"In this way, the merchandise business complements the gas business." So, too, does the credit business. Customers pay their bills and make their note payments at the store. And, if they are already gas customers, the company (including the floor salesman) knows their credit rating when they buy. If their credit is good, he is safe in urging them to buy on credit.

On the other hand, if their credit is not the best, the company will insist upon at least a 50% down payment-the salesman will refuse to "bargain" with them. So successful has the company been in its payment plan business that the seven stores are currently carrying over $500,000 in notes. Center itself has about $200,000.

The bargaining is done on price, and Bu-Pane has an extremely flexible pricing setup. Unlike discount houses, Bu-Pane will not, when you walk into the store, quote you the lowest price at which it will sell. It will start at the highest price, which in most lines provides a margin of at least 35% on the selling price; if you, as a customer, exhibit the maximum amount of sales resistance, the company will reduce its price to give it a 20% margin.

"The people in this area like to bargain," says Boles. "Here we are 'country people,' and we like to dicker when we buy something. It makes the customer feel he has outsmarted the seller."

Appliance markups on most appliances are in four increments-35%, 30%, 25%, and 20%. Salesmen will start at 35% and will work down, and they won't let a qualified customer out of the store until they have offered to sell at the smallest margin.

However, to make sure that the salesman will try to get the highest possible price, Bu-Pane pays his commission on a sliding scale-5% for a sale at the 35% markup, 3% at 30%, 2% at 25%, and only 1% at 20%.

With all this dickering, the stores still came out last year with a gross margin of about 30% on appliances, 26% on brown goods, 36% on furniture. The combined total gross margin was 32%.

"We put this sliding scale into effect in 1966, and with the incentives for the salesmen we increased our gross margins from 28% to 32% in one year," says Windham.

The closest discount houses are in Shreveport, La., some 60 miles distant. With its flexible pricing system, Bu-Pane is more than a match for these competitors. When the company has a sale, it merely starts at the low-end markup and makes that a firm price.

Another reason why the traffic-building mode of operation makes good sense to a company like Bu-Pane is that otherwise it would have very little contact with customers. Historically, the deliverymen have doubled as route salesmen and handled all their own routing. Most customers own their tanks and so far it has not been practicable to establish regular routing systems.

Thus, the company would have relatively little communication with its own customers except through its drivers-were it not for the activities in the store.

In stocking its stores, the management tries to settle on a single brand. "Two brands just cause too much confusion, require too much inventory, and don't generate enough loyalty on the part of the distributor serving us," observes Windham. The stores carry only Whirlpool in all lines but ranges, where they concentrate on Hardwick-plus a few Chambers for the prestige-conscious trade. "It's good to carry two lines if you are in a metropolitan area and have a fast moving operation with high volume. But a typical LP-gas dealer should concentrate on one line and give it all he's got."

Windham is also a strong believer in selling both gas and electric appliances. This brings buyers into the store who might be seriously considering going electric. The salesmen work hard to convert them to gas-"and we usually do," says Windham. The company sells 99 gas ranges for every one electric. It will advertise electric dryers, because of price, but will then sell them up to gas.

Windham feels it helps to complement appliances with furniture, even though it is slow moving. "It's a good line in a small town of 7000 to 10,000. In smaller towns, it's of marginal value because it's so slow moving.

"People like to buy all their home furnishings in one place. If we didn't carry furniture, they might buy their appliances from a furniture dealer-and he might sell them on electric."

Bu-Pane has about six special sales a year. Annual clearances are held in January and August, ranges are spotlighted from February through April, air conditioners through June and July, laundry and color television in September, and color TV only from October to December.

Indicative of the ingenuity the company shows in its merchandising is the twoyear warranty it gives on television picture tubes during special sales. The fac tory warranty is for one year, and experience has shown that if a tube does not go out within this length of time chances are remote that it will go out in the second year period. Therefore, this offer carries practically no risk for the

company.

This year the January sale was called an "after-Santa" clearance. The think. ing was that many customers were to receive Christmas bonuses and would therefore have a little extra money to spend. It was highly successful.

The company is a big believer in using "door busters"-small items that are sold at cost just to get the customer in the store.

Co-op advertising

Bu-Pane is a steady advertiser. For example, last November it used a total of 250 spots-75 on Zenith, 100 on RCA Victor, and 75 on Whirlpool (all of these, of course, were co-opped with the manufacturer). The company has co-sponsored broadcasts of high school basketball and football games.

Last year its advertising expenditures were $3180 plus a matching sum from manufacturers for co-ooping. Therefore, the total outly was something over $6000, which was a little less than 1% of total sales throughout the system. With its radio spots, the company can reach not only Center but also Many, San Augustine and Mansfield.

However, Windham feels that his direct mail program is his best form of advertising. The company works up its own mailers and its own newspaper layouts.

And, in essence, "the key to any good appliance business is traffic and the establishment of the trade of customers. We have this already, and we utilize this trade in every way we can."

To build trade as well as traffic, Windham believes that there are other types of merchandise besides furniture and appliances that can do an effective job. In two districts, Many and Pitkin, lawn mowers are bein gsold. Pitkin also sells chain saws. Center sells outboard motors. And in one store, a line of paint will soon be added.

"Find a need-some line that is not being merchandised adequately in your community and fill it" is his philosophy.

And it's selling gas. Last year, when many marketers' volume was down, Windham's region had a “handsome increase" in gas sales.

And-not incidentally-in profits.

Mr. CONTE. The first witness will be Mr. James Condon of the Peoples Gas Light & Coke Co., Chicago, Ill.

Mr. Condon, you may proceed.

Mr. CUTLER. Mr. Chairman, do you intend to swear in the witnesses!
Mr. POTVIN. Mr. Condon, you are appearing under subpena?
Mr. CONDON. Yes.

Mr. POTVIN. It is traditional for the committee to swear in witnesses appearing under subpena.

Mr. CONTE. Would you raise your right hand, please?

Do you swear that the testimony you are about to give the subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God?

Mr. CONDON. I do.

Mr. CONTE. Would you proceed, sir?

TESTIMONY OF JAMES J. CONDON, EXECUTIVE VICE PRESIDENT, THE PEOPLES GAS LIGHT & COKE CO., CHICAGO, ILL.; ACCOM PANIED BY LLOYD CUTLER, COUNSEL, AND JOHN MILLER, ASSISTANT TO MR. CONDON

Mr. CONDON. Mr. Chairman and members of the committee, my name is James J. Condon. I am executive vice president of the Peoples Gas Light & Coke Co., 122 South Michigan Avenue, Chicago, Ill. I

have with me as my counsel Mr. Lloyd Cutler, and my assistant, John Miller, who is at the easel.

Mr. CONTE. Would you like to have Mr. Miller sit with you?

Mr. CONDON. I think he can stay there to turn the cards.

Mr. CONTE. Fine.

Mr. CONDON. Peoples sells natural gas in the city of Chicago and has

a subsidiary, North Shore Gas Co., which sells natural gas in part of the suburban area north of Chicago.

I am here today to explain why Peoples Gas is strongly opposed to the use of promotional allowances in utility marketing.

We have been forced to engage in such allowances to meet competitive pressures.

We are convinced, however, that promotional allowances are bad for utilities and bad for the public.

Peoples Gas believes that utility services should be marketed on the basis of their merit and price.

We do not believe that the buying of business by cash payments or other favors to builders and developers should be a substitute for competition based on merit and price.

Over the years, we have developed aggressive and imaginative efforts to improve gas equipment, to reduce the cost of gas service, and merchandise gas service, gas equipment and appliances.

These marketing techniques are the heart of competition. Properly conducted, they will lead to increased consumption of utility services and provide the most for the ratepayer's dollar.

We are not, therefore, here to complain about tough competition. We have the ability to complete on price and merit or we, too, can "buy" business if that is the game to be played. Nevertheless, we deplore the latter practice. We believe it is harmful to the consumer, to the economy and to businessmen, both large and small.

This practice of buying business through cash payments and favors is euphemistically called a promotional allowance or promotional practice.

In fact, it is nothing more than a subsidy or bribe. The purpose is to allow a utility to buy its way into a market that it cannot crack on the basis of merit and price.

Most of these subsidies are paid to a third party, to builders or promoters, not to consumers.

The consumer is deprived of a choice. Yet, the consumer winds up paying the bill for the subsidy pocketed by the builder or promoter. This is quite ironic. The ratepayer not only gets stuck with a subsidized decision, but he must also pay for the subsidy.

To dress up such subsidies with words like promotional allowance is to make a costume ball out of a beggar's carnival. With rare exceptions, these subsidies are a crutch for an inferior product, or an inadequate marketing program. They are a shabby and insidious substitute for competition. In fact, they contain the seeds to destroy real competition, based on merit, price, and sound marketing practice.

Let me explain what I mean: These subsidies are like an infectious disease. The first subsidy offered is rarely the last. Inevitably, a countersubsidy is offered by the utility which faces the loss of business it would have obtained if merit and price had been controlling. This in turn brings on a still higher subsidy, followed by a still higher countersubsidy.

When this happens, subsidies-not merit and price, not sound marketing-begin to determine the selection of energy in the marketplace. This is what has been happening in Chicago.

The bidding for business in some instances has reached fantastic heights. The most astounding example involves the John Hancock Center in Chicago, which I shall describe in a few moments. In this case, the subsidy bidding was reported at an estimated $1,550,000. If this practice is not stopped by regulatory or other action, it can only grow worse.

As this committee has discovered, the granting of subsidies by public utilities is not new, either nationally or in the territory of Peoples Gas. In recent years, however, the number of subsidies has greatly increased, the size of the subsidies offered has been greatly inflatedand the subsidies have frequently become nonuniform and secretive. It may be helpful to the committee if I relate some of our own experiences.

Our principal competitor, Commonwealth Edison Co., some years ago established a more or less uniform policy of granting cash allowances for the installation of electric ranges. Peoples Gas had to respond with a similar program.

Then Edison began to give free transformers to the builders of highrise apartments who installed electric ranges. Peoples Gas felt compelled to respond with a program under which free gas piping was offered. The ante kept rising and rising, all at the expense of the general customer.

Then, in 1960, Peoples Gas began to sense a change in the nature and magnitude of Edison's efforts to buy business through subsidies. It began with an announcement that the much-heralded Marina City project, involving the construction of twin 60-story towers in downtown Chicago, would be all electric.

Despite repeated efforts, our sales representatives were unable to make a presentation showing the advantages of gas. There were plenty of rumors about what had happened. These rumors concerned subsidies from Edison, loans from General Electric, and even the exclu sion from bidding of individual electrical contractors.

Mr. POTVIN. Mr. Condon, I do not mean to be discourteous, but I would like to ask one question at this point.

Mr. CONDON. Yes, sir.

Mr. POTVIN. You say you were unable to make a presentation. You mean that literally, you were not even given that courtesy?

Mr. CONDON. That is correct, Mr. Potvin. We attempted to make a presentation to the architect who was drawing the plans, and he refused to see us. We also attempted to contact the principal involved in the building and he refused to see us.

Mr. POTVIN. On the basis of your presentation, was it your thought that you could offer economies to the builders of the project? Mr. CONDON. Precisely.

Mr. POTVIN. Did you point this out to those you contacted?

Mr. CONDON. We were not able to talk to them, but ultimately we were able to finally make a contact after many, many delays, and were able to show the economies involved.

Mr. POTVIN. Were these substantial economies?
Mr. CONDON. Yes, sir, they were.

Mr. POTVIN. Despite this, apparently, no consideration was given? Mr. CONDON. That is right, sir.

Mr. POTVIN. Thank you, sir.

Mr. CONTE. Continue, Mr. Condon.

Mr. CONDON. Mr. Miller will show a photograph of Marina City, which illustrates the dramatic aspect of construction, unique at the time, which enabled the building to be publicized the world over.

I have a smaller photograph which I would like to offer for the record.

Mr. CONTE. Without objection, the photograph will be included in the record. (The photograph referred to follows:)