Saturday, December 13, 2008


This is a story of the grocery business, and I apologize for that. But the grocery business does consume a lot of my time, and the things with which I am preoccupied outside of it certainly apply inside of it as well.

A friend of mine, we‘ll call him Skip, just celebrated his 83rd birthday (the exact same day on which I celebrated my 27th) and - partly out of celebration, partly out of other commitments - his daughter had taken him to Philadelphia to spend the day with her. Skip spent a large part of his life in Philadelphia as a grocery store manager and later as a corporate officer for the same grocery chain. Going back, it seems, evoked a few memories from him that he wanted to share, and I’ve made it a point to always share his memories with him. It was 1968. Skip was the director of merchandising for his company, which is not a small rung on the ladder by any means. He was in charge of setting profit margins for merchandise, setting sale prices, and establishing schematics for store layout. Additionally, he oversaw the pool of buyers who, as their title suggests, buy everything that comes into the warehouse, working out the myriad deals that are intrinsic in that system. Even in 1968 this was a problem: corporations vying for top market position even in small companies like Skip’s were already beginning to slip money into the coffers of those in charge to make sure that their product was top dog. Once there, it becomes difficult for another product to take over. The public buys what they are told to, generally, and it’s very difficult to break that cycle. Make the kid’s parents buy it, lock them in, and the kids will never trust another brand. Their kids won’t even know that another brand is possible.

Skip first encountered this problem when he decided to reset the canned soup sections in his stores. At the time he was selling Campbell’s Chicken Noodle, Tomato, and Vegetable Beef soups at cost everyday. These soups, even today, represent the core of the condensed soup business (a very large and growing category - in 2005 Campbell‘s had revenue approaching $8bn) and a store with everyday low prices on these is sure to net customers en masse. Selling at costs, of course, means losing money, because the cost of each item must also bear the cost to transport it, the cost of labor to warehouse it - and any applicable inventory taxes involved -, and the cost of labor to stock it. The industry calls these items loss leaders - items for which the company is willing to lose money in order to get people into the store. The idea of a loss leader is to get as much exposure for the item as possible while selling as few as possible, thus maximizing profits. Skip, in turn, placed his loss leading Campbell’s cans on the bottom shelf of the set, and the other Campbell’s soups on either side. In the middle he placed the sundry soups, including broths and stocks. Traditional supermarket logic tells us that the middle area - anything from shelf three up - is where customer’s eyes are. Therefore items which do not need help selling are placed on the bottom, because customers are looking for them anyway. In the middle are placed items which do not already have a dedicated following (in cereal, for instance, you will always find large family sized boxes of Cheerios on the bottom shelf, children’s cereals in the middle, and adult cereals on top. Children’s cereals are the only part of the category which consistently change, in order to reflect the newest fad cartoons, movies, etc.). The problem which Skip encountered with this fairly sensible product alignment came from his company’s VP, who had been told that the arrangement could not continue by the president of Campbell’s soup. Attempts to explain the logic behind his choices fell on deaf ears. Nevertheless, and somewhat to the company’s credit, Skip’s new soup schematic was implemented in all of his stores and was a success, but his reputation with that VP had been tarnished.

This small victory was put to the test in a later incident, where the company’s president decided that Crest toothpaste should be placed on sale for 39c. Skip again refused, citing that he could place Close Up toothpaste on sale for the same price with a greater profit margin. The problem with this response is that Crest (incidentally the first toothpaste to include fluoride) is, and was, owned by the multinational juggernaut Proctor and Gamble while Close Up is made by Church and Dwight - even then a much smaller company. Skip’s plan to place Close Up toothpaste on sale was implemented against the president’s wishes, and the resulting row nearly placed Skip on the street. Today he credits these two events as the main reasons why he was unable to achieve a senior executive position within the company - and all because he made it more money than if he had followed the alternative plan.

There are benign reasons for a CEO wanting to place one product on sale over another, but the most obvious reason for this is that there were kickbacks in place about which Skip was not aware. Money talks. Even a few years ago it was common practice for vendors to give grocery managers gifts in exchange for better display spaces, increased shelf space, etc. Companies, purportedly realizing that this created an unfair advantage, have broadly banned this practice. Instead, the corporate offices of those vendors now send huge checks to the company owners in order to get better displays. These kickbacks, which pad the bottom line quite nicely, have resulted in a very narrow field of products (take a look at the detergent or shampoo aisle of your local market and see how many different companies are represented there. For most, non-specialty, markets the answer will be no more than 3 or 4 for both aisles combined) which excludes smaller competition offhand. More importantly, they have resulted in industry standard wages that are only marginally above minimum wage for most positions, generally awful benefits (or, in the case of some well known companies, hardly any benefits at all), and a general cronyism on executive row where the wage divide becomes quite evident.

Of course, these are moderate players in moderate examples from a moderately regulated government. History provides us with better, more telling examples, of what else can happen when that flow of corporate money catches the eye of the right person. In the very same decade that Skip fought for his Close Up sale, the Ford Motor Company had established a prison camp in its Argentina factory, where the military tortured and murdered members of the Union who had forced the company into providing the workers such luxuries as an hour lunch. They were declared enemies of the state.

As for Skip, the moral of his story, as he enunciated it, was to not be smarter than the boss. I told him that I felt the greater imperative was to know who the boss was. He laughed at that and agreed. I felt horrible for him. He came from an era that had told him that he had only to don a suit, go to business school, and he would be initiated into the elite. There was a certain sense of infallibility and empire to his generation, but now he sees - as should we all - that the rulers of the empire only ever were a select, predestined few.

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