The Great A&P and the Struggle for Small Business in America (41 page)

Many poor decisions in the early 1960s sped A&P’s downfall, but one factor stands out: A&P paid generous dividends. From the time of its public share listing in late 1958, shareholders both inside and outside the family called for dividend increases. The John A. Hartford Foundation was A&P’s largest shareholder, and it is here that the dual role of Ralph Burger, serving as head of both A&P and the foundation, was problematic: high dividends may have been in the foundation’s interest even if they damaged the company’s long-run prospects. In the year ending February 1961, nearly half of A&P’s earnings went for dividends. In 1962 and 1963 the payout topped 70 percent.
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High dividends, alongside construction of a huge cannery, a new bakery, and the company’s first dairy, starved A&P’s stores of investment. The investment needs at store level were immense: the average supermarket, a thirty-six-hundred-square-foot space with eleven employees in 1951, grew to a fifteen-thousand-square-foot establishment with forty-five employees in 1961, so even stores built within the previous decade were badly outmoded. A&P lacked the funds to replace them. The number of new stores it built each year was around 4 percent of its total store count, meaning that on average a supermarket would be replaced after twenty-five years—not rapidly enough to keep the stores up-to-date at a time of great change in the way Americans shopped for food. A&P’s aging store base drove customers away. In Cleveland, where A&P had operated since the early 1880s, A&P’s grocery market share plummeted from 22 percent in 1960 to 15 percent in 1965, and market research showed that A&P was not among the four chains most favored by high-income households. Shareholder meetings featured complaints about dingy stores and wilted produce, and comments about A&P’s poor maintenance began to appear in the press.
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The outside directors recognized that things were not going well, and they began to push for new management. In January 1963, the seventy-three-year-old Burger announced he would resign as president while staying on as chairman. As his successor, he proposed John Ehrgott, the company’s vice president and treasurer. Ehrgott, then sixty-seven, had been employed by A&P for forty-six years, since the era of the Economy Store. As corporate controller, he had worked closely with the Hartfords and Ralph Burger for decades. Like Burger, he had never managed a store, run a manufacturing plant, or overseen a warehouse. He was a numbers man. The reaction by A&P’s board was rare in the annals of American capitalism. All fourteen A&P executives serving on the board voted in favor of Ehrgott’s promotion. All six outside directors voted no. After the board meeting, the six issued a most unusual statement urging the promotion of “younger executives.”
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Dissident directors forced Burger to surrender the chairman’s job to Ehrgott later in 1963, but the change did not stanch the flow of bad news. In 1963, when almost all of its competitors saw sales gains, A&P’s sales fell 2 percent, despite the addition of forty supermarkets. Profits per store declined 5 percent. Earnings per share were off 3 percent. When the full-year totals were in, sales at Sears, Roebuck, the department-store chain and mail-order house, exceeded those at A&P. After a forty-three-year run, the Great Atlantic & Pacific was no longer the largest retailer in the world.

A&P, its executive ranks filled with men who had joined the company back when Henry Ford was making Model Ts, now fell victim to the creative destruction it had once dispensed. It could not adapt to a world in which novelty—new stores, new products, new ways of shopping—was an essential part of the consumer experience, and in which suburbia was where most Americans lived. In 1962, the variety-store operator S. S. Kresge opened its first Kmart discount store, and Dayton’s, a Minneapolis department store, inaugurated a discount format called Target. Shoppers crowded department and clothing stores in enclosed malls far from the city centers that were A&P’s traditional home. The competition was no longer mom-and-pop stores but flashy new supermarkets, run by companies as tightly managed as A&P. A&P had no counterpunch. Its stores seemed as tired as its brands, like Ann Page and Eight O’Clock Coffee, which stood as emblems of a store where Grandma might once have shopped. A&P no longer had anything special to offer.

As Ehrgott was taking charge, Huntington Hartford, George and John’s nephew, inaugurated his Gallery of Modern Art in a curved marble building on New York’s Columbus Circle, at the edge of Central Park. The gallery was Huntington’s dream, a place where connoisseurs could experience non-abstract paintings, many of them owned by Hartford himself, for a $1 admission fee. His enthusiasm was not widely shared. After the
New York Times
architecture critic Ada Louise Huxtable called it “a die-cut Venetian palazzo on lollipops,” the structure was universally derided as the “lollipop building.” Few art lovers came, leaving an operating deficit of $580,000 per year plus $320,000 in annual interest and amortization payments. Unable to dispose of the gallery, Hartford sold most of his remaining A&P stock in June 1966 to cover the costs. He used the small stake that was left to launch public attacks on the company, holding press conferences and writing articles to denounce Ralph Burger for using the John A. Hartford Foundation to exercise control.
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Investors abandoned the company that only a few years earlier had been a glamour stock. In 1961, A&P’s stock had traded at $70.50 per share. In mid-1964, despite a 20 percent rise in U.S. share prices overall, A&P’s stock sagged to $34.50. In his first-ever newspaper interview, Ehrgott shrugged off investment analysts who called for A&P to raise prices, reaffirming the basic strategy of selling food as cheaply as possible. “I don’t think we will ever change that,” Ehrgott said. But A&P’s disastrous performance brought vultures swarming. In July 1968, a group headed by Nathan Cummings, the retired chairman of Consolidated Foods Corporation, offered the Hartford Foundation $284 million for its one-third stake in A&P. The offer was rejected. Four months later, a computer-leasing company, Data Processing Financial & General Corporation, proposed to buy the foundation’s holding for $330 million, but that bid, too, was turned down. Burger, although seriously ill, remained in charge of the foundation until his death in 1969, and he was not ready to turn its huge stake in the Great Atlantic & Pacific over to outsiders. In 1973, after A&P omitted its dividend for the first time ever and its share price fell below $17, Gulf & Western Corporation, a conglomerate, offered $20 per share for 19 percent of A&P’s stock, but A&P’s lawyers blocked the offer in court.
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The foundation’s failure to sell its shares promptly would prove a tragic mistake. In 1959, after receiving the proceeds of George L. Hartford’s estate, the John A. Hartford Foundation was the fourth-largest foundation in the United States. The Hartford brothers having directed only that they “strive always to do the greatest good for the greatest number,” the foundation’s trustees decided to focus on bringing medical research findings into clinical use, and the foundation became a major source of funding for research into arteriosclerosis, diabetes, and other ailments. But under Burger’s leadership and after his death, the trustees imprudently failed to diversify their assets, which consisted almost entirely of 8.4 million shares of A&P common stock. As the company’s shares spiraled downward, the foundation had less money to dispense; after making more than 270 grants per year in the late 1960s, it was able to finance only a handful of new projects in 1973. By May 1976, when the foundation sold 1.75 million of its shares to the public, it received $12.50 per share, one-sixth of what they had been worth at the peak.
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In the fall of 1978, the foundation’s trustees finally decided that the game was up. The investment banker they hired to peddle their shares found Tengelmann, a German grocer that was eager to expand in America, and that did not understand how far A&P had fallen. Tengelmann bought effective control in February 1979 by acquiring 42 percent of A&P’s stock. The price set an implied value of a mere $190 million on a company that had been worth $1 billion twenty years earlier. After fending off decades of government efforts to destroy it, A&P had all but destroyed itself.
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THE LEGACY

In their wildest dreams, George and John Hartford could not have imagined the palatial supermarket their company would come to own on the Upper East Side of Manhattan. Over two levels stretching the length of an entire block, shoppers could browse among hand-dipped chocolates and organic shade-grown coffees, have veal chops cut to order at the butcher counter, and select perfectly shaped nectarines grown half a world away. But in 2009, when the Great Atlantic & Pacific Tea Company celebrated what it claimed to be its 150th anniversary, A&P’s Food Emporium was not in on the party. Almost nothing in the store, from the labels on the store-brand canned goods to the receipts handed out at the cash register, mentioned the connection with the world’s oldest grocery chain.

The omission was no accident. Long before 2009, the A&P name had lost its luster. The firm that had been the world’s largest retailer for more than four decades, the first company to sell groceries from coast to coast, the powerhouse whose every move sparked fear in competitors across the United States and Canada, had shrunk to be a modest regional operator. The warehouse and bakeries had been closed, the Canadian stores sold off, the Eight O’Clock Coffee brand dealt to a private equity fund. The Great Atlantic & Pacific reached no closer to the Pacific than Philadelphia. Most of its remaining stores did not even bear the company’s banner. A&P, which had thrived on competition in its first century, was driven into bankruptcy by competition in its second.
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Competition is the lifeblood of a prosperous economy. At the level of the individual firm, competition forces managers to find more efficient ways of doing business, motivates entrepreneurs to come up with new products to sell, and encourages shareholders and corporate boards to get rid of underperforming executives. For the economy as a whole, such changes result in higher productivity as firms use fewer inputs of labor, capital, and natural resources to produce each unit of output. Such productivity gains are the way living standards improve as a society becomes wealthier. Competition has another benefit as well: it helps economies change and adapt. Competition is certainly no prerequisite for economic growth; many countries in which competitive forces are weak have grown at impressive rates. Sooner or later, however, such economies tend to stumble, because they lack the ability to renew themselves in the face of altered technology, demography, environmental conditions, and resources. Where competition is intense, on the other hand, renewal is continuous, because firms that cannot adapt quickly enough to change are driven from the market.

Competition is often conflated with capitalism, but they are not at all the same. Capitalism involves private ownership of the means of production and distribution, but the word implies nothing about the way in which privately owned firms do business. Capitalism is perfectly compatible with a society in which a powerful state doles out favors to private monopolies, protects some enterprises from others, or even sets the prices privately owned firms may charge for their products. Indeed, while capitalists tend to praise the virtues of competition, many of them would just as soon avoid it. Wright Patman, the Hartfords’ longtime nemesis, was not unusual in embracing capitalism while distrusting competition. Many business owners trying to earn a profit and workers eager to hold on to their jobs shared his views. While they were all for private enterprise, they understood that term to encompass small firms run by people such as themselves, who were putting their net worth at risk every time they opened for business. They saw large corporations based in distant places as predators that, if left unchecked, would drive true capitalists out of business.

Through the first half of the twentieth century, George L. and John A. Hartford stood at the center of a conflict between competition and capitalism that raged all across America. That they themselves were capitalists, there is no doubt; their company had used the slogan “An organization of capitalists for the distribution of teas and coffees at one small profit” as early as 1863. Yet they, like their father before them, were also fervent believers in no-holds-barred competition. Their competitive passion distinguished them not only from the millions of men and women who were satisfied to eke out a small profit from a single tiny store but also from the industrialists and railroad executives who routinely agreed with their competitors to fix prices or simply bought them out to the same effect. Other leading grocery-store operators often bought up small chains to consolidate the market in one city or another and sometimes exchanged properties to avoid competing head-to-head. So far as is known, the Hartfords did neither: George L. Hartford was loath to take on other companies’ problems and obligations. Nor is there evidence that the Hartfords joined cartel arrangements to fix prices until, under the New Deal, the U.S. government effectively told them to do so. Price-fixing was not in their DNA.
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A&P’s century-long record of growth was due not to mergers or cartels but to astute management. John Hartford’s success in putting others’ innovative ideas to use in the stodgy field of food retailing dovetailed with his brother’s insistence that the company maintain a solid financial footing. But in a country that took competition for granted, the Hartfords’ sharp competitive elbows ultimately got them into trouble. As A&P flourished, America’s understanding of itself as a free-market economy came into conflict with an equally potent myth, one that places small business at the core of a democratic society.

Small business, in the public dialogue, is venerated as the wellspring of innovation and economic dynamism, the boundless source of job creation, and a bulwark against the overwhelming power of large institutions. Entrepreneurs who built giant businesses out of sweat and smart ideas, from Thomas Edison to Bill Gates, are important cultural icons, and the venture capitalists who back start-up companies are heroes in their own right. As Attorney General J. Howard McGrath asserted in 1950, “The continued existence of healthy independent business enterprises is essential to a democratic society.”
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