Mass Distribution: The Economies of Speed

The coming of mass distribution and the rise of the modern mass marketers represented an organizational revolution made possible by the new speed and regularity of transportation and communication. These new enterprises, in turn, made it possible to increase the speed and lower

the cost of distribution of goods in the United States even more. Whereas the railroads and telegraph coordinated the flow of goods from the train and express company stations of one commercial center to another, the new mass marketers handled the myriad of trasactions involved in moving a high-volume flow of goods directly from thousands of producers to hundreds of thousands of consumers.

The mass marketers replaced merchants as distributors of goods in the American economy because they internalized a high volume of market transactions within a single large modern enterprise. They reduced the unit costs of distributing goods by making it possible for a single set of workers using a single set of facilities to handle a much greater number of transactions within a specific period than the same number of workers could if they had been scattered in many separate small facilities. At the same time, high-volume stock-turn assured a steady cash flow that permitted the enterprises to purchase larger quantities in cash and so greatly reduce the cost of credit needs and finance distribution of goods. Such savings were, however, possible only if the flow of goods through the enterprise was carefully coordinated. The internal transactions had to be made more quickly and at a greater volume than if they were made in the external market. Economies of scale and distribution were not those of size but of speed. They did not come from building larger stores; they came from increasing stock-turn. To maintain and continue a high volume of flow demanded organizational innovation. It could be achieved only by creating an administrative hierarchy operated by many full-time salaried managers.

To assure a continuing high stock-turn the different types of new mass marketers created much the same sort of organizational structure. All handled the buying and shipping of goods the same way. Only in their marketing organizations did they vary according to the differing nature of their businesses. The sale of agricultural commodities to processors, of finished goods to country general stores and urban retailers, obviously required different methods than over-the-counter sales to urban customers, or catalogue sales to rural buyers.

These new marketing enterprises grew by making maximum use of the administrative networks they had created to coordinate the flow of goods and cash. This they could do by increasing the volume of existing lines, adding new lines, and setting up new outlets. Commodity dealers and the wholesalers were restricted to the first of these strategies of growth, that of increasing volume. The commodity dealer might handle different varieties of grain or of cotton, but his facilities and managers were all trained and organized to handle one basic trade. This too was basically true of the wholesaler, even though the wholesaler in dry goods, hardware, drugs, and the like carried many more different items than the commodity dealer.

The mass retailers, on the other hand, had less difficulty in adding new lines that might use more intensively their buying networks and operating organizations. In addition, they were able to expand volume by building new outlets. As cities and suburbs grew rapidly in the first years of the twentieth century, the mass retailers’ markets expanded far more quickly than did those of the commodity dealer or the full-line wholesaler. The profitability of expansion through the building of new outlets caused the chains after 1900 to become the fastest growing type of marketer in the United States.

Because they internalized more market transactions than did the whole- salers, the new mass retailers still further increased the productivity and reduced the costs of the distribution of consumer goods in the United States. Although no measures of productivity have been developed for the distribution sector comparable to those worked out by Albert Fishlow for the railroads, rough indicators emphatically make this point. The new mass retailers were able to reduce their prices below those of the smaller retailer who bought from the wholesaler and were still able to generate higher profits than the wholesalers. The mass retailers’ prices were so low that the growth of each type—the department store, mailorder house, and chain store—quickly led to a protest by the wholesalers and the small retailers. These outcries were strong enough to bring state and national legislators to introduce and often pass legislation aimed at protecting wholesalers and small retailers from such price competition. At the same time, the builders of the new retailing enterprises amassed impressive fortunes. The Wanamakers, the Strauses of Macy’s, the Gimbels, the Bambergers, the Filenes, the Hutzlers, the Rosenwalds, the Thornes, the Hartfords, the Woolworths, the Kresges, and the Kresses soon ranked among the wealthiest families in the land.

In making their fortunes these entrepreneurs, their closest associates, and their families had to rely on the services of a phalanx of managers. The managerial staff of these enterprises differed, however, from those of railroad and telegraph companies in that there were proportionally a smaller number of middle and top managers. The middle managers—the buyers, department heads, regional supervisors, and the senior advertising, traffic, shipping, and accounting executives—normally made lifetime careers out of their specialities. Only a few owned stock in the company in which they spent most of their lives.

At the top, however, the owners did continue to manage. Unlike the railroads, the new mass marketers remained what I have termed entre-preneurial enterprises. Top policy decisions continued to be made by the builders of the firm and their families who remained the major stock- holders. They made the long-term plans and allocated the resources to carry them out. Ownership did not become separated from control because the entrepreneurs who built these enterprises had little need to raise capital through the sale of securities. The large volume of cash flow, supplemented by short-term loans from commercial banks, not only paid for inventory but also provided funds needed for plant and equipment.

In such entrepreneurial enterprises the owner-managers carried out top management functions in a personal and intuitive manner. These senior executives made little effort to develop sophisticated cost and capital accounting methods or to develop long-term planning through capital budgeting and other procedures. On the operating level, the top managers in these mass marketing firms were not innovators in accounting and inventory control. Nor did they, before World War I, attempt to make even short-term systematic forecasts of market demand. Their buyers purchased largely on the basis of past experience and their own intuitive feeling about what the customers would continue to want.

The rise of the mass marketers and the revolution in distribution which they created was of critical importance to the institutional development of the modern American economy. Nevertheless, these enterprises affected the distribution of only part of the goods produced in the American economy. Local farm products and manufactured goods continued to go directly to local customers without passing through the hands of wholesalers or mass retailers. The commission merchant and the commission agent continued to buy, sell, and ship producers’ goods which were manufactured on special order for other business enterprises. Such producers’ goods as rails, bars, wire, castings, beams, other metal shapes, and a wide variety of machinery continued during the nineteenth century to be sold by the manufacturers directly or by manufacturers’ agents selling on commission. Metals, chemicals, and other raw materials purchased by manufacturers from mining and other enterprises were bought either directly or through commission agents.

The marketing revolution based on the coming of the railroad and telegraph came, it cannot be too strongly stressed, only when the output of a large number of producers went to a large number of customers. It came in the marketing of the basic crops and in the production of traditional standardized goods, in such trades as dry goods, clothing, and other cloth products, in shoes, saddlery, and other leather products, in furniture, mill work, and other wood products, in groceries, confectionery, and other food products, in pharmaceutical and other drugs, and in jewelry and tableware. It came primarily in the older industries where the processes of production were labor intensive and technologically simple, and where manufacturing enterprises continued to remain small in size. In the newer industries, those using more complex, high-volume processes of production, the mass producer rather than the mass marketer took over the role of coordinating the flow of goods through the economy.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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