

^hbid. , pp.18-32. 121 budgets; (2) retailers able to charge arbitrary fees for promotions; (3) processors unable to obtain space for in- 5 2 store promotions without buying space in retailers' weekly press advertising. Samuel Taylor expressed the intention of cutting down general media advertising to pay the co-operative subsidies in 1963. Nevertheless, they did not find in the present situation that they were being unduly constrained by retailers in respect of co-operative schemes. Holbrooks,

Beecham (Aust), and Clifford Love all expressed no dissatis­ faction with their experience of retailer promotion schemes.

All these firms have strong brands generally leading their markets in turnover.

Since 1962 the position does not appear to have changed significantly with respect to retailer promotions.

As mentioned above the stronger processors can still avoid paying promotional subsidies, but the smaller firms cannot.

Mr. B. Holt, secretary of the Australian Association of

Advertising Agencies, and thus with a vested interest in the potentially more lucrative and satisfying (to advertising agencies) processor direct promotions is of the opinion that

52 In-store promotions are generally regarded as far more effective than "pre-selling" in general media advertising. Thus many processors prefer to simply supply in-store promotions without paying for the media advertising which is more important to the retailer than to all the processors involved in the advertisements. It is somewhat paradoxical that Samuel Taylor promotions in 1967 were con­ ditional on advertising in general media: Franklins adver­ tisements appeared in order to gain the fee and discount from Samuel Taylor. 122

5 3 processors are unable to curtail co-operative advertising.

In July of 1963 the National Association of Retail

Grocers of Australia published a "Code of Trade Practices" as recommendations to various groups in the industry, notably manufacturers, "Consultative Councils" which are mainly com­ posed of large retailers^ and the Retail Traders Association, made up of large retailers of many kinds of goods, e.g. department stores and chains, voluntary chain sponsors. 54a The recommendations are as follows:-

1• Payment for advertising and promotion services.

(a) That the industry adopt the name "Co-operative Mer­ chandising Agreements" ("C.M.A.") covering any arrangements for advertising and promotion agreements between manufactur­ ers and retailers, and that such Co-operative Merchandising

Agreements should offer proportionately equal payments to all competing retailers.

(b) Such Co-operative Merchandising Agreements shall de­ fine (a) the payments for specific advertising services and

(b) the payments for specific promotion services and (c) that evidence of performance thereof must be submitted before pay­ ment is made.

(c) Co-operative Merchandising Agreements may cover adver-

^Holt, op . ci t. 54 SSM, V, Nos. 9,10,11, September, October and November, 1962 contained a continued exchange on the merits of consultative councils. 54a SSM VI, No.7, July, 1963 , pp.20-21. 123

tising in newspapers, handbills, window posters, radio, theatres, television, floor displays and outdoor promotions. (d) Retailers and manufacturers to agree that there must

be performance of contract and evidence of performance sub­ mitted before manufacturers should be expected to pay.

(e) Manufacturers should not be called upon by retailers

to pay extra money for participating in their special events,

since manufacturers cannot offer proportionately equal payments to all competing retailers.

(f) Manufacturers may participate in retailers' special events which qualify under the terms of the performance of the contract, when such cost is applied to the regular Co-operative

Merchandising Agreement available to competing retailers. (g) Contract forms should be short, simple, understand­ able and practical. They should be reviewed periodically and revised to fit changing conditions when necessary. (h) Co-operative Merchandising Agreements should appro­ priately emanate from manufacturers. (i) Retailers should receive prompt remittance from manufacturers upon submittal of their invoice and evidence of performance.

(j) Any money received in payment of Co-operative Mer­

chandising Agreements must not be considered as part of the price of merchandise or as a contribution to profit. Such payments should be separately made by the manufacturer to the

retailer for services rendered. No such money should be de- 124 ducted from the invoice covering the purchase of merchandise.

2. Promotions and special deals.

(a) Manufacturers are requested to give retailers from four to six weeks' notice about forthcoming promotions and special deals in order to give them an opportunity to dispose of their regular stock, and so they can plan a tie-in promot­ ion .

(b) It is important for each manufacturer to find out who is the right person with each retailer to receive infor­ mation concerning the promotion or deal and to make a special effort to see that he gets it. It varies with retailers as to who is the right man. Sometimes it is the owner, sometimes the manager, sometimes the buyer, sometimes the advertising manager, sometimes the sales manager.

(c) Retailers feel that manufacturers should allocate enough cases to each retailer to stock all stores with sufficient merchandise to justify the promotion. The proper quantity can be best arrived at by manufacturer and retailer working this out together, thus avoiding under- or over-buying.

(d) There should be a fixed policy on the part of the manufacturer covering the following points: (a) termination date; (b) whether retailer can place one or more orders;

(c) when manufacturer considers final shipping date, and (d) assurance that deal is over at termination time for everyone simultaneously.

(c) Retailers have expressed annoyance about overlapping 125 deals on the same product. Having two or more different deals of the same product in the warehouse and in the stores at the same times creates confusion and irritation. Sometimes over­ buying brings about such a condition.

(f) Any deal should be practical and desirable for the retailer as well as for the manufacturer.

(g) When retailers take in special pack merchandise their regular pack becomes dead stock. This ties up money and uses up warehouse space. They consider that manufacturers should give them sufficient advance notice on forthcoming special packs to enable them to reduce regular pack stocks and give them extra dating on the dead stock or on the special pack shipment. (h) Retailers are particularly concerned where deals are offered to retailers in a given area without similar benefits being offered to retailers in adjacent areas. It is recommend­ ed that when such plans are made, especially for selected test markets, manufacturers should advise retailers in the adjacent areas concerning the tests. 3. Point-of-sale material. (a) While retailers note general improvement in manufac­ turers’ display material, they also report that a. large part of the material they receive now from manufacturers is still wasted. They contend that a manufacturer can no longer handle display material on a mass basis.

(b) They suggest that manufacturers discuss this matter 126 with each customer to find out the kind of material that is usable, the quantities they can actually use, when they want it, and how they intend to use it. Because the material that is acceptable varies by retailers and by areas, consideration must be given to these factors. (c) Retailers say that promotion material should be con­ sidered like merchandise. Manufacturers and retailers to­ gether should discuss the matter, decide on what they want, and then order it in the same fashion as merchandise, on appropriate forms.

4. Salesman calling at headquarters.

(a) When the manufacturer's salesman calls on buyers, he should be fully qualified to present all essential infor­ mation covering his products, advertising schedules, promotion programmes, shipping data, prices, etc. (b) Some retailers do not want manufacturers' salesmen calling on their buyers simply to pick up routine orders which would be automatically and preferably mailed or telephoned in. They prefer to have salesmen limit their calls to such times when they have something special to present. This is not generally the case with all retailers, and it is up to manu­ facturers to find out in each instance how they like to be served. (c) Retailers should periodically review their system of interviewing salesmen to see if waiting time can be further reduced, and also to revise their appointments system, where 127 necessary, in order to avoid the long delays sometimes ex­ perienced in seeing buyers.

5. Salesman calling at stores.

(a) To keep the "welcome" sign out for salesmen calling on stores, it is increasingly important for manufacturers'

representatives to plan their work carefully so real benefit

to retailers, as well as to manufacturers, results from these

calls, such as reporting out-of-stock situations, etc., etc.

6. New products.

(a) Presentation of a new product should be accompanied with reasonable samples of the items, full information on prices, results of research and marketing tests, promotion

and advertising plans--in short, complete information. A

determined effort should be made to notify all retailers

simultaneously of the availability of new products so there

is no competitive advantage.

(b) Generally, buyers of retailers and retailers' groups

prefer presentations made in person.

7. Liaison.

(a) There is a real need for improving liaison facilities

at all levels. (b) This applies especially to liaison be­

tween manufacturers and retailers and their Associations.

8. Qut-of-stocks.

(a) There is a full appreciation of the substantial loss

of business which results from the out-of-stock and inadequate

shelf supply situation. Everybody loses business. 128

(b) Many different factors contribute to this. Supply manufacturers and retailers should work closely together to minimise both situations. 9. Spot for price-marking.

(a) Retailers appreciate the real saving in labour costs that results when the packages carry an appropriate spot for marking of prices. They prefer a size at least the equivalent of a shilling and want such spots on top of the package. This has such labour-saving advantages that decisions on what brand to stock are sometimes influenced by the package with proper marking facilities.

(b) Individual packages should be stacked in the outer pack or shipping case so as to permit price-marking without requiring removal of each package by hand. 10. Shipping cases and outer packs. (a) Retailers suggest continued joint discussions to consider standardisation of size and shape, better case markings, number of units per case, and other important factors which enable them to reduce handling costs.

11. Transport operations. (a) There is a growing appreciation of the real impact that transportation and distribution have on total operations.

It is not only important from the standpoint of cost, but the success of a business hinges upon getting the goods delivered promptly and properly.

(b) Retailers suggest that each manufacturer carefully 129 review his pricing methods to see whether quantity differ­ entials are consistent with differences in delivery costs; and whether such price differentials offer sufficient induce­ ment to retailers to regulate their purchases in order to obtain the lowest delivery cost. 12. Standard invoice forms.

(a) Retailers have stressed the importance of working toward a standard invoice form on which all essential infor­ mation sucy as terms, discounts, quantities, and the like would appear in a uniform place on the invoice. Such stan­ dardisation could result in the saving of hundreds of clerical man/hours, and eliminate much of the confusion that now exists.

13. Restrictive discounts and concessions. Manufacturers are strongly urged to eliminate all in­ stances of preferential discounts and concessions of all kinds. Retailers have no objection to quantity discounts as such, but state the following points as essential features of all discount policies: 1. The quantities offered, and the concessions offered therefor by manufacturers, must be clearly and positively defined.

2. These concessions must be offered and be available to all retailers able to comply with the manufacturers’ stated terms as to quantity of purchase, delivery and payment 130

3. The discounts or concessions offered for quantity purchases must be closely related to the actual savings accruing to the manufacturer in consequence of such quantity deliveries. These recommendations illustrate some of the con­ cerns of small but progressive grocers in their buying re­ lationship with processors. It will be noted that eleven of the thirteen

(Nos.2-12) are matters of technical efficiency. The other two, 1 and 13, relate to the elimination of the price dis­ crimination which results from 'excessive' bargaining power of buyers. But of the eleven 'technical' recommendations, all but Nos. 3,9,10 and 12 are also relevant to the competitive struggle between large and small retailers and between original sellers and re-sellers. No.2 is important to small retailers because promotions and special deals are generally aimed at the large turnover retailers. The stockturns of these latter are usually faster than those of smaller firms,^ and thus dead stock and overlapping deals are less likely to affect the larger.

^Woolworths' grocery stockturn is about 2^-3 weeks (Gordon, op.cit.). Major Food Centres, an efficient retailer sponsored group, claimed a stockturn slower than 6 weeks. H. Killick interview, 22 November, 1966 , Mr. Killick was President of M.F.C. 131

Nos.4,5 and 6, concern the role of processors’

salesmen. The change to central buying, in chains, corporate and voluntary, through self service warehouses and buying

groups, meant that salesmen began to be more simply channels of information to and from retailer and processor. They

find out what the retailer is doing with products, tell him

what the processor is going to do, and often help with the

retailer’s involvement in current promotions by setting up

point-of-sale material etc. One of the major problems of voluntary chains in Sydney has been, however, the number of

processors who offer, through their salesmen, to bypass the sponsoring wholesaler and sell direct to members. This has happened both on a regular basis and for promotions and special deals. For example, John David of Davids complained in February 1965 that some processors refused to co-operate with group managements in co-operative advertising schemes, despite payouts to Davids of perhaps $130 as against probably $400 when going direct to members.^ No.8 is a situation probably nearly peculiar to smaller retailers. It generally arises when unexpected results prompt swift action by chains to secure their own stock position. Conservative one-shop owners thus tend to

find themselves more often embarrassed than the chain branch across the road.

^David, op t cit. , p.8. 132

Nos.l and 13 are the most contentious of the re­ commendations. Open price lists showing the quantity discount rates and other types of discount available and the criteria for their being granted have been a desire of small retailers throughout our period. In November 1956 the Federal confer­ ence of the R.G.S.A.A. resolved that "published scales of quantity discounts be substituted for the present closed lists of preferred buyers". 5 7 But despite the publication of such lists by some large processors the ideal of com­ pletely open terms is still not practised by any firms. Those with published quantity discount lists have numerous other means of adjusting their offers to bargaining buyers. Wool- worths, for example, negotiate with processors a net net price which is known to only two or three persons in the 59 organisation. Nestles stated bluntly that only the parties to each transaction knew the price thereof,^ and implied that it would be a breach of confidence for the situation to be otherwise. One of the ways in which extra discounts are given is in the form of co-operative advertising payments. No.l (j) touches directly on this problem, but without

^The Trader, XXXIV, No.11, November, 1956 ,p.6. 58SSM, II, No.7, July, 1959, pp.22-27. 59 Gordon, op.cit.

^Frances, op, cit. 133 suggesting any practicable means of overcoming it. No.l (h) is interesting in its call for processor initiative in co­ operative advertising. This would tend to eliminate the bargaining power of the largest chains, leaving only the processors’ estimates of efficacy to determine price. This would probably favour the middle range of retailers at the expense of the largest firms.

The NARGA code was not mentioned after its announcement due, no doubt, to the many interests to which it ran counter. It is interesting that the Grocery Manu­ facturers of Australia, formed in 1966, has in 1967-68 begun to effect some of the recommendations, notably 10,11 and 12.

The pressures both of inter-processor and processor-distributor competition are such that three domin­ ating firms, Lever and Kitchens in soap powders, virtually a duopolist with Colgate-Palmolive, Nestles in chocolate and many other grocery lines, e.g. Crosse § Blackwell preserves, and Marrickville Holdings, in margarine, nut foods (Eta), flour and cake mixes etc (J.R. Love), all have stated that gross margins have been reduced in the 1960s from levels obtaining in the 1950s.

Mr. Frances of Nestles spoke of a product life cycle:On the introduction of a new product the margin is high and sales are 100 per cent of a market (which may, of

61 Ibid. 134 course, be too small to sustain the product in which case the cycle ends at this point). Within months, or even weeks, competitors have identical products on the market, the market share falls and price comes down. The successful product loses its profitability over a period of perhaps only twelve months: Cut price selling means lower distributor and processor margins, barring economies of scale or cost saving technical improvements, because the processor has to maintain volume or abandon the line. Processor profits in this model depend on the continuous development of new products.

Mr. McCall, Sales Director of Lever and Kitchen stated bluntly that gross margins for processors had fallen since 1957. The problem of maintaining the profitability of a line for a re-seller, in order that the re-seller still find it worthwhile selling, was certainly one cause of narrow- 62 er processor margins.

Mr. R.C. Crebbin, Chairman of Directors of

Marrickville Holdings, said that "substantial increases in

Group turnover... have been accompanied by no proportionate 6 3 improvement in the Group’s net profit... An important consequence of the fierce competition in food manufacturing and selling has been the intensification of pressure on gross

^McCall, op . cit.

R.C. Crebbin, Chairman’s Address, 1967 Annual General Meeting, Marrickville Holdings Ltd., 8 December, 1967. 135 selling margins of the food manufacturers.^ The two import­ ant features of Mr. Crebbin's firm's environment are (1) "the power of the great retail food chains which have grown up and which have brought such substantial benefits to the consumers of Australia and have also given important benefits to food manufacturers from the rationalisation of the retail­ ing of food which has followed; (2) the... struggle for sales between competing manufacturers, sometimes with little con­ sideration for long term profitability^... It is clear that turnover is being bought at too high a price right across 6 6 the food manufacturing industries of this country." An interview with Mr.F. Stovin Bradford, Executive Director of the Grocery Manufacturers of Australia indicated that the pressure of countervailance is at a level which

"national manufacturers" find, in 1968, intolerable.^ The forty five members of the G.M.A. claim to produce 85 per cent of the turnover of grocery shops in Australia. Previous to 1966 there had been no association of processors at all. It was claimed that processors generally had no contact with each other, that they were and are competing strenuously and that the idea of co-operation was very foreign to them at

Ibid., p.2. 65Ibid.

^Ibid. , p . 3 . 6 7 F. Stovin Bradford interview, 26 September, 1968. 136 highest management levels. This applied even in the use of common packaging standards, of joint submissions to govern­ ment bodies with respect to wage agreements and such other matters, let alone trading terms, prices and other traditional collusive areas. At initial meetings many had to be intro­ duced to one another. The business of the G.M.A. appears to be confined to technical problems, mainly of distribution, facing all processors. A pallet exchange scheme, a stock numbering scheme and a uniform invoicing proposal have typified this work. However, a call by the G.M.A. for the discontinuance 6 8 of distributor sponsored customer competitions borders on the more traditional concerns of Australian trade associat­ ions . The industry, it was claimed, in the years since 1960-61 has become as efficient as any in the world. Central warehousing, the extremely high concentration of distributors in every State, and the extremely fierce competition at re­ tail level have meant that efficiency of production and distribution are essential to allow profitable operation. This claim to efficiency is to some extent borne out by the warehousing costs of Woolworths, less than 2 per cent of costs

^Retail World XX, No.24, 29 November, 1967, pp.1,8. Whether the G.M.A. pronouncement had the desired effect is doubtful.

^Gordon, op . cit. 137 of goods sold, and Davids, just over 2 per cent, 70 and by the concern of distributors to improve processors’ distri­ bution methods, shown in their initiation of reforms carried through by the G.M.A. mentioned above.

Despite this impressive display of profit motivated technological virtuosity, the sentiments expressed by R.C. Crebbin at the end of 1967 are said, by Stovin Bradford, to be common to many of G.M.A. members. 71 They illustrate the very difficult position in which processors have been placed:- if a processor does not grant major buyers, particularly Woolworths, the necessary discount his products will not be promoted and turnover will fall below profitable levels. If he does grant them, turnover will in many instances become excessive and marginal cost greatly exceeds marginal revenue, itself reduced by the discounts and other payoffs, though overall profitability is not often endangered. In the competitive situation of the middle 1960s the position of the independent retailer has become either that of the Foodland members, or that of the isolate con­ venience shop. The continued life of these latter seems rather more sure than the former, especially as long as the

^R. Ellis interview, 21 November, 1966, Mr. Ellis is the General Manager of the Foodland group and an employee of Davids, the sponsoring wholesaler.

71 Stovin Bradford, op.cit. 138 present legal position with respect to trading hours is maintained. The two leading self service wholesalers con­ tinued to record increases in turnover and profitability up to the end of the period. 7 2 The situation of the non-isolated independents was maintained in respect of those who were willing to join selling groups and act within them. All groups except Four

Square have, if not prospering, not failed to provide a better competitive basis for members. The technical oper­ ation targets set by Foodland for its members are as exacting as those of chain store managements, if not as numerous, e.g. 14 per cent gross margin, 5 per cent wages/turnover, 2*2-3 week stockturn. 73 However, Henry Gordon of Woolworths could still 74 refer to the independent grocers of Sydney as "wet fish", and Eric Stephens could refer to 80 per cent unconcerned with efficiency or effective competition, and only about 20-25 per cent of grocers were even group members in 1965. Except insofar as non-isolated independents are supplied by

72 Harvey, op.cit. , See also Annual Report, 1968 , A.G. Campbell Holdings Ltd., pp.6-7 for financial variables over the period 1958-68.

^Ellis, op . ci t. 74 Gordon, op.cit.

^E. Stephens, interview, 20 July, 1967. CHAPTER 9

CONCLUSION.

Performance in the Sydney grocery market by

1965 was more competitive than in 1955. Average gross margins were lower and technical efficiency (apart from technological change), especially in the physical distribut­

ion of goods, was higher.

It has been shown that these changes in perform­ ance over the 1955-65 period were caused by innovation, changes of market conduct and structural change.

Innovation transformed re-sellers' production functions: Self service at retail and wholesale levels, the supermarket concept, the extension of chain store methods to voluntary chains and the development of new and old selling techniques were the main forms of innovation.

Management and organisation of innovating firms and their followers were improved to exploit economies seen to be available, especially to chain store firms and those emulat­

ing them.

The environment changed from the immediate post war situation of constraints on factor supply and concomit­ ant restriction on entry and exit to and from the industry

to the early 1950s situation when these constraints were

lifting. Thus the supply functions of original sellers were

140 141

transformed and entry at all levels took place.

An aspect of environment possibly more important

than those mentioned above is that of societal values. The high value society placed on newness and modernness from at

least the early 1950s ensured the acceptance of self service

and supermarkets and allowed rapid shifting of demand in

response to product, price and promotion methods change. The high valuation of change and achievement in

quantitative terms meant that market conduct of firms in the industry, reflecting society's values, came to be directed

to increasing the magnitude of achievement variables of which one of the most important was turnover. This was possibly more important than profit for some firms at some times. Another variable of considerable importance at retail level was the number of branches operated by a chain store firm. Far reaching structural change flowed from the above changes. (1) The size distribution of firms changed. At processor level, while concentration of plants did not change radically, fewer larger firms, often holding compan­

ies, owned more, and more types, of plants and brand names. The causes of this appear to be linked to those of the merger movement of the 1950s as a whole, the entry of large over­ seas firms and perhaps, more specifically, the advantages of the large firm in marketing. At wholesaler level the number

of significant firms fell to only three--Davids, A.G. Campbell

and D. Mitchell and Co. This was caused by the decline of 142 independent stores, the existence of purchasing economies of scale and rapid innovation. This last was in terms of first, the cost saving chain of self service warehouses, and second, the voluntary chain, which by its nature and the nature of independent grocers in Sydney, was a possibility for only few, in its fullest extent only one, wholesalers.

Very easy cross entry for all other types of firm in the industry was seen in the rise and decline of direct processor delivery and in the formation of retailer sponsored voluntary chains. At retailer level, innovation involving the emer­ gence of considerable economies of scale to both firm and shop, entry which occurred as the barriers to entry lowered from the war-time level, and values changes, encouraged the development of efficient chain stores. Sharp discontinuity in the evolution of a new balance of competitive power at retail level came with the entry of Woolworths and Coles. A new balance was achieved by the mid 1960s with no more than four organisations accounting for 50 per cent of retail turnover.

(2) Changes in goods flow patterns can be con­ sidered as subsidiary to changes in size distribution of firms since the latter changes were of such large magnitude.

However, important change which did take place was in the flexibility of flows. As pressure on profits increased so did the willingness of firms to improve their buying both in physical method and in bargaining position, so also did the 143 willingness of processors of fringe groceries, such as soaps, pharmaceuticals and light kitchenware, to sell through as many outlets as possible. (3) Little basic change took place with respect to the degree of differentiation of products: brand iden­ tification has been important in nearly all lines since before the Second World War. However, shop differentiation did become much more important. Retail firms began to build "store image". The extent to which this has become a sub­ stitute for product differentiation is not clear, but certain­ ly there are possibilities for change in the balance of power between levels in the future path of this factor. (4) Changes in the pattern of entry possibil­ ities were mainly confined to the early 1950s when post war entry constraints finally disappeared. These had an import­ ant role at retail level in allowing the creation of excess capacity at price levels initially obtaining and thus in applying pressure to the profits of grocers in their local markets.

(5) Changes in the pattern of retail shop ownership and location were caused by innovation and social change. The self service store and supermarket, while cost saving, possessed considerable economies of scale for the chain store firm, the supermarket offering, as well, con­ siderable economies of scale to the shop. They thus encouraged mainly large scale ownership. Because they 144 developed in a situation of increasing geographical mobility of shoppers, shops began to increase in size from 1500 square feet of the traditional large shop, to 3000 square feet of the conventional self service shop of the early 1960s, to 20,000 square feet of the modern supermarket. The pattern of con­ duct characterizing such large retailers offered little en­ couragement to small firms, whether retailers, wholesalers or processors, except in respect of contract supply of private brand goods.

The future effectiveness of competition and countervailance as constraints on prices of groceries in

Sydney will depend on the maintenance of first, buyers’ high responsiveness to price changes, second, competition between processors, and third, competition between re-sellers.

If processors can negate oligopsony power by such means as agreements on trading terms, publishing all available discount tables etc., then part of the economies of scale currently available to re-sellers will disappear, and there will be a slight once-for-all rise of prices. If processors collude as to prices, a movement away from com­ petitive prices would follow. But because entry to food pro­ cessing is fairly free, especially for re-sellers, neither type of collusion is likely to be effective, even if there were no legal restrictions on horizontal trade agreements and practices. The existence of the association, Grocery 145

Manufacturers of Australia, a body which seems innocent of any encouragement of collusive activities, may nevertheless herald more extensive processor co-operation in subtle and possibly devious ways. If large scale re-sellers, such as Coles and

Woolworths, find that demand is, as they hope, shifting away from goods at cheapest price and towards goods with high cost selling apparatus then gross margin levels will rise. This will not imply a decrease of consumer welfare unless low margin re-sellers are forced out of existence, leaving con­ sumer minorities unable to pay low prices for goods without services.

If, however, the oligopolist retailers evolve controls on entry in the same way as have petrol distributors^ then possibilities for a retardation of free competition are 2 opened. The only indication that such collusion is taking place is with respect to integrated shopping centres, where, in fact, competition is being encouraged, or, at least, low 3 cost low price shops are available and successful.

Current attitudes indicate continuation of inter-

Ij.McB. Grant "The Petroleum Industry" in A. Hunter (ed) The Economics of Australian Industry, Melbourne, Melbourne University Press, 1963, pp.280-281. 2 See Chapter 8 for a discussion of the welfare effects of such collusion. 3 See above, fn.46, Chapter 8. 146

retailer competition. 0£ the largest nine organisations,^ most are trying to take advantage of what is seen as a trend

towards high cost selling, but one is uncompromisingly, even morally, committed to "trading down" (Franklins), two others

appear to be thus committed (Moran § Cato and Permewan Wright), while all the others, especially Woolworths with its Safeway

division, maintain a strongly price oriented appeal to cus­

tomers, and in fact sacrifice service for price as a matter

of policy.^ Nevertheless, this latter aspect of policy could

be, and it appears that it is being, broken down in a very

short period. Safeways offers a delivery service though without being very encouraging of its use. In addition to

the large scale retailers there are numerous of smaller scale

committed to low prices, of which the most important example

is Tom the Cheap Grocer, of very considerable financial

strength. It seems unlikely that entry and location collusion

could take place on a significant scale.

The difficulties which would accompany collusive

agreement can be seen when it is noted that firms would have

to agree about the use of competitive weapons and accept

their initial turnover, growth pattern and character or

’public image’ as fixed. An example of the stresses which

^See Table 4.

^The Foodland cost targets are an example, as are service differentials between Woolworths’ Safeways and Food Fair divisions. 147 colluders would face can be seen in the administrative de­ cisions Woolworths’ management has had to make with respect to growth of the various divisions of the organisation.

Administrative decisions were made about the relative growth of Woolworths, Flemings and Safeways, such that the last was a stop-gap in response to Franklins and similar stores, and Flemings was to be maintained with some ’trading-up’, while Woolworths' supermarkets and Foodfairs were the favour­ ed outlets.^ If these proved not to be the best for overall growth, then further decision as to which direction for ex­ pansion would be needed. Such appears to have been the case. Supermarkets have been converted to Safeways and Flemings have inherited other Woolworths locations, while new Foodfairs have been largely confined to integrated centres. The welfare loss which could result from mistakes in agreements between firms which shared out locations would be considerable. The level of agreement necessary to correct such mistakes can be seen to be very high. From the above it appears that competition in the grocery industry will continue in the future. This does not, of course, mean that the price level of groceries will continue to fall relative to other prices. It can be said that the changes of the 1955-65 decade held down price increase However, to further retard price increase, further changes of

^Gordon, op.cit.

Figure H

Average Yearly Price Increase,

1955-6-----March 1963-----19 65-6

Note that the lines only indicate average yearly change between the plotted dates.

FOOD GROUP

FOOD LESS UNPROCESSED MEAT 148 margin levels, efficiency of production, or input prices, relative to other margins prices and efficiency changes would have to take place.

Figure 4 indicates that between March 1963 and

1955-65 food, without unprocessed meats, rose in price prob­ ably faster than the Consumer Price Index. This is consistent with the view that prices became no more competitive, margins 7 fell no further on average, after about 1962-63. A possible significance of this is that Woolworths and Coles had com­ pleted their initial entry into the grocery industry by

1962-63.

Further technical change in distribution seems to be in the extension and development of currently known techniques. For processors, one cannot tell whether new techniques are to be discovered or not. Research efforts by

Australian food processors do not seem to be important on a level more basic than product imitation. The future of non­ chain retailers seems to lie in the use of voluntary chains to enable non-chain retailers to purchase at comparable prices g and to create similar demand functions. Holdren's finding that chain and non-chain supermarkets have the same cost 7 Three possibilities: (1) no further extension of low margin sellers' share of the market relative to high margin sellers', (2) no decrease of existing sellers' margins, (3) a combination of counter-balanced violations of (1) and (2). g Holdren, op.cit. , p.62. 149 functions is encouraging for the prospects of voluntary chains, provided the present self service store memberships can be transformed into supermarkets of 3-4000 sq.ft, at least. This

is beginning to take place on a small scale. The fact that owners of grocery shops are generally prepared to accept a far lower rate of return than can a public company indicates that independent retailers will certainly not disappear, or necessarily decrease from their present position, even assum­

ing chain stores fully exploit their organisational advantages 9 as outlined by Fulop.

Despite the historical content of this paper

it cannot be claimed that it is adequate historiography. There are a number of points at which the analysis does not require

the "whole" picture. For example, identities of firms and absolute sizes, actual conversion policies of chain firms

throughout the period, numbers of self service stores year by year and rate of growth of value of production are import­ ant parts of the picture but not necessary to the model.

There are, however, a number of points at which

the argument can be questioned:- First, many of the changes

in the grocery industry were by no means peculiar to it.

Examples are changes in motivation and strength of motivation

especially towards valuing growth of output and growth of

^Fulop, op.cit. p.76-81. 150 market share, monopsonistic concentration of buyers, and rapid changes in production functions. The most pervasive of these changes is the first mentioned motivation change. How­ ever, while it has been argued that motivation change was important in increasing the intensity of competition, it is not seen as the crucial factor in the breakdown of the post war sellers' market. But the effect of motivation change would be different, having more effect on the actual intensity of competition in the grocery market than in most other markets, for three reasons. First, an important part of motivation change was in the development by final consumers of rapid mobility which meant high price elasticity, second, marginal cost of turnover at retail is constant over a re­ latively wide deviation from normal, especially for any particular line, and third, many retail firms had a very low acceptable rate of return on capital, and maximized turnover rather than profit. The other two changes, if sufficiently pervasive, do constitute a strong qualification to the present argument with respect to cause of the relative price change.

The price data of Chapter 3 gives some guidance as to this question. The two index groups which did not increase as fast as the Food (without unprocessed meat) group were Clothing and Drapery (14 per cent) and Household Supplies (10 per cent). As noted in Chapter 3, nearly one third of the weight of Household Supplies in fact comes within the grocery industry. Additionally, much of clothing manufacture, 151 though not cloth making, is very unconcentrated,^ while re­ sellers of clothing and drapery are described by Karmel and 11 Brunt as half "oligopoly" and half "large numbers", a situation not unlike that of the grocery industry, prompting the suggestion of a similar explanation for price behaviour.

A second point on which the argument can be questioned is that more careful examination of other possible causes of relative price change may show them to be more im­ portant than presently believed. Changes in productive efficiency and in factor prices at processor level could have been very different from the changes as seen in Chapter 3.

That evidence is, however, consistent with the present thesis, and encourages the hope that it will not be overthrown by further evidence.

A third is that there are a number of points at which the documentation available has not enabled the 12 thesis to be stated and supported in a stronger way. For example (1) the sellers' market ended because of entry of

■^Karmel and Brunt, op . ci t. , p.80.

^Ibid. , p . 74 . 12 These points would mainly fall into the cate­ gory of unnecessary facts , except that knowledge of them may allow the formation of further hypotheses to arise from this thesis. For example, the relative importance of causes of the end of the sellers' market can point to more specific hypotheses about the nature of post war inflation, the capital market and diffusion of technology. 152 amateurs, pressure on wholesalers profits, pressure of pro­ cessor supply changes and technical change, but the precise contribution of these cannot be gauged; (2) the diffusion of technical change; (3) the extent and direction of social change, remembering that self service virtually failed in the 1930s.

The theory used to select and analyse facts of the world has selected different facts of the world from those which a conventional textbook one level model would have selected. The usefulness of the more complex model can only be assessed by comparing its results with those from the simple model. The following is an attempt to explain in summary the changes in the grocery industry as (i) simply changes at retail level and as (ii) simply changes at pro­ cessing level (for one level change explanations can be attempted at various levels).

(i) Technical change and entry caused changes in profitability at existing capacity and opened possibilities of economies of scale in both shop and firm. Innovators and their followers lead the way to low margin selling. Freedom of entry means continuation of competitive gross margin level despite increasing concentration, which, nevertheless, is sufficient to cause an expectation of future movement away from competition.

(ii) Entry and strong growth motivation lead to lower processor price levels and thus lower prices for consumers. 153

Freedom of entry, particularly cross entry} maintains low price equilibrium despite trend towards concentration. Form­ ation of trade association is a move to build oligopoly power

Thus the future of competitiveness is suspect.

The multi-level model, on the other hand, com­ bines the elements of the one level explanations to give, in summary, the following explanation:- Technical change and entry at retail put pressure on profitability and opened economies of scale to firm and shop. This increase of con­ centration, and rivalry, became a countervailing power to the monopolistic power of processors, who were also feeling pressure from entrants and from strong growth motivation.

Countervailance, freedom of entry and highly mobile final consumers maintain pressure on profits at all levels. Con­ centration at retail seems unlikely to lead to collusion because of processor conduct with respect to exploitation of inter-retailer competition. Concentration at processor level seems unlikely to lead to collusion because of retailer con­ duct with respect to exploitation of inter-processor competition.

It seems that the countervailance analysis is more crucial in explanation of processor behaviour than in explanation of re-seller behaviour, especially when the possibilities of quite highly advantaged entry by re-sellers to private label selling and even processing is remembered.

Far from major processors being in a stronger position now 154 than in the early 1950s they are in a manifestly weaker position to expropriate monopoly profits.

This would suggest that when explaining the market behaviour of secondary industry a model of the type presently employed may give a better explanation and more accurate predictions than the usual type of model. As an example, some parts of the builders' supplies industry are strongly oligopolised. Apart from the Trade Practices Act it may be expected that this situation would continue.

However, if the trend towards concentration in the building industry continues, will suppliers be able to maintain their monopoly profits? It is suggested that this consideration, rather than the Act, leads to a prediction of increased competition in building materials at some time in the future.

Nevertheless, for buildings to become relatively cheaper, the final level of the market will have to be competitive enough to pass on the gains at earlier levels. BIBLIOGRAPHY

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