Retail Innovations in American Economic History the Rise of Mass-Market Merchandisers

Retail Innovations in American Economic History The Rise of Mass-Market Merchandisers Revised March 29, 2012 Art Carden 100 Swan Way, Oakland, CA 94621-1428 • 510-632-1366 • Fax: 510-568-6040 • Email: [email protected] • www.independent.org About the Author Art Carden is a Research Fellow at the Independent Institute in Oakland, Cali- fornia, Assistant Professor of Economics at Samford University, Senior Fellow with the Beacon Center of Tennessee, Senior Research Fellow with the Institute for Faith, Work, and Economics, a columnist for Forbes.com, and an occasional contributor to the Washington Examiner... Art Carden Assistant Professor of Economics Brock School of Business Samford University 800 Lakeshore Drive Birmingham AL 35229 [email protected] Retail Innovations in American Economic History The Rise of Mass-Market Merchandisers1 Revised March 29, 2012 Prepared for The Handbook of Major Events in Economic History, Routledge, Forthcoming Abstract The American retail sector is undergoing a long-term structural shift away from small “mom- and-pop” stores and toward national chains. Retail establishments have gotten larger and more concentrated; the mass-market merchandisers of the later twentieth century continued a trend toward consolidation of the retail sector into national chains operating large stores that started before their widespread emergence. In the late twentieth century, Wal-Mart emerged as the world’s most important (and controversial) retailer. The evidence on Wal-Mart’s effects on retail employment suggests either mild positive or mild negative effects, but Wal-Mart’s effect on prices suggests increases in real income. 2 | the independent institute Introduction also inevitably a story about Wal-Mart Stores, Retail changed in the twentieth century as Inc. Wal-Mart is no monopoly, but it dwarfs its small, independent retailers gave way to national competition and (again) appeared in the number chains of massive general merchandise stores. In one slot in the 2011 Fortune 500. Wal-Mart is the late twentieth century, the retail sector was famous for its use of computerized inventory at the front of American economic change. This tracking, extensive automation through its has been especially true of general merchandise distribution network, and the Wal-Mart Satellite retailers and Wal-Mart specifically. In the Network, which was completed in 1987 and twentieth century, the U.S. economy shifted is the largest private network in the U.S. (Wal- toward services and away from agriculture and Mart Stores 2011). Technology has played a role, manufacturing. The late twentieth century but mass-market merchandisers are the product saw a continuing structural shift away from of much more than scanners and satellites. independent single-establishment retailers Modern mass-market, discount merchandising is (“mom-and-pop” stores) and toward national rooted in trends that predate World War II. discount chains operating large stores that deliver broad arrays of goods to multiple Retail and the Changing American Economy markets.2 before World War II Retail has surpassed manufacturing as the Well before chains, mass merchandisers, depart- leading sector in American economic growth ment stores, and mail-order houses, consumers (Campbell 2009: 262), and the transition to bought from small merchants dealing mostly in a service economy has occurred in spite of the local goods. Peddlers wandered the countryside view that the service sector consists largely of hawking their wares, and small, independent re- low-productivity, low-wage, dead-end “McJobs” tailers distributed limited selections (Vance and (Triplett and Bosworth 2004: 1). The rise of Scott 1994: 16-17). After the Civil War, there mass-market retailers illustrates an important were three major retailing innovations: depart- point that has emerged in the literature on ment stores, chain stores, and mail order houses economic history and New Institutional (Vance and Scott 1994: 17-21). Department Economics largely following Douglass C. stores offered an early form of one-stop shopping North’s (1968) study of productivity changes with posted prices, no haggling, generous return in ocean shipping: technological improvements policies, and various amenities (Vance and Scott matter, but organizational changes, institutional 1994: 18). Aided in part by cheap or free rural changes, and market development might be postal service, mail-order houses brought a cor- more important. Information technology has nucopia of new goods to rural customers (Vedder increased retail productivity, but the rise of and Cox 2006: 38, Chandler 1977: 233). Chains mass-market merchandisers is part of longer-run emerged for several reasons and would draw ma- trends in retail explained by combinations of jor political fire in the early twentieth century. economies of scale and scope (Chandler 1977, The economic rationales for chain stores are 1990; Basker et al. 2010) and “economies of straightforward.3 First, falling transportation density” (Holmes 2011) that include “economies costs make it easier to manage several stores over in advertising and in transactions” (Kim 1999: a broader area. Second, an increasingly-mobile 95). population increases the value of a credible Any discussion of late twentieth century retail brand name (Kim 1999, 2001). Third, chain and the rise of mass-market merchandisers is stores allow an organization with several outlets Retail Innovations in American Economic History: The Rise of the Mass-Market Merchandisers | 3 to spread risk across a geographically diversified increased the quality both of the goods on offer portfolio of outlets. The first national retail and the price information to which people chain was the Great Atlantic and Pacific Tea across the supply chain responded (Chandler Company (A&P), which had been founded in 1977: 209-210, 215-219). 1859 as Gilman and Hartford’s in New York Retail also evolved in response to changing City (Hicks 2007: 7). Its operations were still transaction costs. Chandler (1990: 29) writes confined to New York City by 1865, but it had that both “wholesalers and retailers were a footprint that stretched from Norfolk, Virginia organized specifically to exploit the economies of to St. Paul, Minnesota by 1880 and a coast-to- scale and scope,” but Kim (1999, 2001) argues coast presence by 1900 (Chandler 1977: 234). that multi-unit firms developed in response to By 1930, A&P had 15,500 locations (Hicks transaction costs associated with larger markets. 2007: 8), and chain stores “accounted for almost Small single-unit manufacturers and small 40 percent of retail grocery sales” (Ross 1986: single-unit retailers had created a market for 125). wholesalers, for example, because arranging Improvements in transportation trades between small retailers and small infrastructure made layers of middlemen manufacturers would have been prohibitively redundant, and population growth encouraged costly without the coordinating actions of specialization throughout the supply chain middlemen (Kim 2001). Increasing urbanization (Vance and Scott 1994: 16-17). Population and larger markets replaced repeated interactions mobility increased the value of a credible brand between small retailers and the consumers they name (Kim 1999, 2001). The development of served with more anonymous trade. This made the automobile and home-based refrigeration advertising and branding advantageous sources as well as innovations at the store level like self- of credible commitment, which encouraged service and the cash-and-carry model lowered the rise of multi-unit firms (Kim 1999: 95, 97; prices (Neumann 2011: 4). In response to 2001). Brand names developed as market signals pressure from innovative supermarkets, firms that reduced asymmetric information problems, like A&P and Kroger “closed many of their and retailers had incentives to integrate small clerk-service stores and replaced them backward into the manufacture of private-label with fewer—but much larger—stores, which brands because this better aligned incentives were located on major thoroughfares for the along all parts of the supply chain—particularly convenience of automobile drivers” (Vance and between those who did the manufacturing and Scott 1994: 22). those who did the selling (Kim 1999:97; 2001). A recurring theme in the history of retail In 1929, small chains purchased less directly trade is the conviction that consumers’ demand from manufacturers than did large firms (Kim curves for many goods are highly elastic. This 2001: 316). Legal innovations also mattered leads to innovations along the supply chain as 1905 legislation protected trademarks and that allow firms to earn profits by selling high therefore made them clearer signals of quality volumes at very low profit margins. This was (Kim 2001: 310-311). evident in the nineteenth century just as it was Retail competition has always been a in the late twentieth (Chandler 1977: 227). contentious political and social issue. Some Competition and innovation in retail and viewed the chains as a type of colonization of wholesale lowered the costs of transporting the South, Midwest, and West by northeastern goods and transmitting information; it also business interests (Schragger 2005: 117). 4 | the independent institute Opposition became so bad that Sears, Roebuck “the number of chain store locations more would ship wares in unmarked wrappers to than double[d],” and chain store employment pacify customers fearing social sanction (Ryant passed employment in

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