Types of retail middlemen

Retail distribution is carried on by six types of merchandising establishments. These are the general store, the specialty store, which may be a neighbourhood store or a downtown shop, the department store, the chain store, the mail-order house, and the cooperative store. The last-named type is not an important retail outlet in this country. These types differ from each other in the number and variety of commodities that they sell, in their methods of distribution, and in their system of management.

The general store

The first and probably the oldest type is the general store. Located chiefly in small towns and villages, it serves the entire community with all that it needs—groceries, hats, shoes, suits, dry goods, and hardware. In spite of the diversity of articles that it carries the purchaser has little or no variety from which to choose. The general store, in most cases, has only one or two makes of shoes, only one or two brands of canned goods, and similarly limited selections in other lines. It is owned and operated, as a rule, by some individual who becomes well-known throughout the town or village.

The general store will continue to be a necessity in many communities for years to come. The volume of business transacted in any one particular line is not sufficient to warrant the establishment of separate neighbourhood grocery stores, hardware stores, and clothing stores. There are about 150,000 general stores scattered throughout the towns and villages of the United States.

Why the general store is being displaced

When a town grows in population the prosperity of the general store begins to wane. The quantities of groceries, shoes, and clothes which are purchased are sufficient to warrant the opening of separate stores each carrying one or a few of these lines. These stores usually cutsell the general store because of the variety of their stock. A shoe store, for instance, gives the purchaser the opportunity of choosing between many different lines, whereas the general store offers him merely two or three. Under competition of this type the general store naturally loses customers.

Other factors responsible for the disappearance of general stores from small communities are the improvements that have come about in the means of highway transportation and communication. The townsmen or villagers who own automobiles prefer to shop in the larger stores of the nearby cities. With the extension of the telephone system and the unusual accommodations offered by the city stores, the residents of small communities can have delivered in one day's time at their doors the groceries, hardware, and dry goods which they order by telephone from the stores of the city. Other channels of distribution such as the mail-order houses have also weakened the position of the general stores.

Advantages of the general store

In spite of the strong competition of mail-order houses and the larger stores of the neighbouring cities general stores have held a surprisingly large amount of their trade.
It is, after all, more convenient to shop in the neighbourhood store than in one located twenty miles away. In case of difficulties or errors adjustments can be made almost immediately.

Delivery is quicker and credit is usually extended. The bulk of the townspeople purchase in small quantities and only as they need commodities. In the matter of groceries they buy each day what they expect to consume that day. They do not anticipate their wants to the extent of making distant city shopping practicable. They also know the general storekeeper personally. Each trip is somewhat in the nature of a visit and tends to cement the bonds between buyer and seller. Through his personal knowledge of his customers' desires the general store owner knows just what stock to keep.

The general store enjoys a number of minor advantages. Rents are low, salaries are small, and operating expenses, as a rule, amount to little. Intimate knowledge of his customers' resources enables the owner to avoid credit losses. Thriving as it usually does on the sale of convenience goods, that is, goods which supply ordinary everyday needs, the general store is assured of steady patronage. No advertising is necessary beyond the personal solicitation which takes place in the store. In a small village there is no distinction between potential and real customers ; all are real customers.

Some disadvantages of the general store

There are some very definite disadvantages attached to the operation of a general store. One of these, already mentioned, is the limited volume and variety of merchandise offered for the customers' selection. The slow and irregular sale of some goods results in shop-worn merchandise. Goods once popular are left on the shelves because of changing styles and demands. The owner must of necessity buy in small quantities and thus pays a higher price for his goods. Buying as he does to satisfy a wide range of human desires, he cannot become a specialist in any one field. The greatest disadvantage of all, however, lies in inefficiency of management. General stores are notorious for this defect. Years of trade without active competition is the factor probably responsible for this inefficiency.

The specialty store

The second type of retail outlet is the specialty store. This is a single retail unit which handles a limited line of merchandise. In speaking of the specialty store we refer to the kinds of lines handled and not their quality. Popular phraseology has adapted the term "specialty" to apply to types of goods which are "exclusive" and high-priced. By a specialty store, however, we mean one which limits its stocks to certain definite kinds of products. One store will limit itself to girdles, underwear, and stockings, another to haberdashery, a third to groceries, a fourth to hardware, and a fifth to drugs.

The two types of specialty stores now in existence are known as neighbourhood stores, and downtown or exclusive stores. Location determines the classification and the difference in stock. The neighbourhood store serves the community in which it is located. People buy from it because they live in the neighbourhood. The downtown type does not necessarily serve the residents of the district in which it is located.

The neighbourhood specialty stores carry both convenience and shopping goods. A men's hat store in some local section of any one of our large cities is a typical example. The hats are shopping goods. The downtown specialty store is often exclusive in its stock. In every city there are several such stores which carry lines of specialty goods that can be purchased nowhere else.

The neighbourhood specialty store

If the specialty store is a neighbourhood store it en joys other advantages. It is more convenient than the downtown department store. Its customers are residents of the neighbourhood and therefore rather regular in their patronage. By exercising care in the selection of his stock, the proprietor may outdo the downtown department stores in the variety and attractiveness, if not in the volume, of his commodities.

The chief disadvantage which the neighbourhood specialty store owner has to face lies in buying. Purchasing as he does in small quantities he pays a rather high wholesale rate for his goods. Nor does he purchase enough to warrant the services of a special buyer. In this respect the chain stores have a decided advantage over him. Lack of competition in his own neighbourhood does not always work to the specialty store owner's benefit. At best he can get only the patronage of the neighbourhood.

Some of this patronage he has to sacrifice because confirmed shoppers prefer to go to the downtown districts where they can compare prices, travel from store to store, and see what bargains are being offered. Advertising is not as a rule feasible for the neighbourhood specialty store. Posters, handbills, or window displays are probably the only practical mediums. A newspaper advertisement would be of no interest to ninety per cent of the people whom it might reach. The ten per cent who constitute a particular specialty store's patronage would be interested, but the cost of reaching such a limited group in this way would be too expensive. The chain stores have had an advantage over the specialty store in this respect. Their large scale advertising is warranted by the existence of at least one store in each neighbourhood.

The downtown or exclusive specialty store

The downtown specialty store has one definite advantage over the neighbourhood store. If it is located in the general shopping district it attracts the attention of all the people who patronize the department stores. Because of its rather low overhead expenses, its wide variety of goods, and its personal service feature, the downtown specialty shop may compete very favourably with the department stores for the trade of these people.

Men, as a class, do not like department stores. They prefer to do their buying in small shops. The large crowds, the lack of personal interest, and the amount of effort required to locate certain departments deter them from entering the department stores. Shopping in the specialty store is quicker and more comfortable. This accounts, in a great measure, for the business success of men's shops in the downtown districts.

The highly specialized stores locate in the downtown districts for many reasons. In the first place, they are convenient to a large number of prospective purchasers. They do not suffer unduly the competition of the department stores for they carry a quality or kind of goods which the department stores do not stock. This exclusiveness of stock gives them a monopoly in certain restricted lines. They can afford to advertise on a large scale because their patrons come from all points in the city.

Large-scale retailing

Many factors have been responsible for the development of large-scale retailing in America. Increased prosperity, the improvement in highways, the extension of railroad lines, the institution of the parcel post system, and the spread of telephones are probably the most important of these factors. The availability of capital makes large ventures possible. The possession of money makes people a bit more fastidious in satisfying their desires. The newspapers with their Sunday supplements acquaint them with the latest styles. Railroads, motor trucks and the parcel post system make distant deliveries economically possible. Telephones facilitate ordering from the neighbouring city.

Mail-order houses, chain-store systems, and department stores now do a large part of the retail business of the country. Some of these organizations now number their customers by the hundred thousand. Their activities are nation-wide. They purchase goods in enormous quantities. Some of them have their own manufacturing plants. All in all, they constitute the greatest retail systems of distribution the world has ever known. Because of the difference in their methods of operation they must be given individual consideration.

The department store as a retail outlet

After mail-order houses and chain-store systems, department stores are the next largest of all retail outlets. A department store is a retail establishment organized to consolidate the ownership, management and sale of many lines of merchandise under one roof. The goods it sells are divided into classes, each one of which is handled as a department, distinct as to management and location within the store, and carried on the accounts as a separate entity. Normally, dry goods constitutes one of the most important departments. The number of departments may vary from a dozen to a hundred or more.

Types of department stores

There are wide differences between department stores. Many, with their furniture, clothing, grocery, jewellery, toilet accessory, drug, toy, and other departments, are able to supply all the needs of the family. Others have a tendency to specialize. Their stock is limited to dry goods, clothing, hats, shoes and similar lines. Some, while they operate many departments, exploit one department more than the others. In one store it may be furniture, in another men's clothing and in another women's wear.

Advantages of the department store

As a rule, department stores are centrally located. Shopping goods constitute the majority of their sales. They are primarily women's stores. With women doing about eighty-five per cent of all the purchasing in America it is not surprising that the department stores and mail-order houses together do about ten per cent of all the retail business. The appeal of the department store lies partly in the convenience of doing all of one's shopping under one roof. The larger stores have another appeal; each one of their departments carries a wider variety of goods than the specialty store engaged in the same line.

From the standpoint of management and ownership department stores may be divided into three classes : First, those stores in which all of the departments are owned and controlled by a single central organization; second, the type in which the so-called owners of the store own merely the building and rent space to a number of independent units, each unit paying the rent for its space and an additional amount for services such as delivery, the maintenance of information booths, and floor-walker's supervision; third, and most numerous, those stores in which a majority of the departments are owned and operated by one central organization, with a few departments leased to independent units.

Department store savings and services

The department store enjoys all the advantages common to large retail units, and several in addition. It has a system of accounting whereby the profit and loss record of each department is closely checked. This system enables the owners to increase general profits by discontinuing those goods or those departments that are unable to pay an adequate return. Because these stores usually are centrally located they derive full benefit from large-scale advertising. One of their chief advantages lies in the fact that purchasers in going to the particular counters that they seek pass through numerous other departments that attract their attention and solicit their custom. The facility of buying all kinds of articles in one building is another attractive feature. In its appeal to the family the department store offers many inducements to the woman with children. Playrooms under the supervision of a nurse are provided in which children can be left while their parents shop. Restaurants preclude the necessity of interrupting the shopping by going elsewhere for lunch. Waiting rooms make convenient meeting places and offer facilities for rest. Some stores go as far as to provide free concerts and entertainments. A few have rather attractive art galleries. Fashion-shows are held periodically in many. Services of this nature give the department store a decided advantage over its competitors.

Department stores buy in large quantities and thus gain the advantage of reduced costs on their goods. Many of their articles are purchased directly from the manufacturer, and thus the jobbers' profit is saved. By means of its centralized shipping room and delivery system the department store is able to send to the homes of its customers in one lot the articles purchased from many different departments. This is an economy. The privilege of returning goods is extended by all department stores. They also extend credit to a greater degree than any of the competing types of stores. The amount of business transacted warrants the employment of efficient supervisors, merchandising specialists, accountants, credit men and advertising agents.

Disadvantages of department-store operation

The disadvantages of department-store operation are nevertheless numerous. Much of the attractive service is abused. Large amounts of goods are returned because the purchaser finds a better bargain in another department store or specialty shop, or because the returned goods have been purchased merely on approval.

Department store vs. specialty store

The employment of a large number of workers brings many problems in its wake. The service may become impersonal. Certain employees may lack interest in making sales, and sometimes disregard the policies of the store. Without special training many department store employees are incapable of dealing with the numerous types of people constituting the patronage. In some cases it takes almost a specialist to cater to the needs of the shopper. In this respect the specialty shop has a decided advantage over the department store. It is difficult for the department store to secure and hold 'the trade of the wealthier classes. Such people prefer the less crowded establishment, the more exclusive class of goods and the numerous personal attentions offered by the specialty store.

Advertising costs are a large item of expense in a department store. Space must be bought in all the leading newspapers and in a large metropolitan area advertising also has to be carried in the newspapers of neighbouring towns. The distribution of advertising material by mail to thousands or hundreds of thousands of prospective customers is another costly item. General overhead expenses are, of course, very high. Department stores are located in shopping districts where real estate valuations, and consequently property investments or rent, are high. All the services that must be provided are costly in themselves and cut down the profits of the business. The average department store in America today spends for operating expenses between 25 and 30 per cent of its total receipts from sales.

Chain stores as retail outlets

Among the large retail outlets in America is the chain-store system, which has accounted for about one-third of the total retail volume annually. Up to the imposition of chain-store taxes by the various states and the enactment of the Robinson-Patman Act in 1936 and the state fair-trade laws made nationally effective by the Miller-Tydings Act of 1937 (all of which will be discussed later) , chain stores bade fair to outstrip all competitors in retail distribution.
A chain store is one unit of a large group of retail establishments handling practically the same line of merchandise and operating under single ownership and management. The chain may be limited geographically to the cities and towns of a county or a state. Some chains are nation-wide; they have stores all the way from New York to San Francisco.

Chain store not a distinct type

The chain store is not a distinct type of store. There may be chains of grocery stores such as the Great Atlantic and Pacific Tea Company, or general stores such as the J. C. Penney Stores, or drug stores such as the Liggett Drug Company, or department stores such as the Hahn Department Stores, or specialty stores of the neighbourhood variety such as Young's Hat Stores, or exclusive shops such as Knox's. Chains are more numerous in the cities and large towns than in less urbanized localities.

Advantages of the chain store

The growth of chain stores up to 1936 is easily explainable. Their organization and system of merchandising make possible low prices and reasonable profits. They buy in enormous quantities, and as a rule, directly from the manufacturer, which saves them a large amount of money. Their strong financial backing enables them to acquire the most desirable locations for their stores. They have advertising, sales and merchandising specialists who study markets, locations and community factors.

In competition with independent stores, the chains have had many advantages. With their large-scale advertising, they reach all their potential customers. A chain's established reputation is a form of advertising in itself. The presence of the name of a chain on a store window indicates immediately to all passers-by the type of goods sold and the relative prices charged. The prices are often lower than those of independent stores, a most decided advantage in retail trade, made possible by the general efficiency of management and the low prices paid for goods purchased in large quantities. Chain stores can make experiments which the independent storekeeper would not dare to make. They can test the selling appeal of certain articles in one store and apply the results to all of their stores located in the same type of community.

The low cost of chain-store operation

The chain store usually extends no credit and provides, with some exceptions, no delivery service. The entire business is operated primarily on a cash-and-carry basis. Costs of delivery and losses from bad debts are thereby avoided or reduced. If the business is conducted on a self-service basis, as in the Piggly Wiggly stores, clerks' salaries are also eliminated. All of these factors are responsible for the low cost of operation. The average grocery chain store of America spends 10 per cent of its total income on operation, while the independent grocery merchant spends between 14 and 16 per cent.

Difficulties of chain-store operation

In addition to punitive legislation, however, the difficulties of chain-store operation are numerous. The managers of the various stores have not the personal contact with customers that independent storekeepers usually have, nor are they as vitally interested in the success of the business. Some chains attempt to overcome this difficulty by giving the manager a share of the profits of the chain. Separated by thousands of miles from the central office of control, however, the store managers tend to get out of contact with the policies of the chain.

Patronage is also sacrificed through the local manager's inability to contribute to local charities, advertise in school programs, and join in town and city celebrations. A cash business likewise has certain drawbacks. There will probably always be a large class of customers to whom credit is a necessity. Various efforts, of course, are made to overcome these disadvantages.

Supermarkets, originally set up to compete with chain stores, have to some extent helped to solve the legislative difficulties facing the chains. Supermarkets and chain stores are alike in that both apply the principles of mass selling. Chain stores make small profits from many customers reached through a large number of small neighbourhood stores. The supermarket draws customers from a wide area to one store and there gives them the benefits of mass buying and selling.

The mail-order house as a retail outlet

A mail-order house is a retail distributing institution which makes sales and deliveries by mail instead of through personal contact. Mail-order houses may be divided roughly into four classes. Some, like Sears, Roebuck and Company and Montgomery Ward and Company are general and also operate a chain of retail stores. They carry in stock and sell a large variety of every class of goods needed in the home and for personal use, toys, drugs, stationery, certain types of small equipment and farm implements, and numerous other lines. They also sell ready-cut lumber for building complete homes, and all the heating, plumbing and lighting equipment and fixtures required. Many of these items they make or have manufactured especially for their trade. Another class consists of those houses which carry one line, such as cloaks and suits, hardware, automobile tires, or jewellery. The third class consists of manufacturers who sell their products by mail directly to the consumer. Those in the fourth class are not strictly mail-order houses ; they are rather department stores which do a mail-order business along with their usual store business.

Methods of mail-order distribution

With the exception of the fourth class listed above, practically all mail-order houses have an unlimited area of distribution. The very largest ones do a nationwide business. The smaller concerns may limit active operations to two or three states but usually they, too, will fill orders from any part of the country. The majority of the mail-order house patrons live in small towns and villages. All mail-order houses send out catalogue containing pictures, descriptions and prices of their stocks. As a rule the customer pays the mail, express or freight charges, although some of the larger houses are now prepaying shipments.

A highly specialized organization is necessary for the operation of a mail-order house. Careful descriptions of articles must be written up and the appeal value of these descriptions tested. Catalogue must be distributed to those who are interested in the company's goods. An efficient order-filling system is required to avoid errors that are both inconvenient to the customer and costly to the company. The order-assembly and shipping departments must always be prompt in dispatching articles. Mail-order purchasing of necessity causes the customer to wait at least two or three days for the receipt of the goods, and avoidable delay cannot be tolerated. Huge stocks must be maintained. Thousands of items, many in dozens of different sizes, must be available at all times. Some mail-order houses, however, obviate the necessity of carrying large stocks by shipping some of their goods directly from the manufacturer to the purchaser. Mail-order houses that maintain their own factories also follow this method of distribution.

Advantages of mail-order distribution

Their complete and varied lines of merchandise give the mail-order houses a decided advantage in competing with small town stores. The prices charged by mail-order houses are lower, as a rule, than those of the rural stores. The styles carried are more in demand because they are looked upon as city styles. In competition with the department stores of a neighbouring city the mail-order houses have the advantage that it is easier to buy by mail than it is to travel to the city.

Certain operating expenses of a mail-order house are comparatively low. The buildings are mainly warehouses. They can be located in that part of the city where real estate values are lowest. The cost of expensive fixtures is eliminated. The catalogue and the reputation of the company are its real sales agents so that no retail sales force is necessary. The employees are mainly shippers and clerks. Most of the business is done on a cash basis and there is no necessity for a large credit department.

Some handicaps of the mail-order system

There are many people who will not buy goods unless they actually see them. This is especially true in regard to clothing. The patronage of this class the mail-order houses cannot acquire. Others object to the delays incurred in mail-order buying. The prevalent tendency to patronize home or neighbourhood stores also cuts into the business of the mail-order houses. As already pointed out, the extension of credit by general, specialty and department stores draws trade. Mail-order houses are not now and probably never will be in a position to extend much credit to buyers, except on goods of high unit value sold on the instalment plan.

To overcome some of these difficulties mail-order houses are adding to their display and distribution systems by opening retail stores in the large cities. These stores are not located in the shopping districts and hence they attract as new customers mainly that class of people who merely hesitated to buy without seeing the article of purchase. The innovation has been very successful, and has accounted for as much as 60 per cent of the total annual business of companies adopting the plan.

The consumers' cooperative stores

A cooperative store is one in which the stock is owned by the consumers. It is operated primarily for the purpose of buying in quantity and relaying the money thus saved to the consumer in the form of lower prices. The originators of the idea felt that goods were high because of the profits exacted by middlemen. The establishment of cooperative associations eliminated one class, the retail storekeeper. In his place there appeared the store manager, an employee of the "association." Cooperative stores are not so popular in America as in England and on the continent; they constitute a relatively unimportant retail outlet in the United States.

Why cooperative stores do not thrive in America

The numerous failures of "cooperatives" in the United States can be traced to several causes. American people move so often from city to city, town to city, and state to state that membership is continually changing. In addition they are unwilling to subject themselves to the inconvenience of shopping in the cooperative store. The little money saved thereby is not so important to the average American as to the European. Moreover, American cooperative stores, for some reason or other, have not been fortunate in engaging good managers.

However, the cooperative societies have not disappeared entirely from America and probably never will. There are a number of them in the middle and western part of the country and many of them are successful. In some cases they have decided advantages in their favour. Quantity purchasing saves them considerable money. Located on side streets, as they usually are, they pay low rents. They have no advertising expense and need no special salesmen. Clerks can serve the needs of all the customers, for sales are not pushed. The patrons buy merely what they wish. As a rule there are no delivery expenses. If the stores do business on a cash basis bad debts are eliminated, more favourable prices are secured in purchasing from wholesalers because of the ready cash, and a complicated bookkeeping system is rendered unnecessary. The absence of profit also reduces prices.

Cooperatives have always been more popular in farm areas. During the past few years, however, forces favouring the cooperative idea have renewed their efforts to push the development of this type of store units or groups.

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