Chapter 130 - The Rise and Decline of the Great Atlantic & Pacific Tea Company
Today’s Chapter is based on the book “The Rise and Decline of the Great Atlantic & Pacific Tea Company” by William Walsh.
The Great Atlantic & Pacific Tea Company (A&P) was an American grocery store chain founded in 1859 in New York City as a mail-order tea business by George Gilman and George Huntington Hartford. A&P grew rapidly, pioneering low-cost retailing and private label brands, and from 1915 to 1975 it was the largest grocery retailer in the United States, at its peak operating over 15,000 stores and capturing 10% of U.S. grocery spending. Once considered an American retail icon and "the Walmart of its time," A&P ultimately declined and closed its last stores in 2015.
Here’s what I learned:
Customer-Centric Approach
“We're not competitor obsessed, we're customer obsessed. We start with what the customer needs and we work backwards.”
— Jeff Bezos
From its earliest days, the Great Atlantic & Pacific Tea Company (“A&P”)’s foundational principle was deeply rooted in serving the consumers. George H. Hartford, the visionary behind A&P, recognized that true business success stemmed from a shrewd understanding that a consumer-oriented policy was simply good business. This conviction translated into a relentless pursuit of providing more good food for less money than their competition.
As a matter of fact, in the pre-Civil War era, Hartford quickly identified that the exorbitant prices of tea were a result of numerous middlemen taking substantial profit margin. His radical solution was direct buying, eliminating these intermediaries, and taking only a small profit per pound for the company. This direct approach allowed A&P to retail quality teas for well under a dollar a pound, a revolutionary concept at the time. As Walsh explains, "Hartford sensed the opportunity to make the luxury of tea more accessible to the masses through direct buying, eliminating all middlemen, and taking only one small profit per pound for the company."
"While it is true that George H. Hartford's private life was exemplary in the finest American storybook tradition, it must also be recognized that his concept of 'selling quality goods at the lowest possible prices' was not in any way based upon altruism but rather a Yankee conviction that it made damn good sense to base a retail business upon a consumer-oriented policy. It was just plain good business to treat people right, and earning consumers' trust and confidence provided the maximum potential for growth and profitability."
— William Walsh
A&P’s commitment to value extended beyond just low prices. They understood that earning consumer trust and confidence was paramount for sustained growth and profitability. This was exemplified by their "Club Plan," a nationwide mail-order initiative that enabled groups of merchants or individuals to purchase teas below prevailing prices, with added incentives for club organizers. Furthermore, in an era rife with questionable retail practices, A&P boldly offered an unconditional money-back guarantee to any customer not completely satisfied with any purchase. Even as the company evolved and expanded its product lines, the core philosophy of providing value remained paramount. This unwavering dedication to customer satisfaction was well defined in A&P’s Policy.
"The A&P Policy Always to:
Do what is honest, fair, sincere, and in the best interests of every customer.
Extend friendly satisfying service to everyone.
Give every customer the most good food for her money.
Assure accurate weight every time—16 oz. to each pound.
Give accurate count and full measure.
Charge the correct price.
Cheerfully refund customer's money if for any reason any purchase is not satisfactory."
Similarly, the decline of the A&P Company serves as a stark reminder of the peril of losing focus on customer-centric values. Walsh believed that the turning point came when the company drifted from Hartford’s values. He mentions that “Simply put, in most areas reducing retail prices to competitive levels, or slightly below, did not offer sufficient inducement for customers to put up with problems of product unavailability, poor service, and the smaller, less attractive store conditions which customers did not encounter in competitors’ stores.” As the company prioritized cost-cutting over customer experience, it lost the goodwill that had been its hallmark. Slowly but surely, customers sought better service and quality elsewhere.
This reminds me of the IKEA’s business model which came from Ingvar Kamprad’s unwavering commitment to keeping prices low while maintaining quality. As a matter of fact, Kamprad focused on reducing costs notably by cutting out unnecessary intermediaries. He noticed the stark disparity between factory prices and retail markups, which often inflated prices fivefold. This observation led to the creation of a cornerstone of IKEA’s philosophy: deliver quality products at the lowest possible price by streamlining distribution.
“Why does a product that is so cheap to produce get so expensive so quickly once past the factory gate? Why are we so sluggish on the last stage to the customer when we're so rational on the production floor?”
— Ingvar Kamprad
Kamprad’s solution was radical for its time: bypass traditional retailers and sell directly to consumers through catalogs, exhibitions and mail orders. Kamprad mentions, “Mail order and furniture store in one. As far as I knew, that business idea had not been put into practice anywhere else. We were the first.” This approach not only slashed costs but also gave IKEA control over pricing and customer experience.
As such, we can quickly deduce Kamprad’s huge disdain for wasteful spending. As he once said, “Wasting resources is a mortal sin at IKEA. It is hardly an art to reach set targets if you do not have to count the cost. Any architect can design a desk that will cost five thousand kronor. But only the most highly skilled can design a good, functional desk that will cost one hundred kronor.”
"That is why we push cost awareness at all levels with almost manic frenzy. Every krona that can be saved is to be saved.”
— Ingvar Kamprad
Scale Economics Shared
“The simple deep reality for many of our firms is the virtuous spiral established when companies keep costs down, margins low and in doing so share their growing scale with their customers. In the long run this will be more important in determining the destination for our firms that the distractions of the day.”
— Nick Sleep
Nick Sleep, with his partner Qais Zakaria, ran the Nomad Investment Partnership from 2001 to 2014. During these thirteen years, he destroyed the index (20.8% vs index 6.5%). In his annual letters, Sleep believes that the best business model is what he coined as “Scale Economics Shared”. He mentions that "In the office we have a white board on which we have listed the (very few) investment models that work & we can understand. Costco is the best example we can find of one of them: scale efficiencies shared. Most companies pursue scale efficiencies, but few share them."
“Scale Economics Shared operations are quite different. As the firm grows in size, scale savings are given back to the customer in the form of lower prices. The customer then reciprocates by purchasing more goods., which provides greater scale for the retailer who passes on the new savings as well. Yippee. This is why firms such as Costco enjoy sales per foot of retailing space four times greater than run-of-the-mill supermarkets. ‘Scale economics shared’ incentivises customer reciprocation, and customer reciprocation is a super-factor in business performance.”
— Nick Sleep
Similarly, the A&P company was able to provide great prices to its customers due to the result of meticulously engineered systems and relentless attention to operational detail which, by consequence, reduced costs. As the company expanded from a handful of tea shops to thousands of grocery stores, it developed a formula for scalable success.
Walsh writes that “John Hartford's plan was simplicity itself. He would eliminate every unnecessary selling expense, including such accepted merchandising devices as credit selling, home deliveries, telephone orders, stamps, and premiums, and, indeed, he would dispense with all advertising. He would open for business in a small, unadorned, unnamed store in a secondary sidestreet location. The store would be furnished only with the most rudimentary shelving, a counter, a cash register, and $1,000 worth of inventory. The store would be operated by one person, the manager. The store would be open from nine A.M. to six P.M. but would be closed during the manager's lunch period.”
As such, the company’s approach to opening new stores was equally systematic. Walsh explains that “First, $3000 capital was allocated for each store—$1000 for fixtures and equipment, $1000 for inventory, and $1000 for supplies and operating capital. One cash register, a scale, and a small icebox were installed along with shelving pre-determined to be needed to display the 300 standard grocery items delivered on the standard opening order for each store. For each geographic area, a trained maintenance crew was organized which could prepare a location for opening within one week after signing of the lease.”
Furthermore, A&P were not shy to share these scale economies to its customers. As a matter of fact, this stripped-down model, focusing purely on the essentials of selling groceries at the lowest possible cost, was revolutionary at the time. As Wallace explained, "A 2 percent net on such sales does not seem impressive in today's economic atmosphere of a billion here, a billion there, but the more than 30 percent annual return on investment was exciting then and would be now. The 2 percent net on sales required no real estate investment, a minimal investment in fixtures, and much of the inventory was converted to cash sales before payment to the suppliers was due."
This reminds me of what the power of discounting we have learned from Sam Walton. Walton discovered that by lowering prices, even slightly, he could dramatically increase sales volume, resulting in greater overall profit. This wasn't about sacrificing margins; it was about understanding customer behavior and recognizing the allure of a good deal.
Here’s how he explains it, "Say I bought an item for 80 cents. I found that by pricing it at $1.00 I could sell three times more of it than by pricing it at $1.20. I might make only half the profit per item, but because I was selling three times as many, the overall profit was much greater."
This focus on low prices was a core element of Walmart's customer-centric philosophy. Walton believed that providing value to the customer was paramount, and that meant offering quality goods at the lowest possible price. He instilled this belief in his employees, emphasizing the importance of passing savings on to the customer whenever possible. This dedication to low prices and customer satisfaction became the driving force behind Walmart's growth. It resonated with customers, who flocked to the stores for the unbeatable deals and the guarantee of satisfaction. Walton mentions that "The idea was simple: when customers thought of Wal-Mart, they should think of low prices and satisfaction guaranteed."
"We exist to provide value to our customers, which means that in addition to quality and service, we have to save them money."
— Sam Walton
Empowering Employees
“If you want a successful business, your people must feel that you are working for them—not that they are working for you.”
— Sam Walton
A&P’s leadership understood that sustainable success depended on the loyalty and dedication of its workforce. The company’s culture was built on mutual respect and shared responsibility. This was especially prominent under the leadership of John Harford, the son of George Hartford. As a matter of fact, Walsh explains that “Never in that time did they deviate from the deep-seated principle that the company and employees shared equal responsibility toward each other, and shared a joint responsibility toward providing consumers more good food for less money than their competition. Dedicated to such principles, the company grew to become the largest retailer and largest privately owned company in the entire world.”
“The company’s responsibility to a dedicated employee is equal to that employee’s responsibility to the company.”
— John Hartford
As such, in order to back up this principle of theirs, A&P made sure to offer their employees wages above the industry average, health and life insurance and even pensions before such benefits were common. Walsh writes that “Under his direction A&P generally paid wages above the prevailing scale in the food industry. Before the advent of retail unions, A&P provided its employees with health and life insurance benefits. Starting in 1916, A&P provided pension benefits to retired long-term employees to insure they would be maintained in dignity in their retirement years.”
But more importantly, the company also believed in promoting from within, giving ordinary people the chance to raise among the ranks. Under John Hartford, A&P had a policy of promoting entirely from within the company, even to those employees who might not have been considered qualified for such positions on the sole basis of formal education alone.
In fact, A&P created a store manual in order to train employees how to run an A&P store successfully. This accessible guide, designed to fit in a shirt pocket, empowered managers with the knowledge to operate efficiently, emphasizing cleanliness, customer service, and adherence to policy. This investment in training and development built a capable, loyal team that executed A&P’s vision across thousands of stores. Walsh writes that “The simplest of store manuals was prepared in working men’s language it explained in most economical terms every single detail an average hardworking man had to know to run an A&P store successfully.”
“You don’t have to be brilliant; we teach ordinary people to do extraordinary things.”
— John Hartford
This reminds me of what we have learned from Les Schwab. At the heart of Les Schwab’s success in business is based on the belief in profit sharing as a mean to empower employees. In fact, Schwab firmly believed right from the beginning that when employees are treated as partners, they become more invested in their work. As such, Les Schwab first started by sharing 50 percent of the profits of each new store with its manager, and later on, they changed their profit sharing structure to share over 49.51% of their profits with employees working in the stores. The logic is simple; when workers see a direct link between their efforts and the company’s success, they are more likely to go above and beyond in their roles.
Les Schwab once said, "I never could understand why more business people don't share with their employees. What nicer thing can they do with their profits? You can't take it with you. Naturally you should look out for your family, but you can always come out better for your family if you look out for your employees first."
This approach not only fosters loyalty but it also creates a culture of accountability and motivation. By sharing profits with his employees Schwab cultivates an environment where employees feel valued and recognized for their contributions. This sense of ownership translates into higher productivity and morale, which ultimately benefits the entire organization. As he once said, “I encourage you to share profits with your employees. I encourage you in every way possible to ‘Build People.’ This is good for America, it is good for you, and it is good for your employees.”
“If you make people under you successful, what happens to you? Aren't you also then successful?”
— Les Schwab
Beyond the Book
Read "Learning from Nick Sleep" by Investment Masters Class
Read "The Power of Incentives: The Hidden Forces That Shape Behavior" by Farnam Street
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