Payments Innovation

Online Platforms: Why Consumers Rule And Regulators Don’t

A few weeks from now will mark the 72nd anniversary of a federal court decision that found grocery store chain The Great Atlantic and Pacific Tea Company and its founders, George and John Hartford, guilty of engaging in anti-competitive behavior. That story is the subject of a terrific book written by economist Marc Levinson, “The Great A&P And The Struggle For Small Business In America”. It’s a great read and the source of several of the data points quoted in my piece.

That decision caught many by surprise, including the Hartford brothers.

The case against them, and the decision it rendered, deviated sharply from the traditional Sherman Act cases that accused companies of using their market power to raise prices to the detriment of the consumer.

In 1946, the year the verdict was reached, A&P was the country’s largest retailer and, obviously, its largest grocery chain.

But here’s the rub: The guilty verdict was made on the basis of A&P’s use of supply chain innovations to lower prices to consumers.

Yep. Lower prices.

The plaintiffs in the case weren’t the families living on Main Street, U.S.A., who benefited from those lower prices — in fact, they loved shopping at A&P and weren’t the ones complaining.

Those who did and brought the case were the independent grocery stores who said they could no longer compete when A&P came into their town.

These independent grocers further alleged that their inability to compete led to the destruction of the mom-and-pop stores that were the economic underpinning of those towns and those cities. Shutting those stores, they claimed, risked compromising an important driver of the local economy.

The verdict didn’t do much to stop the A&P train — at least for a while. The company thrived and grew for another three decades after the courts handed down its decision.

However, today, A&P no longer exists.

The firm that a White House lawyer once referred to as a “giant bloodsucker,” that hit a (staggering at the time) billion dollars in sales in 1929, that was valued at a billion dollars in 1959 and that reinvented the grocery store experience for consumers sold a 42 percent stake to a German investor in 1979 at a $190 million valuation.

By 2009, A&P had shrunk in size and became a modestly sized regional chain.

By 2015, it had closed its doors.

Regulators didn’t destroy A&P in the end.

A&P destroyed A&P.

Its failure to keep innovating in the face of new players that did was A&P’s downfall.

A&P’s grocery playbook — the one the company wrote in the early 1900s and that changed how consumers shopped for groceries — was now in someone else’s hands.

And those small grocery stores seeking protection?

Most of them failed too.

There’s a lot that can be learned from the A&P story.

 

A Trip Down Grocery Shopping’s Friction-Filled Aisles

If you think grocery shopping today is a big pain, think about going to the grocery store in the late 1890s and early 1900s.

What might sound like a fun, quaint shopping experience — bopping up and down Main Street between the cheese shop, the butcher, the fishmonger and the dry goods purveyor, picking up food to stock the pantry — was friction wrapped around a very pricey experience.

Not only did the consumer have to visit separate shops to buy different things, which was time-consuming, but once inside, it took forever to get what they came in for.

There was no picking up stuff and putting it in a basket to check out.

Shopkeepers behind counters measured things with those lovely antique scales that some of you may have adorning your kitchens today as decorative accessories. Measurements were imprecise (by accident and sometimes even on purpose), and consumers could only buy what the shopkeeper had in his store. A consumer out of flour or short on milk never knew for sure whether the shopkeeper had either until they walked inside.

Speaking of selection, it was limited to whatever the shopkeeper could display, which further influenced what and how much of what consumers bought. Refrigerated displays were nonexistent, limiting the supply of goods even further.

And since there wasn’t home delivery, shopping was also limited to what the lady of the house could carry or push in a small cart home. Most of the time shopping for food was a daily ritual and consumed a big chunk of her time.

About the only thing that was valuable about the whole experience was the ability for the consumer to put things on account to pay later.

Having credit extended by those merchants was a huge convenience for two very good reasons.

One: No one had to schlep piles of cash up and down those Main Streets to settle their grocery tabs.

And, two: Buying groceries was very expensive.

Back then, consumers spent more on groceries than they did on their house payments — about a third of their income.

That’s because the grocery store supply chain was incredibly inefficient, and those costs were borne by the consumer.

By the early 1920s, there was roughly one grocery store for every 51 families — literally a grocery store on every corner. Supporting those stores was a massive cottage industry of wholesalers and distributors that supported a huge network of fragmented food plants and suppliers. There was one wholesaler for every 43 mom-and-pop operations.

Each hop from supplier to wholesaler to distributor added costs. The shopkeeper layered on his margin, including the cost of extending credit to his customers.

Those costs all added up.

The Great Atlantic and Pacific Tea Company would change all of that.

An establishment that started in 1859 as a wholesaler of tea and coffee soon became a wholesale and consumer-facing business that revolutionized the grocery store supply chain and, with it, the grocery store experience. For the first time, shoppers could walk into a store with hundreds, then thousands, of items to buy, inspect what they wanted to buy before buying it and then take those items to a cashier to checkout.

A&P’s stated mission was to create and then use its supply chain efficiencies to be the cheapest grocery store in every local market in which it operated. The Hartford brothers who owned and operated it decided it was more important to sell large volumes of goods at a lower profit than to sell fewer things at a higher margin. They saw low prices as a way to bring customers in the door who, when there, would fill their baskets with more things to buy.

A&P created cost efficiencies by displacing wholesalers and dealing directly with the manufacturers, offering them the certainty of an order and guaranteed payment terms. It eliminated credit for consumers — taking cash and check only for payment. It vertically integrated its supply chain, building plants so that it could make and sell its own branded products at lower costs. Despite being the lowest-priced grocer, it paid its employees a competitive salary.

In its day, A&P was the largest coffee buyer in the world, and its Eight O’Clock coffee was a household staple. A&P’s 35 bakeries produced 600 million loaves of bread each year along with other bakery confections, more than all but one bakery company in the U.S. at that time.

The Hartford brothers lived and died by data, analyzing sales by store and by product and eyeing the competition to make decisions on everything related to store operations. They used data to negotiate better deals with suppliers and where and when to push the pedal down on selling their own branded products instead of other brands. The brands that wanted access to the A&P shopper and were willing to play ball were rewarded. In 1926, A&P stopped making chocolate in favor of stocking and promoting the Hershey’s brand.

That strategy kept A&P’s growth engine humming and customer base growing. The logic that seems obvious by today’s standards was revolutionary at the time: Bigger stores with more products for consumers to buy at cheaper prices that were open longer hours would be a more valuable retailer across all financial measures because it was more valuable to the consumer.

Under the stewardship of the Hartford brothers, A&P expanded its store footprint to become the world’s largest grocery chain during the 60-year period between 1915 and 1975 and the nation’s largest retailer across all categories until 1965.

A&P operated 16,000 locations in all but nine states in the U.S. and reached $1 billion in sales in 1929. It operated 70 factories and 100 warehouses. Its sales were twice that of any other retailer. A&P was reported to have sold one-tenth of all the sugar in the U.S., one-eighth of all coffee and more butter and cigarettes than any other retailer. Of the 32 million households in the U.S. at that time, it was reported that 5 million of those consumers walked into one of its stores every day.

A&P’s urban locations and low prices were of particular importance to lower-income consumers and the ethnic minorities living there who once only had more expensive local markets to shop. Economists estimated that A&P’s low prices raised the standard of living between 2 percent and 5 percent for consumers. They also estimated that consumers also ate more — 10 percent more — since their grocery dollar went farther.

Despite all of that, A&P never dominated consumer spend on grocery.

At the time the antitrust claims were being made, A&P’s sales drove 9.3 percent of grocery sales and a little more than 7 percent (7.3 percent) of consumer spend on grocery.

A&P’s profits were also lower than other retailers at that time: 1.3 percent compared to 2.1 percent to 2.7 percent for most retailers.

And yet, the court made its decision, and with it signaled that tradition and status quo was worth preserving at the expense of the innovation that made things more efficient and better for the consumer.

And all because the status quo couldn’t keep up.

Somehow, the courts, spurred on by the merchant’s claims, surmised that if the mom and pops wouldn’t compete, then at some point, the consumer would get harmed — even though consumers had more money in their pockets because of A&P’s low prices and could shop other retailers with that extra money and buy other things. A lot of economic value was unleashed when suddenly consumers weren’t spending a third of what they made to feed their families.

It’s easy to understand the Hartford’s brothers’ confusion over why the case was brought up in the first place, never mind the court’s decision.

But, what ultimately destroyed A&P was A&P’s inability and unwillingness to innovate in the face of growing competition.

After the Hartford brothers died, new management pivoted and decided to invest in bulking up its margins at the expense of being the low-cost player.

At the same time, new entrants emerged with a new vision: suburban “supercenters” that would sell food plus lots of other household items at low prices. Kmart and Target emerged and began taking share. A&P faltered and could never regain its footing — out-innovated by the innovators who learned at the feet of the A&P master.

Eighty-two years later, as a famous American philosopher would say, it’s déjà vu all over again.

Innovators are emerging and disrupting traditional industry segments from retail to media to advertising to content. Their platform business models remove friction between consumers and those new innovative endpoints and come with better service, a better selection and a better economic proposition for the consumer.

Consumers willingly get on board because the status quo no longer fits their needs.

Regulators and policymakers are revving their engines and are today taking — or threatening to take — action against innovators that, like the Hartford brothers and A&P in their day, are using technology and new business models to give consumers a better experience, and often at a lower price.

Because consumers are complaining?

Nope.

Because lots of competitors are feeling the pressure from innovation and complaining that the innovators are “unfair.”

If you don’t believe me, read almost any article now about how the online platforms need to be investigated, castigated, broken up, etc. The consumer will be missing-in-action in the story.

Then look at who is going to the legislature and regulators looking for help in blunting the online platforms.

It’s almost always a downtrodden competitor who can’t keep up.

FAANG — a reference to Facebook, Apple/Amazon, Netflix and Google — is the pejorative term some use to refer to the new “A&Ps.” Sometimes they are referred to as the frightful five (Amazon, Apple, Facebook, Google and Microsoft).

Either way, they are the new “bloodsuckers” some eight decades later.

Aside from not liking online platforms, the critics can’t seem to get their stories straight.

Why is Netflix on the list?

I thought this was still a cuddly company that was taking down the cable guys — you know the ones with the big bill and lousy service?

And Microsoft — aren’t these the folks that managed to lose the next big thing in personal computing — the smartphone — to Apple and Google?

Google has been double-whacked, most recently for requiring smartphone manufacturers to install Google’s highly desired apps in return for getting a free license for Android, and before that for innovations in displaying product ads that consumers really like.

All the other successful online platforms are in line for a shellacking just like A&P.

They can take two lessons from the history of A&P.

Consumers ultimately decide who wins and who loses.

A&P kept drawing in customers for years after it got whacked by the antitrust courts. People didn’t want to go back to the high-priced inefficient old ways. So online platforms can take their public flogging and keep moving on just like Google and Microsoft have done after their public shaming by Brussels.

It’s easy to lose those customers if you don’t keep innovating. And, even if you do, someone else might just come up with something you’ve never thought of.

A&P ultimately lost its edge and was overtaken by innovative companies. That’s what happened to Microsoft in smartphones and could happen to anyone else too.

Of course, A&P and Amazon have a lot more in common than beginning with the letter A.

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