The Great A&P and the Struggle for Small Business in America (36 page)

A&P fought back with an image-shaping campaign that bore Carl Byoir’s fingerprints. At the end of 1940, John Hartford announced that employees would receive up to 20 percent of their wages for one year if they entered military service, a policy duly noted in the newspapers. He issued a year-end statement, widely reported, emphasizing that efficient distribution would leave the country with more resources for defense. Another Hartford statement, in March 1941, asserted that vegetable and fruit shippers received fifty-three cents from each dollar of produce A&P sold in 1940, up from forty-seven cents in 1937—evidence, Hartford said, of the efficiencies created by the Atlantic Commission Company.
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The following month, Hartford announced that A&P employees in the New York area would henceforth work only five days a week instead of six, receiving the same pay for a forty-eight-hour week that they previously earned for fifty-four hours. Even a modest decline in profits was treated as good news, a result of “the company’s traditional policy of passing along to consumers, producers and employees the savings resulting from the constantly increasing efficiency,” Hartford said. The distribution of $700,000 to twenty-six hundred employees serving in the military, which once would have been handled quietly, merited a press release, as did the award of $1.5 million in Christmas bonuses. At the end of 1941, three weeks after the Japanese attack on Pearl Harbor brought the United States into the war, A&P published advertisements in three thousand newspapers calling for the government to control food prices.
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Such efforts may have burnished A&P’s public image, but they did not soften the views of the antitrust division of the Department of Justice. Teams of investigators fanned out across the country, soliciting complaints from organizations whose members had been hurt by A&P’s aggressive growth, from the National League of Wholesale Fresh Fruit and Vegetable Distributors to the Independent Grocers & Meat Dealers of Omaha, Nebraska. Investigators interviewed hundreds of shopkeepers, citrus growers, and vegetable shippers. They collected documents from the giant retailer’s files in New York, Los Angeles, Seattle, and regional offices in between. By early 1942, prosecutors were outlining two separate types of cases, some charging unfair competition by virtue of purchasing practices, the others against several chains that supposedly conspired to eliminate competition. Patman met Arnold for lunch on February 12, and while the two were in no way close, it seems highly probable that chain stores were on the menu.
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Almost everything the investigators turned up raised suspicions. Internal Justice Department memos highlight examples of normal business dealings that seemed outrageous to the lawyers on the case. Produce handling: “The Commission Company’s files clearly indicate that the best quality of all shipments handled by it are diverted to the Tea Company while the poorer quality on which the multiple commissions, brokerages and discounts are taken, finds its way into the hands of the independent trade.” Wholesaling: “A&P store managers do not have the liberty of buying their supplies from independent wholesale distributors.” Manufacturing: “It manufactures no product whatsoever that is not an imitation of a well-known advertised brand which some manufacturer has invented and introduced to the consuming public at great expense.” Retailing: “In all A&P stores popular brands are displayed in the most inaccessible places. The fighting imitations are kept in the most conspicuous places and everything possible is done to suggest to customers the disparity in price between the originals and the imitations.” Even A&P’s remarkably rapid shift from combination stores to supermarkets exemplified monopoly at work: “We get a vivid picture of the power of this organization to control and dominate when we see how it has been able to reduce the number of its stores by more than one-half and at the same time increase the volume of its retail sales to unprecedented heights.” If fewer stores were able to sell more merchandise, the trustbusters believed, then something illegal must be going on.
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In addition to their concerns about the food business, Arnold’s investigators had a particular incentive to pursue A&P. By early 1942, with war mobilization in high gear, Arnold’s attacks against industrial cartels and monopolies had triggered a backlash within the federal government. The Army, the Navy, and mobilization agencies such as the War Production Board were concerned that antitrust investigations were distracting corporate managers and diverting attention from efforts to boost industrial production; Arnold’s argument that monopoly was the main cause of production shortfalls cut little ice. In an unusual memorandum of understanding signed in March 1942, the War and Navy departments were given veto rights over antitrust prosecutions, and they exercised those rights frequently. But while Arnold’s ability to investigate manufacturers and transport companies was considerably limited, the military had no reasonable grounds to block an antitrust probe of a retail chain. In this sector, the antitrust division had free rein.
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On November 25, 1942, Arnold’s prosecutors persuaded a federal grand jury in Dallas to indict twelve A&P-related companies, Carl Byoir and his firm, and sixteen A&P executives, including George and John Hartford, on charges of “combination and conspiracy to restrain trade.”
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The indictment laid out twenty-five allegations, ranging from publishing false comparisons of store prices to coercing suppliers to sell to other wholesalers and retailers on terms dictated by A&P. At the heart of the complaint was the claim that A&P had “the power to dominate and control the production prices and distribution of a substantial part of the food and food products produced, marketed, sold and consumed in the United States.” The U.S. district judge quickly threw the case out, ruling that the indictment was filled with irrelevant and inflammatory statements. The government appealed, and a federal appeals court reinstated most of the charges; it agreed, however, that there was no case against Carl Byoir. Prosecutors, realizing that a trial in Dallas would be run by a judge who was evidently hostile to their case, withdrew the complaint on February 26, 1944. The same day, they filed new charges against all the original defendants, including Byoir, eight hundred miles away, in the unlikely venue of Danville, Illinois, where A&P’s presence consisted of a single ten-thousand-square-foot supermarket.
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So it was that the epic criminal antitrust case landed in the courtroom of Walter Lindley in the three-story limestone-fronted post office on Hazel Street in Danville. Public interest was intense; as the Danville newspaper commented, “The Hartford family and A&P has always and still is synonymous. Our mothers and grandmothers for the most part have known and trusted them … the Attorney General’s office has attacked a company that has been one of the institutions of the food merchandising world for 86 years.” Swarms of lawyers, witnesses, and reporters crowded Danville’s hotels. Extra court reporters were laid on for the occasion. Lindley wanted to try the case before a jury, but all the parties felt otherwise. They preferred to leave it to the judge to be both the interpreter of the law and the finder of fact.
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The trial in the Danville antitrust case began on Monday, April 16, 1945, when all defendants save George L. Hartford, who was not present, rose at the request of the defense attorney W. M. Acton to enter pleas of “not guilty.” By any measure, the case was extraordinarily long and complex. Prosecutors subpoenaed more than 260,000 documents from A&P’s files. The trial transcript runs to 21,000 pages, the government’s closing brief to 1,105. The government introduced some forty-five hundred exhibits, the defense over a thousand more. Although wartime travel restrictions made it difficult to book train tickets to Danville, 191 witnesses, from A&P produce buyers to a sausage manufacturer to the head of a Chicago noodle company, passed through the post office’s revolving doors, climbed the stairway to the second floor, walked down the narrow, marble-lined corridor, and pushed through the green leather doors into Lindley’s courtroom. Forty additional prosecution witnesses were brought to Danville at government expense but were not called to testify. The presentation of evidence dragged on through eighty-six trial days until October 24, with a two-month break dictated by the fact that the high-ceilinged courtroom lacked air-conditioning. George L. Hartford claimed to be too ill to testify in his own behalf. The final witness, late on a Tuesday afternoon, was John A. Hartford. Then seventy-three, Hartford appeared in his standard gray suit, gray shirt, and bow tie, captivating the audience “both with his rather striking appearance and his knack for expression,” according to a reporter on the scene.
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Despite the mountain of evidence, there was little dispute about the facts. Indeed, almost every document in the record was from A&P’s own files: statistical reports, minutes of company meetings, correspondence with suppliers, letters between headquarters executives and employees around the country. The issue was not what A&P and its executives had done over the previous two decades, but what they had achieved. In A&P’s view, its aggressive efforts to cut purchasing costs, narrow its own margins, and reduce consumer prices in order to build business were exactly what a company was supposed to do in a competitive economy. In the view of Thurman Arnold and his prosecutors, A&P’s behavior amounted to illegal restraint of trade.

The logic of the government’s case is worth considering, because it reflected a very peculiar understanding of economics—an understanding quite at odds with the contention of one of Thurman Arnold’s biographers that “his entire antitrust program was oriented toward the benefit of the consumer.” A typical antitrust case involves the claim that the defendant is attempting to control the supply of some product with the aim of driving prices higher than they would be in a competitive market. In many cases, the objectionable conduct includes mergers by which a company gains greater control of its markets.
U.S. v. New York Great Atlantic & Pacific
was nothing like that. There had been no mergers of consequence; A&P had grown not by buying businesses but by building them. And the government’s case had to do not with monopoly but with
monopsony
, the use of A&P’s power as the nation’s largest buyer of meat, produce, and packaged groceries to force suppliers’ prices down. As Holmes Baldridge, one of the government’s special prosecutors, explained in the Danville court, “A&P sells food cheaply in its own stores because it is a gigantic blood sucker, taking its toll from all levels of the food industry.”
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What made A&P “a gigantic blood sucker,” in the government’s view, was vertical integration. The idea that a company could be engaged in a variety of different activities related to its business—in A&P’s case, manufacturing, warehousing, produce brokering, retailing, and even publishing a women’s magazine—deeply disturbed many critics of big business. Vertical integration was hardly a new concept; decades earlier, the Ford Motor Company had raised soybeans that it made into a plastic which it used to manufacture horns for its automobiles. Over time, vertical integration had waxed or waned in particular industries as economic factors dictated; in many instances, it was not the cheapest way to do business. But A&P, prosecutors argued, gained an unfair competitive advantage by doing so many things in-house. It could organize orders from its store to run its bakeries and canneries full blast, generating greater profits than manufacturers whose flow of business was less regular. It could use its manufacturing capabilities and its clout as the nation’s largest buyer of groceries to pressure suppliers to give it lower prices than any other buyer received. It could, and did, refuse to order merchandise from manufacturers that insisted on selling through brokers, or that declined to grant it advertising allowances, or that wanted higher prices than A&P felt were warranted. It could accept low profits from running stores because the stores enabled other parts of the company to be very profitable.
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The trial testimony included many examples of A&P’s use of vertical integration to cut costs. One involved Ralston Purina, which had invested $1 million in a factory mainly to manufacture private-label breakfast cereal for A&P. In the summer of 1939, A&P declared it would start manufacturing cereal itself unless Ralston lowered prices. This was not an idle threat; A&P had studied the matter carefully, determining that Ralston’s prices were so inflated that if A&P invested $175,000 to expand an existing plant to make the cereals, its investment could earn an annual return of 73 percent. After much bargaining, Ralston agreed to grant A&P various rebates and allowances on corn, bran, and wheat flakes. Although the government prosecutors focused on these “rebates” and “allowances” as nefarious departures from some official list price, in an economic sense they were nothing more than price concessions; the only thing that really mattered was A&P’s ultimate cost per box of cereal. In the event, A&P had leverage because Ralston, apparently unwisely, had expanded its plant without a firm commitment from the largest buyer of its cereals. If it had not struck a deal with A&P, its factory might have stood empty.
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The government attached great significance to the fact that many of A&P’s stores lost money, although one reason for those apparent store-level losses was that manufacturers paid the various price concessions directly to A&P’s headquarters, rather than deducting them from the factory price of each bottle of fruit juice and each can of sardines shipped to A&P’s warehouses. Integration, in short, allowed A&P to cross subsidize, using profits from some parts of its vast operation to support other parts, which simple wholesalers or retailers could not do. The complaint of the Dallas grocer L. S. Culwell that many of A&P’s retail prices were below the prices he paid at wholesale was held up by the government as an example of the unfairness arising from A&P’s system. As Horace L. Flurry, another of the special prosecutors, told the court, “A&P’s programs of expansion were predicated upon its price advantage over competition, resulting from the use of the integrated power.”
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