Allegations and Proposed Reform by Wallace H. Kuralt, Owner of the Famous, 40-Year Old, But Now-Failed Bookstore Chain

First Published on 3/13/02; Date of Last Revision: 3/14/02 at 09:00


By Wallace Kuralt, March 13, 2002.

The Wal-Mart, the mega-mall, the "big box" center full of "category killer" national chain stores - all seem to excite great enthusiasm on the part of city and county officials and their planners. That's where the big money would seem to be.

Yet experience and the widely-respected Shils Report from the Wharton School tell us that it is all smoke and mirrors. Is there hope for a solution? Read on.

The "down side" of the Wal-Marts and the mega-malls

The "DNA" factors favoring the national chains

Now add to the mix the fact that many, if not most, of the national business chains solicit and receive discriminatory prices from their suppliers, using their "buying power," or "muscle," to force extra discounts, fees, rebates, terms, free goods, special advertising allowances and "slotting fees," much of it in violation of the anti-trust provisions of the Robinson-Patman Act.

In papers recently filed in federal court in New York, it can be seen that the national chain bookstores are receiving discriminatory prices such that they buy at 35%-40% of "list" price, whereas their smaller competitors are buying at about 60% of list price! This for the same goods in the same quantities and quality at the same time.

Each of the benefits available in a discriminatory manner to the chains helps make up the DNA Code of business which spells success for the chains over their other competitors. Those with the strongest DNA linkages have success even over their large competitors.

This means that a chain can make 60% or 65% gross profit from most of its suppliers, more than half again that of the smaller stores on the same goods. This permits the chains to discount heavily, to advertise and promote heavily, to build expensive buildings in expensive locations - and still make more gross profit than their competitors.

Some of the discriminatory payments and benefits received by the chains - and largely not disputed by the chains - are listed below. Each is a part of the "price" paid for merchandise received.

Some of the aspects of "price"

Going, going, gone!

These discriminatory payments, fees, rebates, chargebacks, allowances, free services such as freight, special shipping arrangements, free merchandise -- and more, still being uncovered and exposed to the public - amount to as much as one-third of the invoice "price," and permit the chains simply to expand at will and overwhelm any smaller competition, even though the chains are notoriously inefficient and even though these payments give in return very little benefit to the supplier, other than assuring that their products will be given shelf space in the store.

Competitors are forced to discount in order to compete - even though their profit margins are tiny compared to those of the chains. They must spend money to advertise and promote, must try to give better service, find a special niche for themselves, have a large stock of goods or items not yet discovered by the chains, or open in a location far from the chain stores. All to often the chain simply co-opts the business after the smaller competitor has created a demand for a certain product or line of goods.

The customers of the chain stores are happy to purchase merchandise at prices often far lower than those of the chains' competitors, and care little that almost no service is offered to the customer. There is little or no assistance in finding merchandise, in explaining how it is to be used, in repairing damaged or faulty goods, or in shipping or delivering or gift-wrapping the merchandise. Returns can be made only by waiting in long lines.

The chain stores vary their prices in each location according to the strength of the competition. After the competition is effectively silenced, the chains are free to charge whatever they wish, even though the competitors were vanquished by acts in violation of the law.

Customers of the chains - who never meet the owner or any responsible official - realize that complaining is useless. They can accept matters as they are or go elsewhere. Sellers to the chains understand that they must give in to the demands of the chains or try to make a living selling to the disfavored competitors of the chains, many of which have failed. Many of the suppliers fail, too - snuffing out any hope of innovative improvements and new products from those sources. The supply of competing products dwindles to those accepted by the chains.

Approaches to Solutions

The municipality that spends its development money wooing the mega-mall and the mega-store does so in the spirit of stealing a march on its "competitors," the counties around it. The residents of those counties drive to the new business center on roads maintained by the disfavored county and bypass the existing stores in their own areas, and all of the income of sales taxes accrues to the benefit of the "favored" county.

The competition is sometimes fierce, especially when the development is also close to a state border. The adjacent counties or states have little or no control over the officials of the favored county and its officials, yet stand to suffer heavy losses in their own municipalities if the other county "wins" the "prize." It seems sensible - and only fair - that the benefits now enjoyed exclusively by the "winning" county be allocated on a proportional basis according to the home addresses of the customers and employees of the new business center.

Such a system would have to take into account the relatively high expense of servicing the center incurred by the host county, but would provide a fair contribution to the costs of the surrounding counties, as well.

Many retailers now note the zip code of the customer when making the sale. Using these numbers, or those collected by a scientific random sampling of the shoppers from time to time, officials could spread the largesse over all affected municipalities.

The idea of employing the "use" tax, though this tax be somewhat more difficult to implement and maintain, could also be examined as a means of making equitable the benefits produced by the new center, if only to encourage the counties to co-operate in using revenue-sharing.

Certainly the decision to share the funds would dampen to some extent the zeal of the local officials in spending their good money in seeking to accommodate the developers in the first place.

Too, local officials should demonstrate the concern for the safety and well-being of their constituents by examining the operations of the developer and the companies which the developer proposes to invite into the development. This should be done as thoroughly as is the control exerted over companies whose operations or products might pollute the environment or of persons known to be sex offenders or drug dealers. Licenses should be refused those who decline to co-operate in making public their activities in regard to fair competition and Robinson-Patman Act matters.

The path of a Robinson-Patman Act legal action is a long and twisting one, and such action is expensive to undertake and maintain by private civil action. The proper forum for such examination is that of the official public inquiry. State laws, however, tend to cede action regarding unfair competition to the federal jurisdiction, and federal officials such as the Justice Department and the Federal Trade Commission are noted for their lack of accepting responsibility in such cases.

This leaves the matter to individual companies - class actions are felt to be unacceptable by the federal courts. This is quite a burden for any company, especially if it is small and has already been heavily damaged.

However, it is not impossible for a legal action to be prosecuted, though great care and expertise must be employed to achieve success. Please see other papers in this site concerning The Intimate Bookshop vs Barnes & Noble et al and other actions undertaken by Carl Person's firm regarding the distribution of auto parts and of magazine distribution.

The Shils Report is also available in its entirety in Mr. Person's web site. See The Famous Shils Report and also see the following related website:

Future Shock?

What, then, might be the result if all national chain store companies were required to observe the law?

Sailing in All Directions

It is said that "Tranquil seas never made an expert mariner." Real competition produces real successes. In the late 1800s and early 1900s, when various "trusts" ruled much of American commerce - in steel, coal, railroading and more - the trust were protected from competition from abroad by heavy tariffs provided by the American congress. President Wilson, at great political risk, defied the trusts and their lobbies, and pledged in his campaign to drop most of the tariffs. This was necessary, he felt, if we were to be sure that American companies would be able to compete - fairly - anywhere in the world.

The "anti-trust" laws came into being, largely concerned with heavy industry and large companies. In 1936 the Robinson-Patman Act was made into law in order to protect the smaller companies, especially the retailers, from the emerging department stores.

But a law is useful only if those responsible for enforcing it have the will and the funding with which to do so. The RPA has not been enforced by public officials, and only the federal judiciary stands in the way of outright predatory and destructive behavior by the larger national retailing companies. Those who argue for "free" trade and unfettered business activity are invariably those who have the capacity to control a market simply by virtue of their financial capacity, without regard to business acumen.

With the world rapidly trending to international trade, American retailing and merchandising has fallen under the control of those who believe that the muscle of its capital is its only needed asset or virtue, and its ship is sinking rapidly. The time has come to take the restraints from the manufacturers and wholesalers and distributors and allow retailing to become once again truly competitive.

American manufacturers, hobbled by the power of the national chains, have sent millions of jobs to offshore sites in order to obtain goods at the lowest possible cost, without regard to the damage such acts cause in their own country. Smaller companies have been forced to merge, causing huge losses of jobs in the home areas of those companies.

Smaller retailers have closed by the tens of thousands, all because the playing field has been permitted to tilt so advantageously in the direction of the large companies who ignore the law. The social structure of thousands of small towns has been shattered, as local business owners are forced, in shame, to quit.

The time to act is now. The Robinson-Patman Act and other fair-trade laws must be upgraded and enforced. Those who stand to benefit so inequitably must be required to stand and compete instead of relying upon the use of "muscle" in contradiction to law.

The American manufacturer and retailer must once again be made an important part of the business system, however small they may be, so that our strength can once again be that of innovation, effective marketing and merchandising, rather than the strength of illegal intimidation.

The American ship must be able to sail in any direction, regardless of the seas against it, to deliver and bring home cargoes of pride and success.


Copyright © 2002 by Wallace H. Kuralt (in part) and Carl E. Person (in part)