1922 Encyclopædia Britannica/Marketing
MARKETING.—In modern business, special emphasis rests on the importance of proper arrangements for “marketing.” Marketing is essentially buying and selling. The central fact is the sale. But to secure sales the goods must often be assembled from the places where they were produced, graded when qualities differ, sorted when there are different varieties, moved to market and in many cases thence to the place of consumption. Hence assembling, grading, sorting and transportation are to be considered as parts of the general marketing function. Similarly financing, that is, meeting the actual expenses of marketing including that of holding the products until the demand is present, constitutes a branch of market study. The risk of loss from destruction may be covered by insurance. Finally there may also be sales and purchases in advance of the appearance of the products on the market or even in advance of production. Dealing in futures and speculation are phases of marketing.
Methods of Marketing.—There are scores of methods of marketing and hundreds of variations, but the principles involved are few and may be made clear by examples.
(a) Producer Direct to Consumer.—The simplest form of marketing and the most primitive is the sale by the producer directly to the consumer. The village boy or girl who raises flowers and sells them to passing tourists, the truck gardener near cities who disposes of his vegetables and fruits by sale direct to consumers, either from house to house or at a market-place frequented both by producers and consumers, the dairyman who peddles or delivers milk direct to consumers, are illustrations. In the aggregate, sales made in this way run into immense volume, although but a small part of the total of business. Modern business, the development of large cities, an increasing division of labour in industry, all tend to reduce this form of marketing. There are, however, variations of selling direct from producer to consumer in modern business which deserve notice. There is a considerable amount of marketing of produce, particularly butter and eggs, direct from farmers to consumers, by parcel post. Much more was hoped for from this system some years ago than has actually resulted. The development of marketing relations between small producers and small consumers is a slow process that apparently cannot be forced. Again, certain specialities, complicated machines such as printing presses, power installations, made-to-order devices, and machines requiring much attention and service after the first sale, usually are sold direct by manufacturers to consumers through the medium of speciality salesmen. The salesman is the representative of the producer in the marketing transaction. Similarly the publisher of books, maps or periodicals who sells his product through canvassers or agents is selling direct to the consumer. Again, if a retailing house does so large a business that it can advantageously engage in manufacturing some of the lines of goods it sells, it may combine production with distribution. One of the most important instances of this method of direct dealing is the mail-order house of Sears, Roebuck & Co., of Chicago, which manufactures in great quantities some of the goods—shoes for example—which it sells.
(b) Through Wholesalers and Retailers.—Most products of common use—such as foods, clothing, footwear, house furnishings, lumber, fuel and so on—are marketed through middlemen. The manufacturer of men’s clothing or of shoes usually sells his product to retailers scattered over the country who in turn sell to consumers. Manufactured food products, dry goods and notions, drugs, hardware and house furnishings are generally sold first to wholesalers, who in turn sell to retailers.
(c) Through Local Buyers, Wholesalers and Retailers.—Farmers’ produce, fruits, vegetables, butter and eggs are commonly marketed through local buyers, then to wholesalers or wholesale distributors, then to retailers and lastly to consumers.
(d) Variations in Method.—Variations are introduced into marketing in many ways. For example, the actual sale may be consummated through personal salesmanship either in the seller’s place of business or in the buyer’s. If the seller carries a line of goods he must have a store or shop, but even this may not keep him to one location. The old-time pedlar carried his store on his back. More recently grocery stores, meat shops, book and periodical shops, and even dry goods and house furnishings have been put on wheels, on automobile trucks, and sales routes laid out to be covered periodically, making sales direct to housewives and consumers. Again, the sales may be effected through retail institutions by mail. In the United States a gigantic business has been built up by a few large mail-order houses such as Sears, Roebuck & Co. and Montgomery Ward & Co., of Chicago, and the National Cloak and Suit Co. of New York, which are really stores or shops selling retail to consumers. Wholesale concerns selling only to retail dealers, such as Butler Bros., of Chicago, Charles Broadway Rouss, Inc., of New York, and the Baltimore Bargain House, have likewise developed enormous businesses founded on the mail-order method of selling. In addition to these there is an unknown but certainly large amount of business transacted by ordinary retail and wholesale stores by mail, supplementing personal selling.
Commodities of common use and of well-known standards require a minimum of demonstration and explanation. Sales in large quantities of such goods can be and are made through exchanges, organized meeting-places for those who buy and those who sell. Accordingly exchanges are located in large wholesale centres for the sale of such commodities as grain, cotton, wool, farmers’ produce, sugar, coffee, iron and steel, stocks and bonds. At these exchanges, under established rules, wholesale transactions are effected with a minimum of difficulty and risk. In the case of highly perishable goods, such as fruits, where no time may be lost in effecting sales in order that they may reach the consumer before spoiling, the auction system is used. Wholesale buyers and salesmen come together at a designated place at a set time and clear their transactions. The auction is a much more widely used mechanism of trade in England and in continental Europe, where large quantities of nearly all kinds of goods are thus sold, than in America. The auction system has seemed, however, to be developing in recent years in America, particularly in lines of known standard or quality, which are bought in wholesale quantities only at certain brief seasons of the year, such as carpets, rugs, wool and furs.
Variation in marketing occurs through variations in ownership of the goods to be marketed. To illustrate, producers or local buyers usually sell outright to wholesalers all goods marketed through the wholesaler-retailer channel of distribution; but in highly perishable goods such as fruits, dressed poultry, live poultry, etc., and also in cases where the value of the goods runs very high in proportion to the value of the service rendered by the wholesale middleman, as for example, finished textiles, real estate, commercial paper and stocks and bonds, the wholesaler (or dealer who takes his place) frequently, if not usually, merely sells or buys as the agent of the owner and secures a commission or brokerage instead of a profit for his services. This arrangement in the case of perishable goods relieves the wholesale dealer of the risk from loss, and, in the case of costly goods, of the burden of carrying the financing of the goods. Such wholesalers are known variously as commission dealers and brokers.
While goods are being gathered together in wholesale quantities and made ready for distribution to the retail trade other factors in marketing frequently enter in, factors of a speculative nature. Well-standardized goods that are not readily perishable, such as grain, cotton, wool, silk, provisions, coffee, sugar and so on, are likely to be bought purely for speculative purposes. Thus a lot of grain or cotton may be bought and sold several times before being moved to consumption. It is but another step for these speculators to make their ventures in hope of gain on what they think future prices will be. Hence “selling futures” is a common occurrence on the great exchanges that deal in the commodities named. Under this system grain may be bought and sold long before it has been harvested or grown, or even before it is planted. A flour-miller may quite legitimately ensure his future supply of grain at a certain price by buying “futures.” But a great deal of opposition has been aroused at various times by speculation in the necessities of life. It has been charged that dealing in futures enables powerful speculators to combine unjustly to secure success for their ventures, in some cases tending to hold prices down and in others tending to hold prices up. As a result both producers and consumers are suspicious of such traders. The consensus of opinion among those who have studied the course of speculation on exchanges seems, however, to be that if manipulation of prices and monopoly can be kept out of the market, and if the laws of supply and demand are allowed to operate freely, the effect of speculation, particularly of dealing in futures, has a healthful balancing effect on the market. Under such conditions purchase and sale of commodities for future delivery tend to discount and equilibrate all conditions of supply and demand, so that changes of price are made much more gradually than they would be if buying and selling of such commodities were confined solely to the stock offered each day. Dealing in futures is an essential function of marketing, but it needs careful regulation to prevent unfair practices.
Ownership of Distributing Concerns.—In the matter of ownership of the various concerns which link distribution there is most interesting variation. While the ownership of a single retail or wholesale store resting in an individual, or in a partnership composed of individuals who make this business their means of livelihood, or in a group of investors in the form of a corporation, may be considered the normal unit, gradual integration is going on both from the producers' and consumers' ends of the distribution chain.
Numerous American manufacturers have established retail store outlets of their own, such as the W. L. Douglas Shoe Co., which has now more than 100 stores of its own besides hundreds of agencies scattered through the United States; the Singer Sewing Machine Co., whose retail sales branches are found in nearly every large city; and many others in such lines as hats, baked goods, gasoline, typewriters, office furniture, phonographs, sporting goods, paper novelties, corsets, gloves, etc. One of the most notable recent American ventures into the retail field by a manufacturer is that of the Winchester Repeating Arms Co. now the Winchester Co., of New Haven, Conn. This concern adopted the policy of establishing its own retail outlets in the larger cities and of forming agency relations in other cities.
Practically all chains of stores maintained by manufacturers seem to have originated, in part at least, because the producer felt that his goods were not receiving proper attention from the regular retail stores. Ownership of the retail outlets by the producer makes it possible for the producer to sell his goods in just the way that he desires. If the store is his own, he can make sure that his goods are represented by a full line, he can dictate the price at which they shall be sold and the service that shall be given. Retailers have used coöperative methods in order to make their relations with production more direct, through buying clubs organized to accomplish specific purchases, through buying organizations of a permanent character which rival jobbing houses, through capital-ownership in wholesale houses, and in a few cases through manufacturing institutions. The rapid development of chain-store systems under single ownership and control is almost certain to accelerate the growth of this kind of coöperation of retailers in their buying activities. From the other end of the distributive chain efforts are being made to unite consumers in the ownership and control of retailing and even wholesaling establishments. Coöperative stores have had a most successful development in Europe but have not done well in America. In the United States there have been successive waves of interest in coöperation. An early example was the effort of the Workingmen's Protective Union to establish coöperative stores, beginning in 1844 and falling off at the time of the Civil War; later there were the Patrons of Husbandry and their Grange stores in the 'seventies; still later the Knights of Labor; then the California Rochdale Societies; then the Right Relationship League; and more recently the coöperative movement undertaken as a part of the policies of the Non-Partisan League, a political party with a strong following in the Dakotas and other middle-western states. All these movements, with the possible exception of the last two, seem to have exhausted themselves. The reasons for the failure of coöperation in retailing in the United States are generally said to be poor business management, unwise extension of credit, poor accounting and general slump of interest in coöperation. Coöperative stores usually claim to save customers money by reducing advertising, by cutting down service, and by locating in inexpensive places. In most instances, after a period of success, their competitors, the privately owned stores, defeat them just because they do advertise, offer the service that people want, and locate at the most convenient places.
Conditions Affecting Methods of Marketing.—The precise method of marketing and the channels of distribution to be followed for any product under present conditions depend upon a number of factors. A few of these may be enumerated.
(a) Location of Producers and Size of Output.—If producers are many and small and are located far apart, it is almost certain that their products will have to be assembled by a local buyer of some kind; whereas, if the producers are able to turn out large quantities, they may be able to deal with wholesalers direct. Producers who by ingenuity or special skill produce some article of exceptional quality are usually able to sell direct to retailers or even to consumers and thus save.
(b) Location of Consumers and Demand.—If consumers use small quantities or small lots of any product at one time, it is almost certain that they must purchase from retailers. Foods, clothing and other ordinary necessities of life fall into this classification. But a large consumer for example, a chair factory using lumber would not think of buying lumber from an ordinary local lumber dealer. It would be able to buy more advantageously direct from some mill.
(c) Variability in Demand.—Whether a product is wanted regularly or only occasionally is another factor in determining how it shall be marketed. Some articles cannot be sold more than once or twice in a lifetime to a customer. If it also happens that such articles require much demonstration and explanation, then the producer is almost forced to sell direct to the consumer or have his sales made by special representatives or agents. Encyclopaedias, subscriptions to high-priced periodicals, adding machines, life insurance and real estate are illustrations of goods that need such specialized attention.
(d) Degree of Perishability.—Perishable goods need methods of marketing unlike those used for non-perishable goods. Strawberries sent through the same channels as textile piece goods or hardware, or even the channels of most groceries, would never reach the consumer in condition fit for the table. Time is a very important element in the marketing of perishable goods. There must be no delay and little time can be given to the sale of any particular unit. Another illustration of a perishable article (though in a different sense) is the daily paper, the weekly or monthly magazine. Timeliness is the essence of their value. This makes necessary a highly specialized marketing organization to carry papers or magazines over the country and, in the case of magazines, to place them on sale everywhere at the same time. Such specialized handling calls for expense not incurred in goods not perishable.
(e) Unit Price and Distributing Markets.—The price of the product to dealers and to consumers, whether high or low, constitutes another factor governing the channels to be selected in marketing. A low-priced article with a small margin of gross profit to the seller cannot be sold in the same way as an article that offers a wide margin. A 25-cent (or shilling) article, such as a handkerchief, a magazine or a screwdriver, could scarcely be sold direct. The margin above costs of production could not possibly permit the article to be advertised and sold by itself by the mail-order method. It must take its way to the consumer through the channels of trade followed by thousands of similar articles. The producer of such an article would have to sell to wholesalers, to chain stores, to department stores, or to mail-order houses doing a general business in which this particular item would be but one of a great many.
(f) Competition.—The competition in the sales field of any article might readily determine the channel of distribution that is taken. For example, a manufacturer of hardware selling direct to the retail trade found that his strongest competitor's policy was to sell to every dealer who would buy and to offer no exclusive sales arrangements, while he himself made a success by offering his goods only under exclusive sales agencies. Certain manufacturers of soaps, perfumes, and toilet goods have found it so difficult to place their products advantageously in drug stores and similar retail outlets because of the number of competing lines that they have found it advisable to sell, especially in country districts or small towns, direct to consumers by means of agents and canvassers working on a commission basis. A motor-car tire maker found it so difficult to break into the market through automobile dealers and garages that he sold his product to a mail-order house.
(g) Familiarity of Consumers with Product.—A new product must as a rule be sold through channels that may be abandoned after the public has begun to know the article. Office devices at first sold only by speciality men are gradually taken over by stationery stores. Frequently orders for new food products must first be secured by speciality men from customers before dealers will stock them and offer them for sale. Sewing machines, talking machines and musical instruments, formerly sold only by agents directly in the employ of the manufacturers, are now sold more and more through regular retail stores. As demand becomes established specialized marketing systems can give way to the more general methods.
(h) Changes in Marketing Methods.—Occasionally a product which is being sold through the regular or customary channels and is having a large sale is withdrawn and sold through a more specialized channel. Ivory Soap is a recent example; its manufacturers, after a long experience of selling to retailers through wholesalers only, during which it built up the largest single soap business in the United States, decided to eliminate the wholesaler, July 1 1920, and sell to the retailers direct. No reports on the success of the policy were available in 1921, but it is to be presumed that the sales will show some increase over the previous year unless the general conditions of business interfere. The real test in efficiency in this case will come in comparing the costs of selling per unit. Examples of other large American concerns which sell to retailers direct include the National Biscuit Co., of New York, the H. J. Heinz Co., of Pittsburgh, and the big packing companies. Many, if not most, other large food manufacturing concerns distributing through the jobbers employ their own sales organizations that do “missionary work” among the jobbers' customers.
Inefficiency in Marketing.—Many criticisms of contemporary marketing systems appeared during the decade 1910-20. The cost of living had risen steadily for nearly 20 years, and very rapidly during the period of the World War, but wages in most lines had not risen in proportion. Hence the purchasing power of the average family had, if anything, diminished. This pressure on the family means of subsistence had caused breadwinners and housekeepers, as well as students and public officials, to listen readily to complaints of the shortcomings of distribution and its probable share in high costs of commodities. Many instances have been cited of the inadequacy of the marketing system. Food-stuffs have been reported as lying on the ground decaying in agricultural districts, while city people were ready to pay high prices for them could they but get them. Those engaged in distribution have been charged not only with inefficiency but also in some instances with deliberate waste to keep up prices by reducing the supply. This accusation is mentioned here, not because it is general, but rather because it shows the temper of the people towards distribution. In the main, however, the greatest criticism levelled at distribution is that it costs too much and that these costs must be paid by the consumer. It is asserted that there is a grocery store for every 80 families and that there should not be more than one for every 200 families. In other lines of merchandise, it is urged, there is the same oversupply of dealers, needless duplication of stores, equipment, and needless sales and delivery people, all of which must be paid out of the business. Criticism has become more pointed and perhaps more constructive as information concerning distribution and its real functions has accumulated. From such studies as have been made it seems safe to state that for most goods the costs of marketing, including transportation, run higher than those of production. This fact has been accepted by the public with some surprise and a feeling that marketing should not cost so much.
Reduction of Marketing Costs.—One method of approaching the problem is to propose some new or different method of distribution. It may be urged that a more general introduction of department stores or chain stores would give more economical results. But what do the facts, so far as they are available, show?
(a) Comparison of Costs by Various Methods.—Table I contains figures compiled from actual records by the Harvard Bureau of Business Research, Harvard University.
Table I.—Comparison of Costs of Retailing Shoes 1918.
Net Sales 100%.
|Independent shoe stores—|
|Low-priced shoes||13.3 %||32.33%||20.5%|
|Mail-order chain stores||9.85||57.60||24.6|
|Independent shoe stores||13.62||35.63||24.0|
It is clear that the statistics do not prove that in the case of shoes either chain stores or department stores can be conducted at less expense than independent stores. It is true that the lowest figure for chain stores is considerably lower than any other, but the chain stores also show the highest costs. The average costs of selling in chain stores seem to run a little higher than in independent low-priced shoe stores and in department stores. But taking the 1919 figure for the independents (a figure that includes both high- and low-priced shoes), department stores have a little the best of it.
Table II, showing cost of marketing, is compiled and adapted from reports of the Harvard Bureau of Business Research, Northwestern University Bureau of Business Research, several national trades asociations, and from personal studies.
Table II.—Marketing: Percentage on Sales.
Costs of selling through mail-order houses are not officially known. They are supposed to range from 18 to 30% of sales. But the knowledge of a general figure of this kind for a large mail-order house with many departments would be of little value even if correct. Costs of selling vary from department to department in mail-order houses just as in department stores. To be of value in a comparison of selling expenses, the figures should show the cost of selling shoes, for example, by mail. All things considered, the general costs of running a large mail-order house are probably somewhat lower than those for a large department store handling similar lines and classes of goods. The mail-order establishment need not be in a shopping district, so that the rent or investment represented by its site is comparatively small; the employees who fill orders do so more rapidly and for less pay than those who sell in a store; advertising is usually confined to the less expensive publications, and in the case of the largest houses the customers are much more numerous, running into millions. Costs in the shoe department of a mail-order house should run lower than in a department store or speciality shop, because in the mail-order house there is no time and labour lost in fitting shoes. This saving is counterbalanced somewhat by the number of shoes which are probably returned. The lower costs of selling in the mail-order house, however, are offset in part at least by the costs of transportation and other expense incidental to the customer's ordering by mail.
A part of the competitive battle for trade among these various types of institutions consists in the utilization of large buying power. The dealer who buys for the lowest price, other things being equal, can sell for the least and yet make the same profit as his competitors. Large chain-store systems, mail-order houses and large department stores frequently purchase their goods direct from producers and secure the prices usually given wholesale purchasers. In some cases a part of these differences may be used in cutting the prices to consumers, but it would be a mistake to assume that the consumer gets all the benefit from purchases made at lower prices or that this entire difference is gained for the dealers. Concerns that go direct to the producers, and thereby eliminate the wholesalers, as a rule incur practically all the usual expenses of wholesaling, such as interest on the investment in the larger stock of goods, storage risks, buying expense in dealing with numerous producers instead of a few wholesalers, extra record-keeping, and in the case of chain stores, reshipments to their various stores. The only real saving which buying direct from producers insures is the eliminated profit of the wholesaler, with a possible reduction of the expense for salesmen whom wholesalers must employ. Competition in buying has forced the joint creation by small concerns of buying organizations which, united, represent as large a buying power as the chain or department stores. Coöperation in buying certain classes of goods has strong advantages both for dealers and consumers. Buying in group at one time may secure advantages, not only in price but also in transportation and handling, sufficient to cover the added expenses incurred in buying in quantity. Thus farmers find it profitable to unite in buying a carload of fertilizers once a year. On the other hand it may be exceedingly unprofitable to buy other goods in carload lots. Large purchases would be practically out of the question on such goods as shoes, clothing and most other goods.
Comparing the various methods of retailing as exemplified in the ordinary independent stores, the department stores and the mail-order house, from such facts as are available, it does not seem possible to assert positively that any one method presents decided general economic advantages over the rest. Each presents advantages in point of service, but the differences in service appear to be fully compensated in expense, that is, the public pays for what it gets and in proportion to what it gets.
To illustrate: the modern department store gives more service in connexion with its sales than any other retailing type. It offers the purchaser the advantages of buying many kinds of merchandise under one roof. The purchaser has the benefit of elevators, restrooms, wash-rooms, free delivery, credit, large stocks from which to choose, liberal policies as to examination and trial, pleasant surroundings in which to shop, courteous attendants, and so on, but department store expense of distribution includes the cost of maintaining these services. The independent store probably comes second in point of service, although there is the greatest variation in this regard. Personal acquaintance and attention to customers' wants are perhaps the most important factors of independent store service. This type of store renders fewer services, and its expenses are therefore apparently somewhat lower than those of the department stores. Chain stores have had the greatest success when giving a minimum of service. No credit, no delivery and even a minimum of packing and wrapping are common policies. The policy of minimum service is in some cases carried to the extreme of having no salesmen, so-called “self-service” stores. Because the chain store gives less service it can obviously sell its goods at a lower expense. The mail-order house offers to its customers a wide range of goods to select from through a catalogue that may be studied at leisure in the home, but the mail-order house gives less personal service and requires in some ways more from the customer than any other system so far devised. The customer must decide what he wants from the study of a catalogue or other printed matter, he must make out a written order and send it, with a remittance, by mail and await the coming of the goods; he must pay transportation charges and he must make such adjustments as are rendered necessary by the fact that he did not see the goods before purchasing. With no need for showrooms, expensive locations, salespeople and some other incidental expenses, the cost of mail-order business should normally be less than that of any other type. Under the most favourable conditions it probably reaches this position. But the consumer, to some extent at least, makes up the difference by supplying the service that other retailing establishments offer him. The customer may make a money saving by trading with the mail-order house, but he does so by contributing his own time and labour to the transaction.
Another factor needs consideration in connexion with this brief study of the mail-order business. Low costs of retailing by the mail-order methods are based on successful mail-order management. But there are really very few concerns in the United States or any other country which have made a marked success of the mail-order business, while there are scores of highly successful department stores and dozens of highly successful chain-store systems. There have been numerous attempts in the mail-order field, but the failures have also been many. One of the main drawbacks of the mail-order business is the necessity to provide for the supply of merchandise, to draw up sales plans, and to publish the catalogue or other printed matter months in advance of sales. Changes in style, development of new demands and price declines or advances cannot always be foreseen. These conditions cause difficulty in the mail-order business. In a period of consistently rising prices such as obtained during the 30 years ending in the middle of 1920, mail-order methods could be safely employed on a large scale barring difficulties with styles and eccentricities of demand. But if there should be a number of years of price decline, mail-order financial managers will find their problems more difficult than they have been in the past.
So far as the public is concerned it seems safe to say that there are large classes who prefer and who will always continue to prefer to trade in those retail establishments offering them the highest developments of service, the department stores and the independent specialty shops. Other large classes prefer and will probably always prefer to buy in stores offering less service and proportionally lower prices. Undoubtedly there are many who find their greatest satisfaction in purchasing in the stores of the self-service kind where they may look about and pick up on their own initiative whatever they may wish to buy. Institutions are built to serve people in the way that they want to be served. There is room, therefore, in the retail trade for many types of stores. Specialty shops, department stores, chain stores, and mail-order houses will all continue to exist as long as there are numbers of people who want the services each institution offers. It seems impossible to believe that any one type will monopolize the retail business or crowd out all the others.
Any discussion of coöperation in distribution is purposely omitted at this point, for, as has already been pointed out, coöperation does not introduce any novelty in distribution method. It merely changes the type of ownership and control from that of investor-interest to consumer- or producer-interest, depending on whether the coöperators are consumers or producers. Obviously, coöperative ownership and control can be applied to specialty shops, department stores, chain stores or mail-order houses. Any degree of service now offered or refused by any type of store can be offered or refused by coöperative institutions. Most of the savings proposed under coöperative management, other than the profit which the coöperators as owners of the business hope to secure in the form of dividends or in lower prices, come definitely from reduced service. Incidentally that has been the cause of the failure of many coöperative enterprises. Their customers withdrew because they desired more service and were willing to pay for it.
(b) Individual Expenses that may be Reduced.—There is another method of attacking the problem of the high costs of distribution, one that is not spectacular, nor revolutionary, nor necessarily drastic, but which has already given promise of results proportionate to efforts to be applied. This method is merely to apply scientific methods to the improvement of the present systems of distribution, step by step, detail by detail.
In the table already given showing costs of selling in wholesale and retail stores, it may be noted that there is a wide range between the low-cost and the high-cost stores. This range is due, in part, to differences in lines of goods handled and differences in service; but a part of the range is due to differences in operating efficiency. That some stores should be able to show a high efficiency measured in low costs over other stores gives great hope of cutting distribution costs generally, by extending to all the methods now used by the best stores. The first step in a scientific approach to reducing costs of distribution is to determine by survey, investigation and actual measurement what the present difficulties are and what stands in the way of improvement. Although considerable work has already been done in this direction, much more must be undertaken, but it is possible even at present to indicate roughly some of the details in the distribution system which may be profitably studied.
The following statements outline briefly a few of the details of distribution which it seems certain must receive attention in order to secure more economical distribution. No doubt many more could be added. Poor roads greatly increase the costs of bringing the farmers' crops and produce to market, costs that must be added to the price that consumers eventually pay. Inadequate railway transportation is another element that makes a considerable addition to the costs. Car shortages at crop-moving time, cars unsuited to the products to be hauled, excessive delays in forwarding, at terminals, on the way, and at transfer points, are common sources of expense. Every day added to the time required for transportation adds not only to the transportation charges but also directly to the cost of the goods themselves in interest charges on the capital invested in the goods, and in an additional burden of other overhead expense due to lengthening of the period of turnover. Delay in transportation as a factor of expense in distribution has not been given the attention that it deserves. Poor location of terminals makes a great deal of expensive cartage necessary. Congestion of traffic in city thoroughfares is a growing cause of increased costs in distributing goods. Inadequate, inefficient, poorly located storage facilities cause huge losses. Inadequate, unauthoritative and inaccurate collection and dissemination of market information such as is needed by producers, distributors and consumers is responsible for great wastes. Through lack of such information business in many lines now passes constantly from glut to famine and back again. Poor packing of merchandise, inefficient loading, rough handling and uneconomical methods of handling are causes of waste and therefore of higher costs of distribution.
To refer more specifically to the activities of marketing through wholesalers and retailers, there is a startling loss of the wholesale salesman's time in finding customers, in making appointments, in fruitless interviews. The time of both salesmen and buyers is lost. Probably less than a sixth of a salesman's time, averaging salesmen of all classes, is actually employed in selling or even in displaying and describing merchandise. Anything that can be done to improve this deplorable economic condition will increase efficiency and decrease costs. No one can even begin to estimate the losses resulting from poorly trained salespeople, who fail to sell and who waste the time of their purchasers through lack of knowledge of their goods, their customers' wants, and their business, or through lack of ability to use their knowledge properly. Another source of loss that adds to the high level of sales expense is that the rank and file of salespeople of most classes, but more particularly in retail stores, lack interest in their work. The fundamental incentives of profit in proportion to effort expended and of self-expression in management, such as the owners or managers feel, is for the most part totally lacking. For this reason most employees give but a fraction of their ability to their work.
Advertising is or should be an invaluable aid to marketing. In the list of expenses of distribution it occupies a prominent place. There is certainly room for improvement in its administration. Much study has been given in some organizations to such problems as the proper selection of mediums and the right use of the space taken. No doubt much greater progress can and will be made in the future in these directions, but the greatest loss in advertising seems to be in the lack of faith of the public in the advertising. If people gave more credence to advertising, much less of it would be needed to secure the same result. The remedy, of course, lies in the direction of raising the standards and shutting out the dishonest advertiser.
Duplication in delivery organizations by retail stores is a source of economic waste. A beginning has been made towards eliminating some of this waste through coöperative delivery and by utilization of the parcels post. In a few cities a good share of all retail deliveries was in 1921 being made through the post-office with a considerable saving in money and no reduction in efficiency. Poor buying, imperfect realization of public demand, duplication of stocks of goods in too many styles, brands and makes, tying up too much capital, slowing up turnover and increasing overhead expense are causes of high costs of distribution chargeable to buyers of goods both in wholesale and retail stores. There are many who think that there are too many retail stores. Would goods be sold for less if there were fewer? Probably not, because a large part of the competitive losses now occurring because of the number are borne by the dealers themselves in unpaid services. It may be argued that if their number were reduced the rentals for the locations that would be eliminated could be saved. This cannot be definitely checked by such experience as has been recorded in any public way. Concentration of retailing seems invariably to result in increasing rents. In fact, rents tend to increase faster than sales, so that the fewer the stores the higher the share of the landlord. More studies are needed to determine the exact effects of restriction of the number of stores on costs of distribution.
There is another matter that needs consideration in connexion with any attempt to reduce rents, and that is the fact that the store plant is unused for a large part of the time. It seems impossible to secure the high degree of use that may be had in a factory or shop where, when there is plenty of work to be done, the plant can be kept working both night and day by means of two or three labour shifts. Store hours are by custom and legislation steadily growing shorter. This means that the capital invested in stock and plant has fewer hours in which to produce.
Finally, there is undoubtedly an enormous loss due to unfairness and dishonesty, a loss that is now carried in large part if not wholly as an expense of distribution, being added to the price paid by the consumer. Failure to return containers lent by distributors seems a small item, but in such a business as milk distribution in large cities the loss to milk distributors due to non-return of empty bottles is enormous. Uncollectable debts and the cost of collecting delayed payments are important items in the expenses of distribution. Disregard of contracts in such matters as refusal of goods after placing orders, failure to deliver goods after orders are placed, abuse of the privilege to return goods, claims for adjustment, and many other similar items make up large losses in money, time, labour and thought that should be made available for the public good. Unfair competition, efforts made not to increase legitimate business but to impede or even to destroy competitors, commercial bribery, “graft,” and the exercise of monopoly, all burden distribution expense far too much. A source of considerable loss is theft by employees, burglars and shoplifters. Some retail establishments count upon a fixed percentage on their sales representing losses due to this cause, a percentage that is added to the gross expenses which form part of the selling prices. Many of the losses of the distributive business, including theft, breakage, fire, and so on, are covered by insurance. In this way the individual distributor saves himself against exceptional loss, but the cost of the insurance is carried as an expense against the distributing process. Hence the public must pay a price for its goods that will cover these losses. Anything that can be done to reduce them will by that much reduce the expenses of distribution and the prices of goods.
Education in Marketing.—The leaks and wastes enumerated above are certainly responsible for at least a quarter of the present costs of marketing. They may be responsible for a third or even more. Here, then, is a great field for reducing costs by improving present methods. The first general step towards such improvement is education. Trained minds are the means through which the improvements may be devised and trained workers are needed to carry the improvements into effect. A beginning has been made. Before 1860 the apprenticeship system was general in England and to some extent in America, in retail, wholesale and importing houses. Young men came to their life’s work through a course of experience and training well calculated to give an all-round view of the business. The apprenticeship system gradually decreased about the middle of the 19th century, and for years after no systematic training was provided for young people other than the haphazard effect of their experience. The first training of modern salesmen in America seems to have been by the subscription book houses that flourished during the ’seventies and ’eighties. Their canvassers or book agents were thoroughly drilled or schooled in the art of selling or in securing orders. During the ’nineties sales managers in specialty manufacturing concerns, notably the National Cash Register Co., of Dayton, O., began training their men in special schools held at the factory. Training salespeople for retail stores seems to have begun in the ’nineties in such subjects as arithmetic, spelling and writing and, in 1905, in sales methods, under the auspices of the Women’s Education and Industrial Union in Boston. Educational service to salespeople and other workers is now commonly found in the better classes of both wholesale and retail stores. A beginning has been made also in education in distribution and marketing in American colleges and public schools. Several colleges offer courses in marketing, selling, sales management and advertising. Many high schools give similar but somewhat more elementary courses. The main drawback to a rapid development of public education in marketing seems to be a shortage of teachers who can conduct such courses rather than lack of public interest. Considerable aid is being given to distribution through educational short courses, institutes, and conventions and extension classes conducted by some of the state universities on systems much like those adopted by the agricultural colleges in conducting educational work for farmers. Associations of dealers have given to their annual meetings more and more of the spirit of educational gatherings. Such an organization as the U.S. Chamber of Commerce in its relation to distribution is largely a clearing-house for information and educational ideas for its members. One of the notable things in the progress made in educational work for marketing is the growing conception of the relation of the sciences of psychology and sociology when practically applied to the problems of marketing. In addition to these sciences the college courses in marketing now established include economics, statistics, geography and languages, in addition to more technical business subjects such as salesmanship, advertising, sales management and accounting.
Government Aid and Regulation. The U.S. Government has taken a growing interest in marketing, particularly of agricultural products. In 1913 there was established in the U.S. Department of Agriculture a Bureau of Markets to organize and carry on studies in the marketing of agricultural products, assist in working out grades for various commodities, attack problems of transportation and storage as affecting farm products and so on. The Bureau of Markets issues monthly a document known as the Market Reporter. The Bureau of Crop Estimates, another division of the Department of Agriculture, publishes monthly the Crop Reporter, which collects and presents information on the condition of production of agricultural products. The International Agricultural Institute, located at Rome, and supported by the coöperative action of most of the Governments of the world, collects and disseminates essential crop information for all parts of the world, information invaluable to the proper distribution of food products. Since the establishment of the Federal Bureau of Markets there has been a strong tendency to establish state and local marketing bureaus to act locally and to coöperate with the national bureau. Up to Feb. 15 1921, 31 American states had started such bureaus, commissions or departments. Proposals to establish similar organizations were then before other states and were almost certain to pass. The county agents, agricultural educational officers appointed by the states to assist in the development of agriculture, working in hundreds of counties scattered all over the United States, help to organize buying and selling clubs and actually serve in many cases as sales and purchasing agents for such goods as seed grains, fertilizers and so on. In addition, the Federal Government shows its interest in marketing through control of transportation, weights and measures, storage plants and exchanges, and prevents adulteration and mishandling of products entering into interstate trade. The U.S. Department of Commerce, through its Bureau of Foreign and Domestic Commerce, collects and distributes information on export trade. The U.S. Geological Survey reports the production and distribution of minerals and metals. The Forest Service reports the production of lumber and other wood products. The Federal Trade Commission has made intensive marketing studies of certain commodities and has drawn up outlines of accounting systems suited to retailers and manufacturers. The chief function of the Commission, however, is to act as a court of investigation and trial of unfair trade.
Bibliography.—A. B. Adams, “Marketing Perishable Farm Products,” Columbia University Studies, vol. lxxii., No. 3, 1916; “Reducing the Cost of Food Distribution,” Annals of the Amer. Acad. of Pol. and Soc. Science, Nov. 1913; H. H. Brace, The Value of Organized Speculation (1913); W. W. Cumberland, Coöperative Marketing (1917); P. T. Cherington, The Elements of Marketing (1920); C. S. Duncan, Marketing: Its Problems and Methods (1920); and Wholesale Marketing of Food (1920); E. P. Harris, Coöperation the Hope of the Consumer (1918); A. Marshall, Industry and Trade (1920); E. G. Nourse, The Chicago Produce Market (1918); P. H. Nystrom, The Economics of Retailing (1920); W. Sammons, Keeping up with Rising Costs (1915) and How to Run a Wholesale Business at a Profit (1918); A. Sonnichsen, Consumers’ Coöperation (1919) and L. D. H. Weld, The Marketing of Farm Products (1915).
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- Costs of retailing in other lines of merchandise, so far as the figures are available, show about the same relationships. The example presented may be taken as typical.