In somewhat different ways the new instruments of transportation and communication transformed the distribution of manufactured consumer goods as dramatically as they did the marketing of agricultural commodities. The wholesalers were the first to use the modern multiunit enterprise to mass market manufactured and processed goods. The new speed, regularity, and dependability of transportation and communication affected the wholesaler in several ways. First, and most important of all, the merchant handling consumer goods became a jobber. He no longer sold on commission. Like the grain and cotton dealer, he took title to the goods. By the 1870s nearly all wholesalers had become jobbers. Second, the job-ber moved west. No longer did the middlemen on the eastern seaboard control the distribution of manufactured goods. Third, the new jobber created large buying networks through which he purchased directly from manufacturers at home and abroad, and he built extensive marketing organizations to sell to general stores in rural areas and specialized retailers in the cities. No longer did the storekeepers of the south and west have to make their semiannual treks to the eastern markets. The jobbers came to them. Finally, the reduction in the chain of middlemen, and the increased speed and regularity of transportation and communication, altered procedures of financing these trades.
This account of the impact of the new transportation on merchandizing in the midwest by Lewis Atherton is just as true for the south:
The railroad’s penetration of the region completely revolutionized the techniques of wholesaling and ended the pioneer period of merchandizing in Mid-America. No longer did the merchant buy the bulk of his supplies for the year at one time; no longer was it necessary for him to visit the seaboard; no longer did he risk the loss of his goods. The railroad brought the goods he now could order as he needed; it brought the traveling salesman to him, so it was possible for him to spend all his time attending to business at home; and the greater safety of rail transport relieved him of the worries he had faced in the days of river transportation. Thus the railroad, as an improved means of transportation, ushered in the days of modern merchandizing.17
The wholesaler who supplied the country storekeeper benefited as much from the coming of the railroad and the telegraph as did the storekeepers themselves. Like the retailer, the wholesaler no longer needed to carry such large inventories as in the prerailroad days. Nor did the wholesaler have to worry about the high risks of losing shipments en route. He now ordered directly from the manufacturers by telegraph and was fairly certain of delivery on a specified schedule. The increase in speed and regularity made it possible for the merchant to handle a greater volume of goods. Expanded volume, in turn, reduced unit costs and promised higher profits. By taking title to and reselling goods, the wholesaler was normally able to obtain a markup higher than the usual 2 to 5 percent commission. At the same time, the increased volume of business assured the jobber of a more certain cash flow and so reduced his credit needs. Thus commission merchants who handled relatively standardized products became fulltime specialized jobbers.
Finally, the new arrangements pleased the manufacturers. They now obtained cash for their products instead of waiting for payment for six months to a year until the product was finally sold. Payment in cash sub- stantially reduced the manufacturer’s requirements for working capital and therefore his dependence on the merchants who supplied it.
Until the 1850s wholesaling was concentrated on the eastern seaboard and factors in the south and storekeepers in the west had to come east to get their stock. As soon as the railroad and the telegraph provided close and direct contact with sources of supply, the jobbers moved west. A citizen of Cincinnati, writing in 1859, makes the point:
Within the last eight or ten years Cincinnati has been gaining a position as a great centre of supply by wholesale, to country merchants of Ohio, Indiana, Illinois and Kentucky, of their dry goods, groceries, hardware, boots and shoes, hats, drugs, and fancy goods. In these various lines of business it is becoming very apparent to purchasers that they can deal here to greater advantage than our eastern cities. The effect of this has been to enlarge our sales to country merchants. For example—dry goods, from $4,000,000, in 1840 to $10,000,000, in 1850, and to $25,000,000, at this time. There is a corresponding increase, also, in all other descriptions of business which go to make up general sales to country merchants.18
What was true for Cincinnati was also true for St. Louis and even more so for Chicago. Chicago’s rapid growth as a railroad terminus meant that it became a distributing center for manufactured goods as well as a trans- mitter of wheat, meats, and other agricultural products. By 1866 Chicago had fifty-nine jobbers with sales of over a million dollars, while Cincinnati and St. Louis had only fifteen apiece.19 Nevertheless, the eastern wholesale centers—New York, Philadelphia, and Baltimore—did not give up the trade of the west without a struggle. They sent out a stream of traveling salesmen and catalogues to retailers in all parts of the old northwest. Throughout the 1870s the largest dry goods wholesaler in Chicago, Field, Leiter and Company (soon to become Marshall Field & Company), was more concerned with competition from New York than from other Chicago wholesalers.20
As the jobbers of New York and Chicago competed for the retail trade of the midwest, those in St. Louis and Cincinnati, as well as in Louisville and Baltimore, began to concentrate on the trade in the south.21 There the Civil War, by ending the old plantation system and by turning slaves into freedmen, brought a rapid growth of country stores. The country store became, as it had long been in the midwest, the basic retail outlet. Planters set up stores where freedmen, now tenants, could get their supplies. Former Union as well as Confederate soldiers established new stores at rail crossings and country crossroads, often becoming planters themselves. So too did a number of Jewish peddlers who had replaced Yankee ones selling in the rural south during the late forties and fifties. In fact, the new stores, along with improved transportation and the rise of the modern wholesaler to supply them, all but ended the peddler as an instrument of distribution in the United States.
By the late 1860s the full-line, full-service wholesaler had taken over the distribution of the traditional consumer goods—that is, dry goods (in- cluding clothing and upholstered furnishings), hardware (including cut- lery, tools, and implements), drugs, and groceries (including fruit and confectionary).22 The jobber also became central in the marketing of boots and shoes, saddlery and other leather products, tobacco, liquor, jewelry, furs, watches, furniture, mill work and other wood products, china and glassware, stationery, paint, oil, and varnish. During the second half of the nineteenth century these enterprises continued to dominate the distribution of consumer goods in the American economy.
Such wholesalers handled a much greater volume of business than did any earlier middlemen. The sales of the largest importers in the 1840s, such as Nathan Trotter of Philadelphia, rarely rose above a value of $250,000 a year. And Trotter’s staff consisted of only a son, two or three clerks, and a porter.23 By contrast, Alexander T. Stewart, the nation’s foremost dry goods distributor, had, by 1870, annual sales reported at $50 million (of which $8 million were retail). At that time his enterprise employed 2,000 persons.24 In 1864 H. B. Claflin and Company, Stewart’s leading New York competitor (and a wholesaler only), was reported to have sales of $72 million.25 These figures do not come from internal records and certainly they grossly exaggerated. Nevertheless, once the railroad and telegraph permitted the wholesaler to market in a broad geographical territory, the volume of sales which a single firm handled jumped from an annual value of tens and hundreds of thousands of dollars to tens of millions of dollars.
Data on wholesalers in cities other than New York suggest that as soon as they reached out for the markets of the hinterland, they became as large as any mercantile enterprises in history. For example, two years after Marshall Field and his partner Levi Leiter joined Porter Palmer in 1865, their sales, concentrated in dry goods, reached $9.1 million, of which $1.5 million was retail. Five years later they had risen to $17.2 million, of which $3.1 million was retail.26 By 1889 Field’s sales were $31.0 million ($6.0 million retail), and by 1900 $36.4 million ($12.5 million retail). Field’s largest Chicago competitor, James V. Farrell and Company, had a volume of sales close to Field’s, with $7.1 million in 1867; $9.5 million in 1870; and $20 million in the early 1880s. Carson, Pirie and Scott; Charles Gosage and Company; J. B. Shay; and Hamlin Hale and Company were smaller dry goods houses but still of substantial size. In Philadelphia the largest dry goods enterprise, Hood, Bonbright & Company, was close in size to Field’s and Farrell’s. The great hardware houses of Hibbard, Spencer and Bartlett of Chicago, and Simmons and Company of St. Louis were not far behind.27 McKesson & Robbins, Schieffelin Brothers & Com-pany, and other large drug wholesalers in New York and Chicago grew quickly to comparable size and expanded at a comparable rate.
To handle such an unprecedented volume of trade the new enterprises had to build and staff managerial organizations. The new large wholesale houses, operating in quite different trades, came to be structured along much the same lines.28
Central to the success of the large wholesale jobbing enterprise was its sales force. Salesmen were the firm’s primary competitive weapon and its basic source of marketing information. Wholesalers in New York and Philadelphia had first used “drummers” in the late forties to solicit trade of the country merchants when the storekeepers appeared in town.29 Then, in the years after the Civil War, traveling salesmen began to swarm through the land.30 They became familiar figures in rural America and the nation’s folklore.
These salesmen went “by the cars” to the towns and villages on the railroads and then by horse and buggy to the smallest and most distant of country stores. They appeared at these stores at different times of the year and marketed their goods in different ways, depending on the lines they handled. The dry goods representatives sold largely by sample, spending much of their lives unpacking and packing trunks. The hardware and implement men relied, as did those selling groceries and drugs, more on catalogues.
Besides taking orders and drumming up new trade, the salesmen pro- vided a constant flow of information back to their headquarters. They reported on changing demand, items particularly desired, the general economic conditions of different sections, and, above all, the credit ratings of local storekeepers and merchants. The salesmen also assisted the store- keepers in keeping a stable inventory, in improving their accounting, and even in enhancing their merchandise displays.
Normally the salesmen were monitored, evaluated, and directed by a general sales manager and his staff. If the enterprise was a particularly large one, there were assistant sales managers for different regions. The general sales department included a small advertising office, which pre- pared the firm’s catalogues, sent regularly to customers, and arranged for some, though not extensive, advertising in local newspapers.
As essential to the success of the full-line wholesaler as a wide-ranging and aggressive sales force was its purchasing organization. It had two parts. One was the network of buying offices. The other, and more im- portant, included the buyers who actually purchased the goods and who usually worked in the home office. Marshall Field, for example, after es- tablishing offices in New York and other eastern cities, set up in 1871 an office in Manchester and, in the next year, one in Paris.31 These overseas offices, in turn, kept in close touch with French and German agents who usually bought on commission. A. T. Stewart had an even larger overseas network. According to its historian, that house had by 1873 “branch pur- chasing offices in every important textile and apparel center in the British Isles and on the Continent.”32 Other wholesalers had similar though less extensive buying organizations.
The buyers quickly became the most important executives in the new jobbing houses. Each buyer and his assistants handled the purchases for one major product line. They determined the specifications of the goods they purchased, usually set the price to be paid as well as the selling price, and determined the volume of purchases. The buyers used the overseas purchasing organization arid bought directly from manufacturers or manufacturers’ agents at home. Working under the supervision of the general merchandising manager, each buyer was the senior executive of a sizable product department. In nearly all cases the buyers were managers who made a career of their specialty.
Because the requirements of each line were so different, buyers were given a great deal of autonomy. At Marshall Field’s each department, in the words of that firm’s historian, Robert W. Twyman, “was run as though it were an independent business firm. The department head was a merchant, completely and independently responsible for the results within his own separate department or ‘store.’ ”33 He purchased, priced, and advertised as he saw fit, and received a contracted for percent of the profits that his department produced. The buyers also had responsibility for developing private brands. Sometimes they did this by becoming exclusive distributors of one manufacturer’s output. At other times they arranged for manufacturers to produce exclusively to their specifications. At still other times they did the branding and packaging at their own warehouses. The general merchandising manager who had supervision over the several buying departments also watched over the warehousing operations which often involved unpacking and repacking, as well as labeling, branding, and special packaging. He kept an eye too on any manufacturing activities that the firm had acquired.
Large wholesalers came to do some manufacturing, but such efforts were never extensive. The large dry goods jobbers often hired their own needle workers to make standard items such as underwear, shirts, collars, cuffs, suspenders, furs, and upholstering for furniture. More often, however, this work was contracted out.34 Except for A. T. Stewart, very few dry goods wholesalers owned mills or factories and Stewart’s ventures into manufacturing proved unsuccessful. The hardware wholesalers, while developing their own brands, nearly always had independent man-ufacturers make the product.35 In drugs, some of the mixing of compounds was done by the wholesaler, but the compounds were processed by a manufacturer. In the late twentieth century, these large marketing enterprises still concentrate almost entirely on their basic function of mer- chandising.
The managers in the operating departments had the responsibility for the physical movement of goods from the supplier to the consumer, and for the flow of cash the other way.36 The magnitude of this task is sug- gested by the fact that by the 1890s an individual hardware jobbing firm handled 6,000 items purchased from well over 1,000 firms and sold to many more customers. The traffic department concentrated on scheduling the shipments from the suppliers to company warehouses and then to the retailers. Often it made arrangements with the railroads to ship goods di- rectly from the manufacturer to the customer. Managers in the traffic department bargained constantly with railroads to get the lowest possible rates and classifications for their goods and rebates for themselves and their customers. The traffic department had its own shipping office which handled the actual details of the movement of goods. Both shipping and traffic units worked closely with an order department responsible for see- ing that the orders were properly filled.
Another functional department, credit and collections, played a critical role in determining the business success of the new wholesalers. Very short-term and tightly controlled credit greatly reduced credit costs. The standard terms in the dry goods, hardware, and drug trades were twenty days net with a 1 or 2 percent discount for cash paid in ten days, and some- what longer terms for slower moving items.37 Competition, however, often forced the granting of credit extension for more than twenty days. Marshall Field, for example, was particularly generous in extending credit to retailers who were just getting started. Credit extension clearly had its dangers. Unless carried out with care it could jeopardize the maintenance of high cash flow which was so essential to a wholesaler’s success. In granting such extensions, wholesalers relied on information from their own sales force and from credit agencies which had by the end of the Civil War become an integral part of American marketing and distribution.
In fact, the needs of the wholesalers supplied a major reason for the rapid growth of this new type of service enterprise.38 The Mercantile Agency, the first of the credit reporting.firms, was formed by a New York dry goods jobber, Lewis Tappan. Founded in 1841, it began to expand its activities outside of the New York and New England area in the 1850s. In that decade a second firm, the Bradstreet Agency, began operations. By 1870, the older agency, which had been taken over by R. G.Dun, had set up twenty-eight branch offices in the nation’s major com- mercial centers. By the end of the decade it had added forty-one more. Bradstreet followed suit, though on a somewhat smaller scale. As’was so often to be the case, the first two enterprises to create a branch office net- work in a business continued to dominate it. By the 1870s these two en- terprises were doing an enormous volume of business. Dun’s agency then employed over 10,000 reporters or investigators and received daily some 5,000 requests for information. The most successful competitors of the two giants (who later combined to form Dun & Bradstreet) were agencies that reported on specialized trades including dry goods, hardware, furniture, stationery, and jewelry. Marshall Field, for example, relied on two specialists in the dry goods field—Barlow and Company, and Huart, Garlock and Company—as well as on Dun and on Bradstreet.
At Marshall Field’s the granting of credit was of such importance that it became an almost full-time responsibility for one partner, Levi Leiter. Leiter’s abilities in this field made it possible for the enterprise to carry out most of its huge business on a cash basis. “With their carefully selected customers discounting their bills as regularly as a group of faithful em- ployees punching a time clock, the two partners had little capital tied up in delinquent accounts, knew with reasonable certainty how much money was coming in each month, and were subsequently able to maintain an unsurpassed reputation themselves for prompt payment.”39 The resulting steady cash flow reduced the cost of credit per unit of merchandise ob- tained to a new low.
Managers in the credit and collection department worked closely with those in the accounting department. Both provided information essential to the overall management of the enterprise. The data kept by the account- ing department included a record of all financial transactions and the re- ceipts and expenditures of all funds. The several buying offices handling the different lines, and the functional departments, each had their own set of accounts. Although the number of entries was far greater than those in accounts of commission merchants in the 1840s, the method of double- entry bookkeeping remained much the same. In addition to departmental journals recording the transactions, and ledgers showing the accounts of each supplier, customer, or shipper, there was the general ledger that gave monthly summaries of each office and department and of the enterprise as a whole.40 Since the financial transactions were straightforward and of much the same nature, the new mass marketers had less need than the rail- roads to develop complex procedures to record them and then to collect, collate, and analyze the resulting accounts. The wholesalers, therefore, had smaller accounting departments than did the railroads and less ex-tensive internal auditing. As their capital investment was very small in relation to their total business, they were not pressed to consider depreci- ation and other matters of capital accounting.
In evaluating the performance of their operating managers, the senior executives used two types of information generated by the accounting department. One, somewhat comparable to that used by the railroads, was gross margins (income from sales minus cost of goods) to net sales. The other and more important was the rate of inventory turnover or “stock- turn,” as the wholesalers termed it. This they defined as the number of times stock on hand was sold and replaced within a specified time period, usually annually.41 Stock-turn was, indeed, an effective measure of the efficiency of a distributing enterprise, for the higher the stock-turn with the same working force and equipment, the lower the unit cost and the higher the output per worker and per facility.
Significantly the concept of stock-turn only appeared in American marketing after the coming of the railroad had permitted the rise of the modern wholesaler. I know of no example of a prerailroad merchant using that term. On the other hand, by 1870 Marshall Field’s most repeated ad- monition to his managers was to keep “one’s stocks ‘turning’ rapidly.”42 And he constantly urged the retailers to whom he sold to concentrate on the same goal.
By this criterion Marshall Field’s company performed well. In 1878, the first year for which information exists, the average stock-turn in Field’s wholesale operation was 5.9 and was kept about 5, except for one year, until 1883.43 This record was excellent even by twentieth century standards. As the figures suggest, once a distributing network such as Field’s was perfected, further increases in stock-turn and productivity were difficult to achieve. The quantum jump in the volume handled and productivity achieved by a single firm came at the moment when the railroad and telegraph made possible the rise of modern business enterprise in American marketing and distribution.
Many of the organizations the wholesalers created in the 1860s and 1870s continued on beyond the life of their founders. With some notable exceptions, such as the firm of A. T. Stewart, most lasted into the twentieth century.44 After 1880, however, wholesalers began to be challenged by and then even to succumb to two brand new and very different types of enterprises. One was the mass retailer who purchased from the manu- facturer and who sold directly to the final consumer. The other was the manufacturer who began to build his own wholesale marketing and dis- tributing network as well as his own extended purchasing organization. Both proved successful competitors because they internalized the activi-ties of the wholesaler and so extended the administrative coordination of the flow of goods from the manufacturer or processor directly to the ul- timate consumer.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.