LOSS-LEADER SELLING IS EXTENSIVE Some opponents of this bill have stated that "studies have indicated there is very little real loss-leader selling being done." There is no mutually acceptable definition of loss leader within limits that would permit accurate statistical study. However, those who contend there is little of such selling being done have themselves presented the most convincing evidence that loss-leader selling is, in fact, extensive. There are two general types of discounts or markdowns which stores take in the ordinary course of business. The one is the customary markdown or "sale" to close out seasonal goods or stocks that are imbalanced for any merchandising reason. The other is the type of discounting that is done to create an "image" of low-cost operation and low prices throughout the entire store. The former is a necessary and desirable part of efficient merchandising. The latter is intended to mislead the consumer. A retailer using this deceptive form of promotional appeal would explain his methods this way: "Deeply discounted products (loss leaders) are nothing more than tools *** to build traffic and create an illusion about our store. By featuring brand name goods at a value people recognize, I'm telling my customers that all my prices on all my products are cheap. I will make back my losses on the deeply discounted products by also selling those items of furniture, luggage, sporting goods, jewelry, and other merchandise which are not nationally advertised. On these 'blind' products I can make a reasonable profit, while giving the customer the impression he is always getting a bargain when he comes to my store." The dividing line between customary markdowns and predatory discounting is obviously not exact, but when it is the policy of a store to systematically make markdowns on well-known brands substantially below the margin needed for the whole operation, that practice is clearly loss-leader selling. It is intended to be deceptive to the consumer and it is. It is also predatory to the manufacturer who owns the brand. The facts are that all deeply discounted items are sold well below the store's required markup. Consequently, there is a loss on these goods which, of necessity, must be balanced by a higher markup on other goods. The statement that "there is very little loss-leader selling being done," was made during the hearings by a professor of economics and a contributor of publications on consumer information. He appended to his testimony against the quality stabilization bill a long list of items in which the fair trade price and the price paid were shown. There should be no reasonable doubt that most of the professor's data was factual in respect to the savings that were available on specific items. However, when consumers or Members of Congress conducting hearings on the quality stabilization bill are led to believe that the same percentage of savings can be enjoyed on all purchases, then economists who do not give the whole side of the story become themselves a party to deception. Opponents of the quality stabilization bill contends that it would prevent lowmargin_retailers from passing on to consumers the savings resulting from a more efficient form of distribution. This at most is only a theory, an allegation. For no creditable evidence to support such a claim has been submitted in testimony. Nor does such evidence appear to be available from any source to indicate that the total gross margin of stores operating under the discount appeal are any lower than other nonservice stores carrying similar types of merchandise. What has been shown convincingly is that there are savings on specific products. Yet according to the comparative lists submitted by opponents of this bill as their evidence, it is very illuminating--but really not surprising-to note that more than three-fourths of such products are offered for sale or are sold with a markup of less than 15 percent. Responsible merchants, whose buyers have shopped discount stores extensively, can give this committee convincing evidence that the wide majority of discount houses have to get gross margins of at least 25 percent on their total sales. If a store thus needs 25 percent gross margin, then for every dollar he sells below this required markup, he must sell an equal volume above this markup. It can safely be concluded therefore that the visible savings on the individual discounted items cannot be added together and projected on a nationwide basis as net savings to the consumer. Those who make such estimates are either uninformed in regard to the mechanics of discount selling or are attempting aeception. This committee has repeatedly heard such estimates of huge savings. The erroneous assertions came from the Department of Justice and from economists and teachers of marketing, and were echoed by witnesses claiming to be speaking for consumers. There can be no basis in logic or in relevant marketing experience to use such an unsupportable premise as a reason to justify opposition to the quality stabilization bill. Rationalization of such opposition is impossible. OBJECTIVE STUDY BY ENGLISH ECONOMISTS SHOWS RESALE PRICE MAINTENANCE DOES NOT RAISE CONSUMER PRICE LEVELS Evidence that (a) resale price maintenance does not raise consumer price levels, and that (b) it operates to benefit the consuming public, may be found in a book entitled "Fair Trade, Resale Price Maintenance Reexamined," published in 1960 by two English economists. The authors are P. W. S. Andrews, a lecturer on economics at the University of Oxford, and Frank A. Friday of the University of London. Their evidence and findings are based primarily on what actually happened in other countries when resale price maintenance was abandoned. They are thus comparing, in a postmortem way, certain theories and concepts with the realities of the marketplace. As a result of their comparative analysis, the authors found that "there is no evidence at all of a general downward pressure on gross margins after resale price maintenance was prohibited in Canada. In fact, margins have risen (in Canada) to a similar extent as in the United Kingdom. It is clear that the basic assumption of the opponents of resale price maintenance that the practice raises gross margins is quite wrong. The general claims that the abolition of resale price maintenance will benefit consumers by reducing the price level and will improve distribution by lowering gross margins is a great illusion." Economists Andrews and Friday conclude that the abolition of resale price maintenance would mean (a) a decline in the number of independent merchants; (b) a reduction in competition between private brands and manufacturers' brands; (c) an increase in the size of large retailers; (d) a trend toward forward integration with the large manufacturer going into the retail business as well; and (e) the squeezing out of the small manufacturer. ERROR AS TO CAUSE AND SIGNIFICANCE OF BUSINESS FAILURES MISLEADS DEPARTMENT OF JUSTICE TO OPPOSE QUALITY STABILIZATION BILL The Department of Justice asserts that the rate of business failures is higher in States which have fair trade laws than in those States without fair trade laws. Therefore, the Department of Justice concludes that small business will be hurt by the enactment of the quality stabilization bill. Although statistics were submitted showing the rate of business failures in States having resale price maintenance laws compared with States without such laws, there was no accredited information or convincing argument presented by the Department to show any causal relationship between the failure rates and the status of resale price maintenance laws in the various States. This, of course, is a very important consideration if such data, per se, are to be used to substantiate such a broad conclusion that the small businessman will be hurt by the enactment of the quality stabilization bill. It is obvious that many reasons might well influence the failure rate much more than the presence or absence of resale price maintenance laws. The following considerations are sufficient to indicate that the conclusion of the Department of Justice was not based on sound reasoning or dependable statistics. A high rate of business failures resulting from the crippling of State fair trade laws is broadly obvious, but cannot be accurately proved (or disproved) statistically. The impact on small business of lawful "loophole" transshipments, mail-order-house shipments, etc., into fair trade States, thus crippling the effectiveness of the fair trade statute, cannot be accurately weighed. The Dun & Bradstreet report is too general-too broad-for the specific use given it by the Department of Justice. First. This Dun & Bradstreet report represents only approximately one-half of the total number of businesses in the United States. Whereas practically all large businesses are included by Dun & Bradstreet, a staggering number of small businesses are not. These businesses "omitted" from the Dun & Bradstreet report are, in all probability, those with the least economic power to survive price wars, and therefore the ones most affected because Congress as yet has not enacted the quality stabilization law. Further, no weight is given by the Department of Justice to the undetermined number of small businesses exterminated without bankruptcy or other proceedings that would bring their failures to the attention of the courts or of Dun & Bradstreet. Second, To determine the relationship, if any, between fair-trade laws or lack of fair trade laws and the rate of failure of small business, some minimum steps should have been taken by the Department of Justice before the Dun & Bradstreet's statistics could be used. For example, the amount and the type of commercial activity in the State, the nature of the State's economy, the population growth of the State, the number of new businesses being established in the State, the rate of failure of such new businesses, etc., are significant and influential factors given no weight by the Department of Justice. PRICE STABILIZATION AT THE RETAIL LEVEL UNDER THE QUALITY STABILIZATION BILL AND EFFECTIVE COMPETITION AT THAT LEVEL ARE COMPLETELY COMPATIBLE One basic concept that has hampered productive debate and realistic consideration of this bill is the persistent contention of some governmental representatives and economists that there cannot be free and open competition when there is price stabilization at the retail level. At the recent hearings an economist and teacher said with considerable finality that "price maintenance at the retail level and an effective competitive system are incompatible." If the proponents of this theory would go into the marketplace and see the competitive forces in action they would find that the most rugged competition in today's market is to be found among large distributors, such as chainstores, mail-order houses, and cooperative buying organizations. For years these large distributors have been marketing under their own house brands, with price stabilization at the retail level, and with complete control of merchandising policies from the manufacturer to the consumer. Under such a policy, competition for consumer patronage is on "value for money" rather than on the lowest price for the same trademarked item. As far as the marketing processes and competition are concerned, the brand names of these large distributors perform the identical function as the brand names of manufacturers. For most distributor house brands, there is nationwide promotional effort and distribution, and consumer prices are determined by adding to the manufacturer's costs the averaged costs of the retailer, plus a reasonable profit, just as is done by the national brand producers. These controlled distributor brands represent more than one-third of all trademarked goods sold in the United States. Certainly, this is tangible evidence of "effective" free and open competition at the retail level, as far as the consumer is concerned. Under the provisions of the quality stabilization bill, the same unrestricted forces of competition would be in effect on national brands. A PRICE ON A PRODUCT IS MEANINGLESS UNLESS THE PRICE IS RELATED TO THE QUALITY OF THE PRODUCT Opponents of the quality stabilization bill contend that "the only real and effective competition is that which is on a strictly price basis, at the retail level." The theory that price is the sole basis of competition is unsound and efforts to evaluate this bill by such an outmoded concept tend to throttle constructive consideration of it. Admittedly, when an uninformed consumer sees tangible savings on well-known products she is likely to assume that similar savings are storewide, particularly when she is encouraged in such belief by the statements of governmental representatives and teachers of marketing. But those experienced in actual production and marketing know that for most consumer goods the retail price does not, per se, give dependable indication of its real quality. It is only when such price is related to a known quality or grade that the consumer can use price as a guidepost. These guideposts are meaningful and useful to the consumer only when a manufacturer (or a distributor or retailer) clearly identifies the product by trademark or brand name and when he also establishes or suggests a realistic retail price, for each quality or grade. By such identity the seller voluntarily assumes responsibility for satisfactory performance in open competition with other products within the same price range. Thus, competition to maintain these values must of necessity be primarily in the laboratories and testing departments before the goods are offered for sale. Under such a policy, there is aggressive competition to build up to a quality or value rather than down to a price, and consequently in both national trademarked products and distributor house brands, the consumer gets much more real value for her money. This is the basic concept which motivates and governs all effective brand name merchandising and promotion down to the retail level. The discount form of merchandising puts into reverse practically all of the creative and constructive forces inherent in the brand name system of distribution. By its very nature it is admittedly predatory in that its motivating force is sapped from the energy and goodwill developed by brand name manufacturers and retailers by heavy investments, research, and promotion. From the marketing point of view. the primary purpose of this bill is not only to encourage manufacturers and retailers to compete openly on quality rather than just on price, but more importantly to give them specific protection on their investments in establishing quality and developing more helpful guideposts for the consumers in evaluating quality. That price stabilization at the retail level and effective competition are compatible is convincingly demonstrated every day in the market. How then could anyone, except a person insulated from the actual competitive environment of today's market, continue to put forward such a theory? CONCLUSION From the record of hearings it may safely be concluded that a wide majority of all objections to this bill originate from a relatively few basic misconceptions regarding (a) the true significance of some current marketing policies and practices and (b) what would actually happen if there was more price stabilization at the retail level. First. In evaluating the significance of objections to this bill, serious consideration must be given to the fact that it is evolutionary and not revolutionary as the testimony of many of the opponents would seem to indicate. It is evolutionary because its primary purpose is simply to extend to trademarked products the same rights that have been enjoyed for many years by large distributors of house brands. Those rights would entail permission to establish a retail price and maintain control of merchandising policies and operations through to the consumer. During the past few years the forces of free competition in the markets have clearly demonstrated that for the long range the consumer gets more real value for her money on her total purchases when manufacturers and distributors compete to build quality into a stabilized retail price. Second. Those who theorize that "the only true competition is that which is on a price basis at the retail level," will find a positive and realistic answer to the contrary in the market itself. For under the controlled brand form of marketing, all of the forces of free and open competition are in full effect, and this same rugged competition would be in action on national brands under the provisions of this bill. Third. Another stated objection to this bill, in the same area, is that "it would deny the consumer a right and an opportunity to share in any savings made possible by lower cost merchandising." This contention is based on the erroneous assumption that discount merchandising is a new type of distribution in which retailers operate on lower margins. But no evidence whatsoever was offered in the hearings to indicate that the price cutting of branded products has resulted in lower total gross margins for such stores nor is such evidence available from any known source. On the contrary, it is the opinion of widely experienced marketing men that stores using the discount appeal operate on about the same gross margin as other nonservice stores that carry the same type of merchandise. Fourth. The contention that this bill would result in increased prices to consumers and in lessened competition between manufacturers and retailers is not only the basis of most of the unwarranted opposition, but more importantly it is the most difficult to rationalize. For consumers and others not well informed regarding promotional techniques, these savings may seem like evidence of the benefits from free and open price competition at the retail level. Therefore, it is understandable that there is deep concern when the uninformed public is told by representatives of the Government, by economists and by representatives of farm bureaus and labor unions that if this bill is passed these visible-but phony-savings would be taken away and the price of the goods might increase by as much as $14 billion annually. Deep discounting gives visible savings on well-known brands. This the consumer sees. But what she does not realize is that most of these savings are nullified by higher markup on other less known products, because every retail store has to realize a certain minimum gross margin on total sales. Therefore, it is a gross misconception or intentional deception for anyone to add up the savings on specific items used as samples, and project them on a nationwide basis as the formula for estimates of the increased price consumers would have to pay if this bill went into effect. In conclusion, the type of opposition above recited gives emphasis to the major difficulty of getting practical legislation in this area of marketing. This is very pointedly summed up by a former chairman of the Federal Trade Commission who says that "even if the heavy facts of life are on your (business) side, rest assured that in the scales, one feather of governmental inference is worth a ton of private citizen's facts." RESOLUTION Whereas the Massachusetts Consumer Association is concerned over the socalled quality stabilization bill (H.R. 3669) presently before the Congress of the United States; and Whereas the provisions of this bill are not in the interests of consumers; and Whereas this bill emphasizes the role of the manufacturer in price fixing and price rigging and practically eliminates the role of the retailer in the pricing process. The Massachusetts Consumer Association in convention assembled at Framingham State College on April 6, 1963, resolve as follows: To request all members of the congressional delegation of the Commonwealth in the Congress of the United States to vote and actively work against the passage of this bill, and To notify all members of the congressional delegation of the Commonwealth in the Congress of the United States of our desire to learn of their respective activities concerning this bill. Representative JOHN D. DINGELL, House Office Building, Washington, D.C. ANDERSON, IND., April 9, 1963. DEAR REPRESENTATIVE: As a life member of the American Pharmaceutical Association, I would like to make it clear that they do not speak for me, when they support the quality stabilization bill. This is nothing more than a fair trade bill under a different name and I am unalterably opposed to it. Price control is people control-and this bill provides for price control. Retailers do need some kind of protection from loss-leader type sellingbut this bill goes far too far. Sincerely, J. D. SCHREINER. |