Competition in the American Tobacco Industry 1911-1932: A Study of the Effects of the Partition of the American Tobacco Company by the United States Supreme Court 9780231880091

Table of contents :
Preface
Contents
List of Statistical Tables
I. The Partition of the American Tobacco Company
II. The Growth of the Tobacco Industry Since the Partition
III. Evidences of Competition in the Distribution of Business Among Manufacturers
IV. Competitive Influences Affecting the Scale of Production
V. Competitive Influences Affecting Integration
VI. Competition in the Purchase of Leaf Tobacco
VII. Evidences of Collusion in Leaf Purchases
VIII. Price Competition Among Manufacturers in the Sale of Tobacco Products
IX. Non-Price Competition Among Manufacturers in the Sale of Tobacco Products
X. Competition Among Distributors of Tobacco Products
XI. Effects of Competition on the Successor Company Earnings
XII. Financial Control of the Successor Companies
XIII. Conclusions
Appendix
Bibliography
Index

Citation preview

STUDIES IN HISTORY, ECONOMICS A N D PUBLIC LAW Edited by the FACULTY OF POLITICAL SCIENCE OF COLUMBIA UNIVERSITY

NUMBER 381

COMPETITION IN THE AMERICAN TOBACCO INDUSTRY 1911-1932 A STUDY O F T H E E F F E C T S O F T H E P A R T I T I O N O F T H E AMERICAN TOBACCO COMPANY BY T H E U N I T E D STATES S U P R E M E BY

R E A V I S COX

COURT

COMPETITION IN THE AMERICAN TOBACCO INDUSTRY 1911-1932 A STUDY OF THE EFFECTS OF THE PARTITION OF THE AMERICAN TOBACCO COMPANY BY THE UNITED STATES SUPREME COURT

BY

R E A V I S COX

AMS PRESS NEW Y O R K

COLUMBIA UNIVERSITY STUDIES IN THE SOCIAL SCIENCES 381

The Series was formerly known as Studies in History, Economics and Public Law.

Reprinted with the permission of Columbia University Press From the edition of 1933, New York First AMS E D I T I O N published 1968 Manufactured in the United States of America

Library of Congress Catalogue Card Number: 68-58562

AMS PRESS, INC. New York, N.Y. 10003

PREFACE A widespread revival of interest in the " trust problem " makes particularly appropriate at the present time an examination into the effects of the dissolution decrees of twenty years ago. Designed to restore competitive conditions to monopolized industries by judicial fiat, these decrees are unquestionably the most spectacular attempts thus far made to subject industrial monopolies to public control. That they have not been copied of late does not destroy either their interest or their importance. Now that enough time has elapsed to permit the accumulation of evidence concerning their effects, they are well worth a renewed analysis. Because of the detailed care exercised by the court in working out its provisions, the decree which divided the old American Tobacco Company into sixteen presumably independent and competing units is probably the most interesting of these decrees. The purpose of the present study is to look into its effects, both upon the individual companies and upon the industry. The author's analysis has been made under extraordinary difficulties as regards the collection of data. Despite the passage of more than two decades, the materials available are far from satisfactory. The companies and their officers have consistently followed a policy of extreme reticence. Only where there has been litigation or a change of management under circumstances which induced the new officers to make public all the " bad news " so that they might receive full credit for any subsequent improvement, have those in control of the successor companies showed any inclination 5

6

PREFACE

to reveal much about their operations either to the public or to their own stockholders. Their condensed annual reports reveal virtually nothing. E f f o r t s to obtain information by correspondence and interviews with officers of the various companies have been defeated by their refusal to answer inquiries. Only two companies went so far as to acknowledge the receipt of letters of inquiry. Only one was willing to grant the author an interview. This extreme reluctance to provide information may perhaps justly be considered to some extent itself a result of anti-trust legislation. The trade journals also give much less aid than might be hoped for, not merely because they ignore much of the subject matter most vital to such an inquiry, but also because the important information they do offer is buried in unindexed and poorly organized volumes f r o m which it can be exhumed only with great difficulty. It thus has become necessary to fall back upon public records of various sorts, and these are not as numerous as might be wished. The character of the data available has its most definite result in limiting the degree of precision which can be given to conclusions rather than in preventing generally valid conclusions. Only a public authority with direct access to company records and with adequate finances can make a completely satisfactory survey of this subject. On the basis of such information as is available to the outside observer, however, it is possible to draw general conclusions whose validity probably would not be much affected by a more authoritative investigation. The study was originally suggested by the late Professor Henry R. Seager and in its early stages had the benefit of his advice, aid and encouragement. In the later stages of the work the author has profited greatly f r o m the advice and criticism of Dr. Arthur R. Burns, of Columbia University, who has read both the manuscript and the proofs. T h a n k s

PREFACE

7

are due also to Professors R. S. Alexander, J . M. Clark, Carter Goodrich, O. S. Morgan and Carl S. Shoup for suggested improvements and aid in the collection of material. Mr. Paul M. Hahn, assistant to the president of the American Tobacco Company, must be recorded as the sole exception to the rule of silence among the successor companies. Members of the staff of the Tobacco Merchants' Association of the United States have courteously supplied information from their files at various times. Dr. W. H. S . Stevens, assistant chief economist of the Federal Trade Commission, and Mr. Henry Ward Beer, of the New Y o r k Bar, made available to the author certain court documents he could otherwise have obtained only with difficulty, if at all. Rachel Dunaway Cox has been of immeasurable aid at all stages of the study, particularly in the collection of material, the improvement of the manner of presentation and the reading of proofs. REAVIS NEW

YORK

NOVEMBER,

CITY, 1932.

Cox.

CONTENTS CHAPTER

I PAGE

T H E P A R T I T I O N OF THE A M E R I C A N T O B A C C O

COMPAN*

$ I. T h e problem facing the court in b r e a k i n g up the tobacco m o n o p o l y . $ 2. T h e solution embodied in the decree of partition. § 3 . Contemporary criticism of the decree. § 4 . T h e purpose of the present study CHAPTER

17

II

T H E G R O W T H OF THE T O B A C C O I N D U S T R Y S I N C E THE PARTITION

§ ι . E f f e c t s of the world w a r upon the A m e r i c a n tobacco industry. § 2. T h e g r o w t h of tobacco consumption since the partition and concentration of that g r o w t h upon cigarettes. § 3. T h e significance of the shift of consumer preference to c i g a r ettes. § 4. Mechanization of cigar manufacture. $ 5. E f f e c t s of m e c h a n i z a t i o n upon the manufacturers and upon labor. . . . CHAPTER

III

E V I D E N C E S O F C O M P E T I T I O N IN THE D I S T R I B U T I O N OF BUSINESS AMONG

MANUFACTURERS

§ I. T h e significance of c h a n g e s in the distribution of the tobacco business a m o n g manufacturers. $ 2. E f f o r t s of the tobacco manufacturers t o fill out their lines. R e c e n t concentration of effort on single brands. § 3 . C h a n g e s in the output of cigarettes by the " b i g f o u r " , the other successor c o m panies and independent manufacturers. $4. C h a n g e s in the output of s m o k i n g and c h e w i n g tobacco and little c i g a r s by the successor companies and independent manufacturers. § 5. C h a n g e s in the output of snuff by the successor companies and independent manufacturers. § 6. C h a n g e s in the output of large cigars by the successor companies and independent manufacturers. § 7. C h a n g e s in the output of foil and licorice by the successor companies and independent manufactur9

40

IO

CONTEXTS

ers. § 8. Summary. W i d e shifts in relative production by the various companies suggest the existence of competition among the successor companies. T h e independent producers have nevertheless lost ground. Both phenomena call for further explanation, which will be undertaken in subsequent chapters CHAPTER

60

IV

C O M P E T I T I V E I N F L U E N C E S A F F E C T I N G THE S C A L E OF PRODUCTION

§ I . Economic forces tending to concentrate production into fewer hands are of two sorts: ( 1 ) Those which favor the large producer as against the small. (2) Those which favor the integrated as against the nonintegrated producer. T h e first are considered in the present chapter. § 2. Influences affecting the size of individual tobacco factories. § 3 . Influences affecting the size of tobacco manufacturing enterprises. § 4. Conclusions C H A P T E R

V

COMPETITIVE INFLUENCES AFFECTING

INTEGRATION

§ ι . The decree of partition was to some extent an experiment in disintegration. § 2. Types of integration possible in theory. § 3· Types of integration adopted by manufacturers in practice. § 4. Combination into single plants of the manufacture of different products. § 5. Combination into single enterprises of the manufacture of different products. § 6 . Integration backward to assume control over raw materials, supplies and equipment. § 7. Integration forward to assume control over the marketing of tobacco products. § 8 . Conclusions C H A P T E R

VI

C O M P E T I T I O N I N T H E P U R C H A S E OF L E A F

§ I.

100

TOBACCO

T h e contrast between the fortunes of tobacco manufacturers and tobacco farmers a cause of controversy. § 2. T w o methods of seeking evidence to prove the existence of a monopoly. § 3 . Conditions a leaf-buying monopoly would be expected to produce probably not far different from those which would be produced by competition. § 4. Forces other than monopoly may be responsible for the plight of the farmers. § 5 . T h e

116

CONTENTS

II PAGE

production and consumption of leaf tobacco in the United States. § 6. Problems of the tobacco growers. § 7. Conclusions C H A P T E R

141

VII

E V I D E N C E S OF C O L L U S I O N IN L E A F

PURCHASES

§ I. Sources of information as to collusion in leaf purchases. § 2. Purchasing methods condemned by the Federal Trade Commission in its first report. § 3. Recommendations of the first report " urgently renewed " by the commission in its second. § 4. The rise and fall of the tobacco farmers' cooperative associations. § 5. The commission in its third report exonerated the successor companies of having wrecked the cooperatives by unified opposition. Criticism of its report. § 6. Further analysis of the commission's data is needed. $ 7. Limitations on competition where buyers or sellers are few. Duopoly. § 8. The significance of three common buying practices—holding off the market, buying under cover and use of common leaf-buying agencies—where buyers are few. § 9. Conclusions 161 CHAPTER

VIII

P R I C E C O M P E T I T I O N A M O N G M A N U F A C T U R E R S IN T H E S A L E OF T O B A C C O

PRODUCTS

§ ι. Price competition is of two sorts—price competition among manufacturers and price competition among distributors. The first will be considered in this chapter. § 2. Probable effects of a monopoly upon the prices of tobacco products. § 3. Probable effects of duopoly upon the prices of tobacco products. § 4. The course of tobacco-product prices since the partition. § 5. Trade-journal accounts of changes in prices since the partition. §6. The course of prices suggests the existence of something between free competition and absolute monopoly. § 7. The contrast shown by the American Tobacco Company's cigarette price policy in Porto Rico. § 8. Some degree of collusion a possibility. § 9. Secret discounts a modifying factor. § 10. " D e a l s " another modifying factor. Effects of the use of trademarks on price competition. § 11. A price record for cigars would be useful but cannot be obtained. § 12. Conclusions 187

12

CONTENTS CHAPTER

IX

N O N - P R I C E C O M P E T I T I O N A M O N G M A N U F A C T U R E R S IN THE SALE OF TOBACCO P R O D U C T S

$ I . In the absence of sufficient price competition, it is necessary to fall back upon non-price competition as the explanation of the shifts in the relative production of the tobacco manufacturers. { 2. Non-price competition defined and illustrated. T h e predominance of advertising. $ 3. Reasons for the predominance of advertising. $ 4. Company expenditures for advertising. § 5. Influences acting to determine the amount of advertising. §6. Non-price competition among snuff and cigar manufacturers. § 7. Conclusions . . . . 219 CHAPTER

X

COMPETITION AMONG DISTRIBUTORS OF TOBACCO

PRODUCTS

J I. T w o problems must be studied in looking at the marketing of tobacco products: the position of the United Cigar Stores Co. and the influences exerted by manufacturers on the price competition among distributors. § 2. The machinery through which tobacco products are distributed. $ 3. The part played by the United Cigar Stores Co. in tobacco products distribution since the partition. § 4 . Reasons for the failure of the United Cigar Stores Co. to dominate tobacco products distribution. § 5. Conclusions as to the United Cigar Stores Co. §6. Manufacturers' exclusive contracts with wholesalers. § 7. The narrowness of the distributor's margin. § 8 . Distributor organization to maintain resale prices. § 9 . Resale price policies of the manufacturers. § 10. Federal Trade Commission proceedings against resale price maintenance. $ 1 1 . Conclusions as to resale price maintenance. • • · 241 CHAPTER

XI

E F F E C T S OF C O M P E T I T I O N ON THE S U C C E S S O R

COMPANY

EARNINGS

§ I. Earnings a final measure of the extent to which competition has been restored by the partition. § 2. Earnings of the " big f o u r " since the partition. § 3 . Divergences in the earnings of the " big four " . § 4. Analyses of the earnings of the " big f o u r " by the Commissioner of Corporations and the Federal Trade Commission. § 5. Earnings of the smaller successor companies. §6. Conclusions 268

CONTENTS

13 PACE

C H A P T E R

XII

F I N A N C I A L C O N T R O L OF THE S U C C E S S O R

COMPANIES

J ι . The gradual diminution of interlocking stock interests. § 2. Influence of the individual defendants in the management of the successor companies. $ 3. Shifts in the control of individual companies. $ 4. T h e rise of management control to supplant ownership control. $ 5. Advantages and disadvantages of management control. § 6. Bonuses paid to company managements. $ 7. Employee stock subscription plans. 1 8 . Conclusions 293 C H A P T E R

XIII

CONCLUSIONS

§ I. S o m e degree of competition restored. $ 2. Non-price competition stronger than price competition. § 3. W h o has gained and who has lost from the emphasis on non-price competition. § 4. Because the number of manufacturers is small, all types of competition have been limited, although not so greatly as under a monopoly. § 5 . Partition of the " t r u s t " into more units probably would not have established a situation permanently different from that now prevailing. A governmentowned or government-supervised monopoly would offer some advantages. $ 6. Separation of ownership from control makes possible financial abuses

316

APPENDIX

325

BIBLIOGRAPHY

361

INDEX

367

LIST OF STATISTICAL TABLES PAGE

TABLE TABLE

TABLE

TABLE TABLE

TABLE TABLE

I.

Proportion of Country's Annual Output Produced by Tobacco Combination in Each Branch, 1900-1910. • • 2. Claim of the American Tobacco Company with R e spect to the Division of the Tobacco Business of the United States by Volume and Value 3. Distribution of Purchases of Different Types of Tobacco with Estimate of A v e r a g e Crop, as Claimed by the American Tobacco Company 4. Percentage of V o t i n g Stock Held by Individual D e fendants in the Fourteen Successor Companies . . . . 5. Production of Manufactured Tobacco, Snuff, Cigars and Cigarettes in the United States; Calender Y e a r s , 1910-1930 6. Cigars Withdrawn for Consumption in the United States; Fiscal Years B e g i n n i n g July 1, 1920-1931. . . 7. Proportion of Output of the Combination and Seven Successor Companies to Output of the Country, 1909-

TABLE 8.

TABLE 9. TABLE 10. TABLE I I . TABLE 12.

TABLE 13.

TABLE 14.

TABLE 15. TABLE 16.

1913 Percentages of the Tobacco Business of the Country Assigned to Successor Companies and to Independents on the Basis of Sales in 1910 and Percentages of the Business Done in 1912 and 1913 Output of Cigars and Cigarettes in Porto Rico, Fiscal Years, 1910-1930 >· Output of T w e l v e Cigar Companies in 1929 Licorice Used by Tobacco Manufacturers, Calender Years, 1910-1930 Plants Manufacturing Tobacco Products and Dealers in Leaf Tobacco in Business at Close of Year, 19131930 Plants Manufacturing Cigars Classified as to Output and Percentage of Total Production, Calendar Years, 1921 and 1930 Plants Manufacturing C h e w i n g and S m o k i n g Tobacco and Snuff Classified as to Output and Percentage of Total Production, Calendar Years, 1928-1930 Plants Manufacturing Tobacco Classified According to Products Manufactured, 1913-1930 Tobacco Unmanufactured: Acreage, Production, Value, Exports, and Quantities Used by Manufacturers in the United States, 1910-1931 IS

19

30

32 34

42 56

61

62 88 95 97

101

102

104 120

149

ι6

LIST

OF STATISTICAL

TABLES PACE

TABLE 17. TABLE 18. TABLE 19.

TABLE 20. TABLE 21.

TABLE 22. TABLE 23. TABLE 24. TABLE 25.

TABLE 26.

TABLE 27.

TABLE 28.

TABLE 29. TABLE 30. TABLE 31.

TABLE 32. TABLE 33. TABLE 34. TABLE 35.

Leaf Tobacco: Production, Disappearance, and Price of Important Types, 1912-1930 Leaf Tobacco Exports, by Types, 1923-1930 Sales of Leaf Tobacco Made by the Universal Leaf Tobacco Co. and Subsidiaries to the Successor Companies, 1918-1919 Number of Tobacco Associations Operating and Tobacco Handled, by years, 1922-1926 Leaf Tobacco Purchased from the Cooperative Marketing Associations by the Tobacco Manufacturing Companies, 1921-1924 Crops Index Numbers of Wholesale Prices, 1913-1930. United States Internal Revenue Taxes on Tobacco Products, 1909-1932 Prices of " Lucky S t r i k e " Cigarettes: 1916-1932 . Advertising Costs of the Combination in 1910 and the Successor Companies in 1913, by Types of Product, (Exclusive of Cigars) Expenditures by A l l Tobacco Manufacturers and by Principal Successor Companies for Tobacco Products and Accessories Advertising in a Selected Group of Magazines, 1913-1930 Percentage of Net Sales of Three Tobacco Wholesalers Represented by Gross Profit. Total Expenses and Operating Profit: 1924-1927 Tobacco Wholesalers: Percentage of Profit on Net Sales, Turnover and Rate of Return on Net Investment: 1924-1927. Investment and Earnings of Cigarette-Manufacturing Successor Companies: 1912-1930 . Gross Sales and Earnings of the American Tobacco Company: 1912-1923 Rates of Return on Average Investment as Reported by Successor Companies to their Stockholders and as Revised by the Federal Trade Commission: 1916-1920. Earnings Available for Dividends of Three Snuff Companies: 1912-1930 Earnings Available for Dividends of Licorice Successor Companies: 1912-1930 Earnings of Porto Rican-American Tobacco Company Available for Dividends: 1912-1930 Earnings of the United Cigar Stores Company Available for Dividends: 1912-1930

152 160

163 168

172 196 197 199

225

228

255 256 270 273

284 285 287 288 289

C H A P T E R

I

T H E P A R T I T I O N OF T H E A M E R I C A N T O B A C C O C O M P A N Y

§ 1.

W h e n in M a y , 1 9 1 1 , the Supreme C o u r t o f

the

U n i t e d States ruled the A m e r i c a n T o b a c c o Co. a monopoly in violation of the S h e r m a n A c t , it presented itself with the peculiarly difficult problem o f restoring l a w f u l conditions and punishing the guilty while avoiding i n j u r y to the innocent.

T h e method of dissolution used a short time before

in the Standard O i l Co. case, under which the parent company distributed to its shareholders the stocks of important subsidiaries held in its treasury, w o u l d have been unsatisfactory, because the A m e r i c a n T o b a c c o Co. itself

as an

operating company and several of its subsidiaries would have continued to be individually u n l a w f u l monopolies in separate and to a considerable extent non-competitive divisions o f the industry.

Restoration o f the exact situation prevailing prior

to the appearance of the " trust " manifestly w a s impossible. A simple injunction restraining the combination f r o m eng a g i n g in interstate commerce would have thrown responsibility for the correction of affairs upon the g u i l t y ; but it would also have inflicted irreparable i n j u r y upon innocent members of the tobacco industry as well as upon consumers of tobacco products.

Appointment of a receiver to prevent

continued violation of the law and to restore l a w f u l conditions by selling the property or by other means probably would have injured the public and certainly would have injured innocent stockholders whose property w a s thrown on the market.

T h e r e remained only the possibility of w o r k i n g

out in detail a plan for dissolving the combination and re17

l8

COMPETITION

IN THE

TOBACCO

INDUSTRY

creating out of its elements an acceptable situation. Associate Justice Harlan wanted the Supreme Court itself to devise such a plan; but his colleagues disagreed and in the end remanded the case to the Circuit Court for action in conformity with a few general and rather vague principles. Specifically, the Supreme Court held that requisite attention must be paid to three " dominant influences " : ( i ) The duty of giving complete and efficacious effect to the prohibitions of the statute; ( 2 ) the accomplishing of this result with as little injury as possible to the interest of the general public; and ( 3 ) a proper regard for the vast interests of private property which may have become vested in many persons as a result of the acquisition either by way of stock ownership or otherwise of interests in the stock or securities of the combination without guilty knowledge or intent in any way to become actors or participants in the wrongs which we find to have inspired and dominated the combination from the beginning.1 T h e situation thus presented to the Circuit Court for correction can be described in very few words. 2 Starting in 1890 as a consolidation of five manufacturers who among them controlled approximately nine-tenths of the country's 1 2

United States v. The American Tobacco Co., et al., 221 U. S., 185.

N o attempt will be made here to review in detail the history of the tobacco industry prior to 1911, as this is well-known and readily available elsewhere. Perhaps the most satisfactory brief account of the rise of the American Tobacco Co. is in the Supreme Court decision already cited, 221 U . S., 106 et seq. More detailed histories will be found in the records of the suit leading up to that decision, including the decision (164 Fed. Rep., 700 et seq.) and decree (164 Fed. Rep., 1024 et seq.) of the Circuit Court for the Southern District of New York and in tfie Report of the Commissioner of Corporations on the Tobacco Industry published in three volumes, 1909-1915. Some attention is given to the record of the " tobacco trust " in most standard works on trust problems, among which may be mentioned Eliot Jones, The Trust Problem in the United States ( N e w York, 1921), eh. vii and pp. 413-419 and 452-474. and Seager, Henry R., and Gu'.ick, Charles Α., Jr., Trust and Corporation Problems ( N e w York, 1929), chs. χ and xi.

PARTITION

19

output of cigarettes, then one o f the minor branches of the industry, and less than one-tenth of the country's output of smoking tobacco, the American Tobacco Co. had by 1 9 1 0 acquired a monopolistic control of every branch of the industry except cigars. 3 T h e extent of its control can be seen by referring to Table I. It had also acquired varying deTABLE 1 PROPORTION OF COUNTRY'S ANNUAL OUTPUT PRODUCED BY TOBACCO COMBINATION IN EACH BRANCH, 1900-1910 11

Year

1900

19°'

1902 1903 1904 '905 1906 1907 1908 1909 191° a

Plug

Smoking

Fine cut

Snuff

Cigarettes

Little cigars

rCigars

Per cent

Per cent

Per cent

Per cent

Per cent

Per cent

Per cent

62,0 67.7 71.2 76.9 78.2 80.7 81.8 80.5 81.9 83-3 84.9

59.2 57.8 66.3 67.1 69.2 68.7 70.6 72.4 73-6 75-3 76.2

5°· 5 48.1 73-7 77.6 80.4 81.7 80.9 81.4 79.2 80.1 79-7

78.0 80.2 85-9 89.4 90.6 93-8 96.0 95-7 95-7 96.1 96.5

92.7 89.9 84.6 839 87.7

60.6 73-3 71.8 67.9 79.2 78.3 81.3 90.8 88.7 89.0 91.4

4.8 10.9 143 16.4 13-9 '3-3 14.7 14.5 13.0 I3·1 14.4

Report of the Commissioner

of Corporations

847 82. ς 8I.7 8i.8 83.6 86.1

on the Tobacco

Industry,

part iii, 1915, pp. 49, 84, 127, 138, 153, 181 and 192.

grees of control over licorice paste, which finds its chief use in chewing tobacco, tin foil, cotton bags used for the brands of smoking tobacco most popular at that time, wooden boxes used for shipping plug tobacco, pasteboard cartons, tin boxes and other containers. It had entered into an agreement with the Imperial Tobacco Co., the British combination formed 3 A t that time still a hand industry requiring small capital outlay and offering little advantage in costs to large-scale operation, c i g a r manufacturing did not lend itself to monopolization.

20

COMPETITION

IN THE TOBACCO

INDUSTRY

some years before, under which the British market was left to the Imperial Tobacco Co. and the American market to the American Tobacco Co., while the export business of both companies was passed to a new corporation, the BritishAmerican Tobacco Co., in which the American Tobacco Co. owned a two-thirds and the Imperial Tobacco Co. a onethird interest. A n d it had assumed a powerful role in the retail distribution of tobacco products by acquiring control of the only very large cigar-store chain in existence. T h e degree to which it controlled the industry was apparent not only in its production records and relations with other companies, but also in the methods by which it was able to increase its profits. T h e Commissioner of Corporations reported that between 1 9 0 1 and 1 9 1 o, when the combination's power was at its peak, its rates of profit varied directly with the degree of monopoly control it attained; that f o r most products its profits were more than double those of competitors; that its selling costs and specifically its advertising expenditures were reduced materially when it achieved monopoly control; that its prices to jobbers and consumers were virtually unchanged when internal revenue taxes on tobacco products were lowered in 1 9 0 1 and 1902, the combination retaining the entire benefit ; that when the taxes were again raised in 1 9 1 0 , it was able to increase prices f o r some of its products by the full amount of the tax, although on some other products it was compelled to absorb the increase; that while prices to the consumer on its principal brands were virtually unchanged until 1 9 1 0 , it increased prices to jobbers substantially, thus reducing jobbers' margins; and that its most profitable years were between 1 9 0 3 and 1908 when it benefited from a combination of low taxes, moderate leaf costs, decreased advertising expenditures and highly monopolistic control. Despite its monopoly position in manufacturing, leaf tobacco prices advanced sub-

PARTITION

21

stantially during the period under survey, indicating that forces more powerful than the " trust " were at work in its raw materials market. 4 The means used by the combination to achieve its power were condemned unsparingly by the Supreme Court, which found its history demonstrative of the existence from the beginning of a purpose to acquire dominion and control of the tobacco trade, not by the mere exertion of the ordinary right to contract and to trade, but by the methods devised in order to monopolize the trade by driving competitors out of business.8 § 2. Given the problem of unscrambling the " trust," but no precedents or specific rules to guide its action, the Circuit Court fell back upon the expedient of private conferences attended by members of the court, representatives of the combination and the attorney general from which emerged in due course a tentative plan of partition. This in turn came before the Court in public hearings, and, after some modifications, was issued on November 16, 1911, as a formal decree." The central purposes of the decree were, first, to leave the American Tobacco Co. and its subsidiaries without a monopoly control of any branch of the industry and, second, to destroy the close control over the corporation and its subsidiaries held by a small group of dominant stockholders. T o accomplish the first object, sixteen presumably independent corporations were set up, some of them corpora* Report of the Commissioner pt. iii, pp. 2-9.

of Corporations

on the Tobacco

Industry,

» 2 2 1 U. S., 1 S 1 - 1 8 2 . β

it)i Fed. Rep. 3 7 1 - 4 3 1 . T h e most convenient sources f o r the various documents describing the dissolution and its probable effects as seen by commentators at the time are the Hearings before the Committee on Interstate Commerce on the Control of Corporations, Persons and Firms Engaged in Interstate Commerce, United States Senate, Ó2d Cong., 2d Sess., 1 9 1 1 - 1 9 1 2 , and William S. Stevens, Industrial Combinations and Trusts ( N e w Y o r k , 1 9 1 3 ) , pp. 440-461 and 472-516.

22

COMPETITION

IS THE TOBACCO

ISDL'STRY

tions already in existence but now made independent, others, new corporations formed for the purpose.' T o the new corporations, the American Tobacco Co. or its subsidiaries now set free were required to convey specified properties, receiving in return securities which they distributed to their stockholders. T o accomplish the second object, full voting power was given to the preferred stock of the American Tobacco Co. and most of the successor companies. H o w these various measures were put into effect will be made clearer by a more detailed summary of the decree. T h e three branches over which the combination had exerted monopolistic control through the medium of subsidiaries were snuff, tin foil and licorice. In each instance the court decreed as a corrective that the business be divided between at least two independent companies. T h e combination's foil unit, the Conley Foil Co., was required to cancel the bonds of its wholly-owned subsidiary, the Johnston Tin Foil & Metal Co., and to distribute the stock of the subsidiary among its own stockholders. In the licorice paste industry, the combination's subsidiary, the MacAndrews & Forbes Co., was required to form a new corporation, the J. S. Young Co., and to transfer to it one of its two manufacturing plants, receiving in return all of the new company's voting common stock. This stock it was required to dis7

The statement ordinarily made that the combination's business was divided among fourteen corporations is based on the fact that there were fourteen designated corporations, including the American Tobacco Co. itself. As we shall see, however, the Sipecial provisions made for the American Stogie Co. permitted either withdrawal from business or reorganization into at least two different ownerships. In fact, the business was reorganized with division of ownership between the UnionAmerican Cigar Co., American Stogie's principal subsidiary, and the Hernscheim Tobacco Co., a new corporation. W'hile reference will be made subsequently to " the fourteen companies ", it must be understood that this is done only because early discussion of the decree took place before the two additional companies had been decided upon.

PARTITION

23

tribute among its stockholders. Non-voting preferred shares of the J . S. Young Co. were to be offered in exchange for MacAndrews & Forbes preferred, the latter to retire all shares received under the offer. In the snuff industry, the combination's subsidiary, the American Snuff Co., was required to convey specified properties to two new corporations, the George W . Helme Co. and the Weyman-Bruton Co., receiving in return $4,000,000 common and $4,000,000 preferred stock from each company, which it was ordered to distribute according to the method prescribed for the MacAndrews & Forbes Co. Under each of these transactions, the American Tobacco Co., as the principal stockholder of the three subsidiaries would receive controlling shares in the new companies. T o separate control, it was required in turn to distribute among its own shareholders its holdings both of the new corporations and of the original subsidiaries. In the cigar industry, as we have seen, the combination did not hold a monopolistic position. For that reason the American Tobacco Co. was permitted to retain control of the American Cigar Co., but only after the cigar unit had divested itself of three properties. One of these was all of the issued stock of the Federal Cigar Co., which was to be sold to the American Tobacco Co., that corporation in turn transferring it to the P. Lorillard Co., another newly formed corporation. Another was approximately one-third of the stock of the Porto-Rican American Tobacco Co., manufacturer of cigars and cigarettes in Porto Rico, which was also to be sold to the American Tobacco Co. Since the latter owned another third of the Porto Rican-American stock directly, it would now hold a two-thirds interest, which it was required to distribute to its own stockholders. The third American Cigar Co. property affected by the decree was the American Stogie Co., whose only asset was the Union-American Cigar Co., manufacturer of cheap cigars.

24

COMPETITION

IN THE TOBACCO

INDUSTRY

Owing to the fact that the American Stogie Co. was hopelessly in arrears on its preferred dividends, so that dissolution or reorganization was imminent, the decree ordered the company to dissolve and either convert the assets into cash or reorganize, provided that in either event the business be separated into at least two ownerships. Cash received in the dissolution might be retained in the American Cigar Co. treasury; but securities received must be distributed to its shareholders, the American Tobacco Co. in turn distributing its portion. In the fields which the combination dominated directly as an operating company, i. e., cigarettes, smoking and chewing tobacco and little cigars, mere splitting off of subsidiaries would have been ineffective. A start was made, it is true, by ordering the American Tobacco Co. to distribute to its own stockholders the controlling interest it held in the R . J . Reynolds Tobacco Co., a company important at that time only in the southern market for chewing and smoking tobacco. Really to restore competition, however, it was necessary to apply to the parent company itself the method already applied to the important subsidiaries. T w o new companies, the P. Lorillard Co. and the Liggett and Myers Tobacco Co., were ordered incorporated. T o the P. Lorillard Co. American Tobacco was to convey eight branches and subsidiaries manufacturing cigarettes, smoking and chewing tobacco and little and large cigars, included in the assets thus conveyed being the stock in the Federal Cigar Co. mentioned above. T o the Liggett and Myers Tobacco Co. were to be conveyed twelve branches and subsidiaries manufacturing cigarettes, little cigars and smoking and chewing tobacco. In return for these properties, the American Tobacco Co. was to receive practically the entire capitalization of the two new companies. These corporations were much larger than those resulting from the split-up o f the

PARTITION

25

subsidiaries, and their capitalization was much more complicated, so that the ultimate distribution of securities differed in some details from that provided for the securities o f the other new corporations. T h e principle was the same, however, the American Tobacco Co. being required to divest itself of the securities received in the process by selling or distributing them to holders of its own securities. T h e other fields in which the combination held important, if not monopolistic interests, were foreign trade in tobacco products and retail distribution of tobacco products. T o break down its control o f foreign trade, the company was required to distribute to its shareholders all its holdings of British-American Tobacco Co. ordinary shares, to sell or distribute to its own stockholders all of its holdings of nonvoting preference shares of the British-American Tobacco Co. and ordinary shares of the Imperial Tobacco Co. and to abrogate the covenants under which the world tobacco trade of the United States and Great Britain had been divided among the three companies. T o break down its control over retail distribution, the company was ordered to distribute among its stockholders its holdings of Corporation of United Cigar Stores stock. T h e court also ordered that the preferred stock of the American Tobacco Co. be given full voting power, thus weakening the control over the company held by a small group of common stock owners, that all covenants under which competitors absorbed by the company had agreed not to reengage in the tobacco business be abrogated and that the Amsterdam Supply Co., purchasing agent for the American Tobacco Co. and its subsidiaries be dissolved. Through the operations of this plan the assets of the American Tobacco Co. were divided among sixteen corporations, no one of which had an ownership interest in any of the others. Snuff, licorice, foil, general tobacco manufacturing and tobacco retailing were segregated from each

26

COMPETITION

IN THE

TOBACCO

INDUSTRY

other. In each field where the " trust " had held a monopoly, at least two companies were set up. The effects on the holders of American Tobacco Co. securities were as follows : 8 Common shareholders received as dividends the following fractions of shares of the eleven successor companies for each hundred-dollar-par share held: 75,908/401,824 share of American Snuff common; 23,764/401,824 share of American Snuff preferred; 27,602/401,824 share of George W. Helme common; 27,602/401,824 share of Weyman-Bruton common; 21,129/401,824 share of MacAndrews & Forbes common; 7,043/401,824 share of J . S. Young common; 4,950/401,824 share of Conley Foil stock; 1,800/401,824 share of Johnston Tin Foil stock, 50,000/401,824 share of R. J . Reynolds stock ; 60,000/401,824 share of Corporation of United Cigar Stores stock; 13,236/401,824 share of Porto Rican-American stock; and five times 270,892/401,824 ordinary shares of British-American. Subsequently, in 1914, the common stockholders received in addition 360,729/401,824 share of Imperial Tobacco's restricted Β ordinary stock for each share of American Tobacco common held, a provision of Imperial Tobacco's articles of association concerning transfers of shares having prevented their sale at a fair price. The common shareholders also received the right to subscribe for each share held to 214,964/401,824 share of Liggett and Myers common and 151,556/401,824 share of Lorillard common at par. Preferred shareholders were given the right to exchange each share for $66.66% par value of new American Tobacco voting preferred, $19.55 of Liggett and Myers preferred and $13.y8V3 of Lorillard preferred. 8 The American Tobacco Company, Circular to Security Holders, Dec. 9, 1911, summarized in tabular form in Poors Manual of Industrials, 1913, pp. 453-454; Resolution of the Board of Directors, March 1 1 , 1914; and letter from J . M. W. Hicks, treasurer of the corporation, to stockholders, March 11, 1914.

PARTITION

27

Holders of American Tobacco bonds were offered for each $1,000 face value the following plus accrued interest: A m e r i c a n Tobacco sixes, $600 in cash, $293.25 in Liggett and M y e r s sevens and $206.75 Lorillard sevens; A m e r ican T o b a c c o Co. fours, $480 in cash, $293.25 in L i g g e t t and M y e r s fives and $206.75 Lorillard fives; Consolidated T o b a c c o C o . fours, $480 in cash, $293.25 in L i g g e t t and M y e r s fives, and $206.75 ' n Lorillard fives. It w a s evident that this plan, while it satisfied its makers as restoring competition, did not afford any assurance against a revival of the monopoly. A s a remedy for this defect, the court issued a number o f injunctions, some temporary and others permanent. T h e permanent injunctions forbade: ( ι ) Conveyance of the properties of any of the fourteen designated successor companies to any other one of the group or centralization of control through voting trustees or any similar device. ( 2 ) E x p r e s s or implied agreements or arrangements relative to the management or control of the fourteen corporations, prices, terms of purchase or sale, transportation or manufacture of tobacco and allied products and apportionment of business. ( 3 ) Joint clerical forces or officers for any of the fourteen corporations. ( 4 ) C o m m o n ownership by any t w o of the fourteen corporations of stock in a third corporation, exceptions permitted being the joint ownership o f the Porto Rican Leaf Tobacco Co. by the American C i g a r Co. and the Porto Rican-American T o b a c c o Co. and of the National Snuff Co. by the W e y m a n - B r u t o n Co. and the British-American Tobacco Co. ( 5 ) T h e doing of business by any of the fourteen corporations directly or indirectly under any name other than its own or that of a subsidiary, provided that in the instance

28

COMPETITION

IN

THE

TOBACCO

INDUSTRY

of a subsidiary the controlling corporation must indicate the fact of control on the products of the subsidiary. ( 6 ) Refusal by any of the fourteen corporations to sell to any jobber any brand of tobacco product unless he purchased some other brand, excepting on so-called " combination orders " where some product was offered at a reduced price if the jobber or dealer purchased a given quantity of some other product. ( 7 ) Employment of a common agent for the purchase of leaf tobacco in the United States by the British-American Tobacco Co. and the Imperial Tobacco Co., which were also restrained from acting as agent for each other and from employing an agent in common with any of the other successor companies. For a period of five years the court forbade the successor companies to have any officer or director in common, to retain or employ any common agent for the purchase of tobacco leaf or other raw material in the United States or for the sale in the United States of tobacco or other products, directly or indirectly to acquire any stock in any other of the corporations, or to purchase or acquire any of the factories, plants, brands, or business of any other of said corporations or make loans or otherwise extend financial aid to any other of the corporations." For a period of three years, the court restrained each of the twenty-nine individual defendants named in the suit from acquiring or owning any stock or any interest in any stock in any one of the fourteen corporations, except British-American Tobacco Co., in excess of the 9 S e a g e r and Gulick, o/>. cit., p. 177, o f f e r the f o l l o w i n g comment on the last injunction : " T h e distinction, if any, between this limited prohibition of acquisition of factories, business, etc., and the permanent injunction noted above against ' conveyance ' of such assets seems to lie in the fact that the limited prohibition w a s against the corporations, the permanent against individuals. Cf. Decrees and Judgments in Federal Anti-Trust Cases: July 2, i8ço-January 1, IÇI8, pp. 187 and 189."

PARTITION

29

amount to which he was entitled under the provisions o f the plan. T h i s injunction was modified, however, by a proviso that any o f these defendants might acquire f r o m any other o f the defendants, or in case o f death from their estates, any stock such other defendants might hold in any of the corporations. § 3 . T h e partition plan thus worked out promptly stirred up a storm o f controversy. Attacked vigorously by spokesmen for independent tobacco manufacturers and distributors and for tobacco growers, it was defended with equal vigor by spokesmen for the American Tobacco Co. and Department of Justice. It would be possible to quote from many sources, since the debate ran on for two years or more ; but all the important arguments were brought out in the public hearings held by the Circuit Court prior to its issuance o f the decree. T h e y will serve well enough as starting points for a survey o f the effects o f the partition in the light o f twenty years' experience. Three important virtues were claimed for the plan by the American Tobacco Co. in its petition to the court asking approval. 10 F i r s t , it was maintained that the business would be divided among fourteen independent companies, no one o f which would have control o f any branch of the industry. Second, it was maintained that no one company would have a preponderant influence in the purchase of any type o f leaf tobacco. Third, it was maintained that control o f the industry would be effectively taken out o f the hands o f any small group of individuals. In defense o f the first proposition, the company offered the statistics compiled in Table 2. Exactly equal division o f the business was impossible because the combination had concentrated its efforts on a few leading brands. T h i s also was responsible for the fact that in some instances the percentages given one company exceeded one10

191 Fed. Rep., 397-417.

30

COMPETITION

IN THE

TOBACCO

INDUSTRY TABLE 2

C L A I M OF T H E A M E R I C A N T O B A C C O C O M P A N Y W I T H R E S P E C T TO T H E

Company

American Tobacco Co Liggett & Myers Tob. C o . . . P. Lorillard Co R. J. Reynolds Tobacco Co. ' A m e r i c a n Cigar C o . . 0 American Stogie C o . American Snuff C o . . . George W. Helme Co. Weyman-Bruton C o . . Independents a

Compiled

from

191

DIVISION

Cigarettes

Smoking Tobacco

Plug Tobacco

Percentage

Percentage

Percentage

Volutne

Value

Volume

Value

Volume

Value

37 1 1 27.82 15.27

33-15 21.03 26.02

33-O8 2005 22.82 2.66

40.53 '6-47 18.88 2.73

25-32 33-83 3.73 18.07

22-98 3784 4.64 15.49

19.80

19.80

21.39 J 21.39 ¡ '9·°5

Federal

Reporter, 411.

Volume

Ι 9·°5

measured

in

thousands for cigarettes, cigars and little cigars. b

Control retained by American Tobacco Co.

c

T o be dissolved ; assets and business to be divided between at least

third of the business of the country, the general principle apparently being to hold a company's proportion in any branch below that level. W h e r e a single brand accounted for more than a third of the country's output of a product, the company receiving that brand would occupy a correspondingly dominant position. In support of the second proposition, the figures in Table 3 were offered, showing probable purchases of leaf tobacco of the various types by the four m a j o r successor companies in this country and the British-American Tobacco Co. These figures were designed to allay the fears of tobacco growers ; but it may be noted here that they do not include purchases by the snuff companies or the Imperial Tobacco Co. and that it is not clear

PARTITION

OF T H E TOBACCO B U S I N E S S OF T H E U N I T E D S T A T E S BY V O L U M E A N D V A L U E «

Fine Cut Tobacco

Cigars

Percentage

Percentage

Value

Volume

.

9.94 41.61 27.80

13-52 36.26 29-57

Volume

Snuff

Value

5 72

2.88

6.06

8.90 1.58

••58

Percentage

Volume

pounds

two

20.65

for

smoking

8664

86.64

tobacco, p l u g

Volume

fine

cut

Value

'5-43 43.78 33 84

13-41 38.69 40.95

6.96

6.95

35-55 28.95 27.68 7.82

30.88 29.25 7.82

tobacco,

Percentage

Value

32.05

20.65

Little Cigars

tobacco

and

snuff;

in

ownerships.

whether they include purchases by the American Cigar Co., the American Stogie Co. and the Federal Cigar Co. A s to the effects of giving voting power to the preferred stock, which were offered in defense of the third proposition, the clearest picture is given in the subsequent report of the Commissioner of Corporations. Since the preferred and common stockholders were largely different in personnel, the conferring of voting power modified the control previously exercised by the common. In the parent company the effect of this change was to give the preferred stockholders technical control. The 29 individual defendants, prior to the dissolution, owned about 56 per cent of the common (voting) stock of the American

COMPETITION

IN THE

TOBACCO

INDUSTRY

Tobacco Co., which gave them control of practically the whole combination. In the reorganization their proportion of the voting stock (common and preferred) in the fourteen companies was reduced on an average to 35 per cent. 11 A d m i t t i n g that the surface appearance of the dissolution plan was good, opponents argued that careful analysis brought to light a number of serious weaknesses. Louis D . Brandeis, now an associate justice of the Supreme Court, and F e l i x H . L e v y , as attorneys for a group of independent interests in the industry, grouped their objections into two TABLE

3

DISTRIBUTION OF PURCHASES OF DIFFERENT TYPES OF TOBACCO WITH ESTIMATE OF AVERAGE CROP, AS CLAIMED BY THE AMERICAN TOBACCO COMPANY»

Burley

Virginia and North Carolina

Seed Leaf

Turkish

Dark Western

Pounds

Pounds

Pounds

Pounds

Pounds

51,295,870 27-755-4· Ι 2,556,007 25,000,000 40,000,000

6,112,099 5,676,180 I9,993.726

American Tobacco Co. · · . 41,969,957 Liggett & Myers Tob. C o . 69,163,946 P. Lorillard Co 24,074,643 K . J. Reynolds Tob. C o . . . 5,000,000 1 British-American Tob. Co. ·

2,988,898 558,611 3.974.386

19.433,365 3,196,866 1,446,213

!

140,208,546 146,000,000 31,782,005 7 . 5 2 I . 8 9 5 24,076444 1 Total Average C r o p . . . . 200,000,000 240,000,000 180,000,000 90,000,000 200,000,000 Total"

a

191 Fed. Rep., 414-415.

b

British-American also assigned 10,000,000 pounds other than V i r g i n i a

and N o r t h Carolina but not classified as to type. c

E x c l u d i n g British-American purchases of leaf other than V i r g i n i a and

N o r t h Carolina. 11

Report

on the Tobacco

Industry,

pt. iii, pp. 212-213.

PARTITION

33

general classes, " fundamental defects " and " other important defects '\ 1 2 The fundamental defects were five in number : ( 1 ) Common ownership. Messrs. Brandeis and Levy argued that " no plan can be effective to restore competition which does not include as an essential condition a provision that the separate corporations or segments which are to carry forward the business of the trust shall at the outset and for a limited period thereafter, be owned by absolutely distinct groups of individuals." Mr. Levy cited the figures in Table 4 as proof that the twenty-nine individual defendants would retain working control of the successor companies. The court overruled this objection on the ground that common ownership had already been approved by the Supreme Court in the Standard Oil case and that as a court of law it was concerned only with removing the individual defendants from technical legal control. ( 2 ) Dominating concerns. A s Table 2 shows, the smallest successor company in each branch was virtually equal to, if not actually much larger than, all the independents combined. The dominance was further enhanced, the attorneys argued, because the method of distributing the business by brands and plants which specialized in similar classes of brands tended to leave each company dominant in one division or market within each branch. This charge was later amplified in a statement filed by the independents before the Senate Committee on Interstate Commerce,1® where it was maintained, for example, that the American Tobacco Co. was given dominance in the high and low grade Turkish cigarettes, the Lorillard Company dominance in middle grade Turkish cigarettes and the Liggett and Myers Co. in the do12

Stevens, op. cit., pp. 485-498.

13

Stevens, op. cit., pp. 511-516.

COMPETITION

IN THE

TOBACCO

INDUSTRY

mestic or so-called "Virginia " cigarettes and in the " blended " cigarettes manufactured from both domestic and Turkish tobacco. The dominance was still further intensified by the fact that particular classes of cigarettes were favored by consumers in particular territories. A similar situation existed, it was maintained, in smoking tobacco, plug tobacco and little cigars, and this would be reflected in leaf buying in such a manner as to vitiate the apparent fairness of Table 3, the distinction between different types of the same product depending chiefly upon the characteristics of the leaf used. Thus, the Liggett and Myers Co. would dominate the market for medium red burley leaf, the American Tobacco Co. the market for common red and fine white burley, and the Lorillard Company the market for burley trashes. T o correct this defect the independents suggested that the cigarette business be divided among at least seven companies, TABLE 4 P E R C E N T A G E OP V O T I N G S T O C K H E L O BY INDIVIDUAL I N T H E F O U R T E E N SUCCESSOR C O M P A N I E S

DEFENDANTS *

Per cent American Tobacco Co Liggett & Myers Tobacco Co P. Lorillard Co American SnufT Co George W. Helme Co Weyman-Bruton Co Conley Foil Co Johnston Tin Foil & Metal Co MacAndrews & Forbes Co J. S. Young Co R. J. Reynolds Tobacco Co United Cigar Stores Co British-American Tobacco Co Porto-Rican-American Tobacco Co

35·'6 40.76 40.76 38-65 28.49 28.49 33-88 33.73 39-77 43-87 37.53 37.65 34-46 45-31

• 191 Fed. Rep., 415-417. The variation in the holdings of these defendants in the different companies is a result chiefly of variation in the holdings of the American Tobacco Co. in its subsidiaries.

PARTITION

35

instead o f three ; the smoking tobacco business among twelve, instead of f o u r ; the plug tobacco business among twelve, instead of f o u r ; little cigars among seven, instead of three; and snuff among six, instead of three.

T h e partition of the

licorice " trust " was condemned as ineffective, since there was only one independent and it had only 10 per cent of the business, while the M a c A n d r e w s & Forbes Co. would be l e f t with 60 per cent of the business and the J. S. Y o u n g Co. with about 30 per cent.

T h e independents also urged that

the tin-foil business be divided into at least five parts instead o f two, the effect of the decree being to leave the Conley Foil Co. dominant in the industry.

In opposition to this

argument against dominating concerns, attorneys for the corporation argued that the decree was aimed at restoring only " reasonably competitive conditions " while protecting innocent investors and that in any event it was futile to expect to return the industry to its original

conditions."

T h e court ruled against the independents on the ground that from the purely legal point of view there were no dominating concerns, so that the conditions as rearranged would be " not repugnant to the l a w . " (3)

Completely

equipped

concerns.

No

independent

company, the attorneys argued, was " completely equipped for the conduct of a large tobacco business " , as were the three m a j o r units formed under the plan, nor had there been any " completely equipped " companies, each operating in all the main branches of the industry, prior to the illegal operations of the " trust ".

Fair competition between the three

companies and independent manufacturers under the circumstances was impossible.

T h e court declined to give much

weight to this objection: Manifestly, the minuter the fragments into which the old 14

United States

Tobacco

Journal,

Nov. u , 1911, pp. 3 et seq.

COMPETITION

IN THE

TOBACCO

INDUSTRY

combination is split, and the more they are prohibited from conducting business as other companies are free to conduct it, the less will be their ability to compete with such other companies. This whole line of argument deals with the economics of the tobacco business. No doubt the novel problem presented to this court is connected with questions of economics as well as with questions of law. But this is a court of law, not a commerce commission, and the legal side of the proposition would seem to be the controlling one. 15 ( 4 ) Restraints on unfair competition. M a n y of the objections raised under this heading were overcome by adding to the decree the injunctions already noted. Some of the injunctions requested were denied, however, on the ground that the acts sought to be prohibited were common in the trade and obnoxious to no statute, while a request that every interested party should in the event of violation of the injunction be entitled to apply to the court for relief was denied for fear that the court would be overwhelmed with frivolous applications. ( 5 ) United Cigar Stores Company. Attorneys for the independents argued that real competition could not be restored without dividing the United Cigar Stores, which they held to be " so potent in the tobacco business as to be a menace alike to independent manufacturers and to independent retailers." 1 8 The court denied this relief, holding that it had not been requested by the attorney general. Mr. Wickersham had, however, urged the court to require the 15

191 Fed. Rep., 376. Stevens, op. cit., p. 496. In order to avoid confusion over corporate titles, this organization is called the United Cigar Stores Co. throughout this study, except in § 2 supra. This was the title of the operating company at the time of the partition. The holding company in existence at that time, the Corporation of United Cigar Stores, was replaced shortly thereafter by a new one, the United Cigar Stores Co. of America. Cf. appendix. 1β

PARTITION

37

individual defendants to dispose of their holdings of U n i t e d C i g a r common, which they would receive as stockholders o f A m e r i c a n Tobacco. E v e n this request the court denied, holding such an order tantamount to confiscation. T h e " other important defects " advanced by the independents were three in n u m b e r . " T h e first was that the British-American T o b a c c o Co. retained a virtual monopoly in the purchase and manufacture 18 for export of certain kinds of tobacco leaf and the manufacture of cigarettes f o r export. Nothing was done by the court to correct this. T h e second was the lack of a specific prohibition against the British companies' j o i n i n g with each other or with any o f the segments of the American Tobacco Co. for the purchase of leaf tobacco. This, as we have seen, was remedied by an injunction. T h e third was the need that the American C i g a r Co. be separated f r o m the American Tobacco Co. and divided into at least four ownerships. This also was denied. T h e dissatisfaction of the independents with the dissolution decree led them to try to carry an appeal ; but they could find no w a y to do so successfully. T h e N e w Y o r k L e a f Board of Trade appealed to the Supreme Court for a review of the order ; but its plea was denied 1β on the ground that the petitioner was not a party to the suit. The two parties to the suit, the attorney general and the American Tobacco Co., being satisfied with the outcome, no review was possible. Attempts were made in Congress without success to pass bills requiring the attorney general to appeal and to bring criminal prosecutions against the individual defendants. These efforts served to fan the flames of controversy f o r a 17

Stevens, op. cit., pp. 496-498.

" Manufacture " of tobacco leaf means simply the process of redrying green leaf as sold by farmers (which is perishable), so that it can be stored indefinitely. 18

1 · December 11, 1911.

COMPETITION

IN

THE

TOBACCO

INDUSTRY

time; but in the end interest shifted, as the independents grew accustomed to the new situation and the tobacco growers found a hitherto neglected " oppressor " in the foreign governmental tobacco monopolies and their methods of buying American leaf tobacco. 20 One or two suits were filed by individuals who hoped to obtain triple damages under the Sherman Law, the most important, in view of its effects, being that of R. Locker & Co., Brooklyn, Ν. Y., jobbers, who sued the American Tobacco Co., the American Snuff Co., Blackwell's Durham Tobacco Co. ( a subsidiary of the American Tobacco Co.), and the Metropolitan Tobacco Co. (exclusive wholesaler for the American Tobacco Co. in the New York metropolitan a r e a ) , charging that the defendants had conspired to monopolize tobacco jobbing so as to eliminate competing manufacturers by stopping their channels of trade. The suit was promptly dismissed by the District Court and, on appeal, by the Circuit Court but is of some interest because of its effects on the sales policies of the " big four " manufacturers. 2 1 Sporadic efforts were made to force changes in the marketing methods of the successor companies, 22 and the Imperial Tobacco Co. and its Kentucky subsidiary were found guilty of conspiring to force prices of leaf tobacco below its " fair value " in that state and for a time faced the possibility of losing their Kentucky charters, only to be saved by a decision of the United States Supreme Court in another separate action holding the Kentucky antitrust law unconstitutional. 23 In the end these efforts proved to be merely the skirmishes which mark the finish of a battle. 20

United States Tobacco Journal, A u g . 31, 1912, pp. 3, 5.

21

Locker v. American Tobacco Co., 200 F e d . Rep., 973, a n d 2 1 8 F e d . Rep., 447. Cf. ch. χ , infra. 22

United States Tobacco Journal,

pp. 3 and 35; June 5, 1915, p. 3.

April 17, 1915, p. 3; April 24, 1915,

23 International Harvester Company of America v. Commonwealth of Kentucky, 234 U . S., 2 1 6 ; United States Tobacco Journal, D e c . 6, 1913, P· 3, and Nov. 28, 1914, p. 8.

PARTITION

39

§ 4. In the light of twenty years' experience it should now be possible to go back to this controversy without partisanship and see what the decree really accomplished. Was Mr. Wickersham right when he said, " M y opinion is that the most successful dissolution in accomplishing what led to the enactment of the Sherman Law has been realized in the tobacco case " ? " O r was Mr. Brandeis right when he said : The decision was wholly unsatisfactory. Under the plan approved by the court the tobacco company will be in a better position than it was before the government brought suit against it under the Sherman Law, because it can do in the future under the legal sanction of the decree, the things that had heretofore been considered in violation of the law? " In brief, what has the record of the tobacco industry to say as regards this method of handling the problem of industrial monopoly? These questions are important today, when the anti-trust laws are more or less generally in disfavor, with demand widespread and outspoken, though unorganized and divergent in aim, that they be revised. It is the purpose of this study to answer them in so far as they can be answered by a private investigator. 24

United

25

Ibid., Nov. i l , 1912, p. 5.

States

Tobacco

Journal,

Aug. 3, 1912, p. 8.

C H A P T E R

II

T H E G R O W T H OF T H E T O B A C C O I N D U S T R Y

SINCE

THE PARTITION

§ 1 . In order to appraise the policies adopted by the successor companies in the years since they were launched by court decree, one must bear in mind that the conditions they have faced were shaped to a considerable extent b y forces over which they had little or no control. In the first place, the world w a r affected the tobacco industry as one o f the countless groups caught in its maelstrom of political, social and economic change. In the second place, tobacco has benefited in common with all industries f r o m the g r o w t h in its markets caused by the steady increase of the population. T w o other forces affected tobacco alone. T h e y were the tremendously increased concentration of consumer demand on cigarettes and the mechanization of cigar manufacture. T h e m a j o r effects of the w a r m a y be summed up very quickly. In common with all other commodities, tobacco products and the materials f r o m which they are made passed through a tremendous price inflation during the w a r and immediate post-war years. Since any measure of the extent to which competition has been restored must take into account the effects of the decree upon prices, it is obvious that careful attention must be paid to this spectacular price movement. Competition during a period when costs are rising rapidly must differ in its outward manifestations f r o m competition during a period when costs are falling or merely holding steady. T h a n k s to general movements in prices, the post-partition era has been a period of rapidly rising costs, followed by a sharp break, several years of fairly steady costs and another break in the 1929-1932 depression to levels about even with those prevailing before the war. The 40

GROWTH

SINCE 1911

41

policies of the companies must be analyzed in the light of this cycle. The war also affected the tobacco industry in two other ways. One was by disrupting international trade in Near Eastern leaf tobacco and so forcing a change in consumer preferences, particularly as regards types of cigarettes. While Turkish cigarettes held the center of popularity before the war, the center after the war was held by blended cigarettes in which domestic tobaccos are predominant. It goes without saying that the companies which proved themselves most adept in anticipating and adapting themselves to this change were the ones which prospered most. In the second place, the war helped to break down the widely held prejudice against smoking and enormously increase the number of smokers. While not the only influence causing a large increase in the consumption to tobacco, it was perhaps the most important and so contributed to making the competition of the tobacco industry a competition for shares in a rapidly-growing business, rather than a struggle for shares in a static or declining industry. § 2. A good measure of the growth of the industry during the post-partition era may be found in statistics showing the consumption of leaf tobacco year by year. Such statistics are offered in Table 17. 1 Between 1910, the last complete year of the " trust ", and 1930, the last year for which figures are available at this writing, consumption of leaf tobacco in the United States increased from 550,820,000 to 783,981,000 pounds, or 42.3 per cent. Exactly how much of this increase may be attributed to the war, no one can say ; but unquestionably much of the responsibility rests upon the war drives for tobacco to be sent to the soldiers at the front and the war's direct and indirect contributions to the forces that have produced a tremendous increase in smoking by women. 1

Ch. vi, § 4, infra.

COMPETITION

IN

THE TOBACCO

INDUSTRY

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44

COMPETITION*

IN THE

TOBACCO

INDUSTRY

Closer analysis of the growth of the industry brings us to the second major force guiding the tobacco industry during the last two decades—the concentration of this growth on cigarettes. Table 5 shows what has happened. A s against an output of 8,644,300,000 " small " cigarettes in 1910, manufacturers in 1930 produced 125,259,200,000, an increase of 1,339 P e r c e n t ' n twenty years. N o other product made a record anywhere nearly comparable. Snuff increased 29.9 per cent, and smoking tobacco, thanks to a fair increase between 1910 and 1918, was 8.4 per cent above its 1910 figure in 1930, although it has been decreasing in recent years. A l l other products have given much ground, large cigars having declined 13.4 per cent; plug, 50.5 per cent; twist, 47.9 per cent; fine-cut, 60.5 per cent; little cigars, 65.7 per cent; and large cigarettes, 61.9 per cent. Figure 1, which is based on Table 5, taking the quantities produced in 1910 as 100, makes the divergent trends of these production statistics more readily apparent. Because of the diversity in units of measurement, the significance of these figures may not be readily grasped. This difficulty is overcome in part by reference to statistics of tobacco leaf consumed in registered factories. 2 In 1910, 68.7 per cent of the leaf used went into smoking and chewing tobacco and snuff, 24.7 per cent into large cigars, 5.6 per cent into small cigarettes and less than 1 per cent into small cigars and large cigarettes. In 1930, cigarettes took 44.6 per cent, smoking and chewing tobacco and snuff 37.7 per cent, large cigars 17.5 per cent and small cigars and large cigarettes combined less than 2/10 of 1 per cent.3 Still 2 Leaf consumed in bonded warehouses is reported as an aggregate but not by products. Omission of these figures has only a negligible effect on the conclusions. 8 Computed from statistics in the annual reports of the Commissioner of Internal Revenue.

i 1

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GROWTH

SINCE

1911

45

another measure of the rise of cigarettes is in the census of manufactures. In 1 9 1 4 the total value of tobacco products manufactured was $490,165,000. O f this, cigarettes accounted for $81,246,000, or 16.6 per cent, cigars for $233,423,000, or 47.6 per cent, and all other products, for $ 1 7 5 , 2 8 1 , 0 0 0 , or 35.8 per cent. In 1 9 2 9 out of an aggregate of $1,246,242,000 cigarettes accounted for $668,243,000, or 53.6 per cent, cigars for $309,327,000, or 24.8 per cent, and all other products for $ 2 6 8 , 6 7 1 , 5 5 0 , or 2 1 . 6 per cent.4 § 3. The reasons for this phenomenal increase in cigarettes are a matter of dispute. The shift in emphasis among tobacco products is only the most recent in a series of such changes. Cigars held the lead for a long time before cigarettes displaced them. Among the less expensive products leadership was held from 1890 to 1 9 0 7 by chewing tobacco. Smoking tobacco then took the lead and held it until displaced by cigarettes.® The credit or blame for this last shift seems to rest mainly with two forces. F o r one thing, the war's influence in spreading the tobacco habit apparently benefited cigarettes because they could be carried and used by soldiers more conveniently than other products. Secondly, much of the increase has been due to the expansion of smoking by women, to whose uses cigarettes are particularly well adapted. Advertising, improvement of cigarette machinery so as to lower costs and, therefore, prices, and the devising of new blends of Turkish and domestic tobacco agreeable to * Abstract of the Census of Manufactures, 1919 (Washington, 1923), p. 228; Fifteenth Census of the United States, Manufactures: 1929, Industry Series, Tobacco Manufactures and Tobacco Pipes (Washington, 1931), p. 5- In addition to the totals reported for cigars and cigarettes separately in 1914, a sum of $215,000 was reported for the two items jointly. This sum was ignored in computing the percentages. s Report of the Commissioner of Corporations pt. iii, p. 47.

on the Tobacco

Industry,

φ

COMPETITION

IN THE

TOBACCO

INDUSTRY

the American palate, to which credit is sometimes given, seem rather the means by which the manufacturers have taken advantage of changes in taste than the causes of those changes. The significance of the huge growth in cigarette consumption will become increasingly apparent as the analysis proceeds through subsequent chapters; but a few suggestions may be made here. In the first place, the companies which first appreciated and adapted their policies to the drift of the industry should, other things equal, have been the ones to prosper most. Second, those companies which were given a strong position in cigarettes at the partition were given a decided advantage over the others. Third, because of the various factors entering into this trend, which included an actual change of habit by many tobacco users, the capture for cigarettes of an increasingly large proportion of the new smokers who come into the market from day to day and the appearance of a new market among women, opportunities for utilization of a considerable variety o f merchandising skill offered themselves. Fourth, it is evident that competition in an industry with a rapidly growing market must differ markedly from competition in a static or declining market. F o r example, expensive advertising may justify itself if it can so increase production as to reduce costs by more than enough to pay for itself, a process which is fairly easy when the chief result of heavy advertising is to give each company a share in the steady increase of sales. I f there is a limited market, however, a company can increase its output only by taking customers away from other producers, so that it must exercise more care and skill in its advertising policies, particularly if its competitors are few in number but powerful, for fear that the only result of increased expenditures will be a corresponding increase by others and a resultant higher cost of doing business without offsetting savings

GROWTH f r o m large-scale production.

SINCE 1911

47

Conceivably, heavy advertis-

ing under such circumstances might result in a decrease, rather than an increase of consumption because of the increase in costs and hence in prices. These considerations are peculiarly important at the present time, because some commentators express the belief that henceforward one must speak of the rapid growth of cigarettes as a past rather than a present phenomenon.

It used

to be maintained that cigarettes are " depression proof " , the dip in output in 1 9 2 0 - 1 9 2 1 being attributed to the dumping of left-over army supplies on the market rather than to curtailed

consumption.

Table

S

shows,

however,

that

cigarette output declined in 1 9 3 0 , and other figures indicate that the decline was intensified in 1 9 3 1

and 1 9 3 2 . 6

No

• The Commissioner of Internal Revenue's figures for 1931 based on compulsory reports of their output by manufacturers were not available in November, 1932. The trend may be judged, however, by reports of " withdrawals for consumption " based on sales of revenue stamps, a good indicator of domestic consumption, and by exports. In 1931 withdrawals, exclusive of Philippine and Porto Rican products, totaled 113,449,048,657 cigarettes, as compared with 119,624,909,917 in 1930 and 119,038,841,560 in 1929. If conditions throughout 1932 continue as they were during the last half of 1931 and the first seven months of 1932, a decrease of 10 to 20 per cent in cigarette consumption as compared with 1930 will not be surprising. Exports of cigarettes in 1931 totaled 2,978,000,000, as compared with 4,927,000,000 in 1930 and 8,456,000,000 in 1929, according to statistics in Monthly Summary of Foreign Commerce of the United States. It is interesting that one producer, the American Tobacco Co., in recent months has, after a lapse of some years during which it concentrated on one brand of machine-made cigarettes, renewed its efforts to encourage the sale of tobacco suitable for " roll-your-own " cigarettes so as to hold the patronage of those who must economize. Other companies have followed its lead. The withdrawal figures do not reveal the results of these specific campaigns, merely showing that withdrawal of smoking and chewing tobacco combined fell from 328,765,103 pounds in 1930 to 327,995,697 in 1931. Snuff fell from 40,112,663 pounds to 39,543.096, little cigars from 382,540,252 to 337.i73.3S7, and large cigars from 5,889,132,434 to 5,318,892,528. All of these products have continued to decline in 1932.

COMPETITION

IN THE TOBACCO

INDUSTRY

surplus stocks in government hands exist to " explain " this sag. In 1930 the decrease could be attributed to falling exports to China, with domestic consumption holding about steady; but in the last half of 1931 domestic consumption as measured by revenue stamp sales decreased sharply. The failure of cigarettes in these two years to make what had come to be considered their normal gain, has occasioned much painful thought in the industry and led to statements that the companies must expect henceforward an increase proportional to the growth of the population, but no more. 7 Only after some years will it be possible to say whether these statements are warranted so that cigarettes, which have presented a competition based on a struggle for the patronage of an enormous number of new smokers, must turn to a competition based on a struggle to hold a share in a stationary or only moderately increasing business. Although the significance of such a change, if it really has taken place, will be great not only as regards the possibility of entry into the field by new companies, but also as regards competitive tactics on the part of existing companies, it is wise not to take this change as an accomplished fact until the 1929-1932 business depression with its concomitant pessimism has passed. § 4. While the shift of consumers to cigarettes has been extremely important to the cigar industry during the last twenty years, its effects have been completely overshadowed by the invention and widespread installation of efficient cigarmaking machines. James B. Duke and his associates never achieved anything remotely resembling monopoly in this branch of the tobacco industry despite their expenditure of vast sums of energy and money. They obtained a predominant position in Cuban and Porto Rican cigars and 7

Barney, Chas. D., & Co., The Tobacco Industry, ' 9 3 1 ) . PP· 3, 8, 20-22.

1Ç31 (New York,

GROWTH

SINCE

1911

49

raised the proportion of the domestic output under their control to 16.4 per cent in 1903 ; but they were unable to surpass that figure or even to hold their own after they reached it.8 In a hand industry requiring small capital outlay, new competitors sprang up too easily, and rapidly mounting costs of administration and supervision tended to offset possible savings f r o m large-scale production. Had the cigarmaking machine appeared in the 'nineties, the American Tobacco Co. might have been able to duplicate in cigars the monopoly it built up in other branches of the industry ; but the machine did not appear until several years after the disintegration, and so the opportunity did not present itself. A s a result, the study of the partition and its effects becomes as regards cigars not so much an analysis of the extent to which monopoly was broken up as an analysis of the extent to which the decree was effective in preventing the rise of a monopoly when economic conditions became propitious f o r its appearance. The machines that have played a dominant part in determining the conditions under which the companies must operate have themselves been to some extent offshoots of the " trust " . L i k e most complicated mechanisms, they were developed over a period of years, devices which performed parts of the operation having been invented and used commercially before the machine as a whole could be designed." In that development the mechanical staff of the " trust " played a large part ; f o r the heads of the combination realized the opportunity an efficient cigarmaking machine would give them to monopolize this branch of the industry and in 1898 authorized their engineers to apply their talents to the problem. More than twenty years and an expenditure of 8 Cf. Table i, ch. i, § ι, supra ; Report of the Commissioner porations on the Tobacco Industry, pt. iii, p. 143.

• Barney, The Tobacco

Industry,

1924, p. 27.

of

Cor-

50

COMPETITION

IN THE

TOBACCO

INDUSTRY

some $7,000,000 were required to produce the desired result. 10 In the mean time the " trust " had been broken up; but the subsidiary which had been given charge of the work, the American Machine and Foundry Co., was left in the hands of the American Tobacco Co. Although this situation gave American Tobacco alone the benefit of all the information concerning cigarmaking machinery which had been accumulated thus far and consequently promised to give the American Cigar Co. a great advantage over its competitors, a separation became advisable because American Machine and Foundry also manufactured machines used in the processing of other tobacco products and had to sell them to the newly-created competitors of American Tobacco. Accordingly, in 1 9 1 2 common stockholders of the American Tobacco Co. received for each share held 12,000/401,824 of a share of the American Machine and Foundry Co. Rufus L . Patterson, who had been vice president in charge of manufacturing for the American Tobacco Co. and one of the individual defendants in the suit against the " trust " , remained with the subsidiary as its chief executive officer, a position he still holds. 11 The former subsidiary continued to work with the cigar problem. In 1 9 1 5 it tested out a complete cigarmaking machine. 12 By 1919, it perfected this machine sufficiently to start production and installation on an extensive scale, a contract being drawn up whereby the American Machine and Foundry Co. was to manufacture a " large number " of the machines for the International Cigar Machinery Co., a subsidiary organized in 1901 to own the patents.13 B y 1922, large cigar manufacturers were 10

Bondy, Richard C , Jr., " The New Era in the Cigar Industry," in The Burning Question, house organ of the General Cigar Co., issue of May, 1926, p. 4. 11 12 13

Bondy, loc. cit.; United States Tobacco Journal, Jan. 23, 1926, p. 5. United States Tobacco Journal, May 22, 1915, p. 24. Ibid., Feb. ι, 1919, p. 7; Feb. 8, 1919, p. 6.

GROWTH

SINCE

1011

SI

installing units,· since the machine made feasible nickel cigars that were both acceptable to the consumer and profitable to the manufacturers. 1 4 Since then there have been further improvements of the machine and additional equipment has appeared, the most interesting, perhaps, being a machine which sorts cigars at the rate of 4,000 an hour into thirtytwo shades of color, a machine wrapping nearly 2,000 cigars an hour in tinfoil and, more recently, a machine wrapping cigars in cellophane. 15 The American Machine and Foundry Co. has some degree of competition in cigarmaking machinery but is the overwhelmingly predominant producer. It was estimated that in 1 9 2 6 approximately 1,250,000,000 cigars, or 1 8 per cent of the country's total output, was made on this company's machines. 1 8 A t the end of 1928 it was estimated that the company's machines were producing 40 per cent of the country's output. 17 While reliable estimates since then are not available, gross revenue of the International Cigar Machinery Co., chiefly from royalties on these machines, increased from $2,882,748 in 1 9 2 8 to $4,039,921 in 1 9 3 0 ; so that a further gain in output probably has taken place. 18 Part of this increase, but not all, has come not from a larger output but from the fact that in 1927 the royalty fee charged manufacturers was increased from $ 1 . 0 0 per 1,000 cigars to $ 1 . 2 5 f o r cigars retailing at less than ten cents and $2.00 for cigars retailing at ten cents and above. 19 ™Ibid., April 16, 1921, p. 3 7 ; April 15, 1922, pp. 13, 3 4 ; July 22, p. 1 6 ; June 30, 1923, p. 26.

1922,

15 Ibid., May 13, 1922, p. 3 2 ; Jan. 24, 1925, p. 6; Nov. 19, 1927, p. 7 ; July 15, 1930, p. 6. 16

Ibid., May 28, 1927, p. 5.

17

Ibid., Dec. 29, 1928, p. 18.

18

Poor's

Manual of Industrials,

!» United States Tobacco Journal,

1931, p. 2029. Jan. 15, 1927, p. 3.

COMPETITION

IN THE

TOBACCO

INDUSTRY

A competitor of the American Machine and Foundry Co. in this field for two years was the Universal Tobacco Machine Co. This company had already been known for some time for its machines manufacturing " bunches " , (i. e., the inside of a cigar), when in 1929 it introduced a " rolling " machine designed to put the wrapper on the " bunches ". Through combining the two devices, cigars may be manufactured in their entirety by machine.20 This company sold its machines outright. At the end of 1930 its advertised prices for the " rolling " machine was $7,500 and for the " bunching " machine $1,000 to $2,200, according to type. 21 The present writer has been unable to obtain any information as to the relative efficiency of this company's machines and those of the Ameirican Machine and Foundry Co. In any event the matter is no longer of great importance, since the business and assets of the company were sold to the International Cigar Machinery Co. in 1 9 3 1 . It is of interest that no public announcement of the sale was made. The Universal Tobacco Company's properties also included a combination machine to band cigars and wrap them in cellophane at the rate of 4,200 to 4,800 per hour. Its advertised price in 1930 was $ 5 , 5 0 0 . " Through absorbing this company, the American Machine and Foundry Co. has left itself with only one competitor in the field. This is the American branch of a Swedish company. Its American business is apparently much smaller than that of the American Machine and Foundry Co. A third cigar machinery manufacturer is important because of charges of violating the anti-trust laws brought against it. This is the International Banding Machine Co., which leases its cigar-banding machines to manufacturers. 20

Ibid., May 4, 1929, p. 18.

21

Ibid., Aug. 2, 1930, pp. 20-21.

22

Ibid., March 15, 1930, p. 7.

GKUWTH

SIM CL· mi

53

It is affiliated with the Consolidated Lithographing Corp., which represents a merger of several corporations manufacturing bands, labels and other lithographic materials used by cigar manufacturers. In 1 9 3 0 and 1 9 3 1 , suits were brought by George Schlegel, Inc., and H a r r y Prochaska, Inc., New Y o r k lithographers, against the two corporations for $858,000 damages under the Sherman and Clayton laws and $1,040,000 damages under the New Y o r k state antitrust laws. The plaintiffs declared that the banding machine was indispensable to cigar manufacturers and that in order to obtain it they were forced to sign tying contracts obliging them to purchase all their lithographic materials from the Consolidated Lithographing Corp. 23 Both suits were settled out of court. In these actions it was revealed that on June 20, 1930, the Federal Trade Commission entered a stipulation under which the International Banding Machine Co. agreed to abandon its tying contracts. The development of banding machines by other manufacturers may also act as a corrective of this situation. In determining the number of cigars made by machine, it is necessary to fall back upon trade estimates, as there is no source from which exact statistics on the subject can be obtained. These are rendered to some extent doubtful by at least three considerations : First, the subject is a controversial one, and each estimator's figures are apt to be colored by his bias. Second, a great many cigars are made partly by hand and partly by machinery, thus raising a question of definition. Third, cigars reported by the Commissioner of Internal Revenue as " large cigars " include many cheroots and other so-called " package goods " which have been made 23

In the United States District Court, Southern District of New York, Complaint of George Schlegel, Inc., v. Consolidated Lithographing Corportion and others, July 18, 1930; New York Sun, July 23, 1930; New York Times, Aug. 25, 1931.

COMPETITION

IS

THE

TOBACCO

INDUSTRY

by machinery for many years and must be excluded in attempting to measure the spread of cigarmaking machines during the last decade. The first manufacturers to try out the machines on a large scale were the makers of the cheaper cigars; but makers of more expensive types soon began experimenting. A s early as 1920, the San Telmo Cigar Manufacturing Co., at that time one of the large producers, had installed thirty-two machines in its Cincinnati factory f o r use on eight- and tencent cigars. 24 B y 1 9 2 3 , the machines were being introduced into Tampa, stronghold of the companies making the highergrade cigars using Cuban tobacco. 25 B y 1 9 2 6 they were penetrating even into the Havana factories, makers of the most expensive cigars, despite the strong opposition of the workers. 2 " B y 1 9 2 8 it was estimated that, excluding the package goods, 50 per cent of the country's cigars were made entirely by machinery. 27 Thereafter the spread seems to have slowed down a trille. In 1930, the National Better Business Bureau still estimated, on the basis of information from labor union officials, that 50 per cent of the nation's cigars were made entirely by machine, 25 per cent in part by machine and 25 per cent entirely by hand. 26 Statistics offered in Table 6 suggest that one result of the 1 9 2 9 - 1 9 3 2 depression has been to increase the proportion of the country's cigars made by machine. While class A cigars include some of the package goods already referred to, the bulk is made up of nickle cigars. A s the table shows, this class of cigars has increased in output during the business depression. United Stales Tobacco Journal, 25

Aug. 14, 1920, p. 18.

Ibid., Aug. 25, 1923, p. 28.

-6 Ibid., Jan. 23, 1926, p. 4 ; Sept. 1 1 , 1926, p. 3 ; Sept. 18, 1926, p. 3. Barney, The Tobacco Industry, 2

1928, p. 16.

' National Better Business Bureau, Inc., Cremo to Industry (New York, February, 1930), p. 3.

Advertising

Unfair

GROWTH

SINCE

1911

SS

while other classes have fallen, the net result being to increase the proportion of class A to 65.4 per cent. Since virtually all of these cigars and a great many cigars in classes Β and C are made by machine, it seems safe to assert that, even if allowance is made f o r package goods, two-thirds to three-fourths of the country's cigars are now made entirely by machine. One reason for the persistence of a substantial proportion of cigars made wholly or largely by hand lies in the ability of several thousand small manufacturers to continue in business, although their number is falling rapidly. A s late as 1930 the American Cigar Co. advertised that out of 7,500 manufacturers over 7,400 rolled cigars by hand. 29 A cigar machine will make approximately 4,000 cigars a day, or 1,250,000 in a year of 300 days. All manufacturers of less than 1,000,000 cigars a year are thus automatically eliminated as users of the machine. This takes out 7 , 1 2 4 of the 7,552 cigar factories reporting to the Commissioner of Internal Revenue in 1930. These 7 , 1 2 4 factories made only 7 per cent of the country's cigars that year. 30 In addition, there are a good many manufacturers who, while making enough cigars to j u s t i f y one machine, perhaps, are not really justified in going on to the machine basis because for the most economical operation it is necessary to run more than one machine. 31 Probably the makers of 1 5 to 20 per cent of the country's cigars are thus in a position where machine production is impossible as uneconomic. T o them must be added those who will not install machines because 29 30

United States Tobacco Journal, June 14, 1930, p. 19.

Report of the Commissioner table 13, infra. 31

of Internal

Revenue,

1931, p. 129;

Barney, The Tobacco Industry, 1926, p. 13 ; Bondy, loc. cit., p. 6. The author has been unable to obtain exact figures as to the minimum number of machines requisite for minimum manufacturing costs. Various authorities give figures ranging from four to eight.

56

COMPETITION

IN THE TOBACCO βaj **Ο

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GROWTH

SINCE

1911

57

they lack the capital, because they wish to serve the market demanding hand-made cigars or because of simple inertia. As long as all these manufacturers can continue to find markets for their wares, complete mechanization of the industry is out of the question. The large manufacturers have gone almost entirely over to machine production. As early as 1926, the Consolidated Cigar Corp. announced that 70 per cent of its output was machine-made." In 1930 the Porto Rican-American Tobacco Co. announced its intention to put its entire production onto machines. 33 Corresponding data for other companies are not to be had ; but there is little doubt that all of the big producers are now using machines almost exclusively for all except their most expensive cigars. § 5. It is hardly necessary to add that the outcome of this belated industrial revolution in cigars has been a complete revision of the industry's production and merchandising practices, so much so that the problem of the successor companies has been in effect to fit themselves into a new industry. An important effect in production, for example, has been to reinforce the trend toward concentration of the industry into fewer factories, partly through the development of very large factories by companies which have centralized their own production, partly through mergers and subsequent centralization of output, partly through the elimination of smaller producers. In merchandising, the principal revision has been the adapting to cigars of methods which had proved successful with cigarettes. Most of the large cigar producers achieved their present rank as the result of a series of mergers in the course of which they acquired a large number of brands, some widely known, others marketed in limited territories only. Taking their 32

United States

33

Ibid., March 29, 1930, p. 9.

Tobacco

Journal,

Sept. 18, 1926, p. 3.

COMPETITION

IN THE

TOBACCO

INDUSTRY

cue from cigarettes, the more progressive companies have reduced the number of brands drastically and concentrated their efforts on winning nation-wide popularity for the brands retained, paying particular attention to the cheaper cigars. Such efforts both result from and depend upon large output, which necessitates the use of machines. Since there is room for only a moderate number of large manufacturers, there are those who look forward to a situation in the industry analogous to that in cigarettes where production is concentrated in a few hands and the likelihood of newcomers' building up any substantial business in the field is small." Revolutionary though these changes forced on the companies have been, the effects of the machine on labor have been even more far-reaching. A s a highly skilled craft, cigarmaking was well adapted to trade-union organization and so was the one branch of the tobacco industry in which the workers were strongly organized prior to the war. Manufacturers endeavored to weaken the union by employing female labor, but had comparatively little success." The machine gave them another opportunity, since it is operated by girls who can be trained for the job in four weeks or less, whereas months are required to train a really skilled hand worker. 3 ® B y installing the machines the employers achieved a double objective of lowering costs and undercutting the union. Four girls, operating one cigarmaking machine, turn out 4,000 cigars in nine hours, and the four combined receive a total wage 31

3-4,

Ibid., Oct. 6, 1923, p. s s ; Barney, The Tobacco Industry, 1929, pp.

21.

35

United States Tobacco Journal, March 24, 1917, p. 8. The columns of this publication record strike after strike, mostly successful, during the pre-war and war years. 36

Barney, The Tobacco Industry, 1926, p. 12.

GROWTH

SINCE

1911

59

of $2.80 a thousand. A royalty of $1.25 a thousand must be paid for the use of the machine, and other costs of operation run the manufacturing cost of the machine-made cigars up to about $5.00 a thousand. Hand workers can turn out about 2,000 cigars a week, for which the union cigarmaker receives $20.00 a thousand, or $40.00 a week ; while the four operators combined turn out 24,000 cigars a week, equivalent to 6,000 cigars for each operator, for which the operator receives $16.80 a week, or $23.00 less than the hand cigarmaker receives. And for this miserable pay the machine operator turns out 4,000 more cigars a week than the hand operator can. In other words, slightly more (sic) than half the former wage is now paid for producing three times as many cigars. The labor cost of the machine cigar is one-fourth of the hand-made.37 With such a reduction in cost possible, the companies would have been forced to adopt the machine, union or no union; but it must be said that they welcomed the machine as a means of destroying the " tyranny of labor ", 38 Aided by the depression of 1920-1921 as well as by the machines, the manufacturers entered on an open shop campaign which was widely successful." The union, while it will accept machine workers as members, has a much more difficult task ahead of it in organizing unskilled and semiskilled girls than in organizing skilled men. The cigar machine is thus responsible for commendably cheaper cigars, but also for important labor problems. 37 Maurer, James H., Unemployment and the Mechanical issued by Socialist Party of America, Chicago, 1931. 38 3

United

Stales

Tobacco

Journal,

Man,

leaflet

Dec. 27, 1919, p. 4.

* Ibid., March 13, 1920, p. 16; April 24, 1920, p. 3 ; July 10, 1920, p. 3 ; Aug. 2i, 1920, p. 8; Feb. 12, 1921, p. 12; Feb. 26, 1921, p. 30.

C H A P T E R

III

E V I D E N C E S OF C O M P E T I T I O N IN T H E D I S T R I B U T I O N OF BUSINESS AMONG

MANUFACTURERS

§ 1. Logically, the first question which presents itself in a survey o f the tobacco industry designed to show the effects o f the decree, is : How have the various companies fared under the circumstances described in Chapter I I ? These circumstances have provided ample opportunity for the display o f individual talents and shortcomings. I f free competition has been restored and maintained, we should expect differences between managements to make themselves apparent in a continual readjustment of the relative positions o f the companies, evidence of such readjustment being given by their records of output. Specifically, we should expect the records to show that as managements changed first one company and then another has been the aggressive combatant in competitive warfare; that, as a result, first one company and then another has taken the lead in output. W e should expect differences in the speed and effectiveness with which the various managements responded to the problems and opportunities presented to them by such consequential changes as the shift of consumer preference to cigarettes in general and to blended cigarettes in particular or the appearance of a commercially feasible cigarmaking machine. W e should expect to see new companies appearing on the scene and rising to positions of importance, since it is extremely unlikely that the successor companies would develop or acquire all the exceptional managerial talent in a really competitive industry. 60

DIVISION

OF THE

TOBACCO

BUSINESS

6l

§ 2. The only available thoroughgoing official investigation into this subject, is too old to be of very great assistance today. It is the third volume of the report issued by the Commissioner of Corporations in 1915, covering the first two years of the post-partition era. 1 Tables 7 and 8 summarize the findings of the report. Table 7 shows that the successor companies' proportion of the total output of the country was greater ¡01913 than that of the " trust " in 1910 for cigarettes and snuff, smaller for fine-cut and smoking tobacco, and about the same for plug and twist tobacco and little cigars. The gain in cigarettes is particularly important, since this product was just beginning to grow into the dominance it now boasts. How far outclassed the independents were in this field is shown by the fact that in 1913 TABLE

7

PROPORTION OF O U T P U T OF T H E COMBINATION AND SEVEN

SUCCESSOR

C O M P A N I E S TO O U T P U T OF T H E COUNTRY, 1 9 0 9 - 1 9 1 3

»

(Per cent.)

Year

Plug and twist Smoking Fine-cut

Snuff

Cigarettes

Little cigars

Cigars

1909.. 1910..

82.9 84-5

75-2 76.1

80.1 79-7

96.1 96.5

79.6 83-9

89.0 91.4

13·« 14.4

1913.. 1913..

82.9 84.7

73-8 73-4

79.0 77.2

97.I 97-3

91.1 90.7

91.2 91.0

t>

a Report o/ the Commissioner of Corporations on the Tobacco Industry, part iii, pp. 192, 221, 250, 295, 307, 322, and 352. Quantities produced in bonded warehouses for export not included in country's output. b Not compiled. The proportion of the " trust " was reduced. 1

Report of the Commissioner of Corporations on the Tobacco Industry, pt. iii. Data are presented for tobacco products alone, and not f o r licorice or foil.

62

COMPETITION

IN THE

TOBACCO

INDUSTRY

TABLE 8 PERCENTAGES OF THE TOBACCO BUSINESS OF THE COUNTRY ASSIGNED TO THÏ SUCCESSOR COMPANIES AND TO INDEPENDENTS ON THE BASIS OF SAI.ES IN 1 9 1 0 AND PERCENTAGES OF THE BUSINESS DONE IN 1 9 1 2 AND 1 9 1 3 » Per cent Branch and Company

Plug: Liggett & Myers Tobacco Co.. American Tobacco Co R. J . Reynolds Tobacco C o . . . P. Lorillard Co Other companies Smoking : American Tobacco Co P. Lorillard Co Liggett & Myers Tobacco Co.. R. J . Reynolds Tobacco C o . . . Other companies Fine-cut.· Liggett & Myers Tobacco Co. P. Lorillard Co American Tobacco Co Other companies Snuff: American Snuff Co George W. Helme Co Weyman-Bruton Co Other companies Cigarettes : American Tobacco Co Liggett & Myers Tobacco Co.. P. Lorillard Co R. J . Reynolds Co Other companies Little cigars : Liggett & Myers Tobacco Co.. P. Lorillard Co American Tobacco Co Other companies a

1910

1912

'913

3S-3 26.4 18.8 3-9 »5-5

38.1 19.6 20.2 4.9 17.1

40.1 18.5 21.0 5.0 '5-3

32.0 22.1 19.4 2.6 23-9

29.4 19.6 16.1 8.7 26.2

28.2 18.1 16.9 10.3 26.6

41.8 27.9 10.0 20.3

37-5 30.0 II.I 21.0

36· 7 29.6 II.0 22.8

33.6 323 30.6 3-5

35-2 31·1 30.8 2.9

34-4 30-7 32.1 2-7

38.8 29.1 >5-9

36.5 36-9 17 7

16.1

"s'.g

34-9 33-7 21.9 .2 9-3

43·° 33-3 15.2 8.6

38-4 35-3 >7-5 8.8

34-7 38.5 17.8 9.0

....

Computed from data in table 7 and on p. 12 of the Report

of

the

Commissioner of Corporations on the Tobacco Industry, part iii. There is a negligible error involved in that it has been necessary to multiply percentages in table 7, which are based on physical output, by figures the individual companies based on sales. At no place in the report there figures showing tobacco products sales f o r the entire country or put f o r the individual companies.

the for are out-

DIVISION

OF THE

TOBACCO

BUSINESS

63

the American Tobacco Co. and the Liggett and Myers Tobacco Co. each sold more than 5,000,000,000 cigarettes and the P. Lorillard Co. approximately 3,500,000,000, while the five largest independents combined sold only 750,000,ooo. 2 A similar, although not quite so extreme preponderance, was shown in other branches of the industry, where the smallest successor company invariably far outdistanced the largest independents, except in cigars. Table 8 shows the shift in relative volume as between the successor companies themselves. The more even division of business shown by the table to have developed was taken by the commissioner to indicate that competition had been restored in the form of an effort on the part of each company to fill out its lines and to extend its territory. When the " trust " was dissolved, each successor company was given a large number of brands. The policy of the companies was to keep introducing new brands at frequent intervals, apparently in the belief that consumer interest could best be stimulated and maintained by a continuous shifting of emphasis after brands had enjoyed brief periods of popularity, a policy which resulted in their having a very large number of brands on sale at all times. It was only after some years that they adopted the contrary policy of concentrating their efforts on a very small number of brands. In the early post-partition days, as may be seen readily by reference to the out-of-town correspondence of the United States Tobacco Journal between 1912 and 1916, the principal effort of the companies in introducing new brands seems to have been to strengthen themselves in lines where they were weak. A s we have seen in Chapter I, the independents maintained that under the decree individual companies had been given monopolies of particular types of product. The 2

Report of the Commissioner of Corporations on the Tobacco Industry,

pt. iii, p. I I .

64

COMPETITION

IN THE

TOBACCO

INDUSTRY

successor companies promptly set to w o r k

to n u l l i f y this

a r r a n g e m e n t b y introducing competing b r a n d s in fields w h e r e they h a d not been g i v e n parity.

T h u s , seeking to compete

w i t h the L i g g e t t a n d M y e r s " F a t i m a " cigarettes, the leading brand of the d a y , the A m e r i c a n T o b a c c o C o . and the Lorillard

Company

appeared

with

similar

" O m a r " and " Zubelda " , respectively*

blends

named

S i m i l a r l y , the c o m -

panies which w e r e not particularly strong in nickle cigarettes introduced brands to compete in this field. Illustrations could be multiplied almost indefinitely, in other lines as well a s in cigarettes.

T h e essential point is that d u r i n g these y e a r s it

w a s the policy of the companies to introduce new

brands

frequently, either as a pioneering e f f o r t w i t h a new blend or in imitation of someone else's brand.

It w a s simply as one

such brand that the L i g g e t t and M y e r s C o . launched its n o w f a m o u s " C h e s t e r f i e l d " in

1912.4

B y f a r the most important introduction o f a n e w b r a n d came when the R e y n o l d s C o m p a n y introduced its " C a m e l " cigarette.

T h i s company had been given no cigarettes b y the

decree ; but its management apparently s a w the trend o f the industry almost immediately and decided to break into the field.

W h e t h e r its policy of concentrating on one b r a n d w a s

planned or accidental cannot be told n o w .

In a n y

event,

d u r i n g 1 9 1 3 and 1 9 1 4 the company introduced several n e w cigarettes of v a r i o u s types a n d at v a r i o u s prices, one

of

which, " C a m e l , " then selling at ten cents f o r a p a c k a g e of t w e n t y at retail, rapidly achieved immense popularity. 5

The

R e y n o l d s C o m p a n y tried to f o l l o w up this success w i t h the introduction of other cigarettes in both l o w e r a n d

higher

3 United States Tobacco Journal, Aug. 31, 1912, p. 19; Oct. 10, 1912, p. 20; Nov. 2, 1912, p. 24. 4 5

Ibid., Nov. 30, 1912, p. 8.

The rise of " Camel " can be traced in the out-of-town correspondence columns of the United States Tobacco Journal for 1913 and 1914.

DIVISION

OF THE

TOBACCO

BUSINESS

65

price classes, but soon returned to almost exclusive reliance on its one phenomenally successful brand. Prior to the manufacture of " Camel " , the cigarette smokers of the country had preferred either Turkish tobacco cigarettes or blended Turkish and domestic cigarettes with a predomiantly Turkish flavor, such as " Fatima " , which is generally given the credit f o r introducing blended cigarettes. " C a m e l , " the first of the kind of cigarettes now most popular in this country to achieve national favor, forced the other companies to follow suit. T h e Liggett and Myers Co. already had " Chesterfield " in the market and built this up to compete directly with " Camels " , while holding smokers of Virginia tobacco and the heavier Turkish blends with " Piedmont " and " Fatima " . T h e Lorillard Company came into the picture with " Tiger " cigarettes in 1915,® but did not succeed in making this a real rival of the others, so that it gradually dropped back in the race until its sudden spurt in 1926 with " Old Gold " . T h e American Tobacco Co. held off f o r a time, but in 1 9 1 6 entered the field with " Lucky Strike " , which has since become the leading brand of the country, competing directly with the other blended cigarettes, although placing more emphasis on the burley tobacco in its blend, probably with the intent of winning to the brand the smokers gradually being lost to " ' Bull' Durham " , a smoking tobacco containing much burley leaf which had long been in f a v o r with " roll-your-own " smokers. 7 The war played into the hands of the blended and domestic cigarette manufacturers and gave a staggering blow to the Turkish cigarettes by disrupting the import trade in Near Eastern leaf. High prices f o r this leaf automatically eliminated the cheap Turkish cigarettes. They weakened the demand for the more expensive Turkish cigarettes by in' United States Tobacco Journal, Aug. 14, 1915, p. 6 ; Sept. 18, 1915, p. 32. 1

Ibid., Jan. 13, 1917, p. 12; April 28, 1917, p. 20.

66

COMPETITION

IN THE

TOBACCO

INDUSTRY

creasing the price differential between them and the blended cigarettes. The army and navy distribution of blended brands in large quantities also had the effect of democratizing the tastes of smokers to the benefit of the popular-priced varieties. Thanks to these forces, the end of the war found the blended brands, made largely of domestic tobacco, firmly entrenched in consumer favor." T h e principal sufferer f r o m this change was the Lorillard Company, which had received the leading Turkish brands of the " trust " but had neither received nor developed a blended cigarette capable of taking advantage of the change in taste. A few new brands were introduced by the big companies even after the war, chiefly in an effort to take advantage of a demand f o r cigarettes and other products at prices lower than those to which the popular brands had been forced by war and post-war inflation ; but the Reynolds Company had now proved the profitability of concentrating sales efforts on a single brand of cigarettes and a single brand of smoking tobacco, and the others followed suit, accompanying their concentration of effort with a new aggressiveness in advertising which reached a climax in the American Tobacco Co. drive on " Lucky Strike " cigarettes beginning in 1926. It was in this period that the Lorillard Company started a determined campaign to recover its lost prestige and to share in the tremendously increased cigarette market by introducing " Old Gold " cigarettes, which were formally announced in 1 9 2 6 and within a few months had been put on sale all over the country. Suffering under the handicap of starting late and having its campaign run into a business depression during which the cigarette market of the nation has been at least temporarily contracted, the Lorillard Company has not yet proved its ability to restore itself to front rank among the manufacturers, although its resumption of dividends with 8

Ibid., April 5, 1924, p. 5.

DIVISION

OF THE

TOBACCO

BUSINESS

67

the first quarter of 1932 and the retirement oí its outstanding debenture bonds from surplus on January 1, 1932, indicate a feeling of confidence on the part of the management. The cost it has had to pay for its campaign was high, including sharply curtailed earnings for several years, the passing of dividends for four and a half years and the flotation of a $15,000,oc» issue of debenture bonds. § 3. The effects of these readjustments on the output of the various companies can be measured only approximately because of the absence of statistics for the individual companies. The output of the ten largest units in each classification of tobacco products in 1912 was made public by Secretary of the Treasury McAdoo in response to a Senate resolution; but these figures add nothing to the information in Tables 7 and 8 except ( 1 ) that even the subsidiaries of the American Tobacco Co., the Liggett and Myers Co. and the Lorillard Company were larger than the independents in every division except cigars and large cigarettes and ( 2 ) that in small cigarettes the four independents large enough to list were companies which later passed control of their brands to American Tobacco through the Tobacco Products Corporation." Since then the only figures to be had are occasional announcements made by the companies themselves or their officers and more or less unreliable estimates by outsiders. While not exactly accurate, these estimates give a clear enough picture of what has happened since the partition. The Reynolds Company has been the most spectacular performer in cigarettes. In 1912, this company produced 9 United States Tobacco Journal, Aug. 9, 1913. pp. 3, 5. The four independents were Schinasi Bros., M. Melachrino & Co., the Prudential Tobacco Co. and the Surbrug Co. All were much smaller than the " big four ". A complete account of the intricate series of transactions by which control of their brands passed to the American Tobacco Co. will be found in the appendix.

68

COMPETITION

IN THE

TOBACCO

INDUSTRY

no cigarettes; in 1913, it produced 2 / 1 0 of τ per cent of the country's output. 1 0

Its " Camel " brand grew with extreme

rapidity, apparently had become the country's largest seller within t w o years and by

1921 w a s given credit for half the

cigarettes consumed in the country. 1 1

W h i l e this brand

continued to g r o w absolutely in subsequent years, its percentage has fallen because of g r o w t h of other brands.

the relatively more

rapid

George W . Hill, w h o succeeded

his father as president of A m e r i c a n T o b a c c o in 1926, testified in 1927 that, on the basis of the Commissioner of Internal Revenue's figures for stamp sales, he believed cigarettes selling for fifteen cents or less accounted for f r o m 95 to 9 7 per cent of the country's total.

A b o u t 90 per cent, he

said, was held by three brands, " Camel " (which had f r o m 40 to 45 per cent), " L u c k y S t r i k e " and " C h e s t e r f i e l d " . Nearly all the rest of the fifteen-cent business went to " S w e e t Caporal ", controlled by A m e r i c a n Tobacco, " Piedmont," controlled by L i g g e t t and Myers, " O l d G o l d , " controlled by Lorillard, and " Three Castles " and " B a r k i n g D o g ", controlled by affiliates of the United C i g a r Stores Co.

Hill

did not discuss the division of the 3 to 5 per cent l e f t for the more expensive cigarettes ; but it is evident that practically all of this was in the hands of the " big four ", 1 2

Seager

and Gulick estimate that in 1928 " Camel " output was about 35 per cent of the country's total, a figure corroborated by 1 0 Figures for 1912 and 1913 given in this and subsequent paragraphs are computed from data in part iii of the Report of the Commissioner of Corporations on the Tobacco Industry and summarized in Table 8. 1 1 E. L. Rhoades, Introductory Readings in Marketing (New '927), PP· 614-617; Barney, The Tobacco Industry, 1924, p. 36.

York,

12 Porto Rican-American Tobacco Company of Porto Rico v. The American Tobacco Company, in the United States Circuit Court of Appeals for the Second Circuit, Transcript of Record on Appeal from the District Court of the United States for the Southern District of New York, 1928, pp. 369-372.

DIVISION

OF

THE

TOBACCO

BUSINESS

69

another estimate for 1929 which put the " Camel " output at 39,000,000,000 cigarettes, or a little less than 35 per cent of the country's cigarette sales. 13 The probabilities are that both its absolute output and its proportion fell in 1930, one estimate being that its 1930 output was 34,900,000,000 cigarettes, or 29.2 per cent of the country's sales. 14 The probabilities also are that its proportion, if not its absolute output, increased in 1931. The American Tobacco Co. has grown in relative importance as the Reynolds Company has fallen since 1925, after having declined in relative importance during the early postpartition years. This company in 1912 produced 36 per cent, and in 1913, 35 per cent of the country's cigarettes. Despite the rise of " Lucky Strike " cigarettes., its proportion apparently fell back steadily for some years, so that its 1921 sales were estimated at only 20 per cent of the country's total. 15 Beginning with 1926, it inaugurated a strong campaign for business which completely reversed this trend, resulting in the following proportions for its cigarette brands, chiefly " Lucky Strike " : 1926, 20.14 per cent; 1927, 22.44 per cent; 1928, 29.59 P e r cent; 1929, 34.16 per cent; ^ ß 0 » 38.10 per cent.1® Unquestionably it is again the country's largest manufacturer of cigarettes. 1 3 Seager and Gulick, op. cit., p. 183 ; E . F. Hutiton & Co. quoted in The Retail Tobacconist, Feb. 13, 1930, p. 13. 11 Standard 1931, p. 1858.

Corporation

Records,

vol. ix, no. 1563, sec. 10, Sept. 14,

1 5 R h o a d e s , op. cit., pp. 614-617; Barney, The Tobacco p. 26.

Industry,

1924,

1 6 American Employees' Tobacco Co., American Tobacco Company Stock Subscription Plan, IÇ31 ( N e w Y o r k , 1931), p. 3. These percentages are based apparently on sales of revenue stamps, rather than on manufacturers' annual reports of their output. T h e absolute figures have been computed to b e : 1926, 18,014,648,000 cigarettes; 1927, 21,806,430,000; 1928, 31,340,532,000; 1929, 40,663,677,000; 1930, 45,577,086,000. A t the annual meeting in 1932, President Hill said there had been a decline in

COMPETITION

IX

THE

TOBACCO

I SDL'ST

RY

The Liggett and Myers Co. in 1 9 1 2 had 37 per cent of the country's cigarette business and in 1 9 1 3 , 3 4 per cent. In the early years of the post-partition era, its " Fatima " cigarettes apparently were the country's leaders, while its " Piedmont " also ranked high. With the addition of " Chesterfield " , it had a trio of brands which f o r years ranked among the first half dozen in the market. 17 In 1922 the company advertised that 7,000,000,000 " Chesterfields " were smoked yearly, which gave it nearly 1 5 per cent for this brand alone. B y 1927, the rapid growth of this brand had carried it to 28,000,000,000, or 29 per cent of the country's total. Add the sales of its other brands, and the company's cigarette business amounted in that year to approximately one-third of the total. Since then, the relatively more rapid growth of " Lucky Strike " has lowered its proportion of the industry, one estimate being that its 1 9 3 0 sales of cigarettes were 29,000,000,000, or 24.2 per cent of the country's total. 18 Lorillard statistics are completely unsatisfactory. In 1 9 1 2 , the company sold 1 8 per cent of the cigarettes produced in the United States. In 1 9 1 3 , its proportion moved up to 22 per cent. With the coming of the war, the decline in popularity of Turkish cigarettes and the rise of " Camel " , " Chesterfield," and " Lucky Strike " , its proportion fell enormously ; but figures to show the exact proportions of the output in 1931 but that the company's proportion of the country's output was continuing to increase. No specific figures were announced. New York Times, April 7, 1932. 17 18

United States Tobacco Journal, Sept. 17, 1912, p. 8 ; Feb. 8, 1913, p. 23.

Standard Corporation Records, loc. cit. This estimale, combined with that for the Reynolds Company given above, which is conservative, and the official report for the American Tabacco Co., brings the total for these three companies alone to 91.5 per cent of the cigarette business of the country, to which must be added the Lorillard sales, if the aggregate position of the " big four " is to be measured.

DIVISION

OF THE

TOBACCO

BUSINESS

71

output it has held are not available. If the estimate of the United States Tobacco Journal is correct, the company in 1928 sold 11,000,000,000 " Old Golds ", which when added to its other brands would make its proportion of the country's consumption at least 11 per cent ; but it is probable that this estimate is too high.1* The British-American Tobacco Co. in 1 9 1 1 held a near monopoly on the manufacture of cigarettes for export, and there is no indication of a substantial change during the period here under survey, although exact figures are not available. Exports have fluctuated very widely and in the last year or two have been very small. Cigarettes are the only tobacco product exported by the United States in substantial volume and these chiefly to China. The trend of such exports to China has been sharply downward since 1928 because of political conditions, a tendency to export leaf in lieu of cigarettes, and the fall in the value of silver. From 1910 to 1914 cigarette exports averaged 1,786,000,000 a year; from 1921 to 1925, 10,182,000,000. Since then the exports have been in round figures: 1926, 9,539,000,000; 1927, 7,093,000,000; 1928, 11,706,000,000; 1929, 8,456,οοο,οοο; I930, 4,927,000,000; 1931, 2,978,000,000. The decrease has been due almost entirely to the fall in shipments to China, which has taken the following percentages of the total from year to year : 1926, 72.1 ; 1927, 62.3; 1928, 74.1; 1929, 57.4; 1930, 27.8; 1931, 4.8.20 The analysis thus far indicates that the four companies formed by the decree to which most of the domestic cigarette business was passed have developed among themselves a considerable degree of competition, in so far as the existence of 18 20

United States Tobacco Journal, Dec. 29, 1928, p. 9.

Bureau of Agricultural Economics, Foreign Crops and Markets, March 16, 1931, p. 3 1 9 ; Statistical Abstract of the United States, 1930, p. 520; Monthly Summary of Foreign Commerce, Dec., 1926; Dec., 1931.

72

COMPETITION

IN THE

TOBACCO

INDUSTRY

competition is proved by changes in the distribution of control over the country's output. The Reynolds Company, which received no cigarettes under the decree, took advantage of the rise of blended cigarettes in consumer favor to carry itself to front rank. The American Tobacco Co., after many years of falling behind, took advantage of the sudden spread of smoking among women to spurt back into the lead. The Lorillard Company, after falling into relative insignificance as a cigarette producer, tried to recover its lost ground by also appealing to women smokers, but with less effectiveness. What has happened to the other successor companies and to the independents? Have there been any serious attempts by these companies to invade the cigarette field? If so, what have been the results? B y f a r the most ambitious attempt to invade the " big four's " field was that made by the United Cigar Stores interests through the Tobacco Products Corporation, the story of which is told in the Appendix. 2 1 Here it is sufficient to say that the effort failed, its principal result being to merge practically all the important independent American cigarette producers and then to put their merged assets and brands into the hands of the American Tobacco Co. The ultimate effect of this competition has thus been to increase rather than to decrease the relative importance of the " big four ". Probably the most successful and certainly the most significant invasion of the cigarette field has been that made by the British-American Tobacco Co. This company ranks with the Reynolds Company and the Liggett and Myers Co. as regards the size of its resources, so that competition from this source is important. Such competition became potential with the signing of the decree, which abrogated the covenants entered into in 1902 between the American Tobacco Co. and 21

See also ch. iv, § 6, infra.

DIVISION

OF THE

TOBACCO

BUSINESS

73

the Imperial Tobacco Co. under which the world's markets were parcelled out to themselves and their newly-formed subsidiary the British-American Co. A progressive decline in the stock interests held in the company by Americans made such competition increasingly probable. Tames B. Duke, the dominant figure of the " trust " , elected to become chairman of British-American a f t e r the disintegration. 22 F o r a decade under his leadership the company continued to expand its business without invading the American market, although much of its manufacturing f o r export was done in this country. In 1 9 2 3 he resigned the post under circumstances which indicated that he had been forced out by British interests now in control but which he preferred to interpret as a voluntary move preliminary to retiring from business. 23 F o r some years the company under its new management made no effort to enter this country's market; but the Chinese and Indian troubles and particularly the boycott of British goods at various times from 1 9 2 5 on, affected its business adversely, and this development doubtless had some influence in leading it to try its fortunes in America. 24 Early in 1 9 2 7 its plans became evident in the announcement that it had acquired the Brown and Williamson Tobacco Co., of Winston-Salem, N. C . " Operating through this subsidiary, the British-American Co. has since made a strong campaign in smoking tobacco and cigarettes. Until 1932 the company confined its strongest efforts to promoting the " Raleigh " cigarette as a product designed to be some22

United States Tobacco Journal,

"Ibid., 24 25

Feb. 10, 1912, pp. 3 et seq.

Sept. ι, 1923, p. 3 2 ; Sept. 22, 1923, p. 3.

Ibid., Sept. S, 1925, p. 28.

Incorporated in 1906 to succeed a business established in 1894, this company was engaged in the manufacture of smoking and chewing tobacco and snuff. Its relative importance may be judged by comparing the figures in table 29, infra, with its total assets, which were $2,582,631 in 1925 and $3,138,651 in 1926. Poor's Manual of Industrials, 1926, p. 443.

COMPETITION

IN THE

TOBACCO

INDUSTRY

what more expensive than the popular cigarettes on which American producers have concentrated, although it also marketed two fifteen-cent brands on a limited scale. In 1932 " Raleigh " cigarettes, which had been reduced from time to time, were brought into the fifteen-cent class and " Wings " , one of the other two brands, was reduced so as to retail at ten cents. If skillfully done, such price reductions might be carried through without loss of customers who started buying at the higher prices. In the more expensive field the company had seemingly been very successful, although its output gives no indication of being more than a small fraction of the output of the " big four " . The chairman of the British-American Co., belittling the idea of a " tobacco war " between the British and American companies, was quoted in 1928 as saying that his company had only " a minor interest in America and is quite satisfied ", 2 e How long this satisfaction will endure is an open question; although, with two of its major markets, China and India, adversely affected by political disturbances and anti-British agitation, it may not be in a position immediately to finance an expensive and speculative drive for business in the United States. The American Tobacco Co. responded to British-American's move by purchasing control of J . W i x & Sons, a British cigarette manufacturer. Its first campaign was an attempt to popularize a blended cigarette of the type popular in the United States under the trade name " W i x " . " This 26 27

United States Tobacco Journal, Feb. 11, 1928, p. 3.

Although the " Lucky Strike " cigarette was not introduced until 1916, it could not be sold by the American Tobacco Co. in England. Under the decree the British companies were permitted to retain control of the American brands they had been marketing in England and elsewhere; while the American Tobacco Co. was permitted to retain control of the brands it led been marketing in the United States. " Lucky Strike " was the brand of an old, well-established smoking tobacco, and

DIVISION

OF THE

TOBACCO

BUSINESS

75

failed because of the preference of the British smoker for the " Virginia " tobacco cigarette. It was followed by the introduction of a new cigarette of the type preferred by British smokers under the trade name " Kensitas," which has been supported by an advertising drive of the aggressive type used for " Lucky Strike " in the United States. This is competition with the Imperial Tobacco Co. rather than with British-American; but the Imperial Tobacco Co. has succeeded American Tobacco as the dominant influence in the British-American Co., so that the distinction is perhaps more nominal than real. The significant fact in the development is not so much the precise form that competition has taken, as the fact that the decree has operated to break down the international division of territory. Independent cigarette manufacturers are both few in number and small. The most conspicuous of them are three companies formerly included in the United Cigar-Tobacco Products group but now, to all outward indications, independent. These are two affiliated companies, Philip Morris & Co. and the Continental Tobacco Co., of New York, and Stephano Bros., of Philadelphia. No figures as to their sales are available ; but such evidence as is to be had indicates that they are extremely small when compared with the " big four " . The most spectacular of the independents in recent years has been the Axton-Fisher Tobacco Co., of Louisville, Ky., whose " Spud " cigarettes, a mentholated product, have achieved nation-wide distribution. That this company's output is nevertheless comparatively small may be judged from the fact that its sales, including products other than cigarettes, amounted to only $6,277,108 in 1930, as compared with the sales of $138,473,340, also including products other the British companies maintained that they were entitled to the brand for any kind of tobacco products wherever they had marketed the tobacco prior to the partition of the " trust ".

γβ

COMPETITION

IN THE

TOBACCO

INDUSTRY

than cigarettes, reported by the American Tobacco Co. in its annual report f o r 1 9 2 3 , three years before its spurt in " Lucky Strike " sales began. 28 In 1927, when its sales were much smaller, Axton-Fisher was called the " largest independent cigarette manufacturer in the country." 29 More recently the Lambert Pharmacal Co., of St. Louis, has advertised that its " Listerine " cigarettes, another very specialized product, have been unexpectedly popular ; but the Commissioner of Internal Revenue records only 3 3 , 8 1 7 , 4 0 0 cigarettes produced in Missouri in 1 9 3 0 , and these divided between two factories.* 0 Further evidence could be marshalled ; but it would merely f o r t i f y the conclusion already reached. With one exception, neither the independents nor the successor companies have been able to make any headway against the three organizations to which the cigarette business of the " trust " was assigned. That exception, Reynolds, came into the picture early in the proceedings when the cigarette was still f a r from dominant in the industry. A s compared with the four companies in the aggregate, the other successor companies and the independents have lost ground. Table 8 shows that in 1 9 1 2 the " big three " had 9 1 . 1 per cent and in 1 9 1 3 the " big four " had 90.7 per cent of the country's cigarette business, both figures being well above those f o r 1909 and 1 9 1 0 . The evidence which has just been presented forces the conclusion that this percentage has been increased since 1 9 1 3 until it is reasonably certain that the " big four " now control 95 per cent of the cigarette industry and not unlikely 29 Poor's Manual of Industrials, 1931, p. 452. The American Tobacco Co. is the only one of the " big four " that has ever reported its sales, and even it has not done so since 1923. 2e 80

United States Tobacco Journal, Nov. 19, 1927, p. 12.

The New Yorker, Jan. 9, 1932 ; Annual Report of the Commissioner of Internal Revenue, 1931, p. 124.

DIVISION

OF THE

TOBACCO

BUSINESS

77

that their percentage runs as high as 97 or 98 per cent, since these companies have a great many secondary brands in addition to those most widely known. Of the remainder, the British-American Co. should account for a large part. In 1930 it was estimated that " R a l e i g h " cigarettes were selling at the rate of more than 1,000,OCX),000 a year. 31 If the sales of its other brands are added, it would seem that the company has not far from 1 per cent of the country's domestic output, in addition to which, according to all indications, it still dominates the export trade in cigarettes. The true significance of the continued advance of the " big four " in cigarettes will become more apparent when the course of the entire industry as described in Chapter II is brought to mind. It will be recalled that, when measured by leaf consumed, cigarettes now account for nearly half the industry as compared with about one-twentieth in 1910 and that, when measured by value of output, cigarettes now account for more than half the industry as compared with approximately one-sixth two decades ago. To say that these four companies have expanded their control over cigarettes is thus to say also that they have enormously expanded their importance in the industry as a whole. This means that in the industry as a whole the relative importance of the independents has decreased over the years. § 4. As to smoking and chewing tobacco and little cigars, figures which can be obtained are even less informative than those for cigarettes. In 1912 the Reynolds Company had nearly 9 per cent of the country's smoking tobacco; in 19x3, more than 10 per cent. In 1914 it advertised its " Prince Albert " brand as the " largest selling brand of pipe and cigarette tobacco in the world Later estimates are not to be had, although the brand has unquestion31

United States Tobacco Journal, Dec. 6, 1930, p. 13.

32

United States Tobacco Journal, March 14, 1914, p. 25.

γ8

COMPETITION

IN THE

TOBACCO

INDUSTRY

ably grown in popularity. The American Tobacco Co. in 1 9 1 2 had 2 9 per cent of the smoking tobacco business; in 1 9 1 3 , 28 per cent. In 1 9 2 1 its share was estimated at 26 per c e n t . " What has happened since then is an open question. In plug tobacco it was estimated that American Tobacco's share had fallen from 20 per cent in 1 9 1 2 to 1 8 per cent in 1 9 1 3 and to 1 6 per cent in 1 9 2 1 . 3 4 F o r the plug business of the Reynolds Company, the plug and smoking business of the Lorillard Company and the Liggett and Myers Co., and the little cigar business of all four companies, statistics for the years since 1 9 1 3 are not to be had. There is no reason to assume that the share of the four companies in the aggregate has decreased for any of these products. On the contrary, the fact that the country's output in these branches is stationary or declining, the continued decrease in the number of factories," the ownership by the " big four " and other successor companies of the most popular brands, and the absorption of some independents by successor companies, all suggest that, if there has been any considerable change, it has been in the direction of increasing, rather than decreasing, the control of the big companies as a group." Diligent search of the financial manuals and trade journals reveals only a handful of independents important enough to 33 34 35 36

Barney, The Tobacco Industry,

1924, p. 36.

Idem. Cf. ch. iv, infra.

The most important acquisitions affecting these products have been the purchase of the Brown and Williamson Co. by the British-American Co., the absorption of several producers by the Tobacco Products Corp. and the merger of the Weyman-Bratori Co. with the J . G. Dill Co. and the United States Tobacco Co. under the title of the last named. The Brown and Williamson Co., with " Sir Walter Raleigh " and " Target ", and the United States Tobacco Co., with " Model ", have been very energetic in their efforts to increase their sales of smoking tobacco. Further attention will be given to these various mergers in ch. ν and the appendix.

DIVISION

OF THE

TOBACCO

BUSINESS

79

receive much attention from the editors. Since such companies are beyond question the major ones not affiliated with the " trust ", a comparison of their importance with that of the successor companies will indicate how little success has been achieved by those provisions of the decree aimed to give the small outsider an opportunity. Many independents earn good profits ; but none of them challenge the successor companies in size. The Axton-Fisher Tobacco Co. has been mentioned. Another company often spoken of as a " large " independent is the Bloch Brothers Tobacco Co., of Wheeling, W . V a . This company is somewhat larger than the A x t o n Fisher Co. It is listed as a manufacturer of chewing and smoking tobacco and cigarettes, with the following output, chiefly of tobacco: 1924, 11,284,209 pounds ; 1925, 11,282,424 pounds; 1926, 11,349,468 pounds; 1927, not reported; 1928, 11,450,714 pounds; 1929, 12,395,277 pounds; 1930, 11,714,528 pounds." While they represent a large output absolutely, these figures are well under 5 per cent of the country's output and much smaller than the corresponding sums for any of the " big four ". Another prominent independent, the Penn Tobacco Co., of Wilkes-Barre, Pa., manufacturer of smoking and chewing tobacco and cigarettes, which has absorbed the businesses of at least a dozen other independents, reported for 1929 a capacity of 5,000,000 pounds and actual output of between 3,500,000 and 4,000,000 pounds. 58 One of the most profitable independents has been the Scotten-Dillon Co., of Detroit, Mich., manufacturer of tobacco, snuff and cigarettes. This company was able to declare a 100 per cent stock dividend in 1912, 50 per cent stock dividends in 1915 and 1921, and a 331/» per cent stock dividend in 1927 and to pay cash dividends ranging up to 26 per cent in the years just preceding the 1929-1932 business 37

Poor's Manual of Industrials, 1930, pp. 95 and 3325.

38

Poor's Manual of Industrials, 1930, pp. 468-469.

COMPETITION

8o

IN THE

TOBACCO

INDUSTRY

depression; but its total assets at the end of 1930 were only $4>379>ooo." One of the largest, if not the largest of the independent manufacturers is the Larus & Bro. Co., of Richmond, Va., makers of the widely known " Edgeworth " smoking tobacco. This company issues no public reports ; but it unquestionably does a substantial business. There is no reason to believe, however, that it is an exception to the general rule that the independents are much smaller than the successor companies. It is interesting to note that the decree's liberation of former manufacturers who sold out to the " t r u s t " f r o m their pledges not to compete has not resulted in the rise of any powerful companies. Several announced their plans to reenter the business ; 4 0 but few actually did so. Perhaps the most ambitious attempt of this sort was that of the Patterson Bros. Tobacco Co., organized in 1 9 1 3 by a number of individuals who had been connected with companies absorbed by the " trust ". This corporation engaged in the manufacture of cigarettes and smoking tobacco and took over the business of several other manufacturers but experienced little success, going out of business in 1925, when its brands and other assets were sold to the Christian Peper Tobacco Co., of St. Louis. 41 The Peper organization is itself one of the important independents about which little information is to be had ; but there is no indication that it outranks the companies here named. § 5. As to snuff, the available evidence indicates that the proportion of the industry controlled by the three successor companies operating in the field has increased despite the 39

Poor's Manual of hxdtutrials,

40

United States Tobacco Journal, Nov. 25, 1911.

1931, p. 203.

*lIbid., Aug. 16, 1913, p. 5; May 9, 1914, P. 10; March 27, 1920, p. 22; Jan. 13, 1923, p. 3; April 7, 1923, p. 47; Jan. 26, 1924, p. 52; March 28, 1925, p. 8. Poor's Manual of Industrials, 1923, p. 1462.

DIVISION

OF

THE

TOBACCO

BUSINESS

8l

fact that the monopoly of the " trust " was wellnigh complete. Table 7 shows that whereas the " trust " had 96.5 per cent of the country's output in 1910, the successor companies had 97.1 per cent in 1912 and 97.3 per cent in 1913. While exact figures for the period since then are not available, Table 12 is suggestive. 42 In 1913 there were sixtyeight snuff factories registered. In 1927, the last year for which they were reported separately, only twenty-seven were registered. Since the three large producers received only six factories in the beginning and have continued to operate them, and since there were no other large producers with several plants whose operations they could consolidate, the decrease can be explained only by the retirement from business of a considerable number of small producers. It is somewhat difficult to determine what has happened as between the three companies. The Commissioner of Corporations found no real competition in 1913, reporting " that in the snuff branch each of the three successor companies has practically a monopoly in its respective type and to a large extent a distinct sales territory " and consequently " that the branch is characterized by unusually high profits and small advertising and selling expenses." 13 The territorial monopolies thus described arose out of the characteristics of snuff and the distribution of brands. There are three major types of snuff : ( 1 ) Scotch snuff, made of finelypowdered tobacco leaf and stems and including a number of subtypes, such as strong Scotch, sweet Scotch, salt Scotch and hightoast Scotch, of which strong Scotch is the largest seller. (2) Maccaboy or " b l a c k " snuffs. (3) Swedish or chewing snuffs, which are ground much less finely than Scotch and contain a large amount of moisture. Each type 42

Ch. iv, § 2, infra.

Report of the Commissioner pt. iii, p. 14. 43

of Corporations on the Tobacco

Industry,

82

COMPETITION

IN THE

TOBACCO

INDUSTRY

is popular in some particular territory, and within each type particular brands had their particular strongholds at the time of the partition. The result was that under the decree territories were divided rather than business within territories. The George W . Helme Co. received brands of sweet and salt Scotch and maccaboy snuffs selling chiefly in the southeastern states and along the Atlantic seaboard, but also some strong Scotch brands selling mainly in West Virginia. The Weyman-Bruton Co. received brands of Swedish snuff selling chiefly in the northwest and strong Scotch brands sold chiefly in the central south. T h e American Snuff Co. retained only strong Scotch brands sold mostly in the southwest. Of the business done in Louisiana, Arkansas, T e x a s and Oklahoma at the time of the partition, 80 to 85 per cent was in one brand, " Garrett," assigned to this company. " F r o m this preexisting division of sales territory it follows that competition in the snuff business is not active," the commissioner reported. 44 Closer analysis indicates that some degree of competition might be expected to develop in at least one type of snuff—strong Scotch. The Weyman-Bruton Co., with its Swedish snuff selling in a territory entirely separate from that in which most of the country's snuff is sold, and the Helme Company, with its control of sweet and salt Scotch and maccaboys, each had monopolized areas which the other companies could invade only with difficulty ; but all the companies received strong Scotch brands, and while each had territories in which its brands predominated, the territories were adjacent and to some extent overlapping, so that this would be the logical place for a competitive drive started by any company to begin. T h e American Snuff Co. would be the logical chief sufferer, having no well-protected monopoly upon which to fall back f o r support. "Idem,

and π F. T. C, 151-152.

DIVISION

OF THE

TOBACCO

BUSINESS

83

Information developed in proceedings brought against the American Snuff Co. by the Federal Trade Commission which will be discussed in some detail in Chapter I X suggests that something of this sort has happened. 45 Competition is still limited by variations in the type of snuff preferred by different sections of the country but has developed in the overlapping sections. Table 8 shows that through 1 9 1 3 , the American Snuff Co. and the Weyman-Bruton Co. took over increasing proportions of the industry, while the Helme Company dropped back. T h e only available measures of the changes since then in the proportions of the industry controlled, the companies' annual reports on earnings, indicate a subsequent reversal of trend, the net change over the two decades being a substantial increase f o r the Helme Company and the Weyman-Bruton Co. now the United States Tobacco Co., while the American Snuff Co. has virtually stood still." A n undetermined part of the increase of United States T o bacco's earnings has come f r o m the business in other products absorbed in mergers with other companies; but there is no reason to suppose that Helme's great increase has come from anything other than expansion of the proportion of the snuff industry under its control. § 6. In the large cigar industry the failure of the " trust " to achieve a monopoly position alters the point of view f r o m which the post-partition era must be viewed. Here the problem is to see how the successor companies, who were f a r from monopoly control, have fared in adapting themselves to the changed conditions introduced by cigarmaking machinery. The report of the Commissioner of Corporations is of no use here, since he did not tabulate the sales of the individual successor companies in this field but contented himself with the mere statement that their output represented a smaller 45

In the Matter of the American Snuff Co., 11 F. T. C , 144 et seq.

* e Table 32, ch. xi, § 5, infra.

84

COMPETITION

IN THE

TOBACCO

INDUSTRY

percentage of the country's total in 1 9 1 2 and 1 9 1 3 than was produced by the " trust ". T w o of the cigar units carved out of the " trust " may be dismissed at once from further consideration. These are the Hernscheim Tobacco Co. and the Union-American Cigar Co., successors to the American Stogie C o . " The UnionAmerican Cigar Co. received plants at Pittsburgh and Lancaster, Pa., and Newark, N. J . , but early sold the Lancaster plant to the United Cigar Manufacturers' Co.48 Its chances for success were slight from the first, if one may judge from trade-journal comments. When the Union-American Cigar Co. was given independence . . . there was no gainsaying the fact that it did not have much to brag about. The corporation's goodwill asset, as represented in its brands, amounted to a number of broken-down old-timers that were rapidly vanishing from tobacconists' shelves.4" The author of this comment went on to celebrate the tremendous improvement which had followed the decision of its management to advertise in the trade press ; but his cheers were premature, for in 1920 the company went out of business, closing its Pittsburgh factory and selling its plant at Newark to the P. Lorillard Co.80 Concerning the Hernscheim Tobacco Co. the author has been able to obtain no 47

Report of the Commissioner of Corporations on the Tobacco Industry, pt. iii, p. 210. On p. 218 this report refers to the Hernscheim organization as the Hernscheim Co., Ltd. 48 Now the General Cigar Co. United States Tobacco Journal, May i l , 1912, p. 5. 48 60

Ibid., Sept. 18, 1915, p. 5.

Ibid., April 10, 1920, p. 3. It was presumably in this transaction that Lorillard acquired the " Rocky Ford " brand it subsequently developed as a machine-made nickel cigar, although the author has been able to obtain no definite information on the subject.

DIVISION

OF THE

TOBACCO

BUSINESS

85

51

information whatsoever. If it is still operating, however, it is not one of the country's large producers. The net effect of the operations of these companies has thus been to lose for the successor companies their proportion of the industry. The largest of the successor cigar units, the American Cigar Co., was formed originally to consolidate the cigar properties of the " trust " . It was left under the control of the American Tobacco Co., as we have seen, but was required to pass parts of its assets to other successor units. In common with the other large cigar producers of the country, this company has mechanized and centralized its manufacturing operations. At the time of the partition, it had a very large number of plants scattered over a wide area; but by 1930 it had sold many of these and concentrated the bulk of its operations in very large machine-equipped factories at Kansas City, Louisville and Jersey City. Even approximately correct estimates of its output in these factories are not published; but it has a number of very important brands, of which "Chancellor," " Roi-Tan " and " C r e m o " are the most widely known. 52 Early in 1930, the Dow-Jones ticker service reported production of " Cremo " cigars under way at the rate of 1 , 1 1 0 , 0 0 0 cigars a d a y . " If this rate were kept up for 300 working days it would mean an output of approximately 330,000,000 cigars a year, or approximately 5 per cent of the cigars produced in the United States in 1930. If allowance is made for the other popular brands of 61 Individuals to whom the writer has been referred for information have made no reply to letters of inquiry. 52

Secretary McAdoo reported that in 1912 the output of the company and two subsidiaries, Seidenberg & Co. and the Havana-American Co., totaled 440,329,270 cigars ; but his figure was based on taxes paid and probably included some imported cigars. United Stales Tobacco Journal, Aug. 9, 1913, pp. 3, 5. 53 Wall Street Journal, Feb. 24, 1930.

86

COMPETITION

IS

THE

TOBACCO

INDUSTRY

the company and the subsequent increase of " Cremo there is little reason to doubt that it has at least maintained its percentage of the country's output at the 6.06 per cent estimated in Table 2. It has not, however, held the position of first place it held immediately after the partition, having been surpassed in size by at least one independent. The second important cigar unit formed out of the American Tobacco Co. properties was the Federal Cigar Co., which was assigned to the P. Lorillard Co. Comparatively little information concerning this subsidiary has been made public by the parent company ; but there is no indication either that it has lost much ground as compared with other producers or that it has overhauled any of the leaders of the industry. It, too, has mechanized its manufacturing plants and revised its merchandising methods so as to concentrate on two major brands, of which the more expensive, " Muriel," was introduced in 1 9 1 4 . " Early in 1930 the company announced its intention of centering its selling of the brand on one size, the " perfecto," designed to retail at ten cents.8* In nickel cigars the company's principal brand is " Rocky Ford " , a brand apparently taken over from the Union-American Cigar Co. and introduced as a Lorillard product in 1926 when mechanization of the industry had made possible popular cigars at that price.56 A s to output, reliable figures are not to be had for the years since 1912, when the company produced 367,597,647 cigars." Optimistic announcements concerning the growth of its sales which emanate from company headquarters at intervals are couched in terms which give no real information.5® In 1927 increases in " Rocky Ford " sales 54

United States Tobacco Journal, Feb. 21, 1914, p. 27.

55

Ibid., Jan. II, 1930, p. II.

57

Ibid., Aug. 9, 1913, pp. 3, 5·

56

Ibid., June 26, 1926, p. 42.

58 Ibid., Nov. 14, 1925, p. 32; March 12, 1927, p. 8; Dec. 12, 1927, p. 9; Dec. 21, 1925, p. 50.

DIVISION

OF THE

TOBACCO

BUSINESS

87

were given the credit for an enlargement of the company's Richmond plant, its reputed plans being to produce 200,000,000 cigars a year under that brand." Whether it reached that goal was never announced, although at the end of the year, in the annual rush season a daily output of 2,000,000 large cigars a day was reported.80 The third successor cigar unit, the Porto Rican-American Tobacco Co., was given no part of the United States production, but was left the major producer of Porto Rican cigars and cigarettes. In 1 9 1 2 its output of cigars in five factories in Porto Rico was announced as 117,500,000 a year." In 1 9 2 1 , when the company was fighting a proposed Porto Rican stamp tax, it said that its output was 200,000,000 cigars a year.· 2 More recently, the productive capacity of its properties has been listed in the manuals as 250,000,000 cigars and 500,000,000 cigarettes a year. Actual production has been considerably less, having been announced as more than 150,000,000 cigars and 400,000,000 cigarettes in 1 9 2 5 . ω Officials of the company testified under oath that in 1925 the company sold in Porto Rico 356,291,800 cigarettes and in 1926, 341,255,200 cigarettes, to which must be added its exports.®4 The course of dollar sales since then indicates a continued decline in output, although exact production figures are not available.65 The estimates already given may 58

Ibid., Feb. 26, 1927.

60

Ibid., Nov. 12, 1927. β1 Ibid., July 27, 1912, p. 3. 62

Ibid., Sept. 24, 1921, p. 3. Poor's Manual of Industrials, 1930, p. 1633 ; The Journal Commerce (New York), Jan. 4, 1927. 83

of

64

The

Porto Rican-American Tobacco Company of Porto Rico v. American Tobacco Company, Transcript of Record, pp. 213 et seq.

65 Net sales were: 1925. $7.330.0ii; 1926, $6,338,044; 1927, $5,480,429; 1928, $4,762,371 ; 1929, $4,105,102. Not reported since. Poor's Manual of Industrials, 1931, p. 2050.

88

COMPETITION

IN THE

TOBACCO

TABLE

INDUSTRY

9

OUTPUT OF CIGARS AND CIGARETTES IN PORTO RICO, FISCAL YEARS, 1 9 1 0 - 1 9 3 0

Fiscal year ended J u n e 30

1910 1911 1912

8

Cigars

Cigarettes

244,424,598

406,986,300 471,470,045

275.807.593 281,448,271 284,806,812 263.075.534

543.724,35° 473.768,8IO 382,890,120

275.698,490 268,379,151

351,100,915 319,811,295

>9«7 1918

288,426,204

•9'9

243.459.492

346, ς 16,640 446,693,600

1920 1921 1922

321,340,198 258,052,041 218,017,408

1923 1924

259.643.473 251,217,681

581,348,820 417.454.960 436,708,520 420,303,400 408,868,100

1925 1926

1929

266,579,209 323,122,901 229,450,933 207,770,413 220,110,793

424,107,820 375.522,320 354,453,850 390,243,600 304,386,700

1930

201,019,305

260,396,500

1913 •9'4 I9'S 1916

1927 1928

Thirtieth Annual Report of the Governor of Porto Rico (Washington, PP- 23-24. The totals include withdrawals for consumption in Porto Rico and for export, chiefly to the United States. The exports total from three-fifths to two-thirds of the cigars and less than one-tenth of the cigarettes. b Not reported. a

I 93°)>

be compared with the statistics in Table 9, which shows the output of cigars and cigarettes in Porto Rico from 1910 to 1930. Evidently the company normally makes about threefifths of the island's cigars and an even larger proportion of its cigarettes. The decline in output here revealed serves to corroborate the evidence of the company's sales record as to

DIVISION

OF THE

TOBACCO

BUSINESS

89

its fortunes since 1925. It is clearly suffering from a decrease in the demand for Porto Rican products in general. In an effort to overcome this unfavorable factor, as well as to strengthen itself against labor unrest in Porto Rico, the company some years ago decided to enter the cigar manufacturing field within the United States on a large scale." It had already made one foray into this country through subsidiaries eventually joined to form the New York-Tampa Co., with factories at Tampa, Fla. and Perth Amboy, N. J . This company was sold in 1925 to Schwab, Davis y C i a . " In 1927 Porto Rican-American again entered the United States by acquiring a controlling interest in the Congress Cigar Co. and followed this move in 1929 by acquiring a controlling interest in Waitt and Bond. Congress Cigar had been a spectacular performer in the years immediately preceding the change of control. Organized in 1896 to produce " L a Palina " cigars, the company grew steadily and slowly until 1 9 2 1 , when its output was 55,440,017 cigars. Then its growth speeded up suddenly, output increasing to 99,612,925 in 1922, to 147,892,524 in 1923, to 179,150,715 in 1924, to 219,854,835 in 1925 and to 249,616,564 in 1926. In 1927, the first year under the new management, output rose to 274,150,400, then dropped to 251,375,525 in 1928 and to 238,077,565 in 1929. Output for 1930 was not announced; but sales fell from $15,906,395 in 1929 to $ 1 1 , 009,170 in 1930, so that a drop to below 200,000,000 in output is not unlikely.8" Waitt and Bond is a considerably smaller company. Exact production figures are not announced; but in 1930 and 1931 it was reported "operating M Letter from President Luis Toro to stockholders of the Porto RicanAmerican Tobacco Co., Jan. 10, 1927. 87

United States Tobacco Journal, April 30, 1921, p. 3 ; July 19, 1924, p. 3; March 17, 1923, p. 3 ; Feb. 28, 1925, p. 3. 68

Poor's Manual of Industrials, 1931, pp. 2051-2052.

COMPETITION

IN

THE

TOBACCO

INDUSTRY

on 90,000,000 basis " , the probability being that actual output is well below this figure. The downward course of sales is again an indication that, at least through 1930, output was dropping." This does not mean necessarily that the Porto RicanAmerican Co. has control of a smaller proportion of the industry than before, since the cigar output of the entire country has also fallen sharply. On the whole, it is necessary to conclude that the net effect of this company's operations has been to increase the proportion of the industry held by the successor companies to somewhere near the maximum percentage achieved by the " trust " despite the loss of the Union-American Cigar output. Had the measurement been made in 1929, the control of the successor companies probably would have been 20 per cent or more because of the Webster-Eisenlohr and other properties controlled through the Union Cigar Co. by the United Cigar Stores Co.™ Otto Eisenlohr and Bros, alone were reported , to have produced 176,654,381 cigars in 1 9 1 2 and 212,000,000 cigars in 1927. 7 1 Addition of the other properties controlled by the group in 1929 justifies an estimate for that year of at least 250,000,000 cigars. These properties are no longer under the control of the United Cigar Stores Co., however, so that the only other factor left to occasion a possible further increase in the properties controlled by the successor companies is the American Cigar Company's drive on " Cremo " , and as to the results of this in terms of sales there is no information. Among the independents, a very strong merger movement has steadily concentrated output into fewer hands. A long «· Ibid., p. 2052. 70

Cf. appendix.

71

United States Tobacco Journal, Aug. 9, 1913, pp. 3. S ; Jan-

P· 3·

2I

. '928,

DIVISION

OF THE TOBACCO

BUSINESS

series of mergers is responsible for the existence of the largest single manufacturer in the industry, the General Cigar Co. The central unit in this company was formed about 1902 when four important cigar manufacturers combined to organize the United Cigar Manufacturers, a partnership which was incorporated in 1906 as the United Cigar Manufacturers Co. and took its present corporate title in 19x7. apparently to avoid being confused any longer with the United Cigar Stores Co. In 1923, thanks to its absorption of other enterprises, as well as to its own growth, the company had seventy-two factories, thirty-three leaf tobacco warehouses, ninety-two wholesale distributing branches and seventy-two retail stores; at the end of 1930 it had twentyone factories and stripping plants, fifty-nine warehouses, 1 4 1 wholesale branches and thirteen retail outlets." The concentration in factories and expansion in distributive outlets between the two dates gives evidence of concentration of manufacture and alteration of merchandising policies resulting from the adoption of machine methods. Not until early in 1923 were the executives of the company sufficiently satisfied with the machine to use it even experimentally; but in April of that year, twenty of the American Machine and Foundry Co. units were installed at Kingston, Pa.™ By 1927 the company had 766 machines in operation or under contract and was reported to be making more than 60 per cent of its cigars by machinery." Since then exact figures have not been given out ; but the proportion of machine-made output has probably increased. 72 Ibid., Jan. 13, 1912, p. 5; March 9, 1912, p. 3; March 23, 1912, p. 3; Jan. 4, 1913, p. 3; Jan. π , 1913, p. 3; Feb. 15, 1913, p. 3; March 8, 1913, p. 3; Oct. 4, 1913, p. 20; Feb. 7, 1914, P. 3; Nov. 2, 1915, pp. 3, 35; Dec. 30, 1916, pp. 6, 7; Aug. 17, 1918, p. 3; Dec. I, 1923, p. 10. Poor's Manual of Industrials, 1931, pp. 1189-1191. " Bondy, loc. cit., pp. 14, 25. 74 New York World, June 6, 1927.

COMPETITION

IN THE

TOBACCO

INDUSTRY

As to output, the company has for many years been the largest in the country." Its output in 1 9 1 2 , as reported to the Senate by the Secretary of the Treasury was 280,309,765 cigars, a figure somewhat smaller than that for either of the two major successor companies in the field; but in 1 9 1 8 its output was estimated at 500,000,000, and beginning with 1926, when its factories had been fairly well mechanized, its output per year was: 1926, 700,000,000; 1927, 728,000,000; 1928, 752,000,000; 1929, 880,000,000; 1930, 780,000,000; 1 9 3 1 , 776,000,000." It is evident that General Cigar, although admittedly the largest producer in the industry, has not yet equaled American Cigar's pre-partition peak output, which exceeded 1,000,000,000 cigars in 1903, 1907 and 1909, or achieved even temporarily a control as great as the 16.4 per cent of the country's output controlled by the " trust " at its high point in 1 9 0 3 . " Second among the independents in point of volume is the Consolidated Cigar Corp. organized in 1 9 1 9 as a merger of 75

In 1930 it advertised itself as " the world's largest manufacturer of cigars." United States Tobacco Journal, June 21, 1930, p. 6. 78 Ibid., Aug. 9, 1913, pp. 3, 5; Sept. 21, 1929, p. 7 ; Poor's Manual of Industrials, 1931, pp. 1189-1191; Standard Corporation Records, " I n dividual Reports Section," G-16, revised Feb. 4, 1932. There is some reason to believe that these output figures are somewhat exaggerated. Commissioner McCulloch in a memorandum dissenting from the dismissal by the Federal Trade Commission of a complaint against the company based on its exclusive territory plan for wholesalers, stated that " its gross output has reached as high as 812,977,000 cigars per annum." Federal Trade Commission, In the Matter of the General Cigar Co., Inc., Docket No. 1879, Order of Dismissal, May 21, 1932, " Dissenting Memorandum of Commissioner McCulloch." An important factor maintaining the output during 1931 was the company's change of its " White Owl " brand to a nickel cigar in the summer of that year. The company has several other important brands. United States Tobacco Journal, Jan. 17, 1931, p. 7 ; New York Times, Dec. 6, 1931. 77 Report of the Commissioner of Corporations on the Tobacco Industry, pt. iii, p. 192.

DIVISION

OF THE

TOBACCO

BUSINESS

93

six widely known cigar manufacturers which subsequently took in three other producers.™ Its early years were apparently not happy ones, as its presidency changed hands twice within two years and its financial results, especially in 1921, were unsatisfactory; but beginning with 1922, its affairs improved until the depression of 1929-1932 dealt it another heavy blow. Its maximum output seems to have been well under 500,000,000 cigars a year, trade journal reports in 1926 that its year's output was 450,000,000 and that of the G. H. P. Cigar Co., which it was about to absorb, 250,000,000, having been greatly exaggerated." For 1929, a year when earnings were one-third larger than in 1926, the output of the corporation, including that of the G. H. P. Cigar Co., was officially reported at 412,000,000. Since then Poor's Manual has reported that production runs between 450,000,000 and 500,000,000 a year.' 0 Several other independents are important enough to warrant some attention. Bayuk Cigars, Inc., formed as a partnership in 1896 and subsequently incorporated, was reported as producing 240,000,000 cigars in 1923.81 No estimate has been published since ; but until the depression year 1930 almost halved them, earnings increased steadily. The Deisel-Wemmer-Gilbert Co., of Lima, Ohio, was a combination of properties reported to be producing 210,000,000 cigars a year, to which must be added 30,000,000 a year to be made under contract for the Odin Cigar Co.*2 The D. Emil Klein Co., which specializes in hand-made cigars, has announced the following sales: 1927, 38,042,000 cigars; 78

Poor's Mamtal of Industrials, 1931, pp. 1348-1349.

™ United States Tobacco Journal, Sept. 4, 1926, p. 3. 80

Poor's Manual of Industrials, 1930, pp. 1111-1112; 1931, pp. 1348-1349.

81

United States Tobacco Journal, Dec. I, 1923, p. 5.

82

Ibid., Jan. 12, 1929, p. 7 ; Feb. 9, igaft p. 3 ; March i6, 1929, p. 7.

COMPETITION

IN THE

TOBACCO

INDUSTRY

1928, 42,859,646; 1929, 46,086,900; 1930, 43,863,425. 8 3 H. Fendrich, Inc., of Evansville, Ind., is rated as having produced 100,000,000 cigars in 1 9 2 6 and 120,000,000 in 1 9 2 9 . " The Mazer-Cressman Cigar Co., representing a merger of three independents also ranks high. T h e Mazer Cigar Co. alone in 1923 before the first merger was rated at 150,000,000 cigars a year and one year later, after its first merger, at 180,000,000. Subsequent estimates are not available; but the company has since broadened its markets. 85 The R . G. Sullivan factory at Manchester, Ν. H., has been assigned the following figures: 1 9 1 4 , 38,000,000; 1 9 1 8 , 60,000,000; 1924, 8o,ooo,ooo. 8e These do not exhaust the list of important independents, but are all f o r which estimates of output could be found. It is quite probable that other companies in the industry exceed some of these listed. The important point is the extent of the control over the industry exercised by this handful of producers. From the foregoing it is reasonable to assign the output in Table 1 0 for 1929 to the twelve units discussed. Since the entire country in 1929 produced 6,544,477,040 cigars, this indicates that the twelve companies here listed produced approximately 54 per cent of the country's cigars. Allowance being made for inaccuracies in the estimates, it still seems fair to say these companies in 1929 produced not f a r from half of the country's cigars. The four successor company units account f o r 1,300,000,000 of these cigars, or approximately 20 per cent of the output of the country, which is well above the peak reached by the " trust " in 1903. 83

Poor's Manual of Industrials, 1931, pp. 380-381.

84

United States Tobacco Journal, Nov. 6, 1926, p. 5; The Retail Tobacconist, Dec. 19, 1929, p. 17. 85 United States Tobacco Journal, Sept. i6, 1922, p. 3 ; Feb. 17, 1923, p. 3; July 21, 1923, p. 46; Feb. 9, 1924, p. 3; Oct. 16, 1926, p. 18. 8e

Ibid., June 27, 1914, p. 1 3 ; July 20, 1918, p. 7; Dec. 13, 1924, p. 7.

DIVISION

OF THE TOBACCO

BUSINESS

95

T A B L E 10 Ο υ τ Γ υ τ OF TWELVE CIGAR COMPANIES IN

b

American Cigar Co P. Lorillard Co Porto Rican-American Tob. Co Union Cigar Co General Cigar Co Consolidated Cigar Corp Bayuk Cigars Deisel-Wemmer-Gilbert Co Maier-Cressman Cigar Co H. Fendrich R. G. Sullivan D. Emil Klein Co Total

1929»

400,000,000 350,000,000 300,000,000 »50,000,000 880,000,000 412,000,000 250,000,000 240,000,000 180,000,000 120,000,000 80,000,000 46,000,000 3,508,000,000

• Compiled from estimates given in the text. b

Output in continental United States only.

Since 1929 practically all of these companies have suffered decreases in output. T h e continued concentration of the industry into fewer hands shown in the reports of the Commissioner of Internal Revenue on which Table 12 *T is based, makes it probable, however, that while the absolute output of these companies has declined, their proportion of the country's output has increased. For the successor companies, the collapse of the United Cigar structure has put this unit in the hands of a new management, and the new management has in turn passed the cigar manufacturing units to others. The net effect would seem to be a decline in both the absolute and the relative importance of the successor companies since 1929, although the validity of this conclusion must remain in doubt until more information is available concerning the results of American Cigar's " Cremo " campaign. The general conclusions to be reached as regards cigars, 87

Ch. iv, § 2, infra.

φ

COMPETITION

IN THE

TOBACCO

INDUSTRY

then, are : ( ι ) The Cigar successor companies have in the aggregate not much more than held their own in the industry, although it may well be that the American Cigar Co. through the energetic campaign it has inaugurated for " Cremo " will soon change this situation. ( 2 ) A s between the various successor companies, there have been very considerable changes in position. ( 3 ) The decree has not at all deterred either successor companies or independents from participating in a merger movement which has put at least half of the country's output into the hands of a dozen or so producers. O n the whole, the stock-market collapse of 1929 was more responsible for bringing the merger movement to a close than was fear of the anti-trust laws. § 7. A s to the producers of products other than tobacco separated from the " trust ", information is scanty. Concerning tin foil, there is no basis on which to form an estimate concerning the relative progress of the two successor companies or the company to which the properties of one of the successor companies, the Conley Foil Co., were sold." The progress of the licorice industry has not been such as to attract new capital to compete with the two units split off from the combination. Nine-tenths of the licorice used in this country is used as a flavoring or sweetening ingredient in smoking and chewing tobacco." Since the reports of the Commissioner of Internal Revenue as tabulated in Table 11 show that the consumption of licorice by tobacco manufacturers has dropped from 45,223,328 pounds in 1910 to 30,673.738 pounds in 1930, or 32.2 per cent, the opportunities for competitors or even for the successor companies themselves have not been very bright. One of the successor companies, as we shall see,*0 has found it advisable to branch 88

Cf. ch. ν, infra.

80

Barney, The Tobacco Industry, 1924, pp. 45-46.

eo

Ch. ν, infra.

DIVISION OF THE TOBACCO

BUSINESS

97

out into lines of industry having no connection whatsoever with tobacco. TABLE

11

LICORICE L'SED BY TOBACCO M A N U F A C T U R E R S , CALENDAR Y E A R S , 1 9 1 0 - 1 9 3 0 » Year

Pounds

Year

1910

45,»23,328

Pounds

1930

1911

42,786,292

192 t

1912

43.498,944

1922

36.539.237

1913

44.47a.724

1923

37,664,610

I9'4

43.J84.555

1924

37.'54.35°

1915

41,249,609

1925

35,804,927

1916

43424,898

1926

36,230,644

1917

48.759.756

1927

34,196,178

1918

48,647,018

1928

32,959.499

1919

41,015,172

1929

32,651,024

39.366.695

34.575.470

1930 * Compiled

from

the

annual

reports

of

30.673.738 ti;e

Commissioner

of

Internal

Revenue.

§ 8. A general answer to the questions raised at the beginning of the chapter is now possible. A s between the successor companies, there have been enormous s h i f t s in relative importance. T h i s is particularly true in cigarettes, where the years have seen the Reynolds Company invade the industry, rise to first place and fall back to second; the American Tobacco Co. gradually drop back in the race and then spurt f o r w a r d a g a i n ; the Lorillard Co. gradually lose out and find it extremely difficult to recover the lost ground. Similarly in snuff and cigars, there have been far-reaching changes in the relative positions of the successor companies. This indicates the existence of competition, although we must look further to see whether what exists is really free competition or a confused situation in which elements of monopoly and elements of f r e e competition are intermingled.

98

COMPETITION

IN THE

TOBACCO

INDUSTRY

As between the successor companies and the independents in the tobacco industry as a whole, the years have brought a tremendous increase in the relative importance of the former and particularly of the " big four ", chiefly because these companies have been able to increase the percentage of the country's cigarette output under their control during a period when cigarette consumption was growing tremendously, although it is probable that the successor companies have also increased their proportion of smoking and chewing tobacco and snuff. In the cigar industry the independents in the aggregate have been able to hold their own thus far, though the situation is still in a state of flux which prevents a final decision as to what will be the outcome. The fact that in no field other than cigars has any independent appeared who ranks in size with the successor companies calls for explanation, since it indicates the possible existence of some sort of limitation on competition in the industry. Several of the independent smoking tobacco producers operating on a small scale in limited territories, have made handsome profits. Why have they not expanded into producers rivaling in size the successor companies? Why have no independents been able to take advantage of the huge increase in cigarette consumption? The answer might seem to lie in one of the arguments advanced by the independents against the decree—that free competition was out of the question if the business of the " trust " was divided among large, completely equipped companies.' 1 In other words, the independents argued that the court itself was making free competition impossible. On analysis, this argument loses its validity. It is undoubtedly true, as we shall have occasion to see in Chapters VI, V I I and VIII, that concentration of an industry into the hands of a few large producers puts great obstacles in the way of free com" Cf. ch. i, § 3, supra.

DIVISION

OF THE TOBACCO

BUSINESS

99

petition. It does not necessarily follow, however, that the court deserves to be condemned for permitting such concentration from the outset of the post-partition era. Competition presumably tends to work itself out in the survival of firms of optimum size. The most economical size may in any given instance be large or small. If it is large, as seems to be true in tobacco, the ultimate outcome would inevitably be a situation in which competition was limited to that which can develop among a few large companies, and newcomers would find it extraordinarily difficult to break into the field. The situation would differ from that arbitrarily created by the court in that the identity of the dominating concerns might be different. Since the identity of the individuals in control of every producer must inevitably change as time passes, this difference would be of no fundamental importance. Our conclusion as to whether or not the court was wise from an economic point of view in refusing to break the " tobacco trust " into a great many small units thus depends upon whether or not the optimum size tobacco firm is large. We must therefore look into whatever evidence is available concerning the existence and strength of economic forces leading to concentration of the tobacco industry into the hands of a few large producers.

CHAPTER

IV

C O M P E T I T I V E I N F L U E N C E S A F F E C T I N G T H E S C A L E OK PRODUCTION

§ 1. The question raised at the end of the preceding chapter as to whether there are forces in the tobacco industry which could have concentrated it into a few hands even though the court had broken the " trust " into a much larger number of units, divides, on analysis, into two parts. First, it is necessary to see whether there are any influences at work in the industry which make the most economical unit for the manufacture of individual tobacco products a very large one. Second, it is necessary to see whether there are any influences which make it necessary or desirable for tobacco manufacturers to broaden their operations beyond single processes in the manufacture of single products. These two problems, which may be denominated, respectively, that of the influences affecting the scale o f production of tobacco products and that of the influences affecting integration in the tobacco industry, will be taken up successively in this and the following chapters. § 2. The problem of the scale of production also proves, on analysis, to be a dual one. Influences affecting the scale of production operate along two lines. Some of them will operate to determine the most economical size of the factory or plant. Others will operate to determine the size of the most economical firm or enterprise without regard to the number of factories it controls. That the two have often been mixed indiscriminately in theoretical discussions of the factors determining the scale of business operations should not blind one to the necessity of considering the two ioo

SCALE

OF

PRODUCTION

ΙΟΙ

phases of the problem separately. Further analysis will show that the forces operating to determine plant or factory size are often quite different from those operating to determine the size of the firm or enterprise and that any attempt to answer the question as to whether there are economic forces at work tending to eliminate the small producer can result only in confusion if the ambiguity of the term " producer " is not kept constantly in mind. T A B L E PLANTS

MANUFACTURING

TOBACCO I N

12

TOBACCO PRODUCTS A N D D I A L E R S

B U S I N E S S A T CLOSE OF Y E A R ,

1913-1930

IN

LEAP

·

Manufacturers of

Year Cigars

1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924

...

>5.732 14.576 >3·

a

7

2,698 2.364

3 "

2,214 2,085

3 "

>.915

',803 1,814 1,810

237

213 225 185 190 161

11,576 10,628 9.877 8.533

>.9'7

>43 •39 136

8,427 7.974

Snuff

68 68

4,004 3 . >64

7'

3.497 4.139 3.668

67 61 60

1.548

25

1,318

28

>.396

27 27

6,780 6,195

112

1,084

3,424 3.662

35 3«

>•733

I.3°2

3.092

57

1,652

>.243

f r o m the a n n u a l

Dealers in Leaf TobaccQ

28 26

>33 110

7 Ν σ>

o\ M O*

^ 0\

»Λ »Λ »Λ50 O 9« rs ΙΛ ΙΛΧ NO f>4 — Μ Μ te 00

ι Ο. ο s a c e aj

σι «s o

N t s N t> v/V» te te te te te Οχ

v£> w

r

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rr ON

i

ε

's ç

h

Λ

a

li s à s « { tí o· S; a « Ρ c ν V> a a: § S -a Ε κ

ta υ ~ •3 T3 u Ι) α Ρ9 cd

2 sw C 3 λ C Β

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NO 00 m ^

•sβa

be IC

1

o o>

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C

00

00 Ν NO m Μ Ν so te Ν Os00 00 ffvO

00 M ON

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OO'OOI

α.

«ΛΝ m U-> M c> NO ^«O « ' ΝΝ ά 00

INDUSTRY

OO'OOI

"o

IN THE TOBACCO ΙΟΟ,ΟΟ

COMPETITION

381,066,541

!04

2 „ >-* -9 « ^

H i » Ώ ε α 3 'sj , -

ν

S os ε ε

•±3 V c . S s ο =Q,-ΤΝ O Ό Ζ Κ

ο

•ο

ε

»

rt «

2

U 3 S C Γ « * —

ON m 0 0 O v ^ N O CN o -»f r ô

^ o W N LO t>» >-Γ >-Γ

w oN » 0 0 « Γ Ο Ό «- t * t ΓΟ 0 . 0 0 O tï m o O

VO Ο «ΛΟ »-»NO — ON O Ι Λ » «ΟΟΘ PO 0 0 0 0 0 0 t C o NO*

Ο Ο t»«. I>»

^ !>· t>. vo 0 0 vo f ' t σ ι

t í - r>. · ro O O v OnOO t - *

t » . w ©NNO f O ^ \0 Ό vo V O O vo

ν η

μ Ι

Ι

ϊ s

sively sively

exclu-

sively

ettes

exclu-

ettes

exclu-

cigars

o -

rfM τ}- l o Μ Ν

o « Ν O

-

O Ν Ν Μ Λ f " ) On On u"> f ) « W — « t-

•φ LO

» o t—NO vO ON

t>»00 00 Ο Of"» tCvcT

Tf-o ΝΟΟΟΝ Ν Ν Μ Λ Ν VO « Ί · Ν V l ô ^ f ^ - ^ · ^

O O O O o

o ~ o o o

O

00l A f O N i O Ντ)-- - O M M M M

O 0 \ N N Ν ΟνΟΟ t - » 0 0 Ο

Ό Ό

τ Γ TJ- f O Η- O

0

NO f O O Ν

^ o 0 0 0 0 LO vo Ο Ο >Λ LOCO —ο"σΝ

W> O» NO Ι Α O « O NO O-NO 00 LO ·*τ Ο τ Τ Γ-. -· ο ο ο ο r C t ^ v o " NO

f i f j NN 0 0 γ-* t o T f o o o ©Ν 0 0 VO T t Ι Λ

m ο Ό τ •«roo ο ο - ο τί-^ίΟΝ

ON ο σ\ Ονοο h T f ON O O ONOO

» M i n o r o t-.« ΐΛΐ^-m t-» r - . τ}- c o r o

0 0 f^/OO "t 1 Ο o f o n r ) · ΙΛ Ν r o «s — ο

Ο ^ Ο Ό WìOO Tj- r o r^- ^ T f ο ο ΟΝΟΟ ο ο t - -

O00 ΙΛΟ o o ε . CΛ

r o τ}· Ν Ι Λ .s ÙH

g - δ

ΙΛ 3 — be

οο m 00

4» , 2 o o c 6 1 5

ώ e

rt 3 "5 Ό g 2 ri CU ε

sively

cigars

cigarO & H

exclu-

Small

cigarLarge

o - S « S Ε α-

Small

Large

I

β

IN THE TOBACCO

>

s

ë

ω 3 i * = ΰ S CL, X — •* l ai ill

vO v o

m N0 \ ON

r ftJaO

t-» On

»o^O t - » 0 0 ON — O* ffi J I ffi

« O O On On

00f - Ό

-ON

»O\0 r - 0 0 ON N N M N N O\ ON ON O 0 S

LO

INTEGRATION

I 2 I

of tobacco product has been concentrated into the hands o f a very few corporations, the dominant manufacturers of each product except large cigars being the successor companies. Since these producers are the ones which show the greatest degree of integration, it is inaccurate to say that integration in the tobacco industry is not very important because there are only a dozen or so instances. § 4. Fragmentary data showing the extent to which the tobacco industry has been characterized by the combination into single plants of the manufacture of different products, are offered in Table 15, which has been compiled from the reports of the Commissioner o f Internal Revenue. Perhaps the most interesting fact brought out is the smallness o f the number o f factories manufacturing more than one product. 8 Since this table covers a period during which the number of factories manufacturing tobacco products has been declining, it should give some indication as to whether the factory making more than one product has real advantages over the single-product factory; because, other things equal, the multiple-product factories should have shown a lower mortality rate than the single-product factories if such advantages exist. T h e evidence on this point is contradictory and inconclusive. O f the 2,156 smoking and chewing tobacco and snuff factories in business at the end of 1913, only 125, or 5.3 per cent manufactured more than one product; at the end of 1930, the 74 factories manufacturing two or more products represented 9.0 per cent of the factories still in existence. This suggests a possible advantage for plants making more than one product. As against this, among cigar and • ì t must be emphasized again that these statistics apply to factories, not to ownerships. T h e problem of the relative strength of ownerships manufacturing two or more products in separate plants is different from that here under consideration.

122

COMPETITION

IN THE TOBACCO

INDUSTRY

cigarette manufacturers, those who made more than one product were almost exactly ι per cent of the total both at the beginning and at the end of the period. In each instance, the number o f factories making more than one product has fluctuated widely, so that a conclusion based on any one year is questionable. In any event, both the single-product and the multiple-product plants show an exceedingly high mortality for the years since the decree, a fact which indicates that the advantages arising out o f large size are probably more important than those which grow out o f the manufacture of more than one product. 7 § 5 . When attention is shifted from the factory to the enterprise, the advantages arising from the manufacture o f more than one product cannot be dismissed so lightly, although statistics on which to base exact conclusions are not to be had. T h i s type of integration is really a mixture of two o f the types mentioned above 8 — t h e combination of divergent processes and the combination of convergent processes—in that the manufacturing processes start with a common raw material which is elaborated into different products and that these products are then sold in a common market. Advantages from this type o f integration thus appear chiefly in two activities, the purchase of raw materials T

Plant mortality is really higher than Table is shows, since the statistics here give only the total number in operation at specified times, but not the number who have gone out of business, some of whom would be replaced by newcomers. These figures also fail to give any information on another very important subject—the extent to which plants in the two major groups listed overlap. It would be interesting to know, for example, how many cigarette factories manufacture chewing and smoking tobacco. It should also be noted that the overlapping between cigars and cigarettes is even less than this table would suggest. More detailed figures published by the Commissioner of Internal Revenue prior to 1926, show that practically all the cigar and cigarette plants making two or more products fall into two groups—those making small and large cigars and those making small and large cigarettes. 8

Ch. ν, § 2, supra.

INTEGRATION

123

and marketing. The various products overlap in their raw materials to only a limited extent, so that it is in marketing that the major advantages appear, and in this field, advertising takes the dominant position. Because of the fact that the organizers of the " trust ", appreciating the advantages of this form of integration, had already carried it about as far as it could be and were permitted to pass the results on to the successor companies, instances of such integration since 1 9 1 1 have been few. The R . J . Reynolds Tobacco Co. has been the most conspicuous, having early branched out into cigarette manufacturing, although it had been assigned no part in that industry by the court. The advantages of the integrated company are shown in the fact that it could undertake an expensive campaign to popularize " Camel " cigarettes out of its earnings on other products. A similar advantage may be noted in the instances of the P. Lorillard Co. when it undertook to break into the popularpriced cigarette field in 1 9 2 6 ; a company without large resources would have been unable to undertake its sales promotion program. Two exceptions to the general rule governing the advantages growing out of integration must be mentioned—cigars and snuff. Cigars, prior to the invention of the cigarmaking machine, had virtually nothing in common with other tobacco products. Their raw materials were different. Their manufacturing processes and problems were different. Their marketing machinery and methods were different. That the American Tobacco Co. was able despite these differences to achieve an output of 1,119,000,000 cigars in 1903. (as compared with a maximum of 880,000,000 achieved by the General Cigar Co. in 1929, the largest figure reached by any other company even since the invention of machinery), 9 • Report of the Commissioner pt. iii, p. 192; ch. i, § I, supra.

of Corporations

on the Tobacco

Industry,

I24

COMPETITION

IN THE

TOBACCO

INDUSTRY

is a tribute to the importance of the marketing process, and particularly advertising, in tobacco products and to the advantages of the integrated manufacturer in supporting expensive market campaigns. It is certain that these advantages will aid the American Tobacco Co. in its attempt to popularize its " Cremo " cigar now that the invention of cigarmaking machinery has made much more similar the manufacturing and marketing problems of cigars and other products. With earnings of more than $46,000,000 a year, this company can plough huge sums back into its " Cremo " campaign, sums larger than the total earnings of the largest cigar companies, and still pay handsome dividends to its stockholders. A s to snuff, the advantages to be gained from integration with other products seem to be small. It is made from leaf of a type different from that used for most other products and grown in a section of the country different from those growing other types; its market is sectional, not national; and, most important of all, advertising of the type effective for other products its apt to be of comparatively little use here, since it is probable that the bulk of the sales of snuff are made to the illiterate and least literate portions of the population. If this analysis is sound, it is difficult to explain why the " trust " entered the snuff industry at all. Perhaps it believed that through use of its superior resources it could engage in cutthroat competition and eventually emerge with a snuff monopoly and consequent monopoly profits which would further enhance its advantages in other branches of the industry as well as be desirable for their own sake. The records of the snuff companies since 1 9 1 2 are inconclusive as to whether they have gained or suffered from the partition. The American Snuff Co. has remained virtually stationary throughout the years since the partition, if the

INTEGRATION

125

figures in Table 32 are taken as the measure. 10 Earnings have fluctuated from year to year; but there has been no real trend, it being possible to show an increase, virtually no change, or a decrease, according to which of the last three years is taken for purposes of comparison with 1 9 1 2 . The George W . Helme Co., on the contrary, shows a decided upward trend, its earnings have more than doubled between 1 9 1 2 and 1930, each year since 1 9 1 6 having shown an increase over the preceding one. Yet both companies have continued to restrict themselves to the manufacture of snuff. The third company, the Weyman-Bruton Co., has branched out into other products. In 1 9 1 5 it introduced a chewing tobacco brand and shortly thereafter expanded its activities in that field by acquiring all the capital stock of the P. B. Gravely Co., plug manufacturer, of Danville, V a . 1 1 Expansion was resumed in 1 9 2 1 , when the company went into smoking tobacco through the acquisition of the J . G. Dill Co., of Richmond, Va. 1 2 A few months later it broadened its scope still further by purchasing control of the United States Tobacco Co., also of Richmond, whose name it assumed the following year. 1 * Since then the company has been very active in merchandising its brands of smoking tobacco, of which the most widely known are " Dill's Best " , " Old Briar," and " Model ". 1 4 Thanks to these acquisitions its earnings are larger than those of either of the other two companies ; but there is no evidence that its unit profits are larger because of the integration. In theory, however, it should have a decided advantage over manufacturers of smoking and chewing tobacco who do not have its profit10 u 12 13

Ch. xi, § S, infra. United States Tobacco Journal, Feb. 6, 1915, p. 8; Nov. 27, 191 S, p. 6. Ibid., May 28, 1921, p. 3. Ibid., July 2, 1921, p. 6; March 1 1 , 192?, p. 6.

" Ibid., Jan. 8, 1927, p. 8 ; May 14, 1927, p. 9.

J 2Ó

COMPETITION

IN

THE

TOBACCO

INDUSTRY

able snuff business to fall back upon for support in their marketing. § 6. Of the other possible forms of integration, the most important one in the tobacco industry has been the endeavor of the companies to reach backward and take control over the production of raw materials, supplies and equipment. For example, all the " big four ", the snuff companies and the British companies have integrated backward a considerable distance toward control over their chief raw material, leaf tobacco, after it has left the farmers' hands. There is no incentive for them to engage in tobacco farming, and even if there were such an incentive they probably would find the financial and managerial problems insuperable; but they have found it desirable to do most of their leaf buying through their own organizations and to operate their own redrying plants in preparing " green " tobacco for storage. Unfortunately, despite the fact that the Federal Trade Commission has made three investigations into leaf-buying practices, there are no exact figures available showing the proportion of their purchases made direct rather than through dealers. The proportion is large enough, however, to give them a decided bargaining advantage in the purchase of leaf. 15 This bargaining advantage is probably the most important consideration determining their policy, and even it would probably not be strong enough to lead to this form of integration unless the manufacturer bought quantities of leaf large enough to make the costs of direct buying per unit of leaf at most no higher than the cost of buying through dealers. There are no statistics to show what these quantities are. Among the cigar manufacturers, there have been instances where a somewhat closer connection between manufacturers and leaf growers was apparent. The American Sumatra 15

C f . chs. vi and vii,

infra.

INTEGRATION

127

Tobacco Co., for example, was a corporation owning large tracts of cigar leaf tobacco and timber lands in Connecticut, Massachusetts, Georgia and Florida, the importance of which from the point of view of this study lies in its relations with the Consolidated Cigar Corp. 1 * Another instance of close relations between cigar manufacturers and cigar leaf interests is the appearance of representatives of Cullman Bros., New Y o r k dealers in leaf, on the boards of American Sumatra, the Porto Rican-American Tobacco Co. and Webster-Eisenlohr, Inc., at various times. 11 It is significant that in both these instances the active interests were the leaf dealers, not the cigar manufacturers. This fact indicates that such advantages as arise from this form of integration yield more benefit to the dealers, through making their selling easier, than to the manufacturers, through making their purchasing more efficient. A t any rate, stockholders in the cigar manufacturing companies have at times protested against close connections between their companies and leaf dealers. 1 6 During the war and post-war inflation, this company prospered enormously ; but the collapse of 1920-1921 was followed by tremendous deficits, which continued to mount until the company was reorganized by 1926 as the American Sumatra Tobacco Corp. Substantial earnings were again reported in 1926 but dwindled year by year until another deficit was reported in 1930. American Sumatra owned 52,900 shares of Consolidated Cigar up to 1922, when the directors proposed that these shares be sold to American Sumatra's preferred and common stockholders. Another link between the two companies was broken late in 1923, when Julius Lichtenstein, president of Consolidated Cigar, resigned from the board of American Sumatra, whose principal executive officer he had been prior to going with Consolidated Cigar. H o w much of the community of interest between the two corporations has survived is not apparent on the surface. United States Tobacco Journal, July 29, 1922, p. 3; May 9, 1925, p. 3; Aug. 7, 1926, p. 3. 17 United States Tobacco Journal, Oct. 14, 1922, p. 3 ; Feb. 24, 1923, P. 3 ; M a y 9, 1925, p. 3 ; A u g . 7, 1926. P· 3 ! J " ™ '4, 1928, P- 3 ; April 5. 1930, p. 7-

128

COMPETITION

IN THE

TOBACCO

INDUSTRY

A third instance of close relations between cigar manufacturers and leaf dealers must be mentioned. This appeared in 1 9 1 6 and 1 9 1 7 when the Sumatra Purchasing Corp., and the J a v a Corp. were formed by large cigar manufacturers and leaf dealers to import Sumatra and J a v a leaf. Ostensibly this direct entry by the manufacturers into the leaf import trade arose out of the necessity to find substitutes for the normal channels of trade via Holland, which had been disrupted by the war. The government evidently took a different view of the matter; for in 1 9 1 8 indictments were returned charging the corporations with being a means used to bring control of the leaf trade into the hands of four dealers, to increase the price of leaf and to give favorable prices to the cigar manufacturers in question, among the defendants being the American Cigar Co. and its president, A. L. Sylvester; the General Cigar Co. and its president, Fred Hirschhorn; Otto Eisenlohr and Bros., and Cullman Bros, and two of its officers, Joseph F . Cullman, Sr., and Joseph F. Cullman, J r . The offending leaf corporations were promptly dissolved ; but the case was continued, and in 1920 the corporate defendants entered pleas of nolo contendere, paying fines of $5,000 each, indictments against the individual defendants were dismissed, and a consent decree forbidding the illegal acts charged by the government was entered. 1 ' A s to raw materials other than leaf, in most instances the amounts used by the tobacco industry are too small a part of the total consumption to warrant any attempt by the 18 United States Department of Justice, The Federal Antitrust Laws, With Amendments: List of Cases Instituted by the United States and Citations of Cases Decided Thereunder or Relating Thereto (Washington, 1923), pp. 126-127. Histories of the companies may be found in United States Tobacco Journal, June 23, 1917, p. 3 ; Aug. 4, 1917, p. 3 ; Sept. 22, 1917, p. 3 ; Nov. 10, 1917, p. 3 ; Nov. 12, 1918, p. 3 ; Oct. 19, 1918, p. 4 ; April 4, 1919, p. 6.

INTEGRATION

129

tobacco manufacturers to try to bring them under control, even during the days of the " trust ". Most of the sweetening and flavoring agents, such as chocolate, molasses, cane sugar, maple sugar and honey, are in this category. Even where the industry is the principal consumer of a product, as with cigarette paper, other factors may impede integration. Excepting the American Tobacco Co., which has acquired a cigarette paper manufacturer since the partition, the successor companies have been content apparently to buy their supplies from independent producers, (nearly all of which are French manufacturers) as was the " trust " before them. Data on which to base an explanation of this situation are not available. In one instance, the " trust " found it desirable to buy up the producers of a raw material. This was in licorice, a very large portion of which is used in the tobacco industry. Since the disintegration, the tobacco manufacturing successor companies have seemingly been willing to buy their licorice from these companies and made no effort to enter the industry themselves, partly, no doubt, because their demand for the product is falling. It is also not improbable that if any one of them took over a licorice producer the other companies would curtail their purchases from it so that it might be compelled to operate on an uneconomic scale, although exact figures as to what is the optimum size for a licorice producer are not to be had." 19 What the effects of disintegration have been upon the licorice companies, it is virtually impossible to say because of lack of data. The MacAndrews & Forbes Co., the larger of the two, has tried to compensate for the decrease in licorice consumption in tobacco by expanding as an operating company into the manufacture of dye extracts, fire extinguishing compounds, box board and wall board. Why it chose these particular fields is not readily apparent. The following table, taken from Poor's Manual of Industrials, 1930, pp. 1753-1755, shows the progress of the company in the manufacture of licorice products, fire-extinguishing com-

Ι3θ

COMPETITION

IN THE

TOBACCO

INDUSTRY

Similar considerations apparently govern integration backward to assume control over manufacturers of the machinery and containers used in the industry. In its early days pounds, box board and wall board from 1922 to 1927, the only years for which figures are available: O U T P U T OF V A R I O U S PRODUCTS BY M A C A N D R E W S & FORBES C o . ,

Year

Licorice products Pounds

192 2 192 3 192 4 192 5 192 6 192 7

30,982,225 29,591,664 30,816,395 30,022,072 29,259,166 29,164,437

1922-1927

Fire extinguishing

B o x board and

compounds

wall board

Pounds 1,712,175 2,478,043 2,484,329 2,547,634 2,942,427 2,943,886

Pounds 41.447,505 47,701,055 50,152,935 87,123,180 79,623,515 82,599,874

The gradual fall in comparative importance of licorice is evident at a glance. (In 1927 the company sold the assets of its fire extinguishing compound subsidiary, the Foamite-Childs Corp., to the AmericanL a France Fire Engine Co., receiving 18,000 shares of the 7 per cent preferred and 160,000 shares of the common of the latter. Moody's Manual of Investments: Industrial Securities, 1931, p. 1708.) Through subsidiaries the company has also branched out into the oriental rug business, a trade in which it can utilize the organization built up to assemble licorice root in the Near East. Gradually building up its operations in this field, the company has acquired subsidiaries here and abroad which import rugs from both the Near East and the Far East, spin wool for rugs in Greece and manufacture, renovate and clean rugs and carpets. Sales of the company increased for some years as its activities expanded, but have been reduced sharply by the depression of 1929-1932, having been as follows since 1922: 1923, $10,516,203; 1924, $9,769,830; 1925, $10,084,099; 1926, $11,695,471; 1927, $12,659,373; 1928, not reported; 1929, $9,769,547; 1930, $7,892,724. Poor's Manual of Industrials, 1930, ρρ· 1753-1755; 1931, PP· 2287-2288. The other licorice company, the J. S. Y o u n g Co., has continued to confine itself to licorice with fair success ; but information concerning its operations is scanty. Earnings have fluctuated widely, the postdisintegration high having come in 1918 at $449,825 and the low in the following year at $138,772. From 1926 to 1930 the company held within a narrow range around $250,000, about where it was in 1913 when earnings were $251,042. Cf. table 33, ch. xi, § 5, infra.

INTEGRATION

the " trust " extended its control over cigarette machines and used its consequent advantage to further its monopolistic ambitions. A s opposed to this, although the American Tobacco Co. was permitted by the decree to retain control over its machine manufacturing subsidiary, the American Machine and Foundry Co., it voluntarily surrendered this control in 1 9 1 2 by distributing its stock interest in the subsidiary to its own stockholders. 20 Since it no longer had any opportunity to build up a monopoly, it stood to attain the maximum income from its subsidiary for its stockholders by distributing the stock, thus leaving the subsidiary free to deal with all companies without being subject to the charge that competitors of American Tobacco who bought from it would be in effect aiding their rival. It is interesting to speculate whether the American Tobacco Co. would have distributed this stock had it known that within a few years the American Machine and Foundry Co. would present it with a cigarmaking machine, thus giving it an opportunity either to monopolize the cigar industry or to make a substantial income f r o m royalties, as it saw fit. T h e feeling that its stockholders would profit best by a separation of control also led the American Tobacco Co. to distribute its majority stockholdings in the Mengel B o x Co., manufacturer of wooden, fibre and corrugated cardboard containers f o r tobacco products, the explanation made to stockholders being that Mengel could not hold the business of American Tobacco's competitors if it remained under American Tobacco's control. 21 One instance of attempts to eliminate competitors by cutting off their supply of containers has appeared in the cigar industry. The Federal Trade Commission in 1 9 2 1 issued a complaint against the Cigar Manufacturers' Association of 20

Ch. ii, supra.

21

United States Tobacco Journal, July 16,1921, p. 5 ; Sept. io, 1921, p. 5.

132

COMPETITION

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TOBACCO

INDUSTRY

Tampa and three Tampa cigar-box manufacturers, charging illegal agreements the effect of which was to withhold from cigarmakers not members of the association the supply of cigar boxes necessary to their conduct of business. A cease and desist order was issued in 1 9 2 2 . " B y f a r the most important instance of integration to take control over supplies was when the " trust " absorbed the leading foil producers of the country ; and again it is apparent that the principal advantage arising from this move was not economy in production but an aid in the monopolization of the industry. A t any rate, most of the successor companies seem to feel that it is more economical for a company which has no monopoly and no ambition to become a monopoly to buy foil from an outside source than to establish its own company There is one exception; for in 1928 when the United States Foil Co., of Louisville, Ky., was merging its interests with those of other foil companies, including the company to which the properties of the Conley Foil Co. had passed, the R . J . Reynolds Tobacco Co. freed itself from reliance on outside foil manufacturers by purchasing the Tobacco Foil Co., of Richmond. This company had been organized three years previously by individuals formerly associated with the United States Foil Co. at Louisville. Reynolds bought this company and moved it to WinstonSalem to supply its own requirements of foil—estimated in 1928 at more than 1,000,000 pounds a month—and to sell the surplus output to other users. 23 Although no official announcement of the reasons for the acquisition was made, the circumstances suggest that it was the result of an unwillingness to be dependent upon the new combination for supplies of f o i l . " 22

Annual Report of the Federal Trade Commission, 1922, p. 152.

23

United States Tobacco Journal, July 25, 1925, p. 26 ; Aug. 4, 1928, p. 7.

2

* As in the instance of the licorice companies, it is practically im-

INTEGRATION

§ 7.

133

Integration forward to control distributive outlets

possible, because of lack of data, to determine what have been the effects of the partition of the American Tobacco Co. upon the foil producers. The larger of the two foil successor companies, the Conley Foil Co., has liquidated its assets and gone out of business; but its troubles seem to have grown out of the increasing concentration of tobacco manufacture in the south, while its own plant was in the north, rather than of its separation from the " trust ". Although other producers were developing, this company remained until its liquidation the country's largest manufacturer of foil. (United States Tobacco Journal, Jan. 3, 1920, p. 3.) In 1920 control of the company was passed to a new corporation, the Conley Tin Foil Corp., as part of a reorganization whereby new capital from an unidentified source was brought into the enterprise; but four years later Egbert Moxham, president, reported to slocléiolders that more drastic action would be necessary and proposed liquidation of the company saying : " Competition in the foil industry during the past four or five years has become and is now of such an intensive nature that notwithstanding every endeavor to operate under the most economical conditions, it is not possible to earn a profit commensurate with the amount of invested capital, except by the most advantageous location of the manufacturing plant. " A f t e r mature deliberation, your directors, including several of your largest stockholders, have reached the conclusion that this condition can only be remedied by the removal of the major portion of the company's operations from its present quarters in New Y o r k City to a new adequately designed and better located plant, but in their opinion, conditions of the industry do not warrant the investment involved in such an undertaking." ( United States Tobacco Journal, Aug. 30, 1924, p. 5.) In accordance with this proposal the company was liquidated over the next two or three years ; but its properties passed into the hands of an even larger combination. The nucleus of this new combination, the United States Foil Co., organized at Louisville, Ky., in 1919, although organized by members of the family which controlled the R. J. Reynolds Tobacco Co., does not seem to have any very close connection with the tobacco manufacturing enterprise. For some years after its organization, it operated as a manufacturing unit; but in 1928 it exchanged its operating assets for a controlling interest in the Reynolds Metals Co., which had been newly organized to unify the manufacturing ¡properties of the Robertshaw Thermostat Co., of Youngwood, Pa., the Fulton Sylphon Co., of Knoxville, Term., and the United States Foil Co. Subsequently Reynolds Metals acquired some of the assets of the Beechnut Foil Co., the Midland Foil Co. and Lehmaier, Schwartz & Co., Inc., as a

134

COMPETITION

I.W THE

TOBACCO

INDUSTRY

offers no advantages to manufacturers of most tobacco result of which it now has manufacturing plants in Youngwood, Louisville, Knoxville, New York, Chicago, Glendale, Ν. Y., and Richmond. (Poor's Manual of Industrials, 1920, p. 1509; 1931, p. 678.) It was through its purchase of Lehmaier, Schwartz & Co's. assets that United States Foil obtained control of the former Conley properties, which had passed into the hands of Lehmaier, Schwartz & Co. in a series of transactions about which the author has been able to obtain only fragmentary information. In a balance sheet as of Sept. 30, 1924, furnished the New York Stock Exchange with a listing statement, American Tobacco mentioned as one of its assets a " minority interest " in the Conley Tin Foil Corp., the number of shares held not being given, but the interest being carried at a book value of $587,368. It is impossible to say how large a voting interest this stockholding represents, since the stock of the Conley Tin Foil Corp. was no par. If calculated at the market value prevailing at the time of the statement, i. e., approximately $13 a share, it would represent a holding of approximately 45,000 shares out of 171,866 outstanding. (Poor's Manual of Industrials, 1924, vol. i, pp. 1315-1316; Commercial and Financial Chronicle, Sept. 27, 1924, p. 1493 ) This interest in the Conley Tin Foil Corp. was acquired in January, 1921, presumably in connection with the new capital contribution made to the enterprise at the time of its reorganization. Upon liquidation of Conley at the end of 1924, its manufacturing assets were sold to Lehmaier, Schwartz & Co., the sale apparently being accomplished at least in part by issuing securities of the latter company to Conley stockholders. In any event, American Tobacco received a minority interest, in Lehmaier, Schwartz & Co. for its interest in Conley. No announcement has been made of the terms on which the Lehmaier, Schwartz & Co. assets were sold to Reynolds Metals; but the author has been informed that American Tobacco owns no stock interest in either United States Foil or Reynolds Metals. (Letter from Paul M. Hahn, assistant to the president of the American Tobacco Co., March 15, 1932.) The question inevitably arises as to whether these transactions were in accord with the decree of disintegration. Only the courts could decide the issue. It will be recalled that there was some ambiguity on this point because two injunctions, the one permanent, the other temporary, were issued against transfers of property between the successor companies. (Cf. ch. ι, § 2, supra.) Reynolds Metals is now generally rated the largest producer of foil in the country, having succeeded to that title when it bought the Lehmaier, Schwartz & Co. properties in 1930, just as Lehmaier, Schwartz & Co. had succeeded to the title by purchasing the Conley properties in 1924.

INTEGRATION

135

products. A fuller description of the system whereby these wares are marketed will be given in Chapter X . It is sufficient here to say that since an enormous number of distributors is required, (some 6,000 wholesalers and some 700,000 retailers), tobacco products are ordinarily only a part, and that a small part, of the distributor's stock in trade, any one producer's goods are only a fraction of the distributor's stock, and distribution of tobacco products is little more than a mechanical routine, the independent distributor can distribute tobacco products more cheaply than could the manufacturer himself. The value of control of the United Cigar Stores Co. to the " trust " is difficult to explain in the light of these considerations. It may be that the managers of the " trust " thought the chain would be more powerful than it actually became ; or they may have made their investment in the company simply because they thought it would be profitable without regard to its relation to their manufacturing enterprise. A n important exception to the rule against integrating forward may be found in the cigar industry, where some of the large producers have taken over wholesalers and opened wholesale branches of their own and where contracts giving distributors exclusive rights to specified territories are com(The Retail Tobacconist, April 24, 1930, p. 21.) It is, therefore, evident that the decree has not prevented the rise of a new foil company considerably larger than the one dissolved in 1911 nor the ownership by the American Tobacco Co. for some years of a substantial interest in properties presumably split off from its control. Practically no information about the Johnston Tin Foil and Metal Co., the other foil company formed by the decree, is available. The manuals give only very brief statements concerning it. In so far as can be learned, however, the company has continued along a steady course, making enough profits out of its manufacture of foil, Babbit metal and solder to permit its paying dividends of 6 per cent each year on its $300,000 of common stock outstanding and has made no effort either to expand its business very greatly or to enter mergers.

136

COMPETITION

IN THE

TOBACCO

INDUSTRY

mon.

C i g a r s have generally been marketed through whole-

sale tobacconists w h o were expected to p e r f o r m a considerable part of the merchandising function themselves, receiving in return an exclusive right to sell a brand in their territory. W h e n a manufacturer has g r o w n large, as in the instance of the General C i g a r Co. and the A m e r i c a n C i g a r Co., its sales in a given territory m a y be large enough to permit it to establish its own branch or to buy out its wholesaler; as an alternative, it can let the wholesaler continue to handle its goods on a mutually exclusive basis.

W h e t h e r this plan will

survive the effects of mechanization and the rise of the nickel cigar, remains to be seen.

A m e r i c a n C i g a r has introduced

in its latest campaign for " C r e m o " cigars selling methods borrowed f r o m cigarettes; if they result in a corresponding diminution of the distributor's role and increase in the desire of the manufacturer to distribute through as many jobbers as possible, it m a y be that this exception to the general rule against integration

f o r w a r d in the tobacco industry

will

disappear. 25 25

The Federal Trade Commission in 1930 issued a complaint, which it subsequently dismissed over the dissent of Commissioner McCulloch, charging the General Cigar Co. with unfair competition through its practice of setting up branch offices with exclusive territories or giving wholesalers exclusive rights to distribute its products in specified territories. Since the practice of giving wholesalers exclusive rights to specific territories is customary in the cigar industry, the commission would have undertaken a far-reaching revision of marketing procedure if it had ruled against this practice. Federal Trade Commission, In the Matter of the General Cigar Co., Inc., Docket No. 1879, Complaint, Nov. 25, 1930; Order of Dismissal, May 21, 1932. Wisconsin authorities have also proceeded against the cigar industry in a case which is important in many fields other than tobacco because it questions the legal validity of the so-called " voluntary chains " formed by retailers and wholesalers, especially in groceries, to combat the centrally owned chains. (Readers unfamiliar with the "voluntary chain" development will find a description and analysis in Davidson, Craig, Voluntary Chains and How to Run Them, New York, 1930, and in various publications of the American Institute of Food Distribution, New York.)

INTEGRATION

137

Another exception to the rule against integration of tobacco manufacturing and marketing is the attempt to form an ownership interest reaching into various branches of the industry that was undertaken by the United Cigar Stores Co. interests, the story of which is given in the appendix. Over a period of two decades this company built up a complicated organization joining in some degree of affiliation the only two large cigar chains in the country, practically all the important independent cigarette producers, several of the important independent smoking-tobacco producers, a number of cigar manufacturers and a heterogeneous mass of other interests active in a wide variety of manufacturing and distributive pursuits. T h e explanation of this exception to the general rule seems to lie in the motives of the organizers, who apparently were more interested in stock-market operations than in industrial efficiency. The attempt ended in disaster, its net effect being to give the American Tobacco Co. virtually all the cigarette business previously controlled by the independents, to build up a substantial cigar manufacturing combination, Webster-Eisenlohr, Inc., which is now independent, to put the United Cigar Stores Co. into bankruptcy and to establish one of the few corporations in existence representing an international integration of tobacco factories." The suit, brought against the Lewis and Leidersdorf Co., Milwaukee wholesalers, the General Cigar Co., and the G. H. P. Cigar Co., is based on exclusive contracts between the jobber and retailers under which special inducements were given to retailers who signed, the special inducements being made possible by special prices from the manufacturers. The case is still at issue, the Wisconsin Supreme Court having ruled in May 1930, that the state fias a cause of action against the companies. State v. Lewis and Leidersdorf Company, 201 Wis., 543 et seq. 28 This is the Tobacco Products Export Corp. now affiliated with Philip Morris & Co. and the Continental Tobacco Co. The chief instance of this type of integration is, of course, the British-American Tobacco Co., which was organized in 1902. American Tobacco has made a move in the same direction by invading England.

χ38

COMPETITION

IN THE

TOBACCO

INDUSTRY

§ 8. In view of its record, the instance of the United Cigar Stores Co. need not be considered very important as tending to upset the general conclusions to be drawn from this survey of integration in the tobacco industry. These conclusions may now be summarized quickly. No data exist which will show the extent to which the concentration of individual products into fewer factories described in Chapter I V has been accompanied by concentration into single factories of different products formerly made in separate plants ; but the number of plants making more than one product has decreased, just as has the number of those making only one, so that any advantages from this type of integration seem to be comparatively unimportant. This type of integration when applied to enterprises rather than to factories seemingly offers decided advantages in marketing; but there has been comparatively little effort by the big companies to integrate in this way, (the principal exception being the invasion of the cigarette industry by the R. J. Reynolds Tobacco C o . ) , chiefly because the possibilities had already been well exploited by the " trust ". The benefit of what the old American Tobacco Co. had done went to the successor companies at the partition. There can be no doubt that the prior integration was of very great assistance to them in strengthening their hold on the industry; for the tobacco industry is preeminently one in which marketing, and particularly advertising, holds first place in determining who shall win the competitive struggle. The demand for a specific tobacco product is built upon a conviction of the essential superiority of one brand over another which rests not so much upon the actual characteristics of the products as upon what advertisers can make the consumers believe. This being true, it is evident that the advantage lies with the company able to underwrite the most intensive and extensive advertising campaign; which means, of course, the company

INTEGRATION

139

with the largest financial resources. Following this idea to its obvious conclusion, we must conclude that the large company has the advantage over the small company and that the enterprise manufacturing more than one product has better chances of becoming the large company because of its opportunity to use the earnings from one branch to support a campaign in another. It is significant in this regard that the two principal exceptions to the advantages of this form of integration, snuff and cigars, while they offer some differences in production problems are conspicuous chiefly for their difference in marketing problems and that cigars, now that mechanization of the industry has made possible the use of marketing methods used f o r other products, seem to be more suited to integration with these other products. Of the more complex types of integration, reaching backward to take control over leaf tobacco has proceeded as f a r as direct purchasing and redrying. These are advantageous if a company is large enough to purchase directly as cheaply as it can purchase through dealers, because they give it a decided bargaining advantage in its leaf purchases by giving it control over the stocks of leaf always in storage. A s to the other raw materials, machinery, equipment and supplies, there seems to be no advantage in integrating backward, except ( ι ) where the product in question can be manufactured economically on a comparatively small scale, as with printed cardboard containers f o r tobacco products, or ( 2 ) where, in an attempt to monopolize the tobacco industry, products essential to the manufacture of tobacco, such as licorice and foil, are taken over so as to cut off the supply of competitors. E v e n where there is intent to monopolize, the manufacture of some raw materials will not be taken over, because the quantities consumed would be too small to permit economical operation. Integration forward to take control of marketing presents no advantages because the number of

ï40

COMPETITION

IN THE TOBACCO

INDUSTRY

distributors is huge and the part played in their business by tobacco products is small. There is an exception in cigars, where the need to depend upon personal salesmanship rather than impersonal advertising to create demand for their products has led manufacturers to take over the wholesale distributors or to enter into long-term contractual relations with them. This may be changed by the rise of the machinemade cigar, which is better adapted to the impersonal methods used for other products.

CHAPTER

VI

COMPETITION IN T H E PURCHASE OF L E A F TOBACCO

§ 1. W e are now in a position to consider the problem o f prices and begin, for convenience, with prices of leaf tobacco. This is perhaps the most controversial topic in this study; for in the contrast between the fortunes of tobacco farmers and the fortunes of tobacco manufacturers lies a principal reason for the persistence of agitation against the " trust " during the last twenty years. As we shall see subsequently, 1 the more conspicuous successors of the American Tobacco Co. have prospered phenomenally since the disintegration. Tobacco growers, on the contrary, have suffered severely. In part, no doubt, their woes are attributable to the general agricultural depression which started in 1 9 2 0 ; but there is evidence that tobacco producers' incomes have held below those of growers of other crops. Thus the incomes of growers of cigarette leaf, who should have prospered if any tobacco farmers did, have been estimated as averaging from one-half to two-thirds those of other farmers even in good years.® Confronted with such conditions, tobacco growers would be more or less than human if they failed to see in the contrast conclusive evidence of a purchase monopoly exerting its power to enslave and exploit them. § 2. P r o o f of the existence of a purchase monopoly in tobacco during post-partition days, may be sought along two lines. In the first place, an effort may be made to prove 1 2

Ch. xi, infra.

Woofter, T. J., Jr., The Plight N. C , 1931), pp. 21-25.

of Cigarette

Tobacco

(Chapel Hill, 141

I42

COMPETITION

IN THE

TOBACCO

INDUSTRY

that prices paid for leaf f r o m year to year conform to what would be expected under monopoly conditions. F o r e x ample, W o o f t e r suggests that under a purchase monopoly " the companies would not be expected to bid higher prices f o r tobacco than would be necessary to cause the farmers to raise enough to fill the manufacturers' needs and not s h i f t to other crops." H e finds proof of monopoly in the fact that " this is about the situation revealed by the statistics " as well as in the further fact that " the long-time trends of consumption and prices are almost unrelated." 3 This analysis is unsatisfactory; but it suggests a possible approach to the subject. In the second place, a search may be made for evidence of overt acts proving the existence of collusion a m o n g the various companies to control the markets. Thus, to take an example from another industry, the Federal T r a d e Commission found evidence of collusive live-stock buying by meat packers in such practices as ( i ) the establishment of a live-stock pool under which each company purchased a specified percentage of the live stock sold at each principal market, ( 2 ) " p a r t purchases," where t w o or more packers joined in purchasing the live stock of one shipper or producer, ( 3 ) " s p l i t purchases," where one packer would buy the entire lot of a shipper and divide it with one or more of the others, ( 4 ) " split shipment purchases," where shipments divided between t w o markets by a producer or shipper would receive the same price regardless of the number of packers involved, ( 5 ) " wiring on," where a shipper dissatisfied with the price offered at one market would ship his goods to another only to find that buyers at the second market had been notified and would offer prices no greater, and often less, than those offered him at the first, and ( 6 ) " making the market," where buyers for the big packers would enter the market at the same time and exhibit the 3

Ibid., p. 71.

COMPETITION

IN LEAF

PURCHASES

same attitude toward prices. 4 While one would not expect to find these identical practices in the market for leaf tobacco, it may be possible to discover others in use which are just as effective in controlling prices. Certainly the situations of leaf tobacco and live stock are strikingly similar in important particulars, since both are non-homogeneous commodities produced by a large number of growers and sold to a very small number of buyers in a market where there is little opportunity for speculators to operate. § 3 . In order to use the first of these possible methods effectively, it is necessary to determine what conditions a leaf-buying monopoly would be expected to produce. I f it be assumed that the successor companies by purchasing in collusion exert a monopolistic control over leaf tobacco, how should the situation make itself felt in the price structure? The farmer's only effective control over the supply of leaf tobacco is exerted once a year at planting time. Thereafter he may expand his output somewhat by more intensive cultivation or curtail it somewhat by neglecting or failing to harvest part of the crop; but more intensive cultivation involves the danger of injuring leaf quality by inducing too rank growth, and crop neglect or abandonment is obviously painful, so that in either event the farmer's leeway is more important in theory than in practice. In general, except when prices are moving into either extremely low or extremely high levels, the monopoly would be able to neglect the farmer as an influence on supply once the land was planted. Thereafter the effect of the weather on the growing crop would presumably be its primary consideration in estimating supply, and after the crop was harvested it would be able to base its calculations on a virtually fixed supply. Furthermore, tobacco is perishable unless it is redried soon * Report of the Federal Trade Commission Industry, pt. ii (Washington, 1919), pp. 25-99.

on the

Meat-Packing

144

COMPETITION

IN THE

TOBACCO

INDUSTRY

after being harvested and cured; so that the farmer has to sell promptly as a rule, since he is not in a position to undertake the redrying function for himself. Thus it is that at any particular time supply is extremely inelastic. It is impossible to make a strict calculation of the inelasticity of demand; but there is indirect evidence that it is inelastic. Experience during the years 1929-1932 shows that in a depression period when the incomes of consumers are falling, consumption of tobacco products does not immediately fall in proportion, even though prices are held steady. This suggests that in a period of stable income, a rise in prices will cause only a small decrease in the volume taken. A very pronounced increase in prices probably would reduce consumption considerably, while a very pronounced decrease would increase consumption by encouraging waste if not otherwise; but the smoking habit seems to be such that within broad limits it would respond very little to price changes. While the manufacturers may make the demand for leaf a trifle more elastic than that for manufactured products by their willingness to buy somewhat more freely against future requirements at very low prices and their desire to minimize the strain on their working capital resulting from very high prices, in general their buying of raw material must reflect conditions in the market for their finished product. At any given time, the endeavor of the monopoly would be to hit upon the combination of prices paid and volume exchanged which would yield it the maximum aggregate net revenue. Since both demand and supply are inelastic, it can raise the price for its product and lower the price for its raw material substantially without causing more than a comparatively small contraction in the quantity exchanged. Thus we should expect at any given time a tendency toward a price for the product considerably higher and a price for the raw

COMPETITION

IN

LEAF

PURCHASES

material considerably lower than would be established by free competition. A number of complicating factors are brought in when attention is shifted to the dynamic situation. While supply at any given time is fixed, from one season to the next it can and does change greatly. The importance of this factor arises from its influence in setting a lower limit to the price cuts o f the monopoly. While at a given time the monopoly could reduce prices very sharply, it would presumably prefer not to do so if the penalty were an unwanted sharp reduction in supply and consequent rise of prices the next season. If the monopolist decided to get the lowest price he could each year and let the future take care of itself, he would presumably find himself alternating from year to year between very high and very low prices. Whether his average price over a period of years would be higher or lower than it would be if he took into consideration the fact that the supply from year to year is quite elastic, it is not possible to say. Certainly he would run the danger of causing many farmers to give up the growing of tobacco altogether. Over a period of time prices would have to remain high enough to attract such effort from marginal producers as is required to bring the desired quantities to market. 5 The margin of cultivation may be moved by adjusting the amounts of land as of capital and labor allocated to tobacco. One important element in determining the 5 Correspondence taken f r o m the files of manufacturers and leaf dealers as reprinted in the Report of the Federal Trade Commission on the Tobacco Industry ( W a s h i n g t o n , 1921 and 1922, references here being to the 1922 edition, which has a slightly different pagination f r o m that of 1921), pp. 106, u s , 126, 127, shows that as a matter of fact the various purchasers of leaf differed in their willingness to take a long-term view during the collapse of leaf prices in the first f e w months of 1920. T h e president of the American Snuff Co. wrote to one of his vice presidents :

" I have been wondering f o r the last day or t w o if it wouldn't be a

I46

COMPETITION

IN

THE

TOBACCO

INDUSTRY

margin would be the possibility of alternative uses of the land. The tobacco farmer can, for example, shift over to cotton and will do so if he can make a greater income thereby. This situation would differ from free competition chiefly in that the monopoly would find it desirable to make the quantities produced somewhat smaller than would be the result under free competition ; so that on the whole prices would tend to be from year to year somewhat lower than they would be under free competition. Against this consideration, however, must be placed another element in the dynamic situation. Thanks partly to the manufacturers' own advertising and partly to social forces over which they good idea for us to g o into the market while it seems to be in a state of stagnation and buy somewhat freely around prices ruling at from 22 to 24 cents because of the opportunity to make selections of the best in the crop. . . . T h e n there is another consideration to take into account, and that is that if the cost of production is around 20 to 22 cents per pound, w e cannot expect the farmers to continue to raise tobacco if they have to sell it under 20 cents, and the most important thing of all from our standpoint is to have an ample supply of raw material, because without that we would go out of business." Companies taking the longer view evidently tried to change the ways of the companies which operated on the opposite plan. The manager of the American Tobacco Co. Green River leaf department wrote his superior, " W e beg to advise that this morning M r . Clarke, the Imperial field man from Henderson, suggested that they are very sorry we are off the market, as he thinks that in the long run it is not a good idea to let the loose floor tobacco sell too low this season." Directly opposed to this opinion is that of a buyer for the French tobacco monopoly who wrote to his principal, " Y o u know I practically withdrew from the market two weeks ago tomorrow, and it is needless to say there are a good many farmers saying lots of bad things about us. O f course, I do not care, for I want to buy tobacco at a price that I think the product ought to sell f o r . " If flue-cured tobacco is typical of the entire crop, the principal factor determining acreage each spring is the price received the preceding season. It is obvious, of course, that the price which is required to cause a given planting may vary f r o m one period to another. For a fuller discussion of this problem see J. B. Hutson, Factors Affecting the Acreage of FlueCured Tobacco (Bureau of Agricultural Economics, Washington, 1930).

COMPETITION

IN LEAF

PURCHASES

have little or no control, the demand of the public for blended cigarettes, which are made predominantly of domestic tobacco, increased enormously year by year up to the middle of 1931. This factor would complicate enormously the problem of the monopolist in trying to decide at any given time what price would yield him the maximum aggregate net revenue. It might even make his hitting upon the true monopoly price a matter of pure accident. In any event, because of its appearance in the picture it becomes impossible to decide what sort of a price record one should expect under monopoly conditions. § 4. Spokesmen for the tobacco farmers usually take no time to reason out the probable effects of a monopoly in this manner. To them the situation is a simple one evidenced in four " f a c t s " : ( 1 ) Prices of tobacco products have consistently moved upward whenever leaf prices advanced and consistently lagged when leaf prices declined, the net result having been a widening of the margin between leaf tobacco and tobacco product prices. ( 2 ) Gross profit margins of tobacco product distributors have narrowed over the last twenty years. (3) Great numbers of tobacco farmers have received inadequate prices for their tobacco, as is evidenced in their reduction to pitiful standards of living. (4) The manufacturers have received huge earnings from their operations. Given these premises, it is easy to conclude that the manufacturers have ground their profits out of consumers, distributors and farmers. Leaving to subsequent chapters consideration of tobacco product prices, dealers' margins and profits, we may turn here lo a consideration of the reasons for the troubles of the farmers. W e shall find that it is impossible either to prove or to disprove that monopoly has been an important force in reducing large numbers of tobacco farmers to the level of bare subsistence; but we shall also find that there are a great many forces other than monopoly contributing to this result.

I4

8

COMPETITION

IN THE

TOBACCO

INDUSTRY

§ 5. Tobacco is produced in the United States in nearly thirty districts scattered over the region east of the Mississippi River, competition between which is limited to some extent by the fact that each produces a characteristic type of leaf adapted to particular uses.® The fortunes of each leaf type and of each district are thus closely bound to a specific line of tobacco products. Statistics presented in Table 16, where data for all tobacco are presented, must therefore be modified by Table 17, which presents data for particular types of tobacco. Turning first to Table 16, we find that consumption of leaf tobacco, as shown in amounts used by domestic manufacturers and exports, has increased steadily since the partition. It is worthy of note, however, that during the war exports reached a peak to which they have not returned. Consumption by domestic manufacturers also reached a peak during the war but exceeded that peak in every year from 1924 to 1930. Figures for 1931 are not available at this writing. Responding to the increase in demand, the output of leaf tobacco has grown correspondingly and reached a corresponding war-boom peak which it did not surpass until 1930. T h e increase in production proves on inspection to be the result rather of increased acreage than of increased yield per acre; the trend of yield per acre having been downward. Here again, however, the influence of war prices is evident. These prices, the table shows, have fluctuated widely, having risen for two years following the partition of the " trust ", fallen for two years, soared to dizzying heights on the wings of war inflation, collapsed in 1920, wavered uncertainly for the next decade and collapsed anew to pre-war levels in 1930 and 1931 under the stress of another business depression. Reflecting • Bureau of the Census, Stocks of Leaf Tobacco, 1928 (Washington, 1929), p. 20, gives a map of the tobacco growing areas of the United States.

COMPETITION

IN LEAF

PURCHASES

moo 8nΝ OΟΟ f*l Ν

M TOO00 tt « o ι * « · ^ — r n ^HO «O Ov Τ TT ~ 0\» O ^ 0 0 r ^ » i f l 0">0 vO Φ « O »O* ^ « O* ΓΟυ ι η ύ Γ— OUO « r^oo « l s N í * l ^ « « ι Λ ύ 00 « 00 • η ι ή ι η ι ο m f v O Ό N < o \θ Ό n n m ^ í n r*»oo Ν

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- — WO» ^ 0 0 »Λ00 00 Ό « Ο * Ν Ν « « f o ^ο r ^ N t o v f n r x o ® o o o ^Νοοc«2-3 18.8 12.6 '3-1 7.8 10.4

8.1

9-9 8.9 5-5

a

Figures for 1923-1929 from Year-book of Agriculture, 1931, p. 7 1 1 ; for 1930, compiled from Monthly Summary of Foreign Commerce of the United States, October, November and December, 1930, and June and September, 1931, issues. b c Year beginning July 1. Includes eastern Ohio leaf.

national finances and currencies and a revival of nationalism eventuating in policies of national self-sufficiency such as an effort to substitute home-grown for imported leaf. Furthermore, good or ill fortune when it comes is not evenly distributed but falls most heavily in each instance on a particular area because of the inevitable specialization forced on the farmer by the inherent characteristics of tobacco. Add to these such other important factors as the suitability of tobacco to tenant farming, the ease with which the output can be expanded in response to overly optimistic expectations as to demand, a chaotic marketing mechanism, and the absence of adequate grading facilities and standards. Chronic widespread distress becomes almost inevitable, purchase monopoly or no purchase monopoly. It becomes necessary, as a final test, to turn to the second method suggested 1 5 —the search for evidence of overt acts indicative of collusion. 15

Ch. vi, § 2, supra.

CHAPTER

VII

E V I D E N C E S OF COLLUSION I N L E A F P U R C H A S E S

§ 1. In seeking evidence of the existence of collusion among the successor companies to control the leaf tobacco market, the private investigator is forced to fall back upon the reports of official bodies empowered to draw information from unwilling witnesses. Such documents, in the instance of tobacco, are few in number. The entire supply comprises three reports made to Congress by the Federal Trade Commission in 1920, 1922 and 1925, 1 the value of which is seriously curtailed by the fact that they all relate to one short period, (the early years of the post-war agricultural depression). They suffer also from a progressive deterioration of the commission's desire to investigate trust problems thoroughly, (due in all probability to changes in personnel as the Harding-Coolidge administration made itself felt), and are far from complete in their analysis of the situations presented. F o r want of better, however, they must form the foundation for any independent survey of the subject. § 2. The first of the three was designed to reveal, first, the extent to which the " trust " was responsible for the 1920 collapse in leaf prices and, second, whether in their purchase of leaf the successor companies had violated either the decree or the anti-trust laws. Taking up the first of these questions, the commission found many forces other than purchase monopoly contributing to the market break, which affected particularly the common and low grades of 1 Federal Trade Commission, Report on the Tobacco Industry, 1920, printed in two editions, 1921 and 1922 ; Prices of Tobacco Products, 1 9 2 2 ; The American Tobacco Company and the Imperial Tobacco Company, 1925. 161

χβ2

COMPETITION

IN THE

TOBACCO

INDUSTRY

dark-fired western and burley tobaccos. Among these forces were the accumulation of foreign low-grade tobacco which came onto the European markets as steamer space was released from war uses, the post-war upheavals in foreign e x change rates, the general business depression of 1 9 2 0 , and the size of the crops of the principal types of leaf affected. It found no conclusive evidence of collusion among the large purchasers but did discover certain practices indicating a close relationship between some of the large manufacturers and dealers, which were significant because the companies in question held a dominant position in many of the most important types of tobacco. 2 T h e extent of the predominance in leaf purchases maintained by the successor companies is shown in statistics as to their purchases from the 1 9 1 9 crop. 3 These statistics are based on an estimated crop of 1,389,458,000 pounds,* of which 1,157,804,000 pounds, or nearly 85 per cent, represented manufacturing and export tobacco, as distinct f r o m cigar leaf. The Imperial Tobacco Co., the British-American Tobacco Co., the Italian and French tobacco monopolies and two tobacco dealers, (the Universal Leaf Tobacco Co. and the International Planters' Corporation), together bought more than 354,000,000 pounds of the manufacturing and export types. Seven successor companies, the American Tobacco Co., the R . J . Reynolds Tobacco Co., the Liggett and Myers Tobacco Co., the P. Lorillard Co., and the three snuff companies, together bought more than 395,000,000 pounds. Thus thirteen organizations bought some 750,000,000 pounds, or nearly two-thirds of the total. T h e " big 2

Report on the Tobacco Industry, pp. 39, 147-148, 156, 164.

» Ibid., pp. 10, 54-55. «As Table 16 shows, the Department of Agriculture later raised this figure to 1,465,481,000 pounds ; but the difference, an increase of 5 per cent, is not enough to vitiate the commission's conclusions.

COLLUSION

IN

LEAF

TABLE

PURCHASES

163

19

SAI.ES OF LEAF TOBACCO MADE BY THE UNIVERSAL LEAF TOBACCO CO. AND SUBSIDIARIES TO THE SUCCESSOR COMPANIES, 1 9 1 8 - 1 9 1 9 » 1918

1919

Sales to : On order

From purchases

I From On order j purchases !

American Tobacco C o . . P. Lorillard Co Liggett & Myers R. J . Reynolds Imperial Tobacco Co. • • " B l a c k Horse Tob. Co. "Export I.eaf Tob. C o . . Geo. W. Helme Co Weyman-Bruton Co. . . .

Pounds 19462,644 4,090,1 7 8 : 2,415,203 2,723,644

9'6,I3°| 365,900

Pounds 5,840,080; 685,105 1,002,2;» 3·4",769 398,95°,

Pounds j 6,236,959 6,756>345 485,150 101,330 2,707,886 C 2,369,252 2,238,232 '-237.7/0, 165,052 ι 97,695!

a

Report on the Tobacco Industry,

b

Subsidiaries of IJritish-American Tobacco Co.

c

Practically all purchased on order.

_ _

Pounds 2,031,562 ',060,37' 1,075 262,774 2,766,982 '5.730

Γ

p. 58.

four " alone bought 90 per cent of the burley crop. Of the dark-fired tobacco crop, the Italian and French regies bought 37 per cent, the three snuff companies 1 8 per cent, one British company 9 per cent, and the two dealers 1 2 per cent, or a total of 76 per cent f o r eight organizations. Of the bright flue-cured crop, 47 per cent was bought by the two British companies, 20 per cent by three of the successor companies, and 1 3 per cent by the two dealers, or 80 per cent in all for seven organizations. Because of this overwhelming predominance in the leaf markets, the commission attached particular importance to the relations between the successor companies and several tobacco dealers, especially the two just mentioned. 5 T h e 5

It should be noted that the president of the U n i v e r s a l L e a f

Tobacco

Co., T . B . Y u i l l e , resigned as vice-president of the A m e r i c a n T o b a c c o Co.

164

COMPETITION

IN THE

TOBACCO

INDUSTRY

Universal Company and its subsidiaries in the 1 9 1 8 crop year bought somewhat less than 100,000,000 pounds of leaf tobacco and in the 1 9 1 9 crop year approximately 115,000,000 pounds. Table 1 9 shows the quantities sold to the successor companies and the Imperial Tobacco Co. in each of these years. The International Planters' Corporation in 1 9 1 8 1 9 1 9 purchased 40,436,408 pounds of tobacco and in 1 9 1 9 1920 43,198,524 pounds. During the second of these seasons the company purchased 3,404,282 pounds for the Liggett and Myers Co., 3,716,309 for the American Tobacco Co., and " a considerable quantity " for the British-American Tobacco Co., which bought through the Export Leaf Tobacco Co.* It was also found that two firms through which the French and Italian monopolies did most of their buying, bought for some of the other large manufacturers, including the Lorillard Company and the Liggett and Myers Co., and that several smaller dealers sold to more than one of the big interests. In some instances the trade knew that the dealers were purchasing for more than one of the large companies, in others not. Many tobacco men believed that " buying under cover," the trade term for buying through secret agencies, reinforced mere " holding off the market " by the dominant companies and that the two influences together were responsible for much of the 1 9 1 9 - 1 9 2 0 price drop. While not willing to go so far as this, the commission did hold that these practices must be considered significant in view of the importance of the companies. We shall return in 1916 to organize the Universal Company as a consolidation of more than twenty leaf-buying companies. Associated with him as vice presidents were P. H. Gorman and W. S. Luckett, former directors of the American Cigar Co. Subsequently Mr. Yuille resigned and became president of the Tobacco Products Corporation, one of the United Cigar Stores Co. affiliates, and still later returned to the Universal Company as a director. β Report on the Tobacco Industry, p. 60.

COLLUSION

IN LEAF

PURCHASES

165

later in this chapter to a consideration of the validity of this conclusion. O n the basis of these findings the commission concluded that while evidence of collusion to control the market was not conclusive, the successor companies had violated both the spirit and the letter of the decree. They had violated the spirit of the decree in using common and secret leaf buying agents, the offenses being violations of merely the spirit of the decree because the injunction against common leaf agents had expired in 1916, and because the injunction against " bogus independents ", while it applied to manufacturing, did not specifically apply to leaf buying. Violation of the letter of the decree was charged against the Imperial Tobacco Co. and the British-American Tobacco Co., since the injunction against their using common agents was permanent/ T h e commission also intimated that the organization of the Universal and International Planters' companies might have been in violation of section 7 of the Clayton Act. Promising to look into this further, it recommended that the Department of Justice take steps to have the provision of the decree forbidding common agents revived and made permanent and to have the provision against secret subsidiaries made applicable specifically to leaf tobacco purchases. It also recommended that the Department of Agriculture establish a system of grading tobacco as an aid to more orderly marketing. 8 No further action against the leaf dealers or against the British companies accused of violating the decree is on record. The Department of Justice made no effort to have the decree altered as recommended by the commission, justifying its failure to act on the ground that the practices complained of had been abandoned. 8 The only recommendation 7

Ibid., pp. 158-163.

8

Ibid., pp. 164-165.

9

Seager and Gulick, Trust and Corporation Problems, p. 189.

166

COM PET IT I OX

IX

THE

TOBACCO

IXDUSTRY

put into effect was the last, the Department of Agriculture having issued in 1925 a grading system under the title Type Classification of American-Grown Tobacco and subsequently established an inspection, grading and certification service. 10 § 3. This report, though unfriendly to the manufacturers in tone, failed to satisfy spokesmen for the farmers, who brought about another investigation and another report, this one issued in 1922 under the title Prices of Tobacco Products. Since the bulk of the report concerns resale prices for tobacco products it can best be taken up for consideration later. 11 In so far as leaf tobacco was concerned, the Commission found that average prices paid by the successor companies and by the French and Italian monopolies had been cut by two-thirds or more f r o m 1919 to 1921 and more than halved if the measure be made f r o m 1918. 12 Continued dominance by the big buyers was shown by the fact that three companies bought about 160,000,000 pounds of bright southern leaf and four companies bought more than 210,000,000 pounds of burley leaf f r o m the 1920 crops. 13 These figures mean that three companies took at least one-quarter of the 1920 bright southern crop, a large part of which is normally exported, it must be remembered, and that four companies took more than four-fifths of the burley crop. Correspondingly predominant parts in dark western leaf were played by the French and Italian monopolies, which took over 10

Bureau of Agricultural Economics, Type Classification of AmericanGrown Tobacco, Miscellaneous Circular No. 55 (Washington, 1925), and Regulations of the Secretary of Agriculture Governing the Inspection, Grading, and Certification of Tobacco, Service and Regulatory Announcements No. 120 (Washington, 1930). " Ch. χ, 12 13

Prices

infra. of Tobacco

Products,

pp. 28-29.

Ibid., pp. 28-29. The companies are not identified but probably are the American Tobacco Co., the R. J . Reynolds Tobacco Co., the Liggett and Myers Tobacco Co. and, in the second group, the P. Lorillard Co.

COLLUSION

IN LEAF

PURCHASES

167

80,000,000 pounds of these types in 1918, 75,000,000 pounds in 1919 and 60,000,000 pounds in 1920 despite unfavorable financial conditions. 14 As to competitive conditions in the purchase of leaf tobacco, the Commission merely referred to its 1920 report, saying that " apparently there have been no changes of any importance in these conditions since that report was issued " and " urgently renewed " its recommendations for modification of the decree.15 § 4. In the mean time tobacco farmers, deciding to take matters into their own hands, joined eagerly in the cooperative marketing wave then sweeping over the country. Within a brief period beginning in 1921, organizations were formed in every important tobacco-growing district except the Pennsylvania cigar-leaf area, so that, as shown by Table 20, at the peak of the movement in 1923 the cooperatives controlled nearly half of the country's leaf tobacco. The farmers' interest waned as rapidly as it had waxed; for none of the associations fulfilled its founders' roseate hopes, and several failed dismally. When the Federal Farm Board took office in 1929, it found only two minor associations still receiving and marketing tobacco for their members. The board immediately set to work to encourage a revival of the cooperative system; but the farmers' response has not been enthusiastic. In the three years since then, the board has put only two concrete achievements in this field to its credit: a loan to the Maryland Tobacco Growers' Association, which has since been paid, and organization of the South Carolina Tobacco Growers' Marketing Association, which handled approximately 17,000,000 pounds of flue-cured tobacco for approximately 5,000 members from the 1930 crop but suspended operations in 1931 because of its inability to obtain adequate support from the farmers. 1 * 15

14

Ibid., p. 29.

16

The most convenient brief accounts of cooperative marketing by

Ibid., p. 14.

!68

COMPETITION

IN

THE

TOBACCO

INDUSTRY

The ordinary cooperative will have as its objectives two major accomplishments : improvement of the farmers' bargaining power and marketing machinery so as to increase the price received, and elimination of waste in both production and marketing so that as much as possible of the price received shall be net gain. It was the first of these which attracted the growers in this instance. T h e failure of the TABLE

20

N U M B E R OF T O B A C C O ASSOCIATIONS O P E R A T I N C A N D T O B A C C O

H A V D I Ì D , BY YEARS,

Year

Associations operating

1922

554 45»·5°7

9,420,091 39,162,482 24,118,825 69,092,008

* Federal Trade Commission, The American

1924

180,137,952' 27,446 21,187,117 41,588,998 43,031,222 49>°73>74

Tobacco

b

Subsidiary of the British-American Tobacco Co.

Λ

Not reported.

103,842,464 54,096 417,192 '

".957.879

• 10,104,123

2

Company

«7,512,615 and

the

Finally, the commission found in the management of the Tri-State Association itself ample reason for its failure, condemning particularly its redrying policy. Dealers, exporters and, to a considerable extent, manufacturers prefer to redry their own tobacco, so that when the association adopted a policy of refusing to sell its tobacco green, it was, in effect, cutting off much of its market. The importance of this policy is shown in that where the association redried only 3 1 per cent of its receipts in 1922, it redried 75 per cent in 1924. Under such circumstances the commission doubted the bona fides of charges of boycotting by the two tobacco companies, the association having by this policy " arbitrarily excluded several exporters and dealers whose individual requirements each year of bright southern tobacco exceeded those of the American Tobacco Co." 25 The commission 25

Ibid., p. 9·

COLLUSION

IN

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PURCHASES

173

BY THE TOBACCO MANUFACTURING COMPANIES, 1 9 2 1 - 1 9 2 4 CROPS * Dark Tobacco Growers' Cooperative Association

«923

1922

1924

Burley Tobaccco Growers' Cooperative Association

1921

1922

175,066,000 173,066,000 9 0 , 3 9 1 , 8 2 1 119,894,666 197,009,743 8,242,565! 288,460;

Imperial c

1,145,855 763.735

Tobacco

1923

245.307.78» 171,321,189

2,884,924

6,223,545

>7,4'5

33,051,841 67,848,198 7'.754.434 106,578,100! 984.285; 8,595.446 14,289,245

57,752,267 12,326,461 7.275.573 17.7^5^43

17,223,280 39.7'9.895 3.421,39O 8,670,276

737.000

Company,

»9*4

p . 40.

T o Sept. I. 1925.

* T o F e b . 28,

1925.

attributed this " arbitrary " position to the fact that several officials, including a majority of the sales staff, were financially interested in redrying plants which in three years redried 118,000,000 pounds of tobacco, or approximately half of all the tobacco redried f o r the association, at a cost approximately two and one-half times that incurred by the burley association in its redrying plants, with resultant handsome profits to the officials in question. 28 Such being the facts as it saw them, the commission concluded that it does not appear that the difficulties of the impeded progress of the organized growers of tobacco in Virginia, North Carolina, and South Carolina are due either to alleged oppressive hostility on the part of the American Tobacco Co. and the Imperial Tobacco Co. or to marketing problems inherent in the 28

Ibid.,

pp. 8 - 1 1 , 7 4 - 1 0 2 .

174

COMPETITION

IX

THE

TOBACCO

INDUSTRY

cooperative system. The apparent success of the burley association and of organizations in other tobacco regions would indicate that cooperative marketing of leaf tobacco is generally successful. 27 T h e subsequent record of the tobacco cooperatives belied this optimistic closing note. T h e Commission's report naturally angered the friends of the T r i - S t a t e Association and raised a controversy which resulted in a number of studies designed to survey the association's record f r o m a more friendly point of view. Two m a y be cited f o r purposes of comparison. W . E . Garnett, in a study made, under the auspices of the V i r g i n i a A g r i c u l tural Experiment at Blacksburg, V a . , after remarking that the association was thrown into receivership at the behest of " contract breakers and interested lawyers ", 2 8 lists many reasons for its failure. T h e information is much the same as that in the commission's report; but the emphasis differs, Garnett attaching more importance to the companies' mere refusal to buy than did the commission, because of their dominant position, and attributing mismanagement rather to honest errors in j u d g m e n t than to unworthy motives. 2 9 Scanlan and Tinley, in a study as completely impartial and as thorough as can be made, take a middle position. Their conclusion on the point of interest here is that the opposition of the big companies w a s only one of a considerable number of forces responsible f o r destroying the association. 30 It is -'Ibid.,

p. li.

Garnett, W i l l i a m Edward, Rural Organizations in Relation to Rural Life in Virginia with Special Referente to Organizational Attitudes ( V i r g i n i a Agricultural Experiment Station, Blacksburg, V a . , 1927), p. 71. 28

28

Ibid., p. 90.

Scanlan, John J. and Tinley, J. M., Business Analysis of the Tobacco Grozvers Cooperative Association (Washington, 1929). T h e authors are not consistent in their statements. O n page 113 they say, " I t would appear, however, that the refusal of these companies to purchase f r o m 30

COLLUSION

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175

interesting to note that both these studies blame the commission's own report f o r hastening the failure by g i v i n g a final blow to the already waning membership confidence. § 6. T h e general impression conveyed by these reports is that the commission could find no evidence of any very serious violations of either the decree or the anti-trust laws in the leaf buying of the successor companies. O n the whole, there seems little reason to quarrel with the commission as to this conclusion if the evidence printed is a f a i r sample of that collected. Such practices as it complained o f , particularly the use of common agencies and secret agencies f o r the purchase of leaf, while contrary to the spirit of the decree as regards the American companies, affected only a small part of the market and in any event seem to have been abandoned within a short time. E v e n if this conclusion be accepted, however, it does not follow that the commission has proved the restoration of free competition to the industry. On the contrary, some of the evidence uncovered calls f o r very careful analysis to see whether it does not prove the existence of important limitations on competition which, while perfectly legal, are nevertheless perfectly real. For example, do such practices as holding off the market, buying under cover and buying through common agents, which would be of small moment f r o m the point of view of competition when practised by small units in a large market, continue to be of small moment when practised in a market dominated by a handful of companies? the association was largely instrumental in causing ultimate failure." On page 1 1 7 they say, " M a n y factors contributed to this failure, but it is difficult if not impossible "to assign any of them a definite rank among the causes of failure." The general tenor of their study as a whole is to find that the opposition of the American Tobacco Co. and the Imperial Tobacco Co., was only one among many reasons for the collapse of the organization.

I76

COMPETITION

§ 7. of

IN THE

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INDUSTRY

C o n s i d e r a t i o n o f this question b r i n g s us into a field

e c o n o m i c t h e o r y which has been much neglected.

It

seems to be assumed too o f t e n t h a t the industrial world can be divided into t w o c a t e g o r i e s — m o n o p o l i e s

and

fields

in

which free competition p r e v a i l s — a l t h o u g h it is patent t h a t in actuality the division between monopoly and competition is not a sharp line but a b r o a d b a n d within which prices are fixed

neither a c c o r d i n g t o the principles o f monopoly n o r

according to the principles o f competition.

T h e r e is a g r e a t

need f o r clarification o f price problems w i t h i n the band. H e n r y L . M o o r e outlines the f o l l o w i n g five hypotheses as being implicit in the concept o f c o m p e t i t i o n : I . Every economic factor seeks a maximum net income. T h i s is the essential meaning of the term. . . . It may be called the maximum hypothesis of competition. I I . There is but one price for commodities of the same quality in the same market. T h i s is Jevons's law of indifference. . . . I I I . T h e influence of the product of any one producer upon the price per unit of the total production is negligible. I V . T h e output of any one producer is negligible as compared with the total output. V . Each producer orders the amount of his output without regard to the effect of his act upon the conduct of his competitors. 3 1 T h e s e hypotheses in his analysis are applied to sellers but m a y be applied also to purchasers.

I t is the last three which a r e

particularly important here.

M o o r e suggests the need f o r

" a very careful study o f the n u m b e r o f competitors t h a t will render fallacious the usual f o r m o f t r e a t i n g e c o n o m i c equilibrium

To

be specific,

can

true

competition

be

31 Moore, Henry L., " Paradoxes of Competition," Quarterly Journal of Economics, vol. x x , Feb., 1906, p. 2 1 3 . The fifth hypothesis is a corollary of the third and fourth.

- Ibid., p. 219.

3

COLLUSION

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PURCHASES

expected w h e n f o u r companies buy 90 per cent o f the burley crop, when eight companies b u y 7 6 per cent o f the dark-fired crop, or w h e n seven companies buy 80 per cent of the bright flue-cured

crop?

Pursuing Moore's idea further, Ε . H . Chamberlin

has

recently sought to analyze in detail w h a t m a y be expected where sellers are f e w , a condition he denominates " duopoly ", 33

H i s assumption is that " pure " competition, i. e.,

" competition in which n o elements of monopoly exist," will be found where there is a large number of buyers and sellers and where the product traded

is perfectly

homogeneous.

W h a t happens when sellers are f e w varies according to circumstances.

In general, if the various sellers adopt the

policies that would be f o l l o w e d by one o f a great many sellers and so ignore the direct influence o f their o w n output and price policies upon the market as well as their indirect influence through their effect upon the policies o f competitors, the effect on prices will be the same as under " pure " competition.

O n the other hand, if the various sellers are very care-

ful to have regard to their total influence upon price, neglecting no phase of it, the price will be the monopoly one, unless their numbers are very large. Independence of the producers and the pursuit of self-interest are not sufficient to lower it. Only it the number is large enough to render negligible the effect of an adjustment by any one upon each of the others, is the equilibrium price the purely competitive one.34 A n y degree o f variation is possible as between the extremes, according to the extent to which the direct and indirect ins 3 Chamberlin, E. H., " Duopoly : V a l u e where Sellers are F e w , " Quarterly Journal of Economics, vol. 44, Nov., 1929, pp. 63-100. T h i s analysis, like Moore's, is concerned with a sale duopoly but applies equally well to situations where buyers are f e w . 84

Ibid., p. 91.

I78

COMPETITION

IN THE

TOBACCO

INDUSTRY

fluences of his policies are kept in mind by each seller. There is also an area in which the price is indeterminate, i. e., when the sellers are uncertain as to what the influence of their policies will be on competitors. In general, Chamberlin concludes : unless the number of sellers is very large, it would seem that the consumers can rely for protection against monopoly prices only upon (a) the sellers' lack of intelligence, or (b) their haviny only a temporary stake in the market, or (c) their uncertainty as to what their rivals will do. It is possible that they are adequate. At any rate, they are not safeguards ordinarily contemplated by economic theory in explaining the price system." The number of leaf buyers is small, and their stake in the market is permanent, so that if this analysis is sound, the tobacco grower must rely for protection against receiving monopoly prices for his leaf upon the folly of the buying companies or their uncertainty as to what other buyers are going to do. These are not very strong protections, although they should result in prices slightly higher than under a monopoly, since a certain amount of error and misjudgment as to competitors is inevitable. The major weakness of this analysis lies in the fact that it applies only to a static economy. Even if it be granted that at any given moment prices of leaf under such circumstances tend to the purchase monopoly level, have we any assurance that over a period of time the price thus established will be any lower than the price which would be established under free competition ? The answer has already been given in the preceding chapter. At any given time, in view of the extreme inelasticity of supply, a purchase monopoly price for leaf would tend to be considerably lower than the price that 85

Idem.

COLLUSION

IN LEAF

PURCHASES

would prevail under free competition. The possible reduction would be made smaller by the fact that from one season to the next supply may change markedly, and prices in any season must be fixed high enough to induce the farmer to plant tobacco again. It is also evident that the monopoly's desire to reduce the quantity of leaf taken to that which would be required under the static analysis would be hindered by the difficulty of calculating that amount in a rapidly growing market for tobacco products. Its position in leaf buying would then be to exert its full bargaining power so as to get the quantities desired for the lowest possible price, but not to reduce those quantities. It is evident, then, that a monopoly does not operate under dynamic conditions according to the principles worked out for a monopoly under static conditions. It follows that a duopoly, even though it operated so as to produce the same results as a monopoly, would not necessarily have reduced prices for leaf tobacco below competitive levels during most of the post-distintegration era. A second qualification grows out of the consideration of dynamic factors. To what extent does a duopoly under dynamic conditions operate according to the principles worked out for a monopoly? The constant growth of the industry would unquestionably affect the degree to which a duopoly approximated a monopoly in its market behavior. When a market is growing so rapidly as to absorb a tremendous increase in output without price cuts, the individual producer's concern over the effects of his policies upon prices and upon the policies of his competitors is greatly reduced. § 8. The analysis above as to value when buyers are few would therefore seem to hold only as a tendency which can be offset in practice by dynamic factors. The importance of the three practices condemned by the Federal Trade Commission—holding off the market, buying under cover and use

l8o

COMPETITION

IN THE

TOBACCO

INDUSTRY

of common leaf agencies—grows out of their possible use as instruments whereby duopoly can be made to approach monopoly in its effects on prices. Because of the limitations already discussed on the use of monopoly power in the industry, it is evident that some of the more serious objections to the practices in question are valid only in times of stagnation and retrogression. Nevertheless, they are worth analyzing, particularly since they tend to add further to the manufacturers' already preponderant bargaining power even in times of rapid growth in the industry. " Holding off the market," means simply the practice of withdrawing from all purchases of leaf tobacco with the purpose of forcing the sellers to reduce their prices. In a purely competitive market such a procedure on the part of one purchaser would have a negligible effect on prices, partly because the quantities would be small in comparison with the market's aggregate sales, partly because bargaining and waiting power would be equal on both sides. In a market where the purchaser had superior bargaining and waiting power, as is true in tobacco, there would be a tendency toward prices lower than the competitive level, a tendency which would increase in importance as the proportion of the industry controlled by the purchaser increased until monopoly was reached. Outright collusion among a few dominant buyers would be equivalent to monopoly to the extent that any buying agreement was effective. " Holding off the market " can be used as a mechanism for collusive division of the market; but it also can result in a division of the market not through collusion, but through the operation of some of the principles just discussed which govern situations where buyers are few. Letters quoted by the Federal Trade Commission in its Report on the Tobacco Industry show that buyers for the various companies were continually concerned during the post-war price collapse

COLLUSION

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PURCHASES

181

about the probable effects of their policies both on the market prices and on the policies of other companies. They also show a willingness to alternate with other companies in purchasing, so that the number of buyers at any time would be further reduced. A series o f letters between officials of the R. J. Reynolds Tobacco Co. shows how the method would work out.3® Late in December, 1919, the American Tobacco Co. withdrew from the Kentucky leaf markets. T . H. Kirk, the Reynolds buyer in the district, on Dec. 30 wired W . N . Reynolds, president of the company, saying : " A . T . buyers off market all over district. Markets much lower. I have bought very heavily yesterday and today, but rejections h e a v y . " Will have big load if they remain off until January 5 as reported." Three days later the president wrote in reply, " On account of the absence of some buyers it is evidently a good time to ease the market down very materially, and at the same time get your full share of the tobaccos suitable for our purpose." O n January 5 American Tobacco reentered the market, and a few days later Reynolds wrote his buyer that since " A . T . Co. has just come back into the market, I thought it might be advisable to take things a little quiet for a few days, as it might have a tendency to steady things down to a lower level and at the same time enable you to get your part of the receipts at a lower price. . . . It might be a good time to see-saw the market." Since a policy of this sort depends on as accurate knowledge as possible of the intentions of the other buyers, it obviously invites outright collusion. In practice, it would be difficult to determine just when collusion had taken place, as it is possible for buyers to understand each other without formal agreement. In general, however, as long as the various companies adhere to a philosophy such as that ex58

Federal Trade Commission, Report on the Tobacco Industry, pp. 93-95·.

371,

e., rejections by growers of prices offered.

182

COMPETITION

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INDUSTRY

pressed in the following letter f r o m Reynolds to Kirk, no agreements would be required : In wiring you I was not unmindful of the fact that you would take every advantage possible to buy your tobacco cheaper whenever the opportunity presented itself. However, it has been my observation with a number of buyers that instead of taking full advantage of reducing their averages when their competitors were off the market, they simply stand right under the market and buy just that much more tobacco just because they can buy it for a few cents less, although it was still high. By these parties being off the market it would indicate that they were willing to have a more sensible market; while on the other hand they may be trying to load us, hoping to get their requirements later at a considerable less price. In either case we should be prepared to meet them on reasonable grounds. In other words, if they are willing to let us have our requirements cheaper, we have no objection to their getting theirs at a lower price." Another method of achieving the same end is the practice of buying only a certain percentage of the offerings in any market. Instructions of this sort to buyers seem to have been very common in the immediate post-war y e a r s . " As with complete holding off the market, this plan offers obvious opportunities for collusion but would operate about as satisfactorily without formal agreements. This practice can also be used to test out the willingness of other companies to be " reasonable ", as is evidenced by the following instructions sent to virtually all its burley leaf buyers by the American Tobacco Co. when it reentered the Kentucky markets on Jan.

5,1920: We think that you should reduce all of your averages materially, and want you to begin at first very conservatively with this 38

Federal Trade Commission, Report

se

Ibid., pp. 14&-150.

on the Tobacco Industry,

p. 152.

COLLUSION

IN LEAF

PURCHASES

183

end in view, and under no conditions do we want you to buy over per cent of your offerings, keeping your grades up to the standard at all times. Should your price decline, we will expect you to reduce your averages; but do not buy any larger percentage. After trying your market out the first day, if you find your competitors will not let you have your required percentage, you will have to meet the market and get your percentage, even if you have to pay the same average as you were using before the holidays.40 It is clear that if skillfully used, this practice of fixing percentages to be bought could readily be made the means of establishing prices virtually the same as those of a monopoly. Buying under cover, i. e., buying through secret agents, like holding off the market, would have no appreciable effect on a competitive market, where prices would be fixed by the quantities offered rather than by the names of the buyers. O n the whole, it is difficult to see just what will be accomplished by this practice even in a market dominated by a few buyers. Its adoption is evidently based on a feeling that the psychological effect on the sellers of knowing that a certain buyer is in the market is to make them demand a higher price than they would otherwise ask. 41 The validity of this assumption is open to grave doubt, although it may be that a slight difference in price will result from this cause. In any event, purchases by a large company without revealing its identity are very difficult, if not impossible. 42 The absence of recognized standard grades is important in this connection, because a company may by changing its markings take advantage of the farmers' ignorance through pretending to withdraw completely from the market for tobaccos the latter 40 Ibid., p. 67. " Reduce your averages " refers to average prices paid by the buyers. " Per cent of your offerings " means " per cent of the leaf offered in your market."

« Ibid., pp. 63-65. *2 Ibid., p. 99.

¡84

COMPETITION

IN THE

TOBACCO

INDUSTRY

has sorted according to his ideas based on previous sales and so induce him to sell at sacrifice prices. 43 T h e use of common buying agents is more clearly a movement in the direction of monopoly, although the problem is considerably more complex than it might seem on the surface. Commenting on this practice the Federal Trade Commission says : It has a tendency to lower prices in that competition is eliminated in proportion to the number of companies involved, providing competitive tobaccos are being purchased in this manner. The fact that the less important users of tobacco purchased through the same agency would, of course, not affect the market appreciably and would operate to their advantage in that the expense of separate buying organizations would be saved. However, the practice is not limited to the smaller companies, and in recent years some of the large companies have used the same agencies, although maintaining extensive buying organizations of their own.44 The proviso that the common agency must buy competitive tobacco f o r different buyers is important, since obviously the purchase of non-competitive tobacco should have no effect on prices other than the possible slight differences resulting f r o m buying under cover. Other provisos not mentioned by the commission must also be considered. Quantities purchased would be very important. I f it is true that common agents used by small buyers will have very little effect on prices, it is also true that purchases of small amounts f o r large buyers will have very little effect on prices. Furthermore, it is clear that if in addition to buying small amounts f o r the large users, the agents buy f o r a great many small users, the effect will be to make f o r a more compact and thoroughgoing duopoly. A g a i n , any conclusion as to *3 Ibid., p. n o . ** Ibid., p. 56.

COLLUSION

IN LEAF PURCHASES

185

the effects of this practice on prices may vary in different markets, according to whether the agent buys much or little of the offerings in a particular place. The attitude of the companies buying through the agent will affect the outcome. They may buy through him in a deliberately collusive attempt to monopolize the market. Each company may buy through the agent without knowledge that the others are doing likewise. Each company may operate independently, but know the others are doing likewise and use the common agent as a clearing house of information, thus aiding in the working out of duopoly. The companies may let the agent use his own discretion widely or give him continued and detailed supervision. Other possible modifications will occur to the reader. The essential point is that the mere existence of common buying agencies does not necessarily prove the existence of either intent to monopolize or actual monopoly. And even if it did, the limitations on a leaf-purchase monopoly already described would make it more of a potential than an actual evil under conditions of rapid growth such as have prevailed during the post-disintegration era, except in depression years. § 9. The major conclusions to be drawn from the survey of leaf prices in this and the preceding chapter are that for the period under review as a whole monopoly prices, while they probably would have been slightly lower than competitive prices, would not have differed very greatly from these competitive prices, the influence of dynamic forces being strong enough to prevent their settling all the way to the short-period monopoly level; that in the absence of such dynamic forces prices probably would go below competitive levels ; that many forces other than monopoly account for the woes of large numbers of tobacco farmers during the last decade; that there is no reason to quarrel with the Federal Trade Commission's conclusion that evidence of collusion to

186

COMPETITION

IN THE TOBACCO

INDUSTRY

control prices and wreck the cooperatives in 1920 was inconclusive; and that because of the small number of dominant buyers, the situation is such that should the growth of the industry stop or even slow down greatly a condition closely akin to monopoly would be not unlikely. This situation, which may become very important to the farmers some day, can perhaps be blamed on the decree because it set up so few competing successor companies in each field ; but in view of the tendency of competition to work itself out in the survival of enterprises of optimum size, the fact that this optimum size in the tobacco industry is very large, and the gradual evanescence of the public and governmental animus against large-scale industry, it is quite possible that division of the industry into a great many smaller units would have been followed either by the gradual elimination of some producers or remergers until a situation equivalent to the one prevailing now would have been reached.

C H A P T E R

VILI

P R I C E C O M P E T I T I O N A M O N G M A N U F A C T U R E R S IN T H E S A L E OF TOBACCO PRODUCTS

§ 1. In any consideration of the prices which the successor companies have been able to charge for the products they manufacture, there are really two problems to be studied. One is the relation between the costs of the products and the prices at which they are sold to distributors. Since full cost figures are not to be had by a private investigator, we must fall back upon the relation between leaf prices, the principal cost item, and product prices. The other problem is the spread between the prices charged distributors and the prices at which the ultimate consumers buy. The first entails analysis of the extent to which the companies have been able to keep prices above competitive levels, the other factor on which the spread between leaf and product prices depends—the extent to which the companies are able to keep leaf prices below competitive levels—having been considered in the two preceding chapters. The second problem, since we have already seen that tobacco companies have in general not tried to integrate forward to take control of the distribution of their products, concerns the extent to which the manufacturers have attempted to encourage or discourage competition among distributors; in conventional terminology, it has to do with resale price maintenance. The first problem will be taken up in this chapter; discussion of the second will be deferred to Chapter X . § 2 . Much of the analysis which has already been presented in connection with leaf prices will also apply to a 187

l88

COMPETITION

IN THE

TOBACCO

INDUSTRY

study of the spread between costs and prices charged by manufacturers. Essentially the problem is one of duopoly, i.e., the degree to which a small group of companies operating with or without collusion approximates the results that would be achieved under outright monopoly; so that it is necessary, first of all, to see what effects a monopoly would have on price. Under the static analysis, it is clear that at any given moment, since the demand for tobacco products is very inelastic within fairly wide price ranges, as we saw in Chapter VI, § 3, the tendency of monopoly would be to reduce the quantity exchanged somewhat, but not very greatly, below the quantity that would be offered under free competition, and thus to set a price considerably above the competitive level, or, conversely, to set a price considerably above the competitive level, knowing that the quantity taken would be reduced very little. A t least two checks would fix an upper limit to the price thus set. The extreme limit would be the point at which further increases in price would result in more than proportional decreases in quantities taken or, vice versa, further decreases in quantities offered would result in a smaller aggregate net revenue. The other check would be the danger of encouraging competitors to enter the industry, a danger which is fairly remote in practice, because of factors to be considered later,1 but must be taken into account theoretically. A third possible check, substitution, which may be considered perhaps only a variety of the first one, seems to be of less importance than the others. There is no real substitute for tobacco. The only important substitution possible would be one type of tobacco product for another. If all products other than cigars were controlled by the same monopoly, as was true under the " trust ", 2 the 1

Ch. ix, infra.

Now that the cigar industry is mechanized, it is not unlikely that a monopoly would take in this product too. 2

PRICE

COMPETITION

AMONG

MANUFACTURERS

189

opportunities f o r the consumer to improve his position by shifting from one to another would be virtually nil unless the monopoly deliberately priced its goods so as to force consumers f o r reasons satisfactory to itself to shift from one product to another. The shift from other types of product to cigars would be greatly restricted by the differences in the natures of the products. It is self-evident that an extremely great increase in price would be required to shift most consumers from cigarettes or chewing tobacco or snuff to cigars. T o what extent could the probable results of monopoly under static conditions be expected to persist when the analysis is broadened to take in the dynamic forces prevailing during the last twenty years? One important difference between the situation a monopoly would face in selling the product and the situation it would face in buying the leaf must be noted. In the tobacco-products markets there is no sharp cleavage between short and long periods growing out of the characteristics of the production process as there is in leaf tobacco. A t no time is there a demand which is fixed for periods of a year or so, as is true of leaf supply. This means, of course, that the reaction of demand to changes in price would be immediate rather than delayed. There would be no opportunity f o r the shortsighted monopolist to go to such extremes with prices for products as would be possible with prices for leaf. The principal dynamic factors operating in the last twenty years have been the tremendous growth of demand f o r cigarettes, the moderate growth of snuff demand and the stationary or declining demand for everything else, the war inflation, the post-war deflation and the depression of 19291932. When demand is continually growing, it is impossible to say what should happen to prices under monopoly without knowing what has happened to the shape of the demand curve, since the increase in demand may be accom-

ige

COMPETITION

IN THE

TOBACCO

INDUSTRY

panied by an increase or a decrease in the elasticity of demand or by no change whatsoever. As before, the tendency at any particular time would be toward the price yielding the maximum aggregate net revenue ; but over a period of time this price may rise, fall or stand still. In general, the price would continuously be higher than it would be under competition. For products with a falling demand, the situation is about the same as regards inability to predict what will happen to the shape of the demand curve ; but we should expect here too that the price would hold above the competitive level continuously. In either event it is evident that conditions of cost and changes in those conditions would also play a potent part in determining prices. Unfortunately, as we have seen in discussing the scale of production, data as to costs are not available. Inflation and deflation during the last twenty years have been of interest in tobacco, chiefly because of their effects on the prices of leaf and of tobacco products. In times of inflation the prices of leaf have risen in advance of the prices of products. The speed with which this increase would be reflected in the prices of products would be influenced greatly by the fact that the tobacco leaf used in any year is that harvested two or three years earlier. While the rise in current leaf prices does not affect the conditions of production of products at the time of the increase, the possibility of postponing the use of some of the existing stocks of leaf might induce a monopolist to increase the price of products immediately. Inflation would also affect the monopoly price for products through its effect upon consumer incomes and therefore upon demand. The relation in time between the rise in leaf prices and the rise in product prices would depend, therefore, upon the relation in time between the reaction of inflation upon consumers' incomes and its reaction upon leaf prices. These relationships in time would probably be the

PRICE COMPETITION

AMONG

MANUFACTURERS

Ι9χ

same under competition as under monopoly, particularly where speculation in leaf brings about a postponement of consumption of current stocks comparable to that open to the monopolist. Under competition, however, the amounts of the changes in prices would be different from those under monopoly. In the two depressions under survey, prices of leaf fell before prices of products. This does not necessarily imply the existence of a monopoly. Although under competition reproduction costs set an upper limit to prices, the fact that leaf must be aged before use would necessitate the use by all competitors of leaf raised two or three years before and bought at high prices rather than the lower-priced leaf of the current crop on sale in the open market. In consequence, the decline in the price of products would be expected to lag two or three years behind the decline in leaf prices. The convention among the large companies of calculating their leaf costs on the basis of an average for three years, would tend to accelerate the decline in their calculated costs and under competition would accelerate the decline in the prices of products. As in the case of inflation, however, a change in the conditions of demand owing to a decline in incomes may force a reduction in prices before the reduction in costs due to a decline in leaf prices had become effective. Under monopoly a decline in costs would have no necessary effect upon prices. The only force (other than the danger of inducing newcomers to invade the industry), which could bring prices lower under such circumstances would be a change in the purchasing power of consumers large enough to reduce the demand for tobacco products. Where this happened, the monopoly would find it advantageous to reduce its prices so as to maximize its aggregate net revenue. This drop might come in a shorter or a longer period than would be required to use up the expensive leaf, but would have no direct relation to that period.

IÇ2

COMPETITION

IN THE

TOBACCO

INDUSTRY

§ 3. So much for monopoly. How near to monopoly does the situation actually prevailing in tobacco products approach? Cigars, being produced by a great many manufacturers, are obviously removed from monopoly by a long distance. O f the other products, snuff is produced on a very important scale by only three manufacturers, cigarettes by only four, and the same four companies hold a predominant position by a wide margin in the others. 3 Evidently in so far as the analysis of duopoly in the preceding chapter holds good, this is a situation where under static conditions duopoly price would approach very close to monopoly price, since the competitors being very few, each company would have to take into consideration the effects of its policies on its competitors' policies. In a rapidly-growing industry where demand is inelastic, there would be little incentive to cut prices as long as each company was getting part of the increase or even holding its own. In a declining industry, there would again be no particular incentive to cut prices if it be assumed that the decline is due to factors having no relation to price, since an effort on the part of one company to build up its sales at the expense of other companies would lead only to retaliation in kind. In a depression, some company would have to start cutting prices if the market was to drop at all ; but it would do so knowing full well that the other companies would follow its lead, so that the essential consideration would be the need of the industry as a whole rather than its hopes of taking business away from its fellows. T h e effort to take business away from the others under all of these conditions would become evident elsewhere than in price, notably in advertising, the opportunities for and limitations upon which will be discussed in the following chapter. In order that this analysis shall be valid, it is necessary to s

Ch. iii, supra.

PRICE

COMPETITION

AMONG

MANUFACTURERS

ig¿

assume that the products of the various companies are identical. A company manufacturing one type of cigarette may hope by cutting prices to take business away from other types. The weaning of cigarette smokers from Turkish to blended cigarettes during the world war is an instance of this. So is the reduction of " R a l e i g h " cigarettes to 15 cents a package in 1932, since it is obviously hoped that the consumer can be induced to change over from the more popular brands now that the differential has been eliminated. This policy can be successful only if the other companies are unable to reduce prices on their products because of costs, as was true of the Turkish cigarette manufacturers, and either unable or unwilling to imitate the price-cut product. In point of fact, the various companies in early years filled out their lines so that they would compete in all lines. In recent years they have found it more profitable to concentrate on single brands, which by advertising can be built to such a strength that the danger of losing customers to other brands sold at lower prices is small unless the price difference is extreme. It might be thought that the fact that each manufacturer's products are protected by strong brands would make some producers lag behind in price declines. In so far as the most popular brands are concerned, however, the various manufacturers have ordinarily followed each other's price cuts very promptly. It would be interesting to see whether the following built up by advertising for, say, " Lucky Strike " cigarettes would stay with them if their price held steady while, say, " Camel " cigarettes were reduced in price and to see the amount by which the price would have to be reduced before " Camel " would begin to take customers away from " Lucky Strike ". The manufacturers ordinarily show no desire to make this experiment, however, apparently being convinced that they would lose if they failed to follow

194

COMPETITION

IN THE

TOBACCO

INDUSTRY

on price reductions, although there are exceptions, as when " Lucky Strike " stayed at $6.45 a thousand compared with $6.40 a thousand for " Camel " and " Chesterfield " between 1923 and 1928 and when " Old Gold " stayed at $6.10 compared with $6.00 for the other corresponding brands in 1928 and 1929. It is possible too that the strength of a brand may be evidenced in the unwillingness of its manufacturer to be as generous as his competitors in granting special discounts and offering " deals " of various sorts. 4 Secret prices are also a theoretical possibility. Since the manufacturers do not sell direct to consumers, the only opportunity for this is in prices to distributors, where the motive would presumably be to induce particular distributors to favor the brand in their own advertising and selling. The distributors could either pocket the difference in prices or pass it on to consumers and get an extra profit in increased volume at the old margin. While theoretically cf some interest, this exception is of little importance in practice because it is virtually impossible to keep such actions secret. § 4. An attempt to check these hypothetical conclusions against what has actually happened during the last twenty years, runs into the usual difficulty of finding adequate measures of price changes during the period. Table 22 shows relatives of wholesale prices of leaf tobacco, chewing tobacco and smoking tobacco in comparison with indexes for all commodities, non-agricultural commodities, farm products and leaf tobacco as compiled by the Bureau of Labor Statistics. These indexes are not completely satisfactory for purposes of the present study in that for the entire period they cover only dark-fired western leaf, which is much less important than either flue-cured or burley, and, in manufactured products, only plug and granulated smok4

Cf.

ch. viii, § 10,

infra.

PRICE

COMPETITION

AMONG

MANUFACTURERS

I(j-

ing tobacco, two minor items today. 5 Furthermore, the prices for products on which they are based are only list prices.8 They do indicate, however, that prices for tobacco products lagged behind leaf prices and other commodities in the war inflation and deflation and in the business depression of 1929-1932. These prices did not rise as rapidly as for other commodities, especially leaf, in 1 9 1 7 - 1 9 2 9 ; neither did they fall as rapidly or as f a r as other commodities, especially leaf, in the subsequent decade. In the lags on the price falls of 1 9 2 0 - 1 9 2 3 and 1 9 2 9 - 1 9 3 2 (as well as in an absolute rise of cigarette prices in 1 9 3 1 not shown in the table) lies much of the reason for the widespread doubt, especially among farmers, that real competition in prices exists. In interpreting these prices it is necessary to bear in mind the sharp rise in tobacco taxes during the last twenty years. Tobacco is a favorite subject of taxation all over the world, being extremely productive of revenue because of its widespread consumption and inelasticity of demand. In the United States it has been an important source of revenue since Civil W a r days and has grown tremendously in importance since the partition of the " trust " , the taxes paid having risen from $70,590,152 in the fiscal year ended June 30, 1 9 1 2 , to $444,275,503 in the fiscal year ended June 30, 1 9 3 1 . 7 A substantial part of the increase is due to the increased consumption of cigarettes, but much of it is due to sharp advances in rates shown in Table 23. Since the prices 5

Some of these defects are now being remedied by the Bureau of Labor Statistics, which, beginning with 1929 has compiled a new series for leaf tobacco based on average prices in Maryland, Virginia, North Carolina, South Carolina and Kentucky. Beginning with 1932, it is adding to its index 234 items, among which are cigarettes, cigars and snuff. e 7

Cf. ch. vili, § S, infra.

From the annual reports of the Commissioner of Internal Revenue. These totals do not include state taxes.

Ig6

COMPETITION

IN

THE

TOBACCO

INDUSTRY

T A B L E 22 INDEX N U M B E R S OF W H O L E S A L E PRICES, 1 9 1 3 - 1 9 3 1

(Base: 1 9 2 6 =

100.0)

Tobacco l e a f b All Year commodities

1913.. 1914.. 1915.. 1916.. 1917.. 1918.. 1919.. 1920.. 1921 · . 1922·. 1923.. 1924.. 1925.. 1926.. 1927.. 1928.. 1929.. 1930.. «93'··

69.8 68.1 69.S 85.5 117.5 '3'-3 138.6 154-4 97.6 96.7 I00.6 98.1 ιο 3·5 ΙΟΟ.Ο 95-4 97-7 96-5 86.3 71.1

Non-agriFarm products cultural commodities

69.0 66.8 68.5 85-3 113· 1 125.1 131.6 154-8 100.1 97-3 100.9 97·' 101 4 100.0 944 95-5 94 4 85.9 73-0

7'·5 71.2 7'·5 84-4 I29.0 148.0 157.6 ' 588.4 2·7 93-8 98.6 ΙΟΟ.Ο 109-8 ΙΟΟ.Ο 99-4 '°5·9 Ι04-9 88.3 64.8

*

Average warehouse sales, Kentucky 105.2 88.3 82.0 121.6 198.2 271.7 260.9 '72-3 «39» 170.6 «77-7 '73-9 164.4 100.0 '33·' '59-4 '97-4 197.2

Burley, dark red, good leaf Louisville 58.8 65.2 61.4 67.8 99-3 162.8 144.0 152.2 «3°·4 122.4 «23-7 116.o 110.4 100.0 82.0 92.2

....

M anufactured tobacco

Plug

55-9 55-9 5Í2 58.2 69.5 88.7 107.9 111.7 102.5 100.7 100.7 100.0 100.0 JOC.O 100.0 ΙΟΟ.Ο 100.0 100.0 100.0

Smoking

67.8 68.3 69.2 69.2 69.2 97-1 110.3 119.2 119.2 119.2 119.2 101.6 100.0 100.0 100.0 IGO.O 100.0 100.0 °84·3

• Bureau of Labor Statistics, Bulletin No. 493, Wholesale Prices 1913 to 1928; Bulletin No. 521, Wholesale Prices 1929; Bulletin No. 543, Wholesale Prices 1930; Wholesale Prices of Commodities, December and year, 1931; and Prices, Wholesale and Retail, and Cost of Living, December, ¡93'· b T h e bureau discontinued the Louisville burley prices after 1928 because the market had become insignificant. T h e Kentucky leaf prices are given now in the annual bulletins only. F o r use in its index numbers and monthly bulletins, the bureau has substituted an average of leaf prices in Maryland, Virginia, N o r t h Carolina, South Carolina and Kentucky. T h e index numbers for the last three years of this series are : 1929, 100.8 ; 1930, 87.3; 193t, 61.ι. c Marked down f r o m $8.32 to $5.12 per gross of i-oz. bags in August, 1 9 3 1 . Index at end of year was 61.5.

PRICE

COMPETITION

AMONG

MANUFACTURERS

197

shown in Table 22 include the federal tax, it is obvious that a fall to 1913 levels would be out of the question, even with identical leaf prices and manufacturing costs and that a rise greater than the rise in leaf prices during the war inflation would have been justified. A growing tendency toward taxation of tobacco products by the states may be noted here, T A B L E 23 U n i t e d S t a t e s I n t e r n a l R e v e n u e T a x e s on Tobacco P r o d u c t s , 1909-193a »

Large cigars

Internal revenue act of

Per 1000

A

1909 . . 1917.... 1919... 1921.... 1926...·

Small Large Small cigars* cigarettes 4 cigarettes*

b

!

!_

Β

C

D

J3.00 I j . o o I3.00 I3.00 300 4.00 6.00 8.00 4.00 1 6.00 9.00 12.00 4.00 1 6.00 9.00 12.00 2.00 j 3·°° 5.00 lO.JO

ι1

E

1 $3.00 I· 0.00 ¡15.00 15.00

I13-5°

Per moo

Per 1000

Per 1000

t°-75 1.00 1.50 1.50 0.75

>3-6° 4.80 7.20 7.30 7.20

#1.25 2.05 3-00 3.00 300

Manufactured tobacco and snufl

Per pound I0.08 «3 .18 .18 .18

* Based on compilations by the Commissioner of Internal Revenue. b

Cigars weighing more than 3 pounds per 1,000.

1909 all large cigars were taxed alike.

Under the act of

Under the act of 1917 they were

classified according to whether they were manufactured or imported

to

retail at ( A ) less than 4 cents each, ( B ) 4 cents or more and not over 7 cents, ( C ) more than 7 cents and not over IS cents, ( D ) more than IS cents and not over 20 cents, or ( E ) more than 20 cents.

Under the acts

of 1919, 1921 and 1926 they were classified according to whether they were manufactured or imported to retail at ( A ) not more than 5 cents each, ( B ) more than 5 cents and not more than 8 cents, ( C ) more than 8 cents and not more than i s cents, ( D ) more than 15 cents and not more than 20 cents, or ( E ) more than 20 cents. c

Cigars weighing not more than 3 pounds per 1,000.

d

Cigarettes weighing more than 3 pounds per 1,000.

e

Cigarettes weighing not more than 3 pounds per 1,000.

f

Rates effective July I, 1910.

IÇ)S

COMPETITION

IN THE

TOBACCO

INDUSTRY

since these also operate to prevent the consumers' receiving full advantage of competition in prices, although they do not enter into Table 22. In the years 1 9 2 1 - 1 9 3 1 , inclusive, seventeen states imposed taxes on tobacco products; four have been repealed by legislatures or voted down by referenda, leaving thirteen in force at the end of 1 9 3 1 . 8 These laws all tax cigarettes but vary in the rate imposed and in the treatment of products other than cigarettes. Through the courtesy of the American Tobacco Co., the author has also been able to obtain the figures in Table 24, which gives a price series for " Lucky Strike " cigarettes f r o m the time of their introduction in 1 9 1 6 to the present time. The basic figures are the list prices publicly announced from time to time, from which the author has calculated the net prices charged distributors, i.e., the list prices less 1 0 per cent trade discount and an additional 2 per cent for cash in ten days, and the net prices less tax, which represent the amounts actually received by the manufacturers.® The general course of net prices less tax has been about the same as that shown f o r smoking tobacco in Table 2 2 — a sharp rise during the war, a sharp fall thereafter and fairly steady prices from 1 9 2 3 on; but there is a very important exception, to which we shall return, in that whereas smoking tobacco declined in 1 9 3 1 , cigarettes advanced. Further information on prices has been provided by the Commissioner of Corporations, the W a r Industries Board and the Federal Trade Commission, which have at various 8

Shoup, Carl, Sales Taxes on Selected Commodities: A Report to the New York Slate Commission for the Revision of the Tax Laws (Albany, 1932), PP· 5-8. 9

There are no estimates available to show what proportion of the business done by the manufacturers is really done on the basis of cash in ten days. For purposes of this discussion it is assumed that all of the business is done on this basis.

PRICE COMPETITION

AMONG TABLE

MANUFACTURERS

24

PRICES OF " L U C K Y S T R I K E " CIGARETTES : 1 9 1 6 - 1 9 3 3

Price listed

Net price b

Tax·

Net price less tax

$4.00 Í3-5»8 5 ° ° , 4.410 5-83 Κ 5«45 5.292 6.00 6.615 7-5° 6.00 5.292 6.615 ,7-5° f 7·8Ο 6 7°3 '8.20 7.056 8.00 7·Ο 5 6 6.835 7-75 6.6ις 7-5° 6.8o 5-99» •6.20 6.076 « 5.80 5.684 6.45 5.689 6.00 5.292 6.40 5*45 6.042 6.85

$1.25 2.05 2.05 2.05 2.05 2.05 300 3·θθ 300 3.00 3·°° 3-00 3.00 3.00 3.00 3·°° 3·οο 300 3.00

»2.278 2.360 3095 3-24» 4.565 3-24* 3615 3-7° 3 4-°5 6 4.056 3.835 3615 2.998 3.076 2.684 2.689 2.292 2.645 3042

List price

Dec. 22, 1916 Oct. 19, 1917 March 9, 1918 July 27, 1918 Oct. 1,1918 Nov. II, 1918 Fel). 25, 1919 Nov. 4, 1919 Nov. 27, 1919 Dec. 18, 1919 Dec. 5, 1921 Jan. 19, 1922 March 7, 1922 Aug. 24, 1922 Oct. 31, 1922 Aug. 8, 1923 April 21, 1928 Oct. 5, 1929 June 24, 1931

199

·

Relative

d

100.0 103.6 >35-9 >42-3 200.4 «42-3 158.7 162.6 178.1 178.1 168.3 158.7 131.6 135·° 117.8 118.0 100.6 116.1 '33-S

* Compiled from data provided by the American Tobacco C o .

Prices

are quoted in dollars per thousand cigarettes. b

List prices less 10 per cent trade discount and 2 per cent f o r cash in

ten days. c

Federal internal revenue tax on small cigarettes.

d

Based on net price less tax.

e

The sharp advance from $6.00 to $7.50 on Oct. I, 1918, followed by a

drop back to $6.00 on November II, caused a furore in the trade.

It was

explained by the trade journals as due to an error in calculations concerning the new revenue law then under consideration. Journal,

United

States

Tobacco

Nov. 30, 1918, p. 3.

' Special allowance of 20 cents given in addition to the usual 10 and 2 per cent. ' Prices quoted net subject to 2 per cent discount for cash in ten days.

times since the disintegration interested themselves in the subject.

B y f a r the m o s t elaborate report is that o f

Commissioner o f

C o r p o r a t i o n s a n a l y z i n g the situation

the in

200

COMPETITION

IN

THE

TOBACCO

INDUSTRY

1 9 1 2 and 1 9 1 3 ; but, as is true of the other data in his report, the period covered is so brief and so f a r in the past that it is of comparatively little value now. His principal conclusions were : ( 1 ) Prices to wholesalers, retailers and consumers were practically unchanged by the disintegration. 10 This is about what we should expect under the analysis above. ( 2 ) Competition in prices found obstacles in the facts that statutory limitations on package sizes made changes in quantity per package difficult, that there was a general custom of selling tobacco and cigarettes at retail in multiples of five cents and that consumers generally did not look f o r petty economies on what was in some degree a luxury.11 ( 3 ) Competition had made itself felt in sharply increased advertising and selling expenses, resulting in substantially smaller profit margins, especially on cigarettes. 12 T h e W a r Industries Board and the Federal Trade Commission reports touching prices of tobacco products during the war period simply confirm the trends shown in Table 2 2 and show that they apply to cigarettes as well as to plug and smoking tobacco. Foods and the all-commodities index started to rise in 1 9 1 5 . Leaf began to rise in 1 9 1 6 . Tobacco products began to rise in earnest in 1 9 1 7 . The lag in 10 The tables in the report show a small increase in net prices between 1910 and 1913 ; but this is due chiefly to the fact that increases in taxes imposed by the revenue act of 1909 and passed on in the price became effective July i, 1910, and so increased the average for only half of that year. 11

These conditions have changed somewhat. Odd-cent prices for tobacco products are common today, although many consumers are still willing to pay the conventional prices rather than go a few steps out of their way to cut-rate stores, and the number of statutory packages has been increased. For a list of permissible packings see United States Treasury Department, Regulations No. 8, pp. 36-38. 12

Report of the Commissioner of Corporations on the Tobacco Industry, pt. iii, pf>. 23-30, 383-384. Statistics on prices, costs and profits may be found on pp. 224-226, 252,253, 255, 297, 298, 300, 309,312, 324, 327, 354,357.

-

η

/

f f

< v

/ I 1

>· M U S> J

1

.

/

/

.

t


58 4 8 2 , 8 9 7 812,429 1.215.55° 2,268,247 1,900,827 3,152,091 2,398,118 3.287.277 2,169,869 3,492,606 2,066,323 4 , 8 6 6 , 0 7 3 3,402,901

Compiled

Markets

from

and National

annual

Lorillard

Liggett & Myers

American

Per cent

66.3 76.5 73-5 60.3 71.6 59-3 72.5 64.1 68.8 62.6

$204,210 212,190 279.577 187.516 168,019 166,536 368,803 335.'°5 161,011

issues

Advertising,

Î9«,845 117,680

45.872 53,819 141,022

333,453 324,89« 358,>99 181,804

«55.429 156.329 194,925

465.364 447,205 409,381 379,983 160,620 186,206

53-6 530 66.8 83-9 76 I 66.0 59.2 69.9

$220,340 98,607 128,572

46,750 831,950 1,099,100 1.037.525 472,550 876,200

of

Crowell

New

York.

6.525 35.922 59.49« 187,345 616,126

303,104 440,527 430,821 509,700 870,465 1,095,050

Publishing

Co.,

«219,544 448,768 486,767 256.365 238,421 164,611 346,672 4'.348 328,025 224,180 242,981 298,691 456,050 628,350 832,275 563,«53 535,963 815,525

National

whom are not included in the itemized list. Finally, the total includes advertising of smokers' supplies, as well as of tobacco products, so that the proportion of the " big four " would be somewhat higher if tobacco products advertising alone were taken. The important point brought out by the table is the huge increase in advertising expenditures, particularly since the American Tobacco Co. started its " Lucky Strike " campaign and the P. Lorillard Co. its " Old Gold " campaign in 1926. 10 10

T h e f a c t that these f o u r companies account f o r only about two-thirds

NON-PRICE

COMPETITION

229

The only conclusion to be drawn from these statistics is that the big tobacco manufacturers have spent in the past and are continuing to spend great sums for advertising. This means that nearly all the questions which come to mind concerning non-price competition in general and advertising in particular must remain unanswered. For example, it is impossible to calculate the cost of advertising per unit of product and see whether competition in advertising costs the companies as much as they would lose by a price reduction designed to cause the same increase in consumption. It is impossible to compile any tables which will show the trends of advertising expenditure. It is impossible to decide definitely whether advertising has kept the price of tobacco products higher than they would have been without advertising, and if so by how much. It is impossible to say whether there has been any tendency for competition in advertising to be subject to limitations similar to those which restrict competition in prices where sellers are few. § 5. This last problem is particularly important. Is competition in advertising of the kind in evidence since the disintegration to be regarded as one of the permanent characteristics of the tobacco industry, or is it dependent upon the continuance of temporary conditions in the tobacco of the aggregate expenditures as shown in Table 26 calls f o r explanation in view of their admittedly preponderant position. There are two major explanations. One is that a varying but considerable percentage of the aggregate is spent by the manufacturers of cigars. The other is that a considerable part of the expenditure is made by manufacturers of smokers' supplies, such as pipes, lighters, and tobacco pouches. In each of these fields the successor companies play a minor role. It must also be remembered that independent manufacturers of expensive brands of cigarettes and smoking tobacco probably spend relatively more of their advertising budgets in magazines than do the " big four " and that part of the expenditure not assigned to the " big four " is made by other successor companies or their affiliates.

230

COMPETITION

market?

IN THE TOBACCO

INDUSTRY

O b v i o u s l y , if the only important type of v i g o r o u s

competition w h i c h has developed in the industry thus f a r is itself scheduled to disappear a f t e r a while, all conclusions as to w h a t has been achieved b y the decree m u s t be p r o f o u n d l y affected. T h e answer

seems to depend u p o n w h e t h e r

continued

g r o w t h is to be considered a permanent characteristic of the tobacco industry.

F r o m the point o f v i e w o f the private

enterpriser, advertising e x p e n d i t u r e s j u s t i f y themselves if they result in an increase o f net income sufficient to r e w a r d h i m f o r the expense involved.

It is usually assumed in prac-

tice that a d v e r t i s i n g pays f o r itself t h r o u g h inducing consumers t o take quantities l a r g e r than w o u l d otherwise be t a k e n thus increasing output and m a k i n g possible from

larger-scale

production.

These

savings

savings

must,

of

course, be larger than the a d v e r t i s i n g expenditures entailed ; the net savings over and a b o v e the a d v e r t i s i n g expenditures m a y or m a y not be passed o n to the consumer in l o w e r prices, depending upon the competitive situation.

A d v e r t i s i n g also

increases net revenue w h e n it results in an increase o f the price at w h i c h the f o r m e r quantity can be sold, p r o v i d e d o f course that the a g g r e g a t e e f f e c t upon revenue e x c e e d s the a g g r e g a t e cost o f the advertising.

I n times o f

increasing

demand, the inducement to advertise is likely to be greater t h a n at other times because the m a g n i t u d e o f its e f f e c t s is likely to be greater than at other times. W h e n the industry m o v e s into a period o f stationary or d i m i n i s h i n g demand, such that a d v e r t i s i n g is powerless t o increase a g g r e g a t e sales and can act only to d i v e r t the e x i s t e n t d e m a n d f r o m one producer t o another, the results will be different.

U n d e r a m o n o p o l y , w h e r e there is no competitor

f r o m w h o m demand can be diverted, a d v e r t i s i n g should tend to become entirely a d e f e n s i v e w e a p o n designed t o hinder

NON-PRICE

COMPETITION

231

substitution and the rise of competitors. 11 Under free competition with a great many producers, it is very difficult to tell what would happen, since price competition would rival competition in advertising. 12 Advertising might be abandoned by all manufacturers, or it might be sharply reduced by all advertisers, or it might be increased by some in an effort to hold their own despite the general course of the industry, a course which would be adopted if losses from decreases in production were apt to be larger than the cost of increased advertising, or it might be increased by some in an effort to increase their output in the face of a general decline in the industry. There would be a double incentive to advertise freely in a declining industry where improvements in technology have greatly increased the size of the optimum enterprise, a situation prevailing in cigars during the period when machinery was being introduced. Where competitors are few and large, it is impossible to escape the conclusion that the producers would see the advantage of exercising restraint in their advertising policies. Each would know that any energetic drive on his part would be countered by similar drives from his fellow-manufacturers, and the end effect would be reduced profits for all concerned. Enough advertising to keep out new competition and to keep consumption up to the prevailing total would be all that would be required. 11 A monopoly would tend to reduce advertising expenditures below their competitive levels even under conditions of growth, if that growth were in considerable measure due to forces beyond its control. The tobacco " trust " reduced advertising expenditures after it had firmly entrenched itself in the industry. 12

It might be argued that, since advertising represents an attempt to suspend competition in price, it is not compatible with the concept of free competition and so would not be used at all in a truly competitive industry. It probably is more accurate to say that a definition of competition which limits itself to price competition is inadequate.

232

COMPETITION

IN THE TOBACCO

INDUSTRY

A possible exception would be the launching of surprise attacks. Since the success of advertising depends upon various intangible factors as well as upon quantity, it might well be that the management of one company, believing that it had an exceptionally good advertising idea, would plunge into an aggressive campaign, hoping to take business f r o m its rivals before they had time to launch a counterattack. Such sallies should not tx numerous, however, as they would be of uncertain outcome in any event and would invite retaliation in kind. A n ii.stance of this sort of attack is the strong campaign on " Lucky Strike " cigarettes launched by the American Tobacco Co. in 1926. The present writer has been reliably informed that the officials of American T o bacco hoped lo take the other companies by surprise and build up a largely increased business before the opposing defences were organized. While the effort was successful in this instance, although probably not to the extent desired by its sponsors, the other producers were forced to retaliate in kind, and it is likely that it would have led to an even more costly advertising war than was stirred up had there not been a huge new increase in the number of women smokers to give " Lucky Strike " its desired increase without encroachment on the sales of other brands. Whether this situation—where sellers are f e w — w i l l impose any limitations on the characteristics of advertising as distinct from its quantity, it is almost impossible to say. An interesting development in tobacco advertising has been the increase in animosity as between companies and, more recently, in efforts to counteract directly the effects of competitors' advertising. There was one flare-up of animosity before the w a r when Reynolds published full-page advertisements in which, under the delicate heading, " T h e Stench of a Contemptible Slander is Repulsive Even to the Nostrils of a Buzzard," it recounted the competitive methods of unnamed

NON-PRICE

COMPETITION

233

competitors who would hire men to go into crowded streetcars and pretend to read aloud from newspapers articles damaging the character of " Camel " or pretend to be doctors in conversation condemning this brand. Large rewards were offered for information leading to the arrest of these individuals.18 For the most part, however, competition remained on a reasonably friendly basis until with the advent of " Old Gold " in 1926 and the new campaign on " Lucky Strike " inaugurated by George W. Hill shortly after he became president of the American Tobacco Co. in 1925, bitterness again crept into the fight. At the end of 1927, the editor of the United States Tobacco Journal protested that " cigarette competition in recent years has given rise to practices which have invited and deserved severe censure, but even these are excusable in the light of the latest development, which is reducing the fight for business to a level involving not only the personalities of salesmen for competing brands but of executives of competing companies as well." 14 Since then resentful, spiteful and ill-natured comments on each other's advertising and sales policies have been common, and such comments have been relatively easy to make in view of the depths of vulgarity to which cigarette and cigar advertising has fallen. This is a change of advertising from an offensive to a defensive weapon and serves to substantiate the conclusions already reached as to what would happen to advertising under conditions of static or diminishing demand where the sellers are few. 13

United States Tobacco Journal,

1917, p. IS14

March 17, 1917, p. 21 ; April 7,

Ibid., Dec. 3, 1927, p. 4. One practice was condemned by the Federal Trade Commission. This was the use of testimonials bought from individuals who did not use tobacco at all and in some instances had not prepared, signed or even seen the testimonials printed over their names. New York Times, Jan. 24, 1930; Annual Report of the Federal Trade Commission, 1930, p. 224.

234

COMPETITION

IN THE

TOBACCO

INDUSTRY

§ 6. T o what extent the considerations which have been discussed as regards non-price competition apply to snuff, it is impossible to say. Direct evidence as to the course of prices, competition in prices, the distribution of business between the companies and the expenditures of the companies for publicity are not to be had. All that can be said is that at least for a time there has been non-price competition in the industry and that the methods adopted to divert consumers from competing products have not always been commendable, the evidence on which these statements are based being found in the record of proceedings instituted by the Federal Trade Commission against the American Snuff Co. 15 The case began as an investigation of the company's endeavors to maintain resale prices by removing from its list of customers those jobbers and retailers who failed to adhere to suggested price schedules ; but it soon widened into an investigation of competitive practices in general. Substantial competition was found by the Commission to exist only· in overlapping areas, i. e., in the middle southern states, where all three companies were in competition, and in West Virginia, where the American Snuff Co. and the George W . Helme Co. were in competition.14 The Commission found that in these competitive territories, beginning in December, 1 9 1 1 , immediately after the partition, salesmen for the American Snuff Co., acting on instructions from the company, made every effort to cause the customers of the Weyman-Bruton Co. to cancel their contracts and return their goods to the manufacturer or to hide them on their shelves and circulated derogatory statements such as that the Weyman-Bruton Co. was a little company that would be soon out of business, that the Weyman-Bruton Co. was really just a 15 18

In the Matter of the American Snuff Company, 11 F. T. C , 144 et seq.

Cf. ch. iii, § S, supra. This survey covered conditions from the disintegration into the early 'twenties.

NON-PRICE

COMPETITION

235

subsidiary of the American Snuff Co., that the WeymanBruton Co. gave short weight and that the American Snuff Company's " Honest " brand was really " Honest Bruton " , the " Bruton " of the Weyman-Bruton Co. not being genuine because this brand was originally made by Bruton and Condon and could now be made only by the Condon of that firm, who had become president of the American Snuff Co., or his employees. T h e American Snuff Co. salesmen also circulated statements to the effect that the snuffs of their competitors " contained trash and were made out of cigar stumps, old tobacco chews, tobacco stems, contained opium, copperas, glass, hair, dirt and similar substances, and would cause blindness, tuberculosis, and other injury to the health." 17 Finally the commission held that the company's " Dental " brand was misleading in suggesting that the snuff sold under that label would cure diseases of the teeth and gums, an idea circulated by the company through advertising and through its salesmen. 18 17

i l F . T . G , is7-

i l F. T . G , 159. On the basis of these conclusions, the commission on June 20, 1927, nearly four years a f t e r issuing its complaint, ordered the company to cease and desist f r o m ( 1 ) endeavoring to maintain resale prices, (2) making false disparaging statements about competitors, and ( 3 ) using the word " d e n t a l " or a depiction of a tooth in a snuff brand or stating that its product would cure tooth ills. T h e company, while denying the validity of the findings, agreed to obey all parts of the order except that forbidding the use of the word " dental " on its brands. Application f o r enforcement of this part of the order was filed M a r c h 17, 1928, in the Circuit Court of Appeals at Philadelphia. A f e w months later the commission in a supplementary application asked enforcement of the other parts of the order, alleging that the company w a s continuing to circulate false disparaging statements about its competitors' products and to claim false curative properties f o r its own products. Annuel Report of the Federal Trade Commission, 1928, p. 69; 1929, pp. 106-107. In 1930 the court ruled against the commission, holding that there was nothing misleading about the label in question and declaring the order unlawful. Federal Trade Commission v. American Snuff Company, 38 Fed. (2d.), 547. N o mention is made in the court's order of the 18

236

COMPETITION

IN THE

TOBACCO

INDUSTRY

Figures for the cigar industry also are lacking; but it is quite evident that cigars are rapidly changing over to the merchandising methods used f o r cigarettes, which means a shift of emphasis f r o m price to non-price competition and within non-price competition f r o m personal to non-personal selling methods. this change.

T h e General C i g a r Co. has led the w a y in

T h u s in 1 9 1 7 it was reported as being faced by

a serious problem in the reduction of output occasioned by its decision to quit manufacturing for so-called " private brands " . 1 *

It w a s estimated that this meant cutting off a

supplementary petition; but presumably the other parts of the commission's order fell along with the section affecting " Dental " snuff. Petition for a rehearing was denied March 24, 1930. No appeal was carried to the Supreme Court. Charges that cigar manufacturers also were using misleading publicity (an interesting form of non-price competition as defined at the beginning of the chapter), have been made by the commission on several occasions, the usual accusation being that the companies were endeavoring to mislead consumers into believing that cigars made of domestic leaf were made of Cuban leaf. Bayuk Cigars, Inc., is the most conspicuous of the companies proceeded against. On Feb. 8, 1928, the commission ordered this company to cease and desist from using the names " Havana Ribbon " and " Mapacuba " as trademarks or descriptions for cigars not made in whole or in part from Cuban tobacco and from representing in any other manner that cigars are composed in whole or in part of Cuban tobacco when they are not so composed. The company filed suit in the Circuit Court of Appeals at Philadelphia, Feb. 15, 1928, to set aside the order. On June 14, 1930, the court entered its order without opinion modifying and affirming the commission's order so as to permit the use of the trademarks objected to as labels and boxes, provided that they were accompanied by explanatory statements describing the leaf used. On November 21, the court amended its order so as to make it applicable to the company's advertising as well as to its labels and boxes. Annual Report of the Federal Trade Commission, 1931, pp. 71-73. 19

" Private brands " aré trademarks owned by distributors who do not manufacture their own goods but contract with manufacturers to make them. They are used in many lines of industry other than tobacco by jobbers, large retailers, hotels, clubs and other distributors. On " private brands " the "creation" of demand rests with the distributor rather than with the manufacturer.

NON-PRICE

COMPETITION

237

market for 135,000,000 cigars a year. 20 This decision was followed by another made in 1 9 1 8 to concentrate operations on a few brands to be advertised nationally and to abandon a great many smaller brands. A n output of approximately 60,000,000 cigars, it was estimated, had to be transferred from the more obscure to the more widely known brands of the company. 21 Since the company's output continued to grow after these policies were adopted, the problems involved in putting its marketing on a more nearly complete non-personal basis were evidently solved. It remained for the American Cigar Co. to go over completely to sales methods which had proved successful with cigarettes. Before the war this company's " Cremo " was a leader among nickel cigars. When the nickel cigar came back into vogue, the brand was revived ; but instead of using the old methods of sales promotion by the aid of rebates, coupons and other forms of price-cutting, the company determined upon a program of advertising which for brazen vulgarity exceeded anything even " Lucky Strike " cigarettes at their worst had produced. The essence of the plan was to concentrate sales efforts on one brand through blatant advertising of the advantages of machine methods which developed into the notorious " spit " campaign. In preparation for this drive, the company was completely reorganized, the veterans on its staff being replaced by recruits from the American Tobacco Co. staff who had been trained in " Lucky Strike " methods.22 How successful this drive has been can hardly 20

United Stales Tobacco Journal, June 30, 1917, p. 6.

" Ibid., Oct 19, 1918, p. 6; Oct. 25, 1924, P· 3 ; Sept. 25, 1926, p. 7 ; Oct. 2, 1926, p. 7. Ralph E. Breyer, Commodity Marketing, p. 283, note, says the General Cigar Co. reduced the number of its brands from 150 to six. 22 United States Tobacco Journal, Jan. 4, 1913, p. 31 ; Oct. 10, 1925, p. 6 ; Jan. 1, 1926, p. 3 ; March 17, 1928, p. 3 ; Nov. 3, 1928, p. 7 ; Nov. 10, 1928, p. 7 ; Dec. 22, 1928, pp. 7, 10; March 9, 1929, p. 1 1 ; May 11, 1929,

238

COMPETITION

IN

THE

TOBACCO

INDUSTRY

be told as yet ; but it has apparently increased " Cremo " sales tremendously. 23 § 7. Because of the paucity of data to be had, the conclusions to be drawn f r o m this survey of non-price competition are far f r o m satisfactory. Enough can be learned to indicate that in this type of competition, and particularly in the various forms of publicity, of which advertising is by far the most important, lies an adequate explanation of the shifts in the distribution of the country's tobacco business among manufacturers since 1911. When an attempt is made, however, to answer more fundamental questions, the student runs into blankness. Broadly speaking, there are two such fundamental questions which demand an answer : ( 1 ) Is this nonprice competition to be considered a permanent element in the tobacco industry? ( 2 ) Whether permanent or not, is it desirable ? As to the first, theoretical analysis suggests that while some advertising would continue to be used even under a monopoly, it would be greatly reduced in quantity, and that since analysis in earlier chapters has shown the industry to be in a situation closely approximating monopoly except in p. 10; May 25, 1929, p. 9; July 20, 1929, p. 7 ; Aug. 3, 1929, p. 7 ; Aug. 17, 1929, p. 7 ; Feb. is, 1930, p. 7 ; Sept. 27, 1930, p. 10. 23

Two points of interest may be noted. First, the " Cremo " advertising earned the hearty condemnation of the cigar industry in general, the National Better Business Bureau and trade journal editors. United States Tobacco Journal, July 27, 1929, p. 8 ; National Better Business Bureau, Inc., Cremo Cigar Advertising Unfair to Industry, Feb., 1930, and "Cremo" Advertising Attacks Property Rights, March, 1930. Second, as to the sincerity of the advertising of hand-made cigars, if one may be forgiven the naivete of looking for sincerity in advertising, it is of interest that the company continues to sell hand-made cigars and as recently as 1930 introduced " Pall Mall ", a new line of expensive cigars made by hand in its factory at Trenton, N. J . United States Tobacco Journal, March 29, 1930, pp. 7, 38. More recently this factory has been expanded to undertake the manufacture by hand of all the cigars formerly made by the company's subsidiaries in Cuba. New York Times, Sept. 14, 1932.

NON-PRICE

COMPETITION

239

so far as the tendency in this direction has been offset by the effects of rapid growth, continuance of brisk competition depends upon the continued growth of the industry. It is unfortunate that statistical data by means of which to test the validity of this reasoning are not available ; for individuals in the industry always point to advertising as proof that the decree restored competition, and it is important to know whether this type of competition really is a permanent consequence of the partition or a temporary phenomenon associated with rapid growth. A s to the second question, there is room for grave doubt concerning the desirability of this type of competition even if it is to be considered a permanent characteristic of the industry. T h e advantages which the consumer obtains from price competition are obvious ; can it be said that he gains corresponding advantages from nonprice competition which endeavors, not to give him greater value for his money but rather to convince him that he gets greater value although prices have not been changed ? The answer is obvious. Despite the arguments that they have raised the standard of living of the consumers, those who have turned herd psychology to purposes of private gain through adroit use of publicity have incurred a serious responsibility.2* Furthermore, it is necessary to ask whether advertising does not cost the consumer doubly by requiring him to pay not only for the advertising but also for considerably increased profits made possible by the use of advertising as a substitute for competition in price. Presumably, the manufacturer would not use advertising unless it were cheaper than the loss that would be sustained in cutting 21 For an interesting popularized discussion of the part played by publicity in present-day A m e r i c a n life and the psychology of those responsible for its development, see Flynn, John T . , " Edward L. Bernays : T h e Science of Ballyhoo " in The Atlantic Monthly, vol. 149, no. 5, M a y , 1932, pp. 562-571.

240

COMPETITION'

IX THE TOBACCO

INDUSTRY

prices to achieve a given increase in sales or to prevent a given decrease in sales. The result of this analysis of nonprice competition thus turns out to be the raising of more questions than are answered; but it also leaves important doubts as to whether in restoring a type of competition which does not extend directly to prices the court really performed a service for the consumer.

CHAPTER

Χ

COMPETITION AMONG DISTRIBUTORS OF TOBACCO PRODUCTS

§ 1. T h e preceding two chapters in which the competitive practices used by the manufacturers in their sales o f tobacco products were discussed, leave unanswered one important question : T o what extent have the successor companies taken control o f the marketing machinery which distributes tobacco products to the consumers. W e have already seen that, excepting the principal cigarmakers, the manufacturers have found it neither desirable nor feasible to take control over their distributors through the acquisition of ownership interests. 1 There are means other than ownership, however, whereby a considerable degree of control may be exercised. Furthermore, it must be remembered that one important successor company, the United Cigar Stores Co., was not a manufacturer at all, but a distributor, and a distributor against whose continuance as a single enterprise attorneys for the independents protested emphatically at the time o f the partition. 2 The question we have raised thus turns out to be in reality two questions : ( ι ) T o what extent has the United Cigar Stores Co. fulfilled the prediction of the independents that it would stifle its competitors? ( 2 ) Have the manufacturers made any attempt to control the marketing of their products by means short of ownership, and, if so, to what end and with what results ? § 2. T h e marketing machinery through which tobacco products are distributed, while not particularly complex, is 1

Ch. ν, supra.

- Ch. i, § 3,

supra. 241

242

COMPETITION

IN

THE

TOBACCO

INDUSTRY

of interest bccause of the very large number of individuals concerned. 3 These products are perfect examples of socalled " convenience goods " bought by consumers at the most convenient outlet without any need or desire to shop around and find the exact types and qualities wanted. They are sold in small units with a high stock turnover. They involve small capital investment. T h e y can be handled in any kind of a store, as they require little space, no special equipment and no skill in selling. It is thus inevitable that a great many outlets should be used in their distribution. Accurate statistics as to the number of retail tobacco distributors are not to be had ; but 600,000 to 700,000 is a f a i r estimate, the stores being distributed over virtually all lines of trade. 4 Most tobacco products reach the consumer through the old established route—manufacturer-to-wholesaler-to-retailer-toconsumer. T h e wholesalers may be cigar and tobacco jobbers, who ordinarily carry other products on the side, or they may be wholesalers in other trades, especially groceries and drugs, who carry cigars and tobacco on the side. Cigar jobbers are ordinarily given exclusive territories f o r brands they distribute; but jobbers of other tobacco products are ordinarily free to sell where they will. Many very small 11

F o r a detailed description of the marketing of tobacco products, see Breyer, Ralph E., Commodity Marketing ( N e w York, 1931 ), ch. xvi. * Statistics as to the number of stores handling tobacco products collected in the 19JO census of distribution have not been published at this writing. There were 1,549,168 retail stores of all kinds in the country, each outlet of a chain being considered one store. The total of confectionery, grocery, combination food, general food and country general stores, restaurants and eating places, cigar stores and stands and drug stores was "03,868. It is not likely that the final figures f o r stores carrying tobacco products will be higher than this, since the number of stores of other classifications carrying tobacco products will be about offset by the number in these classifications who do not sell tobacco products. The figures are taken from Bureau of the Census, United States Summary of Retail Distribution, Washington, 1931, pp. 12-15.

COMPETITION

AMONG

DISTRIBUTORS

243

retailers are served by subjobbers, w h o are in reality large retailers selling to small retailers as well as to consumers and buying f r o m jobbers until they are able to convince the manufacturers that the jobbing portion of their business is sufficiently important to entitle them to reclassification as fullfledged jobbers and to the privilege of b u y i n g direct at jobbers' discounts.

A third important channel of distribution,

and one of g r o w i n g importance, is the manufacturer-directto-retailer route, which is used primarily f o r chain stores and other large retailers and, in the cigar industry, by manufacturers w h o establish their o w n wholesale branches because they are unable to induce independent jobbers to handle their lines to the exclusion of all others' lines. 5

S o m e manufac-

turers sell direct to consumers; but this method of sale is comparatively unimportant.

Finally, in the cigar industry,

but not in other branches of tobacco, small manufacturers o f t e n use brokers to sell their goods to jobbers and large retailers outside their local markets. 6 * T h e General C i g a r Co. in its reply to the Federal T r a d e Commission's complaint against its exclusive territory plan, said that in the years 19281930 it sold 22 to 26 per cent of its product, when expressed in value, or 22 to 27 per cent, when expressed in number of cigars, through independent jobbers assigned exclusive territories, the rest being sold through branches to retailers or jobbers or direct from the factory to large retailers. Federal Trade Commission, In the Matter of the Getterai Cigar Co., Inc., Docket N o . 1879, A n s w e r of the Company, filed Nov. 10, 1931. • T h e Bureau of the Census in three mimeographed reports issued N o v . 193 1 , gives the following figures on distribution of sales in 1929 by manufacturing plants in the tobacco industry : Plants primarily engaged in making cigarettes, 99.6 per cent of sales made to wholesalers, including manufacturers' o w n wholesale branches ; 0.4 per cent to retailers and manufacturers' own retail branches. Plants primarily engaged in making cigars, 65.5 per cent to wholesalers ; 20.0 per cent to manufacturers' own wholesale branches ; 12.7 per cent to retailers ; 0.8 per cent to household consumers ; 0.6 per cent to manufacturers own retail branches ; 0.4 per cent to industrial and large consumers. Plants primarily engaged in making chewing and smoking tobacco and snuff, to wholesalers 82.9 per cent ; to manufacturers' own wholesale branches 14.7 per cent ; to in-

2I.

244

COMPETITION

IN

THE

TOBACCO

INDUSTRY

All distributors who buy direct from the manufacturers are carried on the so-called " direct " list, which for one of the " big four " will include about 6,000 names. 7 T o those who buy direct, prices are quoted on the basis of a list less trade and cash discounts, normally 10 and 2 per cent, respectively. Jobbers in turn pass on to sub-jobbers and retailers as much of these discounts as they feel is necessary if they are to get the business and on such credit terms as they find desirable ; in practice only very small retailers of uncertain financial status pay the list price and that in cash on delivery. § 3. The part played by the United Cigar Stores Co. in this distributive machine is made evident by statistics showing the importance in the industry of the cigar chains as a group. Data from the first census of distribution which will give a measure of this importance are not yet available. All that has been announced so far is that there are 90 cigar chain systems with an aggregate of 2,240 units in the country. 8 However, from various other sources it is possible to learn more about the part played in the tobacco products market by this type of distribution. M. M. Zimmerman in 1930 reported that there were sixty-six cigar chains of three or more stores each controlling an aggregate of 3,386 stores. Since United Cigar controlled 2,648 of these and the Schulte Retail Stores Co. 298, according to his dustrial consumers (interplant transfers or other manufacturers), 1.5 per cent; to retailers, 0.9 per cent. The usefulness of these statistics is greatly reduced because of their failure to recognize the subjobber classification, to give any indication of the extent to which brokers are used or to analyze the sales of the manufacturers' branches to show whether they are made chiefly to wholesalers or retailers. T

Federal Trade Commission Record (1925), p. 418. β

v. American

Tobacco

Bureau of the Census, United States Summary Washington, 1931, p. 5.

Co., Transcript of

of Retail

Distribution,

COMPETITION

AMONG

DISTRIBUTORS

figures, there were left only 440 stores for the other 64 chains, none of which had more than 25 stores.® Figures collected in the " experimental census " of 1927 covering eleven cities, show that out of 3,280 cigar and tobacco stores with annual sales of $50,218,30x3, 2,900, or 88.4 per cent, were independents and only 380, or 1 1 . 6 per cent were chains. Since average sales per store were much higher for the chains than for the independents, the chain-store sales aggregated $17,840,700, or 35.5 per cent of the total, against $32,378,100, or 64.5 per cent for the independents.10 These percentages are based on sales of all goods in cigar stores alone, not on sales of tobacco products in all stores. T o get a true measure of the importance of the cigar chains in the tobacco business, it would be necessary to compare the sales of tobacco products in all stores with such sales by cigar chains; but unfortunately the figures are not so compiled as to make this possible. It has been estimated that in the country as a whole cigar chains do less than 10 per cent of the retail tobacco business." Evidently, the United Cigar β Zimmerman, M. M., " The How and Why of Chain Growth in Various Trades," Printer's Ink, Oct. 9, 1930, p. 70. The difference in the number of stores Zimmerman lists and those given by the Bureau of the Census apparently results from a difference in classification of the United Cigar Store agencies. The difference in the number of chain systems is apparently the result of a more thorough coverage of the field by the census. 10 Figures for the " experimental census " here given are compiled from Chamber of Commerce of the United States, Domestic Distribution Department, Retail and Wholesale Trade of Eleven Cities (Washington, May, 1928). 11

Retail sales of tobacco products in the eleven cities surveyed totaled $71,221,800, the number of outlets handling these products being 18,705, or nearly six times the number of cigar stores proper. The estimate that cigar chains do less than 10 per cent of the country's tobacco business is from United States Tobacco Journal, May 19, 1926, p. 6. This does not mean that chains in general do only this fraction of the business, since the business done by grocery and drug chains would greatly increase the percentage done by the chains.

246

COMPETITION'

7 7 / £ TOBACCO

I.Y

I.XDL'STRY

S t o r e s Co. has failed by a w i d e m a r g i n to become the p o w e r in the tobacco industry w h i c h some o f the critics o f the decree forecast. 1 2 T h e f a i l u r e of the U n i t e d C i g a r S t o r e s C o . to dominate the t o b a c c o

12

products m a r k e t and its recent financial troubles, w h i c h a r e described in the appendix, must not be taken to mean that the c o m p a n y has failed to e x p a n d its merchandising and financial operations since the issuance of the decree.

A s a matter of

f a c t , partly t h r o u g h opening n e w stores of

its

o w n and partly t h r o u g h the appointment of agents, i. e., independently o w n e d stores operating under c o n t r a c t s w h i c h permit them to display the U n i t e d C i g a r S t o r e s signs, c a r r y i n g all the U n i t e d p r i v a t e b r a n d s and, f o r m e r l y , to g i v e U n i t e d coupons w i t h their merchandise, the c o m p a n y h a s g r e a t l y expanded its operations.

A s c o m p a r e d w i t h 623 stores w h e n

the " t r u s t " w a s b r o k e n up, it had in 1930 about 2,850 outlets, of w h i c h 1,050 w e r e its o w n stores and 1,800 w e r e agencies. Poor's most

Manual

trustworthy

(These

figures,

taken f r o m

1912, p. 3462, and 1931, p. 2757, a r e the

of Industrials, estimates

the

Z i m m e r m a n ' s estimate above.

author

has been able

to

find.

Other commentators give widely

f i g u r e s as high as 3,700 outlets.)

E a r l y in 1931, the c o m p a n y w a s

ported to be l a y i n g plans f o r 200 more stores and 500 m o r e (Sales

Management,

bankruptcy of

of

its stores.

in the p. 5 ; 24,

in

company

Sales

number

$91,862,872

F e b . 14, 1931.)

the of

have

stores,

1930.

has

rising

a

reduction

in c o n f o r m i t y

from

States

nearly Tobacco

in

the

number

with

the

increase

$30,000,000 in

1912

Journal,

5,

May

to

1912,

S t a n d a r d C o r p o r a t i o n R e c o r d s , vol. ix, no. 1521, section 7, July

1931,

p. 4676.)

Although

exact

figures

are

not

available,

c e r t a i n that tobacco products have represented a d e c r e a s i n g of

re-

agencies.

It is probable, h o w e v e r , t h a t the

caused

increased

( C tilted

Note

varying

these sales, and that w i t h i n the t o b a c c o g r o u p c i g a r e t t e s h a v e

placed c i g a r s as the principal item.

it

is

proportion dis-

A considerable part of the c o m p a n y ' s

r e v e n u e has c o m e not f r o m profits on its sales of merchandise but f r o m operations in real estate. editors, They

Told

( P o u n d , A r t h u r , and M o o r e , S a m u e l

Barron,

O n l y one other l a r g e c i g a r - s t o r e chain is in o p e r a t i o n — t h e Retail Stores Co.

Taylor,

p. 2 2 5 ; B r e y e r , op. cit., p. 281.) Schulte

In 1914 this c o m p a n y had 41 stores, all in the

New

Y o r k metropolitan a r e a ; at the end of 1928, it had 312 stores in v a r i o u s p a r t s of the country.

No

figures

are available f o r the y e a r s since 1928;

b u t the number of stores is probably about the same.

Relations between

S c h u l t e and United C i g a r h a v e been v e r y close at times, s o that S c h u l t e should perhaps not be considered a really separate o r g a n i z a t i o n . States

Tobacco

Journal,

trials,

1930, p. 2006.

Cf.

A p r i l 18, 1914, p. 1 3 ; Poor's also the appendix.)

Manual

(United of

Indus-

COMPETITION

AMONG

DISTRIBUTORS

247

§ 4. The credit or blame for preventing domination of tobacco distribution by the United Cigar Stores Co. rests chiefly upon the fact that tobacco products no longer offer a promising opportunity for profits to stores dealing in them exclusively. This situation is a result of the action of several mutually reinforcing influences. In the first place, since tobacco products can be and are sold by almost every type of retailer, the total number of distributors handling them is necessarily large, so that the market open to each is necessarily quite small. Secondly, to an increasing extent sales are made mostly in popular-price cigarettes and cheap cigars, while the old profit-yielding medium- and high-priced cigar business is gradually dwindling. Thirdly, chain grocers and other large retail organizations enjoy all the advantages in buying held by the cigar chains and can sell more cheaply because they handle only a very few of the most popular brands which are automatic sellers in so far as the stores are concerned, take up practically none of the salesmen's time, require no special equipment and necessitate a comparatively small investment because of their fast turnover. Finally, as articles of low unit value and wide consumption identified in the minds of purchasers with firmly established " standard " prices, tobacco products lend themselves admirably to use as " loss leaders " and so tend to fall into a type of competition which is disastrous for the dealers who must make a profit from them if they are to remain in business. If any one agency is to be held responsible for the destruction of the United Cigar Stores' opportunity to dominate the industry, the chain grocers probably will have to be named. 13 13

Independent retailers have not often been effective in their efforts to combat the " chain store menace ", their favorite methods being to appeal to trade associations for agreements to maintain prices or to agitate f o r anti-chain legislation of one sort or another. United States Tobacco Journal, Aug. 10, 1912, p. 3; Sept. 14, 1912, p. 3; Aug. 2, 1913, p. 3 ; Nov. I, IÇI3, P- 7 ; May 2, 1914, p. 3; May 23, 1914, p. 3 ; July 4, 1914, p. 3 ;

248

COMPETITION

IN THE

TOBACCO

INDUSTRY

During the years immediately after the partition of the American Tobacco Co. it was the United Cigar Stores Co. which usually led the way in " price wars " , although even then there was some complaint about price cutting by druggists, grocers, department stores and others who used tobacco products as " loss leaders ". Competition from these sources began to achieve importance when the first drug chains declared " price wars " aimed at United Cigar as well as at independents. These " wars " sometimes carried prices far below cost, as in 1 9 1 3 when a protracted three-cornered fight forced United Cigar to sell fifteen-cent cigarettes at nine cents and ten-cent cigarettes at seven cents, with a coupon nominally valued at two cents thrown in. In the " truce " which ended this " war " , prices were put back up to "the old cut price " , i. e., nine cents for ten-cent brands, twelve cents for fifteen-cent brands and eighteen cents for twentyand twenty-five-cent brands. 14 Special one-day sales at times reduced retail prices to levels below wholesale prices so far that independent retailers would take advantage of them to fill their own stocks. During the war price-cutting was more or less in abeyance, as the consumers were in too prosperous a frame of mind to be interested in petty economies ; but with 1 9 1 9 " price wars " again appeared and broke out at intervals thereafter. All this competition United Cigar met with no great difficulty. Even that from drug chains it was able to combat successfully, partly because by the ' twenties it also was carrying a considerable volume of goods other than tobacco 14

United Stales Tobacco Journal, Aug. 2, 1913, p. 5 ; Sept. 13, 1913, p. 5. July il, 1914, p. 8 ; April 3, 1915, p. 12; Oct. 9, 1915, p. 3 ; March 11, 1916, PP· 3, S; May 13, 1916, p. 4 ; July 1, 1916, p. 24; Oct. 14, 1916, p. 5 ; Nov. 4, 1916, p. s ; Jan. 13, 1917, pp. 5, 8 ; Jan. 20, 1917, p. 10; Jan. 27, 1917, P. S; Feb. 24, 1917, p. 16; June 30, 1917, p. 3 ; July 14, 1917, p. 3 ; Aug. 4, 1917, P· 3 ; May 7, 19121, p. 8 ; A^ril 14, 1923, p. 18; May 12, 1923, p. 38; Feb. 24, 1923, p. 42. New York Evening Post, May 22, 1929.

COMPETITION

AMONG

DISTRIBUTORS

249

but chiefly because its operations were more extended than those of the drug chains so that it did not have to cut prices in all its stores at one time. It met competition of a different order in 1927 when the Great Atlantic and Pacific Tea Co. introduced the six most popular brands of cigarettes into its 15,000 stores at cut prices, and other chain grocers followed. The cigar chains now faced an adversary which not only could buy on terms as favorable as their own but also had store systems even more extensive than their own and handled tobacco products as a comparatively small item in aggregate sales. Intermittent outbursts of extreme price cutting by department stores and others continued to make their appearance; but it was the permanent reduction of margins by chain grocers which hurt United Cigar most severely. This company and its affiliate, Schulte, alternately endeavored to induce competitors to agree to less drastic price policies and threatened price cutting "to the bone " ; but from 1928 on they no longer were the controlling powers. Prices of " fifteen-cent " cigarettes went as low as two packages for twenty-one cents in some sections of the country, and while they did not stay as low as this, they stayed lower than the cigar chains wanted. The only permanent advance affected resulted from advances by manufacturers in the list prices and did not help the distributors' margin." 15

It is hardly an exaggeration to say that almost any issue of the United States Tobacco Journal will contain some reference to prices and price cutting. Some of its more important reports on the subject are at: March 30, 1912, p. 1 2 ; April 3, 1912, p. 6; July 15, 1912, p. 12; Aug. 3, 1912, p. 1 5 ; Aug. 24, 1912, pp. 3, 1 5 ; Feb. 15, 1913, p. 14; April S, ï9'3» P. 19; Aug. 16, 1913, p. 8; Nov. 15, 1913, p. 1 2 ; March 7, 1914, p. 3 ; Aug. 29, 1914, p. 27; March 20, 1915, p. 3 ; May 22, 1915, p. 34; June 19, 1915, p. 5 ; March 4, 1916, p. 7 ; Aug. 11, 1917, p. 18; Aug. i8, 1917, p. 18; Feb. ι, 1919, p. 42; March 29, 1919, p. 30; June 19, 1920, p. 26; Oct. 22, igei, p. 3 ; Nov. 1 1 , 1922, p. 6; March 1 1 , 1923, p. 7 ; March 22, 1924, p. 42; Oct. 24, 1925, p. 39; May 1, 1926, p. 8; April 16, 1927, p. 3 ; July 2, 1927, pp. 3, 1 2 ; Sept. 17, 1927, p. 6; Oct. 15, 1927, p. 1 2 ; March

250

COMPETITION

IN THE

TOBACCO

INDUSTRY

§ 5. The answer to the first question raised by this chapter, then, is that thanks to the emergence of extremely strong competition from other types of chains and to the financial troubles of the United Cigar Stores Co., which grew partly out of this severe price-cutting but chiefly out of unwise expansion and the business depression starting in 1929, the big tobacco chain has been greatly deflated as a serious threat to the well being of the industry. It no longer has even a clear title to the reputation of being the largest distributor of tobacco products in the country. It has grown greatly since the partition, but much of its growth, perhaps the greater part of it, has come from the appointment of independents as agents. On the whole, therefore, it is just to conclude that, as matters have turned out, little or nothing would have been gained by splitting the company into several systems in conformity with the demands of the independents, excepting possibly that the ambitious attempt to build up another large combination of manufacturers undertaken by the company with disastrous results, as recorded in the appendix, would not have been undertaken. It seems necessary to conclude in addition, however, that this beneficent outcome could hardly have been foreseen by the framers of the decree, but was the result of forces which made their appearance at a much later date. § 6. We come now to the second question raised at the beginning of the chapter : Have the manufacturers made any attempt to control the marketing of their products by means short of ownership? We have already seen that, excepting cigars, the successor companies have shown no desire to purchase control of their distributors.1® In fact, they have 17, 1928, p. 10; March 2, 1929, p. 18; Dec. 14, 1929, p. 10; Feb. 1, 1930, p. 8; Oct. 5, 1929, p. 7 ; Dec. 7, 1929, p. 7 ; Feb. 22, 1930, p. 9; June 14, 1930, p. 7; Jan. 24, 1931, p. 7; Jan. 31, 1931, p. 6. Also New York Times, April J 7, 1929; April 18, 1929; Jan. 22, 1930; July 4, 1931. 18

Cf. ch. ν, § 7, supra.

COMPETITION

AMONG

DISTRIBUTORS

251

even refused to enter into agreements whereby wholesalers receive exclusive rights to distribute their goods in particular areas. One short-lived exception must be recorded. In the New Y o r k metropolitan area, embracing nearby communities in three states, distribution of the products of the " trust " was wholly in the hands of the Metropolitan Tobacco Co., an independently owned enterprise. 17 A f t e r the partition, the " big four " continued this arrangement for a few months; but in June, 1 9 1 2 , the Liggett and Myers Tobacco Co. led the way to a new system by announcing that thenceforward it would distribute in New Y o r k City through all legitimate jobbers, the Metropolitan to be only one of the number. 18 F o r two years the other three companies held to the policy of distributing in this territory through the Metropolitan Company; but in 1 9 1 4 almost simultaneously they announced that in the future they, like the Liggett and Myers Co., would sell in greater New Y o r k through all acceptable jobbers. There was some belief in the industry that the step was taken to ward off threatened court action against the exclusive arrangement by the Federal authorities. 19 Whatever the validity of this belief, a report from Washington a few weeks later said the Attorney General had expressed himself as well satisfied with progress made in breaking down the " jobbing monopoly " in N e w Y o r k , fifty-one jobbers now being in competition f o r the business formerly done exclusively through one. 20 Three of the companies made no further experiments with 17 United Slates Tobacco Journal, Aug. 6, 1921, p. 3. While the Metropolitan Tobacco Co. was the sole wholesale distributor of the American Tobacco Co. in New Y o r k it was not the sole direct buyer, since United Cigar also bought direct. 18

United States Tobacco Journal,

19

Ibid., April ι8, 1914, pp. 3, 6.

20

Ibid., June 13, 1914, p. 3 1 .

June 8, 1912, p. 3.

252

COMPETITION

IN THE

TOBACCO

INDUSTRY

exclusive distribution; but the American Tobacco Co. less than a year later returned to the plan by once more making the Metropolitan Company its distributor in New York and concentrating its northern New Jersey trade in the hands of the New Jersey Tobacco Co. Percival S. Hill said the open plan had proved unsatisfactory because the new companies had failed to provide the old Metropolitan service of frequent deliveries in small lots, which is desirable because it keeps the goods on the retailers' shelves fresh. Price-cutting by jobbers was believed by the trade press to be one reason for the change, since the other jobbers were not entirely cut off but were permitted to buy at differential prices that would net them about 2 per cent on sales to retailers, which, while not large enough for their entire lines of products, was, Hill said, " about what they have been making under price-cut conditions ". 2 1 The action of the American Tobacco Co. was apparently encouraged by the decision of the Circuit Court of Appeals in the Locker case which held it within its rights in making the Metropolitan Company its sole distributor in New York on condition that it should not sell the American Tobacco Co. products at higher than list prices.22 In any event, the exclusive agency arrangement was no longer a truly satisfactory one, for in 1 9 1 8 American Tobacco returned once more and this time permanently to the open distribution plan. The Metropolitan Tobacco Co. has continued to operate, but only as one of many New York jobbers. It is the largest in the area, having been credited in 1930 with doing 40 to 45 per cent of the jobbing business in New York City. 2 ' 21

Ibid., Jan. 23, 1915, pp. 3, 31. No clearcut statement as to the policy of the American Tobacco Co. with respect to price cutting in this instance was made by any official of the company. 22 Locker v. American Tobacco Co., 200 Fed. Rep., 973 ; 218 Fed. Rep., 447. 23 United States Tobacco Journal, Aug. 10, 1918, p. 6; Dec. 6, 1930, p. 7.

COMPETITION

AMONG

DISTRIBUTORS

§ 7. With the elimination of the exclusive contract, all that is left open to the manufacturers in the way of control over distribution is the possibility of exerting pressure upon distributors so as to prevent their reducing the gross profit margin between the manufacturer's price and the price paid by consumers below what the manufacturers regard as a desirable figure. In conventional terminology the only form of control left open to the manufacturers is resale price maintenance, a policy they have been urged for many years by distributors to adopt; because it is unquestionably true that competition does force both wholesale and retail distributors to work on an extremely narrow margin per unit of product in tobacco products, especially cigarettes. When " price wars " break out, this margin may be cut to as little as ι or 2 per cent of the list price. For example, in 1914 Detroit wholesalers engaged in a " war " at the climax of which they were selling cigarettes at list less 10 per cent on a cash basis. This meant that their gross margin consisted of the 2 per cent discount allowed by manufacturers for cash in ten days plus any special discounts or " advertising allowances " they received.2* Cigar jobbers at various times during the war years complained because the " legitimate " discount to retailers of 2 per cent for cash was being exceeded by competitors who offered from 3 to 10 per cent extra." The financial stringencies of the immediate post-war period brought in their train a nation-wide outbreak of " price wars " complicated and, in the instance of tobacco, made much more severe by the dumping on the market of excess government supplies after the cessation of hostilities. Dis" Ibid., Jan. 28, 1914, pp. 9, 33. 25

Ibid., Sept. 2, 1916, p. 1 1 ; Sept. 7, 1918, p. 20; April 19, 1919, p. 33. This would seem to indicate that even under exclusive arrangements such as cigar jobbers ordinarily have, price cutting will break out now and then if the brands are numerous enough.

254

COMPETITION

IN

THE

TOBACCO

INDUSTRY

counts of 8, 9 and i o per cent were not unusual in all parts o f the country. ΐ β

In 1924 competition f r o m chain stores

w a s blamed for jobbers' offering retailers 9 per cent off the list in N e w Orleans, where the manufacturers were condemned for putting several local chains on their direct lists and f o r recognizing as a legitimate wholesaler an " admitted long discounter

Late in 1930 in N e w Y o r k C i t y the

Metropolitan Tobacco Co. w a s selling on credit for 10 per cent off the list, with an additional 1 per cent off for cash. 28 In fact it has come to be the normal thing, at least in the larger cities, that the margin between manufacturer's selling price and consumer's buying price shall be astonishingly small. E a r l y in 1932 the prevailing price f o r the popular cigarettes in N e w Y o r k City w a s fourteen cents f o r a pack of twenty, or twenty-seven cents for t w o packs.

T h e wholesaler or

large retailer pays the manufacturer $6.85 a thousand less 10 per cent trade discount and 2 per cent f o r cash in ten days, or $6.04 net.

A t fourteen cents a pack, the retail price is

$7.00 a thousand and the combined wholesale and retail gross margin is 13.7 or 15.9 per cent, according to whether it is computed on the cost or the sale price.

A t 13^2 cents,

the retail price is $6.75 a thousand and the combined margin is 10.5 or 11.5 per cent, according to the method of calculation.

B y the middle of the year most of the chain stores

were selling cigarettes at $1.25 for a carton of 200 cigarettes, or $6.25 a thousand.

T h e difference between $6.25 and

$6.04 is only 3.5 or 3.4 per cent, according to which

figure

is taken as the basis.

other

Advertising allowances and

special discounts would, of

course, increase this

margin

somewhat. H o w small a margin can be and still yield a profit to the 2e

Ibid., M a y 10, 1919, pp. i6, 28; M a y 24, 1919, p. 31.

27

Ibid., M a y 17, 1924, p. 44.

28

Ibid., Dec. 6, 1930, p. 7.

COMPETITION

AMONG T A B L E

P E R C E N T A G E OF N E T

S A I . E S OF T H R E E

DISTRIBUTORS

255

27

TOBACCO W H O L E S A L E R S

B Y G R O S S P R O F I T , T O T A L E X P E N S E S AND O P E R A T I N G P R O F I T :

REPRESENTED

1924-1927*

Percentage of net sales represented by

• Federal Trade Commission, Report OH Resale Price Maintenance, part ii, " Commercial Aspects and Tendencies," Washington, 1932, p. 41.

distributor, remains a moot question. Philadelphia wholesalers testified before the Federal Trade Commission in 1922 that 4 per cent was the minimum on which they could operate profitably. If they take the cash discount from manufacturers, this means they can sell to retailers at about 8 per cent off the list.2" Testimony taken in this hearing also indicated, however, that tobacco products turn over rapidly, figures mentioned being from four to fifty times a year, thus justifying a very narrow margin on each turn as sufficient to earn a fair return on capital invested.30 Figures on dealers' margins compiled by the commission in its Report on Resale Price Maintenance and tabulated in Tables 27 and 28, while based on a sample too small to be representative, are of some interest. The first of these tables shows that with an average gross margin ranging from 8.17 to 8.49 per cent of net sales, the wholesalers in 1924-1927 earned an operating profit of only 0.64 to 1.55 per cent of sales. What this means in terms of earnings is shown in Table 28, which 29

Federal Trade Commission of Record, pp. 36-37. 30

Ibid., pp. 115, 158, 376, 473.

v. American

Tobacco

Co.,

Transcript

2^6

COMPETITION

IS

THE

TOBACCO

TABLE

INDUSTRY

28

TOBACCO W H O L E S A L E R S : PERCENTAGE OF PROFIT ON N E T AND R A T E OF R E T U R N ON N E T

Year

Per cent of profit on net sales"

1924 1925 1926 1927

1.17

ι.21 •77

.58

INVSSTMENT:

SAI.ES, T U R N O V U

1924-1927

»

Turnover "

Rate of return on investment (Per cent)

7.21 8.50 8.93

10.68 «0.34 6.95

7-77

4-93

a Federal Trade Commission, Report on Resale Price Maintenance, part ii, " Commercial Aspects and Tendencies," Washington, 1932, p. 37. b

Net operating profit.

c

Number of times total capital invested in business, as shown in balance sheet was turned over in course of year.

reveals that leturn to capital has ranged f r o m 10.68 to 4.93 per cent, the companies tabulated not being identical f o r all f o u r years. 3 1 N o explanation is giving in the report for the decline in operating profit and increase in expense. F o r retailers very interesting data are presented in the survey made by the Department of Commerce in Louisville, K y . , in 1 9 2 8 - 1 9 2 9 . " This study included an intensive analysis of the operations of twenty-six stores, of which twenty-three carried tobacco products in stock. The average gross margin in these stores on tobacco products was 2 3 . 7 per cent, and the average ratio of net profit to sales was 5.3 31 T h e term " turnover " is used differently in this report from the w a y it is used in the present study. It represents the turnover of the total capital invested in the business as shown in the balance sheet, rather than the turnover of tobacco inventory, and so would be smaller than the other figure by an undetermined amount. 32 Department of Commerce, Bureau of Foreign and Domestic Commerce, Merchandising Research Division, Selling Cigars, Cigarettes and Tobacco Through Retail Grocery Stores (issued at Washington, 1931, in mimeographed f o r m ) . C f . especially pp. 16-17.

COMPETITION

AMONG

DISTRIBUTORS

257

per cent, the profit being pure profit after allowance f o r all operating expenses, including rent, even though the proprietor owned land and building, interest at 6 per cent on all capital invested, and a " fair " salary for the proprietor. average turnover w a s 17.2 times a year.

T h i s is a tremend-

ous pure profit whpn measured by investment. vidual items the profits were even greater.

The

O n indi-

Cigarettes, which

accounted f o r 65.1 per cent o f the tobacco sales of these stores, on a gross margin of 22.8 per cent averaged a net profit of 9.3 per cent w i t h a turnover of 42.8 times a year. O f the four leading brands of cigarettes, t w o averaged a net profit of 10.0 per cent on a turnover of 60.8 and the other t w o a profit of 1 1 . 5 per cent on a turnover of 48.0. I f these figures are at all representative, it is evident that dealers can operate on an extremely narrow net margin f o r each sale and still earn a good return on their investment. There is also a good deal of justice in the attitude of Percival S. Hill, w h o held that the real work of selling tobacco products is done by the manufacturers, w h o are therefore w a r ranted in not wanting to give distributors more than a small profit margin on units of product f o r what is essentially a mechanical function.

Hill candidly told a jobber w h o asked

how he might increase his profit margins on tobacco, " It is not fair that y o u should. products and keep it alive.

W e create the demand f o r our T h e distributor gets quite a

volume of business of our making. his profit is adequate."

F o r the work he does,

33

There still remains the question, however, as to how small the margin may be and not result in a loss

A gross margin

of only 3.5 per cent for jobbers and retailers combined seems certainly too low to permit a profit to either, although it m a y yield a profit to other types of distributors ; and it must be remembered that while rapid turnover is effective in quickly 33

United Slates Tobacco Journal, Nov. 13, 1915, p. 24.

258

COMPETITION

IN THE TOBACCO

INDUSTRY

multiplying profits, it is equally effective in multiplying losses. M o s t of the margins mentioned above probably would permit m a n y of the independent jobbers and retailers to survive, but they might also in some instances exact the penalty of requiring them to accept a land rent, return on capital and salary smaller than normal if they wished to stay in the business. T h e s e figures are not comprehensive enough, however, to permit a satisfactory conclusion as to when prices become unremunerative or less than normally remunerative and o f f e r no data on which to base a judgment as to differences in cost between the various types of dealers handling tobacco products. T h e y furthermore o f f e r no basis f o r a judgment as to whether tobacco products are subject to cutthroat competition among distributors, since it is evident that the low price of one distributor as compared with another or of one channel of distribution as compared with another may be the result of differences in efficiency as well as o f u n f a i r competitive methods. § 8 . T h e most obvious corrective f o r extreme price cutting is distributor organization; but there is a considerable diversity of policy open to an organization once it is formed. N o w and again the jobbers in a city get together and more or less tacitly agree to do a w a y with some disliked practice or institution. F o r example, they may decide to do a w a y with subjobbers by giving them a discount no greater than that allowed retailers ; or they m a y decide simply to keep all prices up to agreed levels. Ordinarily, however, the principal purpose of such organizations seems to be to g o a d the manufacturers into taking action to maintain resale prices. A t times they content themselves with repeated demands f o r the elimination of persistent price cutters f r o m the direct lists of manufacturers ; at other times they demand the elimination f r o m the direct lists of distributors who, they maintain justly or not, are not really entitled to the designa-

COMPETITION

AMOXG

DISTRIBUTORS

259

tion jobber.34 At least one effort has been made to combine some of the leading tobacco jobbers into a corporation of nation-wide scope; but nothing came of it.35 To enforce their demands, jobbers have often threatened to give up distributing of tobacco products in general and of cigarettes in particular, and now and then an individual jobber has made a gesture in this direction ; but there has never been any real movement of this sort. Small though they are, profits on tobacco products are not willingly surrendered. § 9. Despite the comment by Hill already quoted, the outward response of the manufacturers to jobber agitation has been neither uniform nor consistent. In 1 9 1 3 , the " big three " were reported cooperating to end a " price war " in Boston, the Riker-Jaynes Drug Co., with seventy stores in New England, reputed leader in the " war ", being cut off the direct list of the American Tobacco Co. according to trade journal reports.38 As a gesture toward price maintenance, American Tobacco in that year also inaugurated a policy of 31

F o r example, Kentucky distributors in 1919 and 1920 objected strongly to " j o b b e r s " who were organized to sell only drop shipment cigarettes at a time when manufacturers were offering retailers 2 or 3 per cent extra discount on drop shipments. These " jobbers " would solicit the business, giving the retailers 9 or 10 per cent discount, which when added to the special discount would give the retailer about the same price as that paid to manufacturers by legitimate jobbers. The profits of the self-styled jobbers would come from the 2 per cent cash discount allowed them, an adequate margin since, selling only on drop shipments, they had no storage or delivery facilities to maintain. United States Tobacco Journal, Jan. 3 1 , 1920, p. 33. It should be noted that any attempt to cut an offender off from his source of supply entails a hazard of a private suit f o r triple damages under the anti-trust laws as well as government action. 35

United States Tobacco p. 3 ; Journal of Commerce of the corporation was P . American Tobacco Co. and 36 United States Tobacco p. 31 ; May 24, 1913, p. 28.

Journal, April 23, 1927, p. 3 ; March 3, 1928, ( N e w Y o r k ) , April 26, 1927. The president J . Hanlon, previously vice president of the of the P. Lorillard Co. Journal,

May 3, 1913, p. 5 ; May 17, 1913,

2ÖO

COMPETITION

IN THE

TOBACCO

INDUSTRY

offering special " combination deals " for non-price-cutting dealers, an instance being a combination of a pipe and a jar of " Lucky Strike " tobacco to retail at fifty cents." A similar policy was followed for a time by the Liggett and Myers Tobacco C o . " Another step taken by some of the manufacturers was to refuse to accept orders for less than specified amounts, say 5,000 cigarettes of any popular brand or 25,000 cigarettes on mixed orders, so as to eliminate the smaller buyers from the direct lists." The post-war period ushered in a series of difficult problems. During the war-inflation, retailers were generally allowed only the 2 per cent cash discount ; but by the spring of 1921 competition had changed this situation, so that much larger discounts were being allowed in the larger cities of the country, the Federal Trade Commission reported.40 Under the mutual guidance of jobbers, who felt the effects of the keen competition directly, and some of the manufacturers, who apparently feared the increase in discounts would ultimately force them to reduce their prices to jobbers and expressed concern because disgruntled jobbers were threatening to discontinue carrying their goods, a nationwide movement for the organization of jobbers' associations designed to fix discounts to retailers and in some instances 87

Ibid., Sept. 9, 1913, p. 3 ; Nov. 22, 1913, p. 13.

38

Ibid., July 12, 1913, p. 22.

89

Ibid., Aug. 30, 1913.

40

Federal Trade Commission, Prices of Tobacco Products. The American Tobacco Co. and the P. Lorillard Co. refused to give the commission access to their correspondence files in this investigation. Suit was brought in Federal Court to compel compliance with the order; but on appeal to the Supreme Court the companies' objections were sustained on the ground that the commission had no power to conduct " fishing expeditions into private papers " on the chance of discovering evidence of wrongdoing. Federal Trade Commission v. American Tobacco Co., 264 U. S., 298 el seq. The decision of the lower court is at 283 Fed. Rep., 999-

COMPETITION

AMONG

DISTRIBUTORS

261

to eliminate subjobbers, made its appearance. In some instances the organizations were sponsored by the jobbers, in others by the manufacturers; but in either event support was given by the manufacturers through threats to remove and in some instances actual removal of the price-cutting jobbers from the direct lists. Particularly active in this regard, according to the commission, were the American Tobacco Co. and the P. Lorillard Co. Less active but still giving some support to the movement were the Liggett and Myers Tobacco Co., the Tobacco Products Corp., the Bloch Bros. Tobacco Co. and the Scotten-Dillon Co. In contrast to them was the R. J . Reynolds Tobacco Co., which not only declined to support the movement but energetically opposed it. T o the opposition of this company was attributed the decrease in effectiveness of the movement during the second half of 1 9 2 1 , although it was noted also that the support of the American Tobacco Co. weakened after the commission started its investigation. By 1922 the trade was convinced that the manufacturers, far from desiring to maintain resale prices, were determined to stop the fall in sales by getting retail prices down to fifteen cents for popular brands partly through cutting their own list prices, partly by forcing the dealers to cut their margin. The desired result was accomplished by persuading individual retailers that it was to their advantage to cut prices and by advertising the desired retail prices to the consumers.41 The Liggett and Myers Tobacco Co. made much of its refusal to follow the lead of the other manufacturers who cut their price to 6.80 a thousand, a price which should have meant on the basis of the old " standard " margins a retail price of seventeen cents for twenty, although " it is no secret that the new list prices were made in an effort to have certain 41

United Stales Tobacco Journal, Jan. 21, 1922, p. 36; March 11, 1922,

p. 3-

26j

COM PET 1'ΓΙ OX IX

THE

TOBACCO

IXDUSTRY

brands retail at fifteen cents ".*- In spite of its statement Liggett and Myers soon followed suit on prices. Distributors blamed the R. J. Reynolds Tobacco Co. for the general reduction, its offer of 3 per cent extra to jobbers doing a specified increase in volume having led jobbers to offer retailers a discount of 10 and 2 per cent, while its salesmen exerted their efforts to induce retailers to return to a fiftcencent price." Although the Reynolds Company was perhaps more drastic and a little franker in its actions than the other manufacturers, its policy seems to have been followed by all the companies despite occasional gestures of contrary intent. At least there is no evidence of any really vigorous effort to maintain resale prices, while the willingness with which the manufacturers have since sold their goods to chain grocers and other price-cutters and their failure to respond to proposals by distributor organizations for steps to correct or end the " price wars " in recent years other than by evasive messages, indicate that their interest in expanding their markets is keener than their interest in preserving the integrity of a more or less fictitious " standard " price. By way of contrast it is interesting that whereas in 1913 American Tobacco removed Riker-Jaynes from its direct list for cutting prices, in 1931 it temporarily removed the United Cigar Stores Co. from its direct list for leaving " Lucky Strike " cigarettes out of a special price-cutting offer in which the three other leading brands were included.44 § 10. The Federal Trade Commission decided, however, that such efforts to maintain resale prices as it had uncovered in the investigation cited above merited action under the Ibid., March 18, 1922, p. 5. 43

Ibid., March 25, 1922, pp. 8, 45; April 1, 1922, pp. 3, 24; Nov. 1 1 , 1922, p. 22. 14

The Progressive

Grocer, February, 1931, p. 12.

COMPETITION

AMONG

DISTRIBUTORS

263

a n t i - t r u s t l a w s a n d a c c o r d i n g l y instituted in 1 9 2 2 a series o f proceedings number of

against

several

wholesalers,

combinations

to

manufacturers

under

maintain

complaints

prices. 4 5

and

a

charging

large illegal

Manufacturers

pro-

ceeded a g a i n s t included the A m e r i c a n T o b a c c o C o . , the

P.

L o r i l l a r d C o . , the L i g g e t t a n d M y e r s T o b a c c o C o . , the T o bacco

Products

Co.,

the

Falk

Tobacco

Co.,

(a

Tobacco

P r o d u c t s s u b s i d i a r y ) , t h e S c o t t e n - D i l l o n C o . a n d the L a r u s & Bro. Co.

T h e j o b b e r s included both i n d i v i d u a l s a n d a s s o -

ciations in m a n y p a r t s o f the c o u n t r y . O n l y one o f these p r o c e e d i n g s , t h a t a g a i n s t the A m e r i c a n T o b a c c o C o . a n d the W h o l e s a l e T o b a c c o a n d C i g a r D e a l e r s ' Association

of

Philadelphia,

was

carried

to

court. 4 *

It

started w i t h a c o m p l a i n t a g a i n s t the A m e r i c a n T o b a c c o C o . , the P . L o r i l l a r d C o . a n d n e a r l y all the t o b a c c o j o b b e r s o f 45 Suit had already been brought in 1921 by the attorney general of Wisconsin charging the American Tobacco Co., P. Lorillard Co. and practically all the tobacco jobbers in Milwaukee with violating the state law by combining to maintain prices. Subsequently the Wisconsin Supreme Court threw out the complaint against the companies on the ground that it did not state a continuing cause of action. State v. P. Lorillard Company and others, 181 Wis., 347. United States Tobacco Journal, Oct. 29, 1921, p. 7 ; May 5, 1923, p. 10. 46 All the others were dismissed at intervals beginning in 1923. Reasons for the dismissals were not given in all instances ; but f o r several of the complaints the statement is made that they were dismissed for want of the public interest required by the Federal Trade Commission Act. Presumably, the fact that most of the associations had gone out of business had much to do with the lack of a public interest. In any event the outcome of the suit against the American Tobacco Co. probably would have forccd dismissal of the complaints, the only ones held over pending the end of that litigation having been dismissed following the decision of the Supreme Court in 1927. Brief summaries of the complaints and their disposition may be found in the Annual Report of the Federal Trade Commission as follows: 1924, pp. 193-194; 1925, pp. 198, 202, 204-205; 1926, pp. 1 1 4 - 1 J 7, 121 ; 1928, pp. 148-149. In addition to these cases, there were proceedings against Otto Eisenlohr and Bros, and the American Snuff Co. Cf. the annual report for 1923. p. 217, and 1 1 F. T . C., 144 et seq.

264

COMPETITION

Philadelphia.

IN

After

THE

TOBACCO

hearing,

the

INDUSTRY

commission

dismissed

the complaint as to the Lorillard Company, but as to the others issued cease-and-desist orders forbidding agreements to maintain prices.

H a v i n g disbanded their association, the

wholesalers made no attempt to fight the o r d e r ; but the A m e r i c a n Tobacco Co. carried a successful appeal to the courts.

T h e Circuit Court of Appeals at N e w Y o r k in a

decision handed d o w n in October, 1925, reversed the commission partly on a finding that the facts did not warrant the order but also on the ground that even if the facts were as maintained by the commission the law had not been violated by the c o m p a n y . "

In the words of the commission :

. . . the lower court appears to hold . . . that it is lawful for the manufacturers to aid and abet jobbers in making effective their illegal price agreement; that it is not unlawful for a jobbing association to agree to fix prices and prevent members and nonmembers who do not observe the agreed price from procuring goods ; that it is not an unfair method of competition for a manufacturer to join with a jobbers' association in compelling observance of prices illegally agreed upon; that it is unlawful for jobbers to sell goods at prices satisfactory to themselves and which, in the past, have sustained their business, though such prices may be lower than those agreed upon by the members ot the association of competing jobbers ; and, conversely, that it is fair competition for jobbers to combine to coerce competitors into charging prices which they have agreed upon as satisfactory to themselves ; that a combination in restraint of interstate commerce in violation of the Sherman Act is not also an unfair method of competition ; that it is not to the interest of the public to prevent jobbers from agreeing upon prices at which they will sell and from agreeing to prevent those who will not observe their prices from getting the goods. 48 47 American Tobacco ( 2 d ) , 570 et seq. 48

Company v. Federal

Federal Trade Commission, Annual

Trade

Report,

Commission,

1926, pp. 31-32.

9 Fed.

COMPETITION

AMONG

DISTRIBUTORS

265

The Supreme Court in a decision handed down in May, 1927, expressed a general agreement with the commission's feeling that the law had not been interpreted correctly by the lower court, but upheld the lower court's decision as to the facts, saying: Proper decision of the controversy depends upon a question of fact. Did the American Tobacco Co. become a party to the unlawful combination of tobacco jobbers at Philadelphia to maintain prices? . . . Accordingly we adhere to the usual rule of noninterference where conclusions of circuit courts of appeal depend on appreciation of circumstances which admit of different interpretations. And upon that ground alone we affirm the judgment below. The opinion of the circuit court of appeals is of uncertain intendment and is not satisfactory as an exposition of the law. What this court has said in many opinions indicates clearly enough the general purpose of the statute and the necessity of applying it with strict regard thereto.49 Although the commission's report Prices of Tobacco Products would seem, as Seager and Gulick say, " to indicate that with the exception of the R. J . Reynolds Company the former members of the trust are willing to go to considerable lengths to prevent bona fide price competition in the sale of their products," 50 the testimony collected during hearings 51 and the history of their activities in this field as summarized in this chapter, leave some doubt as to the validity of such a conclusion. A fairer statement is that distributors have been willing to go to considerable lengths to prevent competition in prices and the companies have shown varying degrees of willingness to submit to their pressure. Least will« 2 7 4 U. S., 544so

Seager and Gulick, Trust and Corporation Problems, p. 186. Federal Trade Commission v. American Tobacco Co., Transcript of Record. 51

266

COMPETITION

IN THE

TOBACCO

INDUSTRY

ing has been Reynolds; most willing has been American Tobacco. It is impossible to avoid a feeling, however, that none of the companies is very enthusiastic about maintaining resale prices in spite of the Federal Trade Commission's report on resale price maintenance that four out of five tobacco manufacturers questioned favored this policy, and that whatever enthusiasm they had has waned rather than waxed in recent years." Certainly none of them has made any determined stand since 1 9 2 3 against the sharp reduction which has taken place in distributors' margins or against the price-cutting tactics o f the grocery chains, which have become the principal cause of complaint by independent distributors. 53 § 1 1 . The answer to the second question raised at the beginning of this chapter, then, is that the manufacturers have made very little effort to control the distribution of their products since the partition of the American Tobacco Co. and practically no such effort during the last decade. Such attempts at control as have been made have been confined to endeavors to maintain resale prices at levels the companies in question have thought to be reasonably remunerative to the distributors. Since these attempts have been half-hearted at best and have not been tried recently at all, it is not necessary to enter into the highly controversial discussion of the resale price problem which has been raging for some years." Proponents of resale price maintenance 52

Federal Trade Commission, Resale Price Maintenance, pt. i, p. 36. Cf. testimony of Percival S. Hill in Federal Trade Commission v. American Tobacco Co., Transcript of Record, pp. 421-422, 442-444. 53 How effectively the manufacturers could enforce a policy of resale price maintenance it is difficult to determine. The task of merely keeping posted on what 6,000 direct buyers and 600,000 or more retailers are doing with their prices, would be formidable ; that of disciplining the recalcitrant distributors would be even more so. 64

The Federal Trade Commission neatly sums up the controversy over

COMPETITION

AMONG

DISTRIBUTORS

267

ordinarily argue that the interests of manufacturers are best served by preventing retail and wholesale prices from being cut so deeply as to lead distributors to refuse to handle the goods any longer or to lead consumers to suspect that quality has been reduced, the last being an argument often advanced by advertisers w h o say that their expenditure of vast sums of money in efforts to establish a reputation f o r quality entitles them to protect themselves against " predatory " price cutting. 5 5

Tobacco manufacturers, however, seem to feel that

they can safely ignore most of the threats of their distributors to stop carrying their lines ; their experience apparently has been that distributors will continue to take small profits even though they prefer large.

A s to the quality argument,

it is doubtful whether price cutting can really injure the reputation of a thoroughly advertised staple as long as the manufacturer himself is careful to maintain quality, except perhaps where the manufacturer's own list price is cut too drastically at one move.

In any event, as long as the manu-

facturers are not themselves convinced that it is to their best interest to maintain resale prices, the problem can hardly be considered an important one in tobacco. resale price maintenance and its own position in the last two sentences of its report on the subject : " T h e real c r u x of the question is whether injury done to the consumers' interests through the elimination of dealer competition would be greater than the damage now alleged to be done to the interests of manufacturers and distributors of trade-marked, nationally advertised brands when they are used as leaders. Neither injury is capable of exact measurement ; but, iri the opinion of the commission, the potential damage to consumers through price fixing would be much greater than any existing damage to producers through this f o r m of price cutting." Report on Resale Price Maintenance, pt. ii, p. 165. 55 Glib use of this term " predatory " tends to overlook the fact that defining it either in theory or in practice is a formidable problem.

CHAPTER EFFECTS

OF C O M P E T I T I O N

ON

XI

THE

SUCCESSOR

COMPANY

EARNINGS

§ 1. In preceding chapters three measures of the extent to which the decree of partition of the American Tobacco Co. resulted in competition among the successor companies have been tried. One was the division of the market as shown by changes in the output of the various companies. The second was the effect of the partition on prices of leaf tobacco and of tobacco products. The third was the extent to which nonprice competition has been stimulated by the decree. W e come now to a fourth and final measure—the effect of the decree upon earnings. Since a tobacco monopoly would tend to hold prices considerably higher than they would remain under free competition so as to gain the largest possible aggregate return, it is clear that, other things equal, the breaking up of the monopoly should result in a smaller absolute amount of profits, a smaller rate of profit when measured on sales as a base and a smaller rate of return on capital investment. Preceding chapters have indicated the existence of a situation in the post-partition era which is intermediate between monopoly and free competition, so that each of these three figures should be somewhat lower than during the heydey of the " trust " but not so low as they would go under free competition. A s usual, an attempt to put these hypothetical conclusions to the test, runs into difficulties. In the first place, since the situation is a dynamic, not a static one, it is necessary to determine what part of the changes in earnings from year to vear is the result of the destruction of the monopoly, what 268

EARNINGS

OF SUCCESSOR

COMPANIES

269

part a result of the fact that other things never are equal. In the second place, information as to exactly what has happened to earnings and to the supply and demand schedules for tobacco products upon which the significance of the changes in earnings depend, is not to be had by the outside investigator. All that can be done is to take the annual reports of the corporations and try to judge from them whether the earnings have been higher than should be expected under a regime of free competition. § 2. Data on which to base such an analysis as regards the " big four " are offered in Table 29, which shows the book value of the net investment and the income applicable to that investment as reported year by year from 1912 through 1930. Although all four companies were in existence by the last quarter of 1911 and issued annual reports as of December 31 that year, the transfers of assets and securities required to carry out the decree were still under way, so that it is necessary to go to December 31, 1912, for a fair starting point from which to measure the progress of the various units. The aggregate net investment of the four companies grew between 1912 and 1930 from $276,824,945 to $682,532,172, an increase of $405,707,227, or 146.6 per cent. Aggregate earnings applicable to this investment increased in an even larger ratio, having risen from $33,115,801 in 1912 to $108,866,149 in 1930, a gain of $75,750,348, or 228.8 per cent. The total for 1930, it may be noted, is 3.11 times the regular earnings of $35,018,803 available for net investment reported by the " trust " in 1910, its last full year of operation. 1 At least a large part of this increase is unquestionably the result of the enormous expansion in cigarette sales. 1 The American Tobacco Co. reported for 1910 earnings of $44,701,303 ; but this included $9,682,500 extra dividends paid by subsidiaries out of profits accumulated prior to 1910. If the higher figure is used for 1910, the 1930 earnings were 2.44 times those of the last year of the " t r u s t " .

2γο

COMPETITION

IN THE

TOBACCO

TABLE INVESTMENT

AND

EARNINGS

29

OF C I G A R E T T E - M A N U F A C T U R I N G

COMPANIES : 1912-1930

American Tobacco Co.

Dec. 31

INDUSTRY

SUCCESSOR

a

Liggett and Myers Tobacco Co.

I Book Value ! of Net ! Earnings c Investment b¡

Return on Net Investment

Return on Net Investment

Book Value of Net Investment b

Per cent 1912 '9'3 1914 1915

¡138,182,550 $15,930,663 '3-l.759.o87i 14,721,638 '31.453.356; 11,796,638 131,125,488. 11,342,610

Per cent 12.30 11.05

"•53 10.92 8.97 8.65

$73,129,801 74.95'.991 75.705.576 77,870,112

$4,998,°34 i3.69°.576 17,002,297

10.43 9.88 9-43 10.15 I 1.21

1926 1927 1928 1929 1930

186,439,426 190,889,491 Ι97.Ό7.42' '251,831,782 262,806,o73' d

22,553,384. 23,308,322! 25,063,934' 30,227,283! 43,345,371 j

12.10 12.21 12.72 12.20 16.49

'58,4'9,9'8 165,424,426 170,065,893 136,601,134 '57,325,298

19,740,866 20,438,652 21,095,526 23,695,182 25,671,182

12.21 12.36 12.40

d

a Source : A n n u a l reports of the companies, except in a f e w where figures were taken f r o m Moody's Manual oj Investments: Securities and Poor's Manual of Industrials. b

'7-35 16.32

instances Industrial

T o t a l of bonds, stocks and surplus.

T o t a l available f o r payment of interest on bonds and f o r dividends on p r e f e r r e d and common stocks. c

d Includes a negligible retired. e

sum representing

the premium paid on

boi;ds

Goodwill, etc., reduced $40,709,710 in 1929 and charged to surplus.

$3,000,000 set aside f r o m surplus in 1924 to reduce value of physiçal assets previously overvalued. Cf. letter f r o m B. L . Belt, newly elected president, to stockholders, Feb. 5, 1925. 1

EARNINGS

OF SUCCESSOR TABLE

29—Continued

P. Lorillard Co.

Dec. 31

1912I

9'31914. 1915.

Book Value of N e t Investmentb

Earnings

0

$49,668,021 $5,286,634 5,360,598 51,342,720 4,501,590 5I»427>3I3 5 2 . " " 2 , 5 3 > i 4,802,228

271

COMPANIES

R . J. Reynolds T o b a c c o Co.

Return on Net Investment

Book Value of N e t Investmentb

Per cent 10.64 10.44 8.75 9.22

1916. 1917. 1918. 1919. 1920.

53.249.454: 55.579.i92, 63,695.928; 64,887,186, 73> I 5 I >397i

5,853,208 7,191,582 6,647,058 6,230,991 7,790,136

10.99 12.94 10.44 9.60 10.65

1921. 1922. 1923· 1924. 1925.

74,907,620 76,901,630 76,974,872 ' 74.498.673 77,418,858

7>5 I 7> , 85 8,119,607 6,263,289 6,424,046 6,854,696

10.04 10.56 8.14 8.62 8.85

1926. 1927. 1928 1929. 1930.

77.i55.4i2 94.915.332 94,300,226 105,062,297 106,564,278

5,324.565 4,104,779 3,841,058 3,353,551 5.592.93'

6.90 4.02

Earnings ·

$2,899,957 2,862,567 2,916,564 4,729,988

$15,844,573 17.507.H0 18,823,704 23,678,691 29,247,369 43,806,464 57.999.227 66,171,980 82,064,102 * 92,122,425 104,915,222 116,955,098 129,732,814 '119,154.394

4.07

3-19 5-25

130.203,797 140,696,775 144.869,339 'S',579.859 155,836,523

h

8,043,678 10,340,345 7,042,763 11,272,754 10,891,122 16,258,323 21,992,797 23,039.876 23,777.717 25,221,579

Return on Net Investment

Per cent 18.30 16.35 1549 19.98

β

h

27.50 23.60 12.14 17.04 I3-27 17.65 20.96 19.70 18.33 21.17

26,249,403 20.16 ' 37.825.404 ' 26.88 20.83 30,172,563 21.25 32,210,521 21.98 34,256,665

β 1920 i n c o m e f o r R e y n o l d s i n c l u d e s $200,808 a p p l i c a b l e t o p r i o r p e r i o d s ; w i t h o u t t h i s i t e m i n c o m e w a s $10,691,294 a n d r a t e of r e t u r n w a s 13.03 per cent. 11 1922 i n c o m e f o r R e y n o l d s i n c l u d e s $1,513,562 a p p l i c a b l e t o p r i o r p e r i o d s ; w i t h o u t t h i s i t e m i n c o m e w a s $20,479,234 a n d r a t e of r e t u r n w a s 19.52 p e r c e n t .

' $20,000,000 p r e f e r r e d s t o c k r e t i r e d b y

Reynolds.

J 1927 i n c o m e f o r R e y n o l d s i n c l u d e s $8,744,739 a p p l i c a b l e t o p r i o r p e r i o d s ; w i t h o u t t h i s i t e m i n c o m e w a s $29,080,665 a n d r a t e of r e t u r n w a s 20.66. k $119,529,550 r e c e i v e d a s p a r v a l u e of 390,583 c o m m o n Β s h a r e s $29,293,725 p a i d i n t o s u r p l u s b y p u r c h a s e r s of t h e s e s h a r e s .

issued;

2-J2

COMPETITION

IN

THE

TOBACCO

INDUSTRY

T A B L E 29— Concluded Four Companies Combined Dec. 31 I ! I

>9'2 1913 '9'4 1915 I9'6 19'7 igle >9'9 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 «93°

.. .. ·. .. ..

Book Value un Net Investment b

Earnings e

, >276.824,945 ! 278,560,938 : 277,409,949 1 284,786,822 I i 294,472,683 i 323.M2.05 ' ! 353,822,981 368.612,434 409,790,234

£33,115,801 31,224,700 26,416,931 29.477.73»

437,086,766 461.515,099 488,885,596 519,006,337 53°.999.7'2

53,716,272 60*84,151 58,637,192 64,737.332 7«.374.°76

552,218,553 591,926,024 606,342,879 645.°75.°7 2 682,532,172

I

Return on Net I Investment

34.68o, 758 40.091,308 40,329,680 41,264.342 43.273.346

73*68,218 85,677,157 80,173,091 89*86,537 108,866,149

1

Whether the growth of the industry has been offset or reinforced by changes in the unit profit margins on goods sold it is impossible to ascertain. It would be very desirable to measure earnings against sales and so get at least a general idea as to whether the companies' profit per unit of goods sold has risen or fallen ; but complete data on sales are not to be had. Only one company, the American Tobacco Co., has announced its annual sales f r o m year to year and that only through 1 9 2 3 . Table 3 0 shows the results of taking its earnings available f o r investment as shown in Table 29 and calculating them as a percentage of the figures announced

EARNINGS

OF SUCCESSOR

COMPAS

IES

273

for sales during the years 1912-1923, inclusive. The most startling fact brought out by this table is the drastic decline in the rate of profits from 23.4 per cent in 1912 to 10.6 per cent in 1920 and subsequent advance to 13.1 per cent. On first glance, this might be taken to be the decline in profits expected when a monopoly is broken up. It must be noted, however, that the company's return on capital invested shown in Table 29, while it fluctuated from year to year, about held its own. Furthermore, since sales increased faster than investment, it is evident that the company's turnover was speeded up. Since this was the period of war inflation, and demand was changing, it may be that even a monopoly would have lowered its price in its effort to achieve the maximum T A B L E CROSS SAI.ES AND

EARNINGS

COMPANY:

30

OF T H E 1912-1923

AMERICAN

TOBACCO

»

J YEAR

'

SALES

EARNING}

NET PROFIT ON SALES*

B

Í

1912 >9>3 1914

!

69,516,932 69,339,084

1915 1916 I9I7 MIX

23-4 21.2 17.0

11,342,610

>7-5

12,400,306 1

89,920,249

13,409,198 16,708,524 16,063,399

1919 1920 1921

$¡5,930,66 3 14,721,638 11,796,638

1

143.106,332

>5.235.538

1922

1 !

>55.963.752 143,901,446

>8,333.248 18,909,328

«923

j

'38.473.340

>7.981.993

A

C O M P I L E D FROM THE ANNUAL REPORTS OF THE C O M P A N Y .

B

TOTAL AVAILABLE FOR P A Y M E N T OF INTEREST ON BONDS

PREFERRED AND C O M M O N STOCKS. C

PERCENTAGE OF SALES REPRESENTED B Y

EARNINGS.

!

>7-7 >4-9 11.6

1

11.2

I

10.6 11.8 >3·> L.Ì.O

AND FOR DIVIDENDS ON

274

COMPETITION

IN THE

TOBACCO

INDUSTRY

aggregate net profits. Furthermore, although the reports are not clear on this point, it is probable that much of the increase in sales is the result of increases in taxes, which are paid in the first instance by the tobacco manufacturers, rather than of increases in quantities sold, so that when measured as a percentage of net sales less tax, the decline shown by the table might very well disappear. Because of these considerations, the table is, therefore, of practically no value from the point of view of this study. Calculated as a percentage of book value of net investment, the earnings of the four companies have averaged higher than 10 per cent in every year since the issuance of the decree except one, 1914. 2 With that one exception, profits have ranged from 10.35 t o Ι 5·95 Ρ61" c e n t of investment, and it is noteworthy that the six highest average returns were received in the last six years of the period. The return on net investment similarly calculated for the combination prior to the partition was: 1904, 7.83 per cent; 1905, 9.54 per cent; 1906, 9.91 per cent; 1907, 10.52 per cent; 1908, 10.83 V e r cent; 1909, 1 1 . 4 0 per cent; and 1910, 1 2 . 3 0 per cent or 15.70 per cent, according to whether the $9,682,500 extraordinary profits are counted or not. Clearly, the partition has not resulted in any weakening of the ability of the combination's properties to earn handsome profits for the stockholders. This fact would seem to offer confirmation of the conclusion reached in earlier chapters, and notably concerning tobacco leaf and tobacco product prices, that competition among four large companies which in the aggregate control a very high percentage of their industry's output, is apt to 2 The figures given in Table 29 tend to minimize the rate of return since they are based on net investment at the end of the year. If the net investment at the beginning of the year on an average of the two were taken, return on net investment would be increased in nearly every instance.

EARNINGS

OF SUCCESSOR

COMPANIES

275

yield results more like those expected under monopoly than those expected under free competition as the term is defined in economic theory. It is not possible, of course, to say exactly what percentage represents a monopoly return on capital investment; neither is it possible to say what represents a purely competitive return. There is no reason to doubt, however, that an industry which can average a return on capital invested of 10 per cent a year or better for twenty years and through two m a j o r depressions should be attractive to new capital if there were no barriers standing in the way. And this underestimates the attractiveness of the prospect in that it makes no allowance for the facts that earnings have averaged above 13 per cent on investment during the last six years, that the percentage is calculated on book values which may or may not represent actual investment and that the organizer of a new enterprise by judicious issuance of limited-return securities may concentrate a high proportion of the return on his own investment. § 3. While the average return of the four companies in the aggregate thus seems to confirm conclusions reached earlier in this study, it is necessary to see what significant divergences among them the average conceals. A number of facts of considerable interest are brought out by Table 29. For example, the American Tobacco Co., which owned 49.92 per cent of the net investment of the four companies in 1912, owned only 38.51 per cent in 1930. On the other hand, the Reynolds Company, which represented only 5.72 per cent of the aggregate investment in 1912, had 22.83 per cent in 1930. Thanks to the relatively more rapid growth of the Reynolds Company, the other two companies also dropped in relative importance, but not so much as did the American Tobacco Co., the Liggett and Myers Co. declining f r o m 26.42 per cent to 23.05 per cent and the Lorillard company from 17.94 per cent to 15.61 per cent.

276

COMPETITION

IS

THE

TOBACCO

INDUSTRY

Differences in the rates of increase of earnings have been even more striking. The American Tobacco Co. and the Liggett and Myers Co. moved about in proportion with the changes in their investments. The American Tobacco Co., which in 1 9 1 2 , received 48.11 per cent of the income of the four companies applicable to bonds and stocks, in 1930 received only 39.82 per cent despite a tremendous increase in 1930 over 1929; while the Liggett and Myers Co., received 2 7 . 1 7 per cent of the aggregate income in 1 9 1 2 and only 23.58 per cent in 1930. The Reynolds company advanced as markedly as in net investments, receiving only 8.76 per cent of the aggregate income in 1 9 1 2 , but 31.47 per cent in 1930. The Lorillard Company moved almost as markedly in the opposite direction, taking 15.96 per cent of the aggregate income in 1 9 1 2 , but only 5 . 1 4 per cent in 1930. The absolute figures show more clearly, perhaps, than do the relatives what has happened. Where earnings of the American Tobacco Co. and the Liggett and Myers Co. have nearly trebled, those of the Reynolds Company are nearly twelve times as great, and Lorillard's, after increasing during the first decade, dropped for some years to figures below those of 1 9 1 2 and only in 1930 recovered sufficiently to make the record for the entire period one of a very small increase. Rates of return on net investment, while they have not shown such spectacular changes as the absolute earnings figures, reveal some interesting developments. The Reynolds Company has at all times led the field, its rate of return having held in the neighborhood of 20 per cent and for the last five years above that figure. The other three companies started out on a parity near 1 1 per cent, as was contemplated under the plan of partition. The Lorillard Company, although it held its own for a few years, dropped back beginning in 1923 and up to 1930 had been unable to recover lost ground. The Liggett and Myers Co. and the

EARNINGS

OF SUCCESSOR

COMPANIES

American Tobacco Co. had earnings hovering around 1 0 per cent in the first decade and around 1 1 per cent in the second decade until 1929 and 1 9 3 0 , when they climbed to above 1 6 per cent. Although the two companies show similar recent increases, they do so f o r different reasons. Liggett and Myers in 1 9 2 9 reduced good will, patents and other intangibles from a valuation of $ 4 0 , 7 0 9 , 7 1 1 to a valuation of one dollar, thus leaving a correspondingly reduced book investment against which to apply moderately increased earnings. The American Tobacco Co., on the contrary, increased its net investment sharply in 1 9 2 9 by selling 390,583 class Β common shares, par value $ 5 0 , for $ 1 2 5 , but increased its earnings even more sharply. While these figures are as satisfactory measures of the profitability of the various companies as can be obtained without access to the original records, one other point is of interest—the proportion of the increase in investment f o r each company coming from reinvestment of earnings and the proportion coming from contributions of new capital by purchasers of securities. On this basis the Reynolds Company takes first place among the " big four " by a wide margin. Taking net investment at the end of 1 9 1 2 as the starting point, s we find the company's net investment has increased from $ 1 5 , 8 4 4 , 5 7 3 to $ 1 5 5 . 8 3 6 , 5 2 3 . a gain of $ 1 3 9 , 9 9 1 , 9 5 0 , or 883.53 per cent.4 Of this huge increase 3 Obviously, this figure is not the true original investment for any of the companies ; but it is the best figure to be had as a starting point f o r the period under survey.

* The increase is made even more significant by the fact that the total investment is undoubtedly carried at a conservative figure on the books. In an industry where advertising is very heavy and consumer preference f o r brands is a potent factor in success or failure, good will may be listed legitimately at a high valuation; but the Reynolds Company carries intangibles at one dollar, having reduced them to this figure from $1,332,426 in 1927.

2J8

COMPETITIOX

IN THE

TOBACCO

INDUSTRY

only $10,000,000 or 7 . 1 4 per cent, represents new capital contributed by stockholders, who in 1 9 1 8 bought that amount of the new non-voting class Β common then first issued; all the rest of the increase, $ 1 2 9 , 9 9 1 , 5 5 0 , or 92.86 per cent, represents reinvested earnings, against which the company has issued $80,000,000 in stock dividends, all non-voting class Β common, carrying the remainder of the increase, or $ 4 9 , 9 9 1 , 5 5 0 , to surplus. The investors who calculate that with an investment of less than $26,000,000 they have acquired during two decades assets conservatively valued at nearly $ 1 5 6 , 0 0 0 , 0 0 0 in a company which earns more than 2 0 per cent on these assets have no reason to regret their choice. T h e other three companies have not been so spectacularly successful; but two of them have done very well for their shareholders. T h e American Tobacco Company's net investment has increased f r o m $ 1 3 8 , 1 8 2 , 5 5 0 to $262,806,073, a gain of $ 1 2 4 , 6 2 3 , 5 2 3 , or 9 0 . 1 9 per cent. Of this increase, $ 6 3 , 7 4 7 , 2 2 5 , or 5 1 . 1 5 per cent, represents new capital contributions, including $ 3 4 , 4 5 3 , 5 0 0 as the par value of nonvoting class Β common shares issued at intervals beginning in 1 9 2 0 and $ 2 9 , 2 9 3 , 7 2 5 as the amount paid into surplus in 1 9 2 9 when 390,583 of these shares were issued at $ 1 2 5 . The remaining $60,876,298, or 48.85 per cent, represents the increase through reinvestment of earnings, against which the company has issued one stock dividend of $38,375,000.® The Liggett and Myers Co. ranks between the other two companies in this regard. Its net investment has grown f r o m $ 7 3 . 1 2 9 , 8 0 1 to $ 1 5 7 , 3 2 5 , 2 9 8 , a gain of $84,195,497, or 1 1 5 . 1 3 per cent. Of this sum, $ 5 0 , 4 4 3 , 7 7 5 , or 59.91 per 5

$4,105.050 of class Β common stock issued during the period under survey but not accounted f o r here, represents the face value of bonds retired during the period. This is substitution of one form of investment for another, not new investment.

EARNINGS

OF SUCCESSOR

COMPANIES

cent, is new capital contributed, comprising preferred stock of an aggregate par value of $7,130,300 sold during the period and class Β non-voting common stock of a par value of $43>3 I 3>475· The remaining $33,751,722, or 40.09 per cent, represents increase through reinvestment of earnings, against which the company has issued two stock dividends totalling $11,342,750.* T o make this figure for reinvested earnings strictly comparable with that of the American Tobacco Co., it is necessary to recall that the Liggett and Myers Co. in 1928 sharply reduced its book investment by writing down intangibles from $40,709,711 to one dollar. The American Tobacco Co. has never taken this step but continues to carry intangibles at $54,099,430. Thus the Liggett and Myers Co. has really reinvested more earnings than has the American Tobacco Co., although its aggregate book investment is much smaller. As would be expected from its earnings, the Lorillard Company, the last of the " big four ", has made the poorest record in this matter of accumulated equities for its stockholders through reinvestment of earnings. Book investment has increased from $49,668,021 to $106,564,278, a gain of $56,896,257, or 114.55 per cent. Of this sum, $39,024,005, or 68.59 P e r cent, represents new capital invested through the purchase of $13,758,000 in bonds and $25,266,005 in common stock. The remaining $17,872,252, or 3 1 . 4 1 per cent, represents the company's reinvestment of earnings, against which was issued one stock dividend of $3,03i,i00. T " $2,270,350 of class Β common stock issued but not accounted for here represents the face value of bonds retired during the period. 7

The Lorillard Company in 1926-1927 issued three stock dividends of 2 per cent in lieu of cash dividends. These are treated here as new contributions of capital rather than reinvestment of earnings so as to make the figures comparable with those of the American Tobacco Co., which has at various times issued scrip dividends in lieu of cash, part of which were redeemed in cash and part in class Β common. It should be noted

28ο

COMPETITION

IN THE

TOBACCO

INDUSTRY

The Lorillard Company's record is rendered even less favorable relatively by the fact that in order to help finance its invasion of the popular-price cigarette field undertaken in 1926, which is discussed in Chapter I I I , dividends were omitted for four and a half years, beginning with the middle of 1 9 2 7 and ending with the last quarter of 1 9 3 1 . ® T h e greater part of the reinvestment of earnings has been made by this company at the cost of complete sacrifice of present income on the part of the stockholders. The other three companies have made their reinvestments while maintaining very handsome dividend rates on their common stock. It is true that dividends have been paid at times in scrip or stock, particularly during the war period of financial stringency; but these were temporary measures and the amount of the permanent investment thus taken out of the normal dividend has been small. The Reynolds Company f o r years kept its regular cash dividend on the common and class Β common at 1 2 per cent a year, making up for the increase of earnings by extra dividends ranging from 4 to 1 6 per cent a year or by issuing stock dividends and maintaining the regular dividend at its old rate. Since 1925, the company has followed a policy of issuing a large percentage of its earnings in dividends without changing capitalization, so that the dividend rate has increased steadily and in 1 9 3 1 was at 30 per cent a year. The American Tobacco Company's common dividend rate was held at 20 per cent a year f o r several years but was reduced to 1 6 per cent in 1920 and to 1 2 per cent in 1 9 2 1 after declaration of a stock dividend of 75 per cent. In recent years the dividend rate has risen again and in 1 9 3 1 reached 24 per cent. The Liggett and Myers Co. distributed that the Lorillard Company called for redemption on January i, 1932, the $13.758.000 in bonds which represented the outstanding portion of a $15,000,000 issue sold in 1927 to finance its "Old Gold" cigarette campaign. 8

New York Times, Dec. 2, 1931.

EARNINGS

OF SUCCESSOR COM PAMES

281

1 6 per cent a year on its common stock through 1 9 1 9 , 1 2 per cent a year f r o m 1 9 2 0 to 1 9 2 4 , 1 6 per cent f r o m 1 9 2 4 to 1 9 2 7 and 2 0 per cent thereafter. E v e n the Lorillard Co., the weakest of the four, gave its stockholders a good return before its venture into the popular-price cigarette field, having declared dividends on its common stock ranging f r o m 1 0 to 1 8 per cent a year prior to 1 9 1 9 and holding steadily at 1 2 per cent thereafter until distribution of earnings w a s suspended entirely. Because of the many factors which enter into the determination of profits, it is difficult to know how much basis the difference between the records of the individual companies a f f o r d s f o r modification of the conclusion to be drawn f r o m their average record that competition has been limited. T h e very high earnings of the Reynolds Company, the Liggett and M y e r s Co. and the American Tobacco Co. individually, are themselves large enough to attract outsiders to the industry, if there were no barriers standing in the w a y . Since the outsiders have not entered, it is necessary to conclude that, as we have already seen, such barriers do exist. A t the same time, the divergent records of the four companies give evidence of some degree of competition between them. W h i l e we have been able to discover no evidence that this competition has affected prices very much, it evidently has not prevented the various managements f r o m exercising their skill ( o r taking advantage of their luck) in forecasting and, chiefly through advertising, exploiting if not actually causing changes in consumer taste. T h e skill or luck of the Reynolds Company in entering the cigarette industry just as its greatest growth began and doing so with a blend which found f a v o r quickly, is responsible f o r its increase in relative importance. T h e skill with which the American Tobacco Co. attracted women smokers to " L u c k y Strike " cigarettes, while somewhat lacking in esthetic sensitivity, was obviously

282

COMPETITION

IN THE

TOBACCO

INDUSTRY

effective in expanding the company's earnings. The Lorillard Company's failure to progress as did the others must be attributed to less able management, since its delay in entering the blended cigarette field was too prolonged to be attributed to mere ill fortune. Even when allowance is made for this sort of competition, however, the industry remains one of very great profitability. It must not be forgotten that the Lorillard Company, despite its falling behind the others and its extremely expensive efforts to recover lost ground, has never earned less than 3 per cent on its invested capital. § 4. The only two official studies of the tobacco companies' earnings which have been made do not affect the conclusions drawn from Table 29. The more detailed of the two was made by the Commissioner of Corporations for the year 1913. Its major conclusions were: ( 1 ) The earnings of the combination and of seven successor companies manufacturing tobacco products, (i. e., the " big four " and the three snuff companies), expressed as a percentage of the cost of investment, (i. e., book value with most of the water squeezed out), averaged: 1908, 17.9 per cent; 1910, about 17 per cent; 1913, 14.6 per cent. ( 2 ) The rates of profit based on net receipts less tax averaged 23.1 per cent in 1910 and 18.3 per cent in 1913 ; but the change varied for different products, profits having decreased on some and increased on others. (3) The change between 1910 and 1913 in rate of profits per unit of product varied, five products showing increases, while four decreased. The most important decrease was in blended and domestic cigarettes, the field which had just been entered by the Reynolds Company, where the profit had fallen from 76 to 27 cents a thousand. ( 4 ) In spite of the fact that the profits were generally lower in 1913 than in 1908 and 1910, they were still absolutely high and much higher than earnings of the independents. 9 4 Report of the Commissioner of Corporatons on the Tobacco pt. iii, passim.

Industry,

EARXIXGS

OF SUCCESSOR

C0MPAX1ES

283

Table 29 indicates that the decline in return on investment noted by this report was not permanent. A report by the Federal Trade Commission on earnings of the "big four " in 1916-1920, summarized in Table 31, shows a somewhat lower average return on net investment than the 1908-1910 return; but these were the war years when leaf and other costs were rising more rapidly than product prices.10 A similar study for the years 1921-1922, when the contrary conditions prevailed, probably would offset this decline. Furthermore, it is obvious from Table 29 that the years since 1920 have been appreciably more profitable for the companies than the first half of the post-partition period. § 5. Earnings of the other successor companies, excepting the British-American Tobacco Co., are so small in comparison with those of the " big four " that they warrant much less detailed analysis. The British-American Company may be eliminated because its activities have been confined largely to the tobacco trade of foreign countries and thus lie outside the purview of this study. The UnionAmerican Cigar Co. and the Conley Foil Co. must be eliminated because they have withdrawn from business. The Hernscheim Tobacco Co. and the Johnson Tin Foil & Metal Co. must be eliminated for lack of information. This leaves seven companies to be accounted for. The three important manufacturers in the group are the snuff companies, whose net earnings available for dividends for the years 1912-1930, inclusive, are tabulated in Table 32. This table, as we have already seen, is almost the only available indicator of the extent to which competition between the three companies has grown. The Commissioner of Corporations reported that the snuff companies' profits per pound were lower in 1912 and 1913 than in 1909 and 1910. Net receipts from sales for the 10

Federal Trade Commission, Prices of Tobacco Products, pp. 35, 89-90.

284

COMPETITION

IN

THE T A B L E

TOBACCO

INDUSTRY

31

R A T E S OF R E T U R N ON A V E R A G E I N V E S T M E N T AS REPORTED BY C O M P A N I E S TO T H E I R

STOCKHOLDERS A N D AS

FEDERAL T R A D E C O M M I S S I O N :

1916-1920

Per cent Per cent 10.6 II.I 15.2 14.0 10.8

THE

1

Liggett (American & Myers P. Tobacco Tobacco Lonllard Co. Co. Co. 1916: Per cent As reported by the companies. 9-4 As revised by the commission. '2·J 1917: As reported by the companies. IO. I As revised by the commission. 12.7 1918: As reported by the companies. I 1.2 As revised by the commission. 2Ο.9 1919 As reported by the companies. IO.6 As revised by the commission. Ι4.Ο 1920: As reported by the companies. 9-5 As revised by the commission. 11.8 Average, 5 years : As reported by the companies. 10.2 As revised by the commission. »45

SUCCESSOR

REVISED BY

R. , . Reynolds Tobacco Co. Per cent 3°·4 32.0

Average

1'er cent 12.0 16.1

132 21.0

28.3 29.2

13.0 18.0

9-9 19.8

I I.I

• 3-8 26.1

11.2 21.2

7-9 10.2

9.7

16.7 '9-5

IO.7

7-5

8.8 11.5

11.3 11.8

15.0

12 5

9-4

11.2

'7-9 21.8

•"•3

14.8

14.0

18.4

14.0

I3.0 IO.3

15.8

* Federal Trade Commission, Prices of Tobacco Products, p. 35. The figures " a s reported" differ from those in tab'e 29 because ( 1 ) average investment is used rather than investment at the end of the year, and (2) this table inclndes short-term obligations in the investment, whereas table 29 includes only bonds, stocks and surplus. " The more important revisions made by the commission were as follows: ( 1 ) The inclusion in investment of current borrowings and the exclusion from investment of good will not paid for in cash or its equivalent and holdings in subsidiary companies, except where all the capital stock was held, and (2) net income was taken before the deduction of interest on current borrowings and income and excess profits taxes."

three companies, it is true, averaged 45.3 cents a pound in 1912 and 45.1 cents in 1913, as compared with 44.1 cents in 1909 and 44.8 cents in 1910; but in the mean time the tax rate on snuff had risen from 6 cents to 8 cents a pound. Net

EARNINGS

OF SUCCESSOR

COMPANIES

T A B L E 32 E A R N I N G S A V A I L A B L E FOR DIVIDENDS OF T H R E E COMPANIES : 1 9 1 2 - 1 9 3 0

Year

American Snuff Co

1912

»2,090,559

J914 1915 1916 1917

>.9·9.3°4 1,685,668 >.7°'.334 1,899,686 1,504,645

1913

1918

1919 1920 1921 1922

1923 1924

»9-5 1926

1927 1928 1929 «93°

'.533.893 «.774.4· 2 1,906,760 1,811,080 2. Ι "3.954 2,082,520 1,358,588 Ι ,64Ο, 1 5 8 1,673,450 «,973.9'7 2.'78,535 2,IO9,-8I

«.893.049

Geo. W. Helme Co. >'.075,13 3 1.069,358 1.025,922 1,095,016 1,078.503 9'7.97« 2

«.074.70

1,254,967 1,362,550 1,538,464 2,002,612 2,096,307 2.'99.749 2,203,724 2,223,920 2,25^,850 2,301,041 2,324.993 2,33«.5°«

• Compiled from Poor's Manual of Industrials Investments: Industrial Securities. b

SNUFF

»

United States Tobacco C'o.b 11,163,216 1,229,478

'.«98.923

1,271,372 1,448,711 1,471,528 1487,984 '.727.205

•.805,535 '.873.23« 2/>¡3.««5 2,112,580

2.i97^>83 2,298,307 2.394.837 2,576,871 2,660,390 2,771,038 2,950,818

and Moody's Manual of

1912-1920, inclusive, the Weyman-Bruton Co.

receipts less tax, therefore, declined, a v e r a g i n g 3 7 . 2 cents a pound in 1 9 1 2 and 3 7 . 1 cents in 1 9 1 3 , as compared w i t h 3 8 . 1 cents in 1 9 0 9 and 3 7 . 9 cents in 1 9 1 0 , the manufacturers Their being able to s h i f t only about half of the t a x increase. inability to s h i f t the entire t a x resulted more f r o m the characteristics of the packages used in the industry and statutory limitations on package sizes than f r o m competition. Profit per pound fell considerably more than the decline in net price. The profit of the successor companies amounted (in the snuff branch) to $4,606,713, or 14.6 cents per pound in 1 9 1 2 , and $4,357,500, or 13.4 cents per pound in 1 9 1 3 . The absolute amounts of profit in 1 9 1 2 and 1 9 1 3 were substantially the same

286

COMPETITION

IS

THE

TOBACCO

INDUSTRY

as for the combination in 1909 and 1910. The rate of profit per pound, however, on account of the large increase in sales was considerably less in 1 9 1 2 and 1913 than in 1909 and 1910. The combination's rate of profit averaged 16.7 cents per pound in 1909 and 17 cents in 1910, and that of the successor companies was 14.6 cents in 1 9 1 2 and 13.4 cents in 1913. Notwithstanding a reduction in the rate of profit, the operations of all three of the successor companies were exceedingly profitable. In 1 9 1 3 the profits of the companies ranged from 10.9 cents to 15.8 cents per pound. 11 T h i s greater decline in profits than in net receipts less tax was due in part to higher leaf prices, but also in part to higher competitive expenditures. 12 With snuff as with other tobacco products, the companies thus confirm the conclusion already reached that competition has appeared elsewhere than in prices. T h e expenditures involved have not been large enough to prevent their earning very good profits, as Table 32 shows, although the companies have not prospered alike, the George W . Helme Co. and the United States Tobacco Co. each having outstripped the American Snuff Co., which has hardly more than held its o w n . " All three companies have excellent dividend records. T h e American Snuff Co., the least profitable of the three, has paid from 1 1 to 1 5 per cent in cash each year since the disintegration. T h e Helme Company has done much better. Starting at 1 0 per cent immediately after the disintegration, its dividend has risen steadily until in the last few years it has run from 28 to 3 2 per cent a year ; and it must be remembered that these recent high dividends 11 Report of the Coimiiissioiter of Cor/Orations on the Tobacco pt. iii, pp. 309-311. 12 13

Industry,

Cf. Table 25, supra.

None of the companies has any funded debt, so that earnings available f o r dividends are equivalent to earnings applicable to investment, except f o r minor borrowings of circulating capital.

EARNINGS

OF SUCCESSOR

COMPANIES

287

TABLE 33 E A R N I N G S A V A I L A B L E FOR D I V I D E N D S OP LICORICE SUCCESSOR COMPANIES : 1 9 1 2 - 1 9 3 0

Year 1912 •9'3 1914 '9'5 1916 1917 1918 I9'9 1920 1921 1922 >923 1924 «925 1926 1927 1928 1929 1930

»

MacAndrews St Korbe« Co.

»989^4 1 902,544 969,38' 1,061,310 '.357.592 '.347.876 1,236,906 '>422,695 I.94M73 783.988 '•'53>023 '.3°7.744 1,264.804 '.573.807 '.653.034 1 »494.985 1,224,186 1.194.795 1,002,182

J . S. Young Co.

#251,042 306.433 286,866 365.33' 217.806 440,825 '38,772 197,167 180,11 j 370,176 344.925 305,880 276,825 254.556 24 5.3 Ό 29.Ì.O7 244.97° 255,816

• Compiled f r o m Poor's and Moody's manuals.

have been paid on common stock increased in amount in 1 9 2 2 by a 5 0 per cent stock dividend, so that a 28 per cent dividend is equivalent to 4 2 per cent on the common issued at the time of disintegration. Dividends of the United States Tobacco Co., whether under its present or its f o r m e r corporate title, have ranged f r o m 1 0 to 3 2 per cent. 14 Since 1 9 2 9 , its dividends have ranged f r o m 1 3 to nearly 1 8 per cent, if the no-par common be taken at $ 2 5 . A s with the Helme C o m p a n y , the dividends of recent years are deceptive when compared with earlier years because the company issued stock dividends of 2 0 per cent each in 1 9 1 8 , 1 9 2 1 , 1 9 2 3 and 1929. E a r n i n g s of the two licorice companies split off f r o m the 14

Includes scrip and stock dividends issued in lieu of cash in three years.

288

COMPETITION

IX

THE

TOBACCO

IS'DUSTRY

TABLE 34 EARNINGS OF PORTO RICAN-AMERICA.V TOBACCO COMPANY AVAILABLE FOR DIVIDENDS:

Year 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921

I

Earnings

>7°'>593 67'.973 569.198 683,499 860,105 5".33' 708,378 '37.934 998,948 2.7°4.395 '

I

1912-1930 »

Earnings

Year

1922 '923 1914 1925 192 6 1927 1928 1929 1930

ι

390,238» 301,3'°'' >9,9*4 3'7>'30 162,820 276,491 615,723 1,081,287 831,048

• Compiled from Poor's and Moody's manuals. b Deficit. " trust " are shown in Table 33. In neither instance is the record of much value, since data by means of which to interpret the figures are lacking. It is evident, however, that the MacAndrews & Forbes Co. record must be somewhat disappointing to stockholders. The earnings have been extremely irregular. Despite the expansion of the company into fields other than licorice, there is no upward trend. On the contrary, the trend has been downward since 1920. The J . S. Young Co. has held its own, but not much more, over the years. In neither instance is it possible to ascertain what the effects of the partition have been upon licorice profits. The earnings record of the Porto Rican-American Tobacco Co., given in Table 34, shows rather serious difficulties have been encountered. Earnings suffered severely from prolonged and bitter strikes by its workers in 1 9 1 9 , 1921 and 1926-1927 and from the price competition offered by American Tobacco in 1926-1927. 1 5 The effects of these forces " United States Tobacco Journal, March 1, 1919, p. 3 ; April 5, 1919, p. 3 ; Oct. 29, 1921, p. 5 ; April 23, 1921, p. 1 0 ; Jan. 15, 1927, p. 3. Cf. also the company's annual reports for the years in question and ch. viii, § 7, supra.

EARNINGS

OF

SUCCESSOR TABLE

COMPANIES

289

35

EARNINGS OF UNITED CIGAR STORZS COMPANY AVAILABLE FOR DIVIDENDS: 1 9 1 2 - 1 9 3 0 » Year

>9'2 >9«3 >9'4 '9'5 1916 •9«7 1918 I9"9 «920 1921

Year

Earnings

! 1

i ; J i ¡

$1,879,361 2,171,$17 2.24·,783 2,404^71 2,892,072 2,873,500 4,010,205 5,021,369 5,029,005 4,(01,656

"922

4.359.806

« 9 2 3 '924 1925

4 . 7 5 7 . 9 2 8 6,696,699 8,813.228

192 6

9.854.869

> 9 2 7 1928 1929

9 . 9 5 2 . 4 5 7 4,525,609'' 2,840,630 B

• 9 3 °

ι , 5 5 ' . 9 8 0

• Compiled from Poor's and Moody's h

Earnings

manuals.

A f t e r l o s s 011 H a p p i n e s s C a n d y S t o r e s ,

Inc.

may be found in an extremely wide fluctuation of earnings, with low points in each of the strike years and a large deficit in each of the three years 1 9 2 1 - 1 9 2 3 . T h e expansion of earnings in 1 9 2 8 - 1 9 2 9 resulted from absorption of the Congress Cigar Co. and Waitt and Bond. 1 * Since then, the effects of the mergers have been outweighed by the effects of the 1 9 2 9 - 1 9 3 2 business depression. Earnings of the United Cigar Stores Co., which have been compiled in Table 3 5 , increased until they reached a maximum of $9,952,457 in 1 9 2 7 , but collapsed in 1 9 2 8 and in 1 9 3 0 were less than in 1 9 1 2 . Much of the increase in this company's earnings came from the increase in the number of its stores and expansion of its sales, so that the 1 9 3 0 income represents probably a smaller profit per unit of sales, although the figure is complicated by its inclusion of profits and losses from real estate operations. T h e company's fortunes have been so much affected by its operations in real estate, its expansion into various fields of manufacture and distribution 16

Cf. c h . iii, § 6,

supra.

2ÇO

COMPETITION

IN THE

TOBACCO

INDUSTRY

and its ultimate reorganization and bankruptcy that the effect upon them of the disintegration cannot be disentangled." § 6. It is evident from this survey that while the successor companies have not in all instances been brilliantly successful, the seven tobacco-products manufacturers, (i. e., the " big four " and the three snuff companies), have earned large profits and give no evidence of having suffered seriously in this regard from the partition. There is reason to believe that these profits have continued to be larger than would be expected under free competition. W h y have the companies been able to maintain their earnings at such high levels? T h e answer has been suggested in preceding chapters of this study. Competition in the purchase of leaf tobacco, which is the most important of the raw materials used by the industry, has been limited, not so much by outright collusion as by the fact that the market situation differs from free competition in that the number of buyers is too few for them to operate on the assumption inherent in the concept of free competition. This assumption is that each competitor can ignore the effect o f his own policies upon the market and upon the policies o f his competitors. Similarly, competition among manufacturers in the sale of their products has been limited in so far as expressing itself in price is concerned. T h e entry of newcomers endeavoring to take advantage of the high price levels from which the present manufacturers benefit, has been hindered apparently by the fact that the most economical size of factory and enterprise seems to be very large. Anyone who wished to enter the industry would have to invest large amounts of capital ; and the raising of large amounts of capital for the purpose would be difficult. The venture would be highly speculative, depending for success as it would upon capturing public favor 1T

See the appendix for the full story of this company's operations.

EARNINGS

OF SUCCESSOR

COMPANIES

through cleverness and luck in advertising rather than essential differences in product. Much of the capital, being invested in intangibles, would be beyond recapture in case of failure. There would always be the danger that the entry of a new and large competitor would have the effect of destroying the exceptional profitability of the industry which had made it attractive to new capital at the outset. Why is ihe wide profit margin not reduced by the cost of non-price competition? We are again faced with the lack of data which handicapped the analysis in Chapter IX. Apparently, however, the tendency of an industry in which competitors are few would be to restrict these expenditures just as price reductions are restricted, so that we should expect them to be somewhat smaller at all times than they would be if competition were more vigorous. Those in the industry would point to factors which have not thus far been cited as responsible for the higher earnings of the companies. How much of the rise in profits is to be attributed simply to the expansion in cigarettes ? How much of the increase in the rate of earnings is due to increased efficiency in management? How much to the development of new and improved machinery? How much to savings arising from the concentration of production into fewer factories? Exact answers are not available; but even if they were, they would not affect the basic conclusions already reached. The growth of cigarettes undoubtedly accounts for the great increase in the aggregate profits of the " big four " companies, just as the increase in snuff consumption is the principal factor explaining the increase in the aggregate profits of the snuff companies. The extent to which each company has been able to divert this growth to its own ends accounts for the growth of the individual companies. But this factor does not account for the essential phenomenon— the fact that the companies have been able to keep their

2Q2

COMPETITION

IN THE TOBACCO

INDUSTRY

return on capital high and actually to increase it during the last decade. Similarly, while the improvements in the technique of management and production would explain a fall in costs, if they have fallen, it would not explain why the companies have been able to retain the savings, which one would expect, under a competitive regime, to be passed on to the consumers, except where, as in the instance of patented machinery, the inventor of the improved machine or process was able to restrict its use by others. It still seems necessary to conclude that the true explanation of these earnings lies in the general validity of the analysis in preceding chapters. An important possible modification remains to be considered. The analysis thus far has indicated that the existent limitations on competition arise out of the nature of a situation where sellers are few rather than out of collusion between the companies. The limitations might result from neither of these factors, but rather from interlocking ownership. This possibility is particularly important in the tobacco industry because of the original community of interest between the companies. In turning to an analysis of the extent to which the companies remain under common control, we also shall find the occasion opportune to see whether there has been any continuance of the practices whereby the greater part of the profits of the " trust " were led into a few hands.

CHAPTER

XII

F I N A N C I A L CONTROL OF T H E SUCCESSOR

COMPANIES

§ 1. T w o of the strong arguments against the plan o f partition were, first, that while the individual defendants would be removed from technical legal control they would in practice retain working control of the individual companies and, second, that by permitting interlocking ownership of these large interests in the various companies instead of requiring that each segment o f the industry be owned by absolutely distinct stockholders, the court was in effect preventing competition. It was, on the contrary, the feeling o f the government attorneys that with the passage of time the natural diffusion of ownership resulting from deaths, sales and transfers of interest would break down both the compact control of individual companies held by this limited group of stockholders and the community o f interest between the various companies. It now becomes incumbent upon us to see whether the subsequent history o f the companies has justified this optimistic view taken by the attorney general and his aides. Here more than in any other part o f this inquiry the difficulties under which a private investigator labors when delving into the records of corporate business enterprise become apparent. From the manuals it is possible, of course, to obtain lists of the officers and to make sure that there is no interlocking here; but as to the really vital information—the identity of the stockholders and the sizes of their holdings, the forces behind each director, the relations under cover as between the directors and stockholders 293

294

COMPETITION

I.W THE

TOBACCO

INDUSTRY

of the different companies, the significance of private holding companies which come to light now and then and the methods by which the managements of the various companies have obtained and retained the positions of control—as to all this the individual investigator is helpless in the absence of official reports. Such documents f o r the tobacco industry are virtually non-existent. Attorney General Wickersham, who was in no small degree responsible for the final form of the decree, was quoted as saying in the summer of 1 9 1 2 : My opinion is that the most successful dissolution in accomplishing what led to the enactment of the Sherman L a w has been realized in the tobacco case. The differentiation of interests there is going on more rapidly, and you have got a dozen fullsized companies engaging in competition with each other which is very marked. There was a group of about seven strong men in that concern, and each one of these has cast his lot with a particular company and each is making every effort possible to have his company the most successful. One of the serious things with which everybody was concerned was the United Cigar Stores Co. ; every share of stock of that company that was owned by the trust or by any of the people in the trust has been sold out to third parties. There has been a complete change of interest. Duke, who was the best known, has gone to England permanently, to take the British-American Co., and is devoting his attention to that company.1 Besides this there are to be had only two very brief and utterly inconclusive statements by the Federal Trade Commission. The first is in its Report on the Tobacco Industry: The position of the large manufacturing and snuff concerns is more convincing because of the fact that they have many stockholders in common. . . . In the old American Tobacco Co. the 10 largest stockholders, 7 of whom were directors, held over 1

United States Tobáceo Journal, Aug. 3, It)l2.

FINANCIAL

CONTROL

295

60 per cent of the common stock. These parties were J . B. Duke, A. N. Brady, O. H. Payne, P. A. B. Widener, Thomas F . Ryan, B. N. Duke, G. B. Schley, Moore and Schley (acting chiefly as agents for clients), and the estates of W. C. Whitney and W. L . Elkins. At the present time at least 8 out of 10 of the original largest stockholders or their families retain large holdings in the disintegrated companies, their aggregate stock ownership in the Big Four and three large snuff companies amounting to nearly 300,000 shares. Out of 82 holders of stock in two or more of the successor companies, 7 hold stock in each of the Big Four manufacturing companies and three snuff companies. One holds stock in all of the seven companies except George W. Helme Co., another in all but R. J . Reynolds Co., and three in all but the American Tobacco Co. Three have stock in each of the Big Four and at least one snuff company. Three have holdings in three of the Big Four and two of the snuff companies. Twelve parties own stock in each of the Big Four. Five have stock in each of the Big Four except R. J. Reynolds Co. Twenty-three are stockholders in all three of the snuff companies. There are 18 who hold stock in each of two of the snuff companies, and 27 are holders in only two of the Big Four. 2 The second statement by the commission is a single paragraph in The American Tobacco Co. and the Imperial Tobacco Co.: It will be noted that the two companies have no common officers or directors. The records of the American and Imperial companies show that the companies are not under the same control or management. When the American Tobacco Co. was dissolved in 1911 about 5 per cent of the stock of the Imperial Tobacco Co. was held in the treasury of the American company. This was later distributed to stockholders of the American com2 Federal Trade Commission, Report on the Tobacco Industry, pp. 55-56. The author is unable to account for the discrepancy between the number of stockholders given as 82 and the total of the itemized list, which is 103.

296

COMPETITION

IN

THE

TOBACCO

INDUSTRY

pany as a stock dividend. The list of the American shareholders of the Imperial Tobacco Co., which is on file with the Treasury Department, was compared with a list of the important stockholders of the American Tobacco Co., and while showing two or three common stockholders of consequence it is not sufficient to indicate control. In this connection it may be stated that the number of American shareholders in the Imperial company totals 1,245, only five of which own more than 100,000 shares (ordinary stock) in the Imperial company* These quotations indicate that the process of

splitting

apart the companies by breaking up the interlocking stockholdings started immediately a f t e r the partition and had made some progress by 1920 but w a s by no means complete. Because of the character o f the evidence that is to be had, a becoming modesty is a necessary qualification of any conclusions which may

be reached concerning

during the last decade.

developments

W i t h the understanding, then, that

statements presented are necessarily only such judgments as can be made f r o m the outside and with absolutely no access to company records, the f o l l o w i n g comments are offered for what they may be worth. In the first place, the handful of " strong men "

who

dominated the " trust " , taking an active part in its management, are now dead, and they have left no heirs to take their places either in the active management of the companies' day-to-day operations or on their boards of directors.

We

shall return shortly to the question as to whether their large holdings of tobacco company securities have been held intact, so that the heirs must still be considered the dominant forces even though they do not seek places on the company boards ; just as the dominant figures themselves exerted considerable influence a f t e r the partition even though they all 3 Federal T r a d e Commission, Imperiai Tobacco Co., p. 33.

The

American

Tobacco

Co.

and

the

FINANCIAL

CONTROL

297

withdrew into the background, excepting James B. Duke, who became for some years the active head of the BritishAmerican Tobacco Co. Most of them died within a few years after the dissolution. Only two have been very active in the affairs of the tobacco companies within the last ten years, James B. Duke, who died in 1925, and Thomas Fortune Ryan, who died in 1928. Duke seems to have severed completely his connection with the American Tobacco Co. shortly after the disintegration, transferring his tobacco interests to other successor companies, notably the British-American Company ; but, according to George J . Whelan, he began to buy the company's stock on a large scale again about 1919.* Within a short time, Duke, Whelan and Ryan, who continued to be a large stockholder in the various corporations and especially in American Tobacco, began to work together, as may be seen by reference to They Told Barron. For example, late in 1920 Whelan told Barron, " Thomas F. Ryan, James B. Duke and I have together bought about $9,900,000 worth of American Tobacco. Duke and I have been buying Tobacco Products all the way down and have a load of it." 5 Subsequently, Jesse Livermore, the widely known stock market operator, added the information that " Duke, Ryan and Whelan had a little speculative company which handled their stocks and took hold of outside stocks only to help their own." β * United Slates Tobacco Journal, They Told Barron, p. 19. 5 6

Nov. 23, 1912, p. 5 ; Pound and Moore,

Pound and Moore, op. cit., p. 41.

Ibid., p. 48. This comment may have referred to the American Tobacco Securities Corp. What securities this company held and who were its stockholders has not been revealed ; but Whelan said Duke was the principal owner. On June 9, 1920, the New Y o r k Stock Exchange received a committee report recommending that $25,160,300 common stock of the American Tobacco Co. be restored to the list, this amount previously

298

COMPETITION

IN THE

TOBACCO

INDUSTRY

The three financiers apparently worked together also in the post-war expansion of the United Cigar Stores Co. which is reviewed in the appendix. Thus it seems fair to assume that the American Tobacco Co., the Tobacco Products Corp. and the United Cigar Stores Co. were connected by a very substantial community of interest. In 1922 the trade saw the influence of Duke in the naming of James M. Dixon as president of the Tobacco Products Corp.7 In 1923 the United, States Tobacco Journal made the statement that Whelan, Duke and Ryan among them held about 200,000 of the 450,000 class A shares of Tobacco Products Corp. stock.8 Even in 1927, after Duke had died, Ryan continued to cooperate with Whelan, who announced that the veteran financier was his " financial adviser " in the Union Tobacco Co.9 It is, perhaps, significant that the collapse of the Whelan structure came shortly after Ryan's death. Add to these circumstances the lease of the Tobacco Products Corp. brands to the American Tobacco Co. and the subsequent subleasing of part of them to the Union Tobacco Co., and the evidence of a close community of interest becomes irresistible. To what extent the operations of these three individuals removed from the list as owned by the American Tobacco Securities Corp. having been restored to the open market when the holding company was dissolved, ostensibly to enable the stockholders to receive directly a 75 per cent stock dividend declared by the American Tobacco Co. in 1920. No statement was made as to why it was desirable for the dividend to be received by the shareholders directly. This block of shares represented 27.1 per cent of the voting stock outstanding at the time. Pound and Moore, op. cit., p. 19; listing statement of the American Tobacco Co., New York Stock Exchange, June 2, 1920. 7

United States Tobacco Journal,

June 3, 1922, p. 3.

8

Ibid., April 2>i, 1923, p. 3. This holding would have given them about' i2l/¡ per cent of the voting power, even though they owned none of the common or preferred, both of which also had voting power. 8

United States Tobacco Journal,

Aug. 6, 1927, p. 3.

FINANCIAL

CONTROL

299

represented efforts to control the managements of the various companies and to what extent they represented merely stock speculations and manipulations, it is impossible to say. A s in the instance of Whelan himself, it is impossible to avoid the conclusion after reading the comments in They Told Barron that the second type of activity was of very great importance in their own minds. It is also true that Duke and Ryan each had very widely diversified interests by this time so that they could not take as direct an interest in the management of the companies as in the days of the " trust ". Nevertheless, it is doubtless true that they were in a position to map out broad policies for the companies if they so desired. It is probably an indication of this influence that some individuals passed from company to company in the group. Thomas B. Yuille, who has already been mentioned as going from the American Tobacco Co. to the Universal Leaf Corp. to the Tobacco Products Corp. and back to the Universal Leaf Corp., is an example. 10 Even more interesting is the instance of Jesse R. Taylor, who passed from the presidency of the Illinois subsidiary of the United Cigar Stores Co. to a vice presidency of the parent company, subsequently becoming in succession acting president of the United Cigar Stores Co., treasurer of the American Tobacco Co., chairman of J . W i x & Sons, the British subsidiary acquired by the American Tobacco Co., and president of the Union Tobacco Co., a position he still holds. 11 The relations of these companies and the other successor companies are hidden in the shadows of an even deeper secrecy. In 1921 a " large block of stock " in the Reynolds Company turned up in the treasury of the United Retail 10 11

Cf. ch. vii, § 2, supra.

Ibid., Aug. 15, 1914, p. 7 ; May 8, 1920, p. 3 ; Feb. 4, 1922, p. 6 ; April 6, 1929, p. 7.

300

COMPETITION

IN THE

TOBACCO

INDUSTRY

Stores Corp., one of the many Whelan companies." Since this was non-voting Β stock, it could have no direct voice in the management; but it was large enough to give its holder some influence. What became of it after these facts became public has not been announced. Despite its presence there is no reason to doubt the belief generally held in the industry that the Reynolds Company was the most independent of the successor companies from the beginning of the post-partition era, since all outward indications are that the small proportion of voting stock is closely held by members of the Reynolds family, their associates and employees. Whelan told Barron in 1919, " R. J . Reynolds is the only tobacco company that is not with me or the Ryan or Duke interests. Ryan was the largest owner of American Tobacco. He had $40,000,000 in it at market prices." , s A year later Louis K . Liggett, founder of the drug-store chain bearing his name, told Barron, " Ryan is in control of the Lorillard Co. and Lorillard owns 55 per cent of the Schulte stores." " The close relations between the Schulte and United chains are described in the appendix. We have also seen that for some years the American Tobacco Co. held a substantial interest in the holding company organized to take control of the Conley Foil Co. 1 5 The Porto Rican-American Tobacco Co. and the United Cigar Stores Co. also seem to have been at least friendly for several years, and in 1923 plans were made public whereby a large interlocking interest in the two corporations would be established, plans which were significant although never consummated.16 Early in 1927 the Liggett and Myers Co. 12

Cf. appendix.

13

Pound and Moore, op. cit., p. 220.

14

Ibid., p. 223.

15

Cf. ch. ν, § 6, supra.

1β

Cf. appendix.

FINANCIAL

CONTROL

301

formed the Liggett and Myers Tobacco Company (China), Ltd., to conduct its sales operations in the Orient. Later that year it was announced that the British-American T o bacco Co. had acquired an interest in this company and would in the future conduct operations in Liggett and Myers brands in the Far East. Control of the Liggett and Myers Canadian subsidiary also was passed to the British-American Co. through its subsidiary, the Imperial Tobacco Co. of Canada. 17 Another community of interest between the British-American Co. and an American successor company lies in the fact that the Morrow interests, who were in control of the United Cigar Stores Co. until its recent bankruptcy, also own a large minority interest in the Imperial Tobacco Co. of Canada. 18 It is thus evident that rather strong connecting links between several of the successor companies persisted for at least ten and possibly for fifteen years after the partition. Just what significance should be attached to these connections or how far-reaching their influence was in affecting 17

United States Tobacco Journal, Feb. 26, 1927, p. 3 ; July 23, 1927, p. 5.

See the appendix f o r further details and United States Tobacco Journal, A u g . 31, 1929, p. ix. Although there has been no approach to monopoly by anyone in the cigar industry, it should be mentioned that at one time the Consolidated C i g a r Corp. was reported to be slated f o r absorption by the United Cigar-Schulte interests, the New York Times saying (July 13, 1927) that " a tentative agreement is understood to have been reached, and the deal will be formally closed as soon as the approval of the Federal Trade Commission is obtained." Either the commission failed to approve or something else interfered, as the plan was never consummated. It is not unlikely that the " approval " of the commission referred to concerned its action on a complaint which had been issued on A p r i l s, 1927, charging the Consolidated Corp. with violation of Section 7 of the Clayton A c t through its purchase of the " 44 " and G . H . P . companies. Eventually the complaint was dismissed; but by that time the United Cigar group was in no position to effect a merger with anyone. Federal Trade Commission, In the Matter of Consolidated Cigar Corporation, Docket No. 1451, April 5, 1927, and Annual Report, 1930, p. 177. 18

302

COMPETITION

IN THE TOBACCO

INDUSTRY

company policies, it is hard to say from the outside. In any event, most of them are now a matter of past history. T h e more important links were personal connections through R y a n , Duke and Whelan. With the deaths of Duke and R y a n and the removal f r o m active participation in the industry of Whelan, they seem to have been broken. The reorganization and bankruptcy of the United Cigar Stores Co. have severed it even more completely f r o m the other units in the American industry. The Schulte interests apparently have withdrawn f r o m any close relations with the United Cigar Interests. The Porto Rican-American Tobacco Co., if recent changes in officers have any significance, has come under the dominance of that part of its holdings which was bought after the partition and besides has no reason to look with friendly eyes upon the old " trust " and its successors, particularly the American Tobacco Co. The American Tobacco Co. saw fit in 1 9 3 1 to discipline the United Cigar Stores Co. by striking it off its list of direct customers in a tiff over policies, thus indicating a rupture of the former friendly relations. 19 The American Tobacco Co. holdings in the Conley Foil properties have been passed to another corporation which gives no indication of being under the tobacco company's control. § 2 . Time also has broken down such ties of friendship between the companies as grew out of the predominance among the company officials of those who had been included among the twenty-nine individual defendants. A t the time of the disintegration such of the defendants as continued active in the industry were distributed among the various companies as their executives. F o u r of the major companies, the American Tobacco Co., the Liggett and Myers Co., the Lorillard Co. and the British-American Co., had as their chief officer in each instance one of these defendants. 19

United States Tobacco Journal,

Jan. 31, 1931, p. 6.

FINANCIAL

CONTROL

303

Twenty years having taken their toll, there are very few of these defendants left, nearly all of them being dead. Of the thirteen successor companies still in existence, only the American Snuff Co. and the J. S. Young Co. have as their executive heads today the individuals named to the posts at the partition. None of them has at its head today one of the individual defendants, and only one, the American Tobacco Co., has at its head the heir of one of these defendants. Even before the deaths or retirements of the older executives, the ties of personal friendship which might have been expected to preserve cordial relations between the companies were, as we have seen,20 being subjected to considerable strain by the bitterness of the competition between the companies. The younger men who have succeeded to the places of those now dead or retired, in most instances had experience under the " trust " as young men ; but their strongest ties are with their own successor companies. § 3. There have been no interlocking directors or officers.21 Only one change in the composition of a board of directors has been of the sweeping character to be expected when control changes hands suddenly and completely. That was in the instance of the reorganization of the United Cigar interests. The displacement of James B. Duke as chairman of the British-American Co. a decade ago, despite Duke's attempt to make it seem that he had retired voluntarily, must be considered a consequence of the shift of control from American to British hands, the American interest having fallen from an original two-thirds to less than one-fourth by as early as 1915.22 The retirement of 20

Ch. ix, § 5, supra. Although the decree's injunction against interlocking directors expired long ago, having been operative for only five years, the Clayton Act might have operated to prevent their appearance. 21

23 Fitzgerald, Patrick, Industrial Combination in England (London, 1927), pp. 145-146. The American interest is still smaller today.

•J04

COMPETITION

IN THE

TOBACCO

INDUSTRY

Luis Toro as president of the Porto Rican-American Co. may mean a shift of control to the Congress Cigar and Waitt and Bond interests absorbed during the boom or to new interests in the company, since it was accompanied by the election of several new directors ; but time alone will tell. The replacement of Thomas J. Maloney by B. L. Belt as president of the Lorillard Co. in 1924 requires no upheaval in control as an explanation, since it was inevitable that directors and stockholders should find grounds for dissatisfaction in the progress of the company." § 4. An interesting feature of the present constitution of the various boards of directors is the fact that in many instances they are dominated by officers active in the business. A majority of the boards of the American Snuff Co., the American Tobacco Co., the Liggett and Myers Co., the Mac Andrews & Forbes Co., the Reynolds Co., the United States Tobacco Co., and the J. S. Young Co., as constituted at the end of 1930, is in each instance made up of officers and employees of the company. The United Cigar Stores Co. and the Porto Rican-American Co. have majorities other than officers and employees. As to the Johnston, Helme and Lorillard companies, it is impossible to tell from the manuals. The officers are not in a majority; but there is no information as to whether the other board members are employees or not. While the predominance of the officers on the boards of seven of these companies is of interest, it is not conclusive proof that the management in each instance controls the company. It is necessary to know where the majority of the stock is held, and this information is not available to the outsider. It would be possible to compile from probate records a list of tobacco holdings left by various prominent 23

P· 4·

United States

Tobacco Journal,

March 15, 1924, p. 6; Oct. 10, 1925,

FINANCIAL

CONTROL

305

individuals at their deaths; but such a compilation would mean little for a number of reasons. In the first place, the data would be scattered at irregular intervals over a long period of time and so would give no cross section of the situation at any particular time. In the second place, there would be no figures available to show what changes had taken place in their holdings prior to death. In the third place, there would be no record of g i f t s of tobacco securities presented to heirs before death. In the fourth place, there would be no record of what the heirs or executors had done with the securities since receiving title to them, a vital point. 24 A b o u t all that would result f r o m such a compilation would be a table showing that various individuals have at various times held substantial but far f r o m controlling blocks of stock in various tobacco companies. T h e number of stockholders of at least the more important successor companies has increased sharply during the years. There is no doubt this has happened, although exact figures are again not to be had. This trend is in keeping with the trend of stock ownership for corporations in general. 25 This would indicate that the legal control of the companies has been diluted over the years, thus strengthening the position of the management. It is necessary to remember, however, that the stock outstanding has also increased greatly and that there is no information available on which to base a judgment as to the extent to which the diffusion of ownership has been confined to non-voting stocks. In the instance of the Reynolds Company, voting stock has not been diffused. In any event, it is difficult to tell how much emphasis should be placed on stock ownership as the center of control 2 4 V e r y few heirs of the dominant figures in the " t r u s t " have died, thus affording an opportunity to measure changes in family holdings over a period of years. 25 Cf. Means, Gardiner G , " T h e Diffusion of Stock Ownership in the United States," Quarterly Journal of Economics, Aug., 1930, pp. 561 et seq.

306

COMPETITION

nowadays.

IN

THE

TOBACCO

INDUSTRY

Gardiner C . Means, in a study of one of the

important present-day trends in

finance,

summarizes

the

prevailing tendency in A m e r i c a n business toward separating control f r o m ownership : It is apparent that, with the increasing dispersion of stock ownership in the largest American corporations, a new condition has developed with regard to their control. No longer are the individuals in control of most of these companies, the dominant owners. Rather, there are no dominant owners, and control is maintained in large measure separate from ownership. . . . The corporate system is now bringing a change in the position of capital much as the factory system changed that of labor. A s the factory system divorced control from labor, so the corporate system is divorcing control from ownership. T h e one brought the labor of a multitude of workers under a single control, the other is bringing the wealth of countless owners under the same unified control. 26 M e a n s cites a number of w a y s in which control may be held without m a j o r i t y ownership, a m o n g them being control of the p r o x y machinery, various legal devices which centralize voting

rights,

ownership

of

a

sizeable

well-organized

minority interest and a mere strategic position astride the management.

A s regards the A m e r i c a n Tobacco Co., the

L i g g e t t and M y e r s C o . and the Reynolds Co., he believes the m a j o r factor g i v i n g control without m a j o r i t y ownership to the management is a legal device, i.e., non-voting stock.

The

extreme smallness o f the stock issue in the Reynolds C o m pany which has the power to vote and the concentration o f this stock in a f e w hands, make this conclusion justifiable as to that company.

T h e other two, however, have very large

blocks of voting stock outstanding, and there is no evidence 2 9 Means, Gardiner C., " T h e Separation of Ownership and Control in American Industry," The Quarterly Journal of Economics, Nov., 1931, pp. 95-96.

FINANCIAL

CONTROL

307

that a majority of this stock is held by the controlling interests ; so that it seems fairer to conclude that these companies are controlled rather by virtue of a strategic position in the management, control of the proxy machinery and possibly a fairly large minority interest which is well organized. The Lorillard Company has no non-voting stock, and majority control seems to be widely distributed, so that these three factors probably account for the placing of its control also. In the United Stores Corp., control of the properties has been centralized partly by the legal devices of pyramiding through holding companies and the voting trust, partly by special voting provisions. § 5. In so far as this analysis is correct, then, it would seem that the hopes of the government for a gradual splitting apart of the companies are being fulfilled. The deaths and retirements of the leaders of the " trust " have opened the way to power for younger men whose friendships and loyalties date to the post-partition era alone. Furthermore, there seems to be a progressive diffusion of stock ownership under way, and even where large blocks of stocks have continued to be held they apparently have gone into the hands of individuals with widespread interests who have not tried to take an active part in the management of the companies. Finally, at least the more important successor companies seem to have been subject to the general tendency of the corporate system toward separation of ownership and control. In so far as this last tendency continues, it seems inevitable that each company shall settle under the control of separate and distinct groups as time goes on until the hopes of the government for virtually complete separation of the various companies is achieved. Whether this victory of the government has been of any real consequence remains to be seen. Other things equal, it tends to make somewhat more difficult effective collusion

3O8

COMPETITION

IN THE

TOBACCO

INDUSTRY

between the successor companies to fix prices, divide markets, control output or otherwise engage in monopolistic practices ; but our earlier analysis has shown that, even without definite agreements among the managements where the competitors are few, competition will tend to result, paradoxically, in conditions more nearly like what we should expect from monopoly than like the normal consequences of pure competition. Furthermore, this mere breaking apart of the companies does not necessarily assure the stockholders that they will receive a fair division of the profits One of the telling criticisms made against the " trust " was that through " adroit and frequent adjustments of the securities " the insiders were able to effect a " remarkable concentration " of the wealth accumulated.®7 While non-voting securities have been used freely since 1 9 1 1 to prevent diffusion of control as a concomitant of increases in capitalization, there has been no corresponding post-partition effort to concentrate the earnings of any company on a small block of stock through skillful use of preferred shares and bonds. Large incomes for the predominant officiais have been made possible, however, through the use of bonuses. These differ in detail, but in so far as the three largest companies are concerned are similar in principle, having been designed to give a more or less limited group of officials 1 0 per cent of the difference between current earnings and the earnings of the corresponding properties in 1 9 1 0 . § 6. Thus in the Liggett and Myers Co., profits for 1 9 1 0 are estimated at $4,552,748 and it is provided that six officers shall receive 1 0 per cent of the sum by which net profits in any year exceed that figure, in the ratio of 2)4 per cent to the president and 1 1 /¡ per cent to each of five vice presidents. In the American Tobacco Co. the basic figure taken is $ 1 1 , 27

Report of the Commissioner of Corporations on the Tobacco

pt. ii, p. iii.

Industry,

FINANCIAL

CONTROL

369,000, representing net profits and dividends on preferred stock for the corresponding properties in 1 9 1 0 , and it is provided that 1 0 per cent of the excess of the company's earnings " as a manufacturer and seller of tobacco " over that figure, after allowances for preferred dividends, shall be divided between the president, who receives 2Λ/ι per cent, and five vice presidents, who between them receive y l /t per cent. The Reynolds plan takes 2 2 . 1 9 Ρ61" cent of the common stock, representing the percentage earned in 1 9 1 o, as the basis. Of the sum by which earnings in any year exceed 22.19 P® r cent on the common, 1 0 per cent is set aside as a bonus. Since the common has not been increased from the original figure of $10,000,000, this means in effect that the bonus is 1 0 per cent of the sum by which net profits in any year exceed $2,219,000. It is divided among officers and employees of the company in proportion to their holdings of common stock, the bulk doubtless going to the higher officers. In this bylaw lies one explanation of the fact that all stock issues of the company since the dissolution have been either preferred or class B., neither of which entitled its owners, if they are employees, to share in the bonus. The by-law should also operate to bring the voting stock into the hands of the company's personnel, since it is obvious that because of the extra income it brings them this stock will have a higher value to them than to an outsider." In only one instance have the payments made to officers under these bonus plans been made public. Litigation over the American Tobacco Co. plan has resulted in the announcement that for 1930 George W . Hill, president, received a 2S

United States Tobacco Journal, March l6, 1912, p. 5 ; The American Tobacco Company Employees' Stock Subscription Plan, 1931, issued by the company in March, 1931, summaries of which may be found in NewYork newspapers of March 13, 1931 ; Moody's Manual of Investments: Industrial Securities, 1931, p. 1996.

3 io

COMPETITION

IN

THE

TOBACCO

INDUSTRY

salary of $ 1 6 8 , 0 0 0 and a bonus of $ 8 4 2 , 5 0 7 , or a total o f $1,010,507. F o r 1 9 3 1 , he received a salary of $ 1 6 8 , 0 0 0 and a partial payment of $ 8 5 0 , 0 0 0 on his bonus, the exact amount due him to be determined a f t e r the accounts f o r the year were closed. T h e f o u r vice presidents received as partial payments on their bonuses f o r 1 9 3 1 : Charles F . Ncilcy and Vincent R i g g i o , $ 4 1 8 , 2 5 0 each ; Charles A . Penn, $ 3 5 0 , 0 0 0 ; A r t h u r C. M o w r e r , $ 2 5 0 , 0 0 0 , the shares of the last two named being smaller than the others because they served only a part of the y e a r . " A s to the other companies, it is impossible to calculate f r o m figures made public the exact return under these plans either to individuals or to the officers and employees as a group ; but rough approximations are possible. Since net income is reported in the annual statements a f t e r the bonus has been deducted and so is somewhat smaller than the actual figure on which the bonus is calculated, the approximations here given probably underestimate rather than overestimate the bonus actually paid. I f the L i g g e t t and M y e r s Company's " net profits " be taken as the income available f o r common shares and $ 4 , 5 5 2 , 7 4 8 be deducted as the estimated earnings in 1 9 1 0 , the sum in which officers share has varied f r o m a low of nothing to a high of $ 1 7 , 8 7 3 , 5 8 0 in 1 9 3 0 . T h e officers' part of this would be $ 1 , 7 8 7 , 2 5 8 in 1 9 3 0 , divided in the following proportions: president, $ 4 4 6 , 8 3 9 ; each vice president, $ 2 6 8 , 1 0 3 . Since the Reynolds Company has only common stocks, the net earnings available f o r dividends are the same as the earnings listed in T a b l e 29, except f o r a f e w years during the w a r period when preferred stock w a s issued. Subtraction o f $ 2 , 2 1 9 , 0 0 0 leaves a figure ranging f r o m a low of $ 6 8 0 , 9 6 7 in 1 9 1 2 to a high of $ 3 2 , 0 3 7 , 6 6 5 in 1 9 3 0 , and makes the aggregate bonus range between $ 6 8 , 0 9 6 and $ 3 , 2 0 3 , 7 6 6 . 29 Λ 'civ York Times, April 6, 1932. One of the five vice-presidencies of the company was vacant throughout the year.

FINANCIAL

CONTROL

311

The distribution of this bonus cannot be determined because it is based on stock ownership, which is not made public. These calculations, while admittedly not exact, indicate that the return to a handful of officers in each company has been large, especially in recent years. These officers, it should be noted, while they have at various times included many of the individual defendants, have not at any time included any of the six individuals who dominated the " trust " and profited most from its concentration of profits on a small base of securities. The Lorillard Company's bonus plan has not been so lucrative to the management, and efforts to change this situation were defeated by suits on the part of minority stockholders. This company's bonus law provides that 1 5 per cent of the sum remaining after deduction of $ 1 . 5 0 per share of common 30 and 7 per cent of the surplus from the year's net profits shall be distributed among officers and employees in proportion to ownership of common stock, with the limitation that such ownership shall not exceed 3^2 per cent by the president, 2 per cent by a vice president, 1 per cent by certain other officers and heads of departments, and of 1 per cent by the other officers and employees of the average common stock outstanding. Since no bonus had been paid under this plan in several years, the management proposed in 1 9 3 1 that the by-law be changed so as to eliminate the deduction of $ 1 . 5 0 per share of common and 7 per cent of surplus, make the bonus 5 instead of 1 5 per cent of the net profits and raise the limitations on stock ownership to 7^2, 5, 2 τ / 2 and ι per cent, respectively, for the various classes of officers and employees. 31 Minority stockholders opposed the change 80 Changed from 7 per cent of the common when this stock was changed to shares without par value. 31 Letter from B. L. Belt, president of the P. Lorillard Co., to stockholders, April ι, 1931. Published as an advertisement in the New York Times, April 6, 1931.

312

COMPETITION

IN THE

TOBACCO

INDUSTRY

and were successful in litigation against it, the New Jersey Court of Errors and Appeals having sustained a lower court which issued an injunction restraining a vote by the stockholders on the proposed amendment." After losing this suit, the management of the company announced its abandonment of efforts to have the proposal approved, holding the change " not vital to the company § 7. In addition to the profits accruing to them through the operation of these bonus laws, the officers and employees have profited to some extent from opportunities to buy company shares at favorable prices. In the instance of the American Tobacco Co. this has been particularly important." In July, 1930, the company's stockholders by an overwhelming vote approved a plan whereby the unissued common stock B, approximately 312,000 shares, should become available for sale to officers and employees at not less than par, i. e., $25 a share. At the beginning of 1931, the directors decided to allot approximately one-sixth of the total immediately and consequently set aside and offered to the employees 56,712 shares at par. In all, 535 employees, ranging in rank from president to sub-assistants in factory departments, were brought under the plan, the amount allotted to each being determined according to a double rating. The maximum for each employee was fixed at the number of shares whose aggregate par value was equal to one-third of his annual rate of compensation in 1930. Each department head then rated the participating employees in his department at anything from 100 per cent down, according to their presumed value to the company; and this rating determined the exact allot82 83

New York Times, Dec. 4, 1931.

New York Times, Dec. 12, 1931. 34 For details of the American Tobacco Co. plan see The American Tobacco Company Employees' Stock Subscription Plan, 1931, on which the description here given is based.

FINANCIAL

CONTROL

3!3

ment. F o r the president and vice presidents, the annual compensation calculated included the bonus already discussed. Thanks to this fact, the allotment worked out so that the president alone received 13,440 out of 56,712 shares, or 21.9 per cent of the total, and the five vice presidents received 16,685, making 30,125 shares, or 53.1 per cent of the total, which went to six men. Allotments for individual employees other than the six major executives ranged from 10 to 980 shares and averaged about 50 shares per man. A s the market value of the shares thus sold for $25 was then above $125, the offer meant a g i f t of approximately $100 a share tc each employee concerned, or about $5,671,200 on the shares actually allotted. For the president alone this meant about $1,344,000. The total g i f t voted by the stockholders was more than $30,000,000, i. e., $100 on each of 312,000 shares. T h i s generosity has to some extent been defeated, since it was provided that none of the shares should be delivered until the end of 1931 and on January 2, 1932, the market value had fallen to about $70 a share. T h e paper value of the g i f t to employees was thus reduced to approximately $45 a share instead of $100. In view of the fact, however, that the investment of $25 brought in dividends of $6, or 24 per cent, in 1931 and gives every indication of doing better in the future, no one who has received the stock subscription privilege has any real ground for complaint, least of all the six major executives who received more than half of their stockholders' largess. Some minority opposition to this plan developed and resulted in a suit for a permit to inspect the company's books so as to find out what officers and employees received the right to buy shares under the plan and for an injunction to prevent distribution of the shares allotted. T h e court granted a temporary injunction against further distribution of shares or payment of the bonus pending trial and ordered the com-

314

COMPETITION

IN THE TOBACCO

INDUSTRY

pany to permit the inspection of its books; but the second part of this order meant little, since the elaborate description of the plan already cited was made public by the management immediately." One is inclined to agree with the contention of the minority that a plan which was designed to put $30,000,000 in the hands of employees as a gift, with more than half of that g i f t going to six officers, is, to say the least, exceedingly generous ; but the success of the company seemingly put the stockholders as a whole in a happy frame of mind, so that the management's policies were endorsed by a majority verging on unanimity at the annual meeting in April, 1 9 3 1 . " The other stock-subscription plan which deserves mention, that of the Lorillard Company, was rendered at least temporarily ineffective by the persistent decline in stocks, the reduction of the company's income for several years and the opposition of stockholders to any change in the plan." Stockholders in 1925 authorized the directors to sell not more than 100,000 shares of common stock to employees at not less than $ 3 0 a share. Some shares were sold under this plan, the exact number not being announced. In 1929, the stockholders authorized the directors to sell an additional 150,000 shares at not less than $20 a share. Market prices of the shares have been so low as to prevent any sales under this plan. In 1 9 3 1 the management proposed that the minimum price under both plans be reduced to $ 1 0 . This proposal suffered the same fate as the attempt to change the company's bonus-by-law. Attacked by the same minority stockholders in the same suit, it was prevented from coming « New York Sun, Feb. 20, 1931 and March 13, 1931 ; New York Times, Feb. 20, 1931, March 13, 1931 and April 6, 1932. " New York Times, April 2, 1931. 57 For details of the Lorillard plan and the results of litigation against it, see the letter from B. L. Belt to stockholders referred to above and New York Times, Dec. 4, 1931 ; Dec. 12, 1931.

FINANCIAL

CONTROL

315

to a vote of the stockholders by court injunction and w a s abandoned by the management in December, 1 9 3 1 . § 8.

W h i l e it is evident f r o m this summary that the

decree did not destroy the opportunity of a f e w dominant figures

to reap large personal incomes, there has not been

any concentration of earnings in a f e w hands comparable to that under the " trust " , since there has been no repetition o f the justly condemned manipulation of securities, and by f a r the larger part of the income of the companies has gone to common stockholders as either dividends or increases in their

equity.

Furthermore,

the

individuals

who

have

profited largely are different f o r each company and are neither the same people w h o were the " insiders " f r o m 1904 to 1 9 1 1 nor the heirs of those " insiders " .

Nevertheless, a

serious problem is raised by the large incomes paid to these officers.

W h e r e ownership is divorced f r o m effective con-

trol, as seems to be true in these companies, w h a t limits the amount of salary and bonus to be paid the officers?

Agita-

tion and litigation by energetic minorities are inadequate protection against abuses under these circumstances.

T h e prob-

lem lies very largely beyond the scope of the present s t u d y ; but it is one that should be raised because of its importance in finance generally, where separation of ownership control has developed rapidly in recent years.

from

It m a y well

be that opportunities for unfair treatment of " outsiders " by " insiders " are here offered which are fully as important as the evils o f security manipulation which characterized the old " trust

CHAPTER

XIII

CONCLUSIONS § 1 . In passing judgment upon the decree which broke up the American Tobacco Co. in 1 9 1 1 it is necessary to answer some half-dozen questions. First, has competition between the various producing units been restored to the tobacco industry? Since the restoration of competition was the primary purpose of the decree, a negative answer to this question would be equivalent to saying that it has failed utterly. Second, if competition has been restored, what forms has it taken? Third, who has benefited from it? Fourth, are there any limitations upon it? F i f t h , in the light of twenty years' experience, is it possible to say that any alternative plan would have been more in the public interest than the one adopted by the court ? Sixth, were the financial abuses which resulted in unfair concentration of the earnings of the " trust" to the detriment o f the majority of the stockholders stopped by the decree, or have they persisted under the new regime ? A s to the first question, year-to-year variations in the absolute and relative output of the various successor companies testify to the existence of some degree of competition. This is true particularly in the manufacture of cigarettes, where the " big four " have been energetic in endeavoring to attract to their respective brands as many as possible of the rapidly increasing number of tobacco consumers in the United States, the majority of whom have adopted the cigarette as their favorite f o r m of tobacco. T h e changes in relative importance of these companies have been closely correlated 316

317

CONCLUSIONS

with the promptness and aggressiveness with which they have adjusted themselves to sweeping changes in consumers' tastes, and especially to the shift of favor from other products to cigarettes, the displacement of " Turkish " by " blended " cigarettes and the rapid spread of smoking among women. § 2.

A s to the second question, while price competition

has not been completely lacking, the strongest efforts of the companies have taken other forms.

This is an exceptionally

important conclusion because it upsets the conventional assumption that competition always means competition in price. Those who argue f o r rigorous enforcement of the anti-trust laws, for example, assume that business men can be forced to compete by law, that if they are forced to compete they will automatically compete in price and that the results will be higher prices f o r those from whom they buy raw materials, supplies and equipment and lower prices for those to whom they sell their products.

The experience of the tobacco in-

dustry belies this assumption by showing that even when competition is strong enough to affect the fortunes of the individual manufacturers materially; it may restrict itself to non-price forms.

These forms are quite numerous; but

they have one characteristic in common in that they are aimed at increasing the volume exchanged not by reducing the price for a given product but by inducing consumers to take more of the product at a given price.

In terms of the conventional

demand and supply curve analysis, the companies endeavor to increase their sales not by lowering the price but by changing the shape or the position of the demand curve or both.

The

most efficacious implement for accomplishing this result is publicity, the most important variety of which in the tobacco industry is advertising. § 3.

In view of these considerations, those who would

justify the operation of the anti-trust laws in this instance are forced to prove that non-price competition is as much in

3I8

COMPETITION

IS

THE

TOBACCO

INDUSTRY

the public interest as is price competition. This leads to the third question : W h o has benefited f r o m this non-price competition, other than those who reap a direct gain, such as advertising agencies and the various advertising media ? Whether the producers of raw materials used in the manufacture of tobacco products, (the most important of whom are the tobacco f a r m e r s ) , have benefited depends upon whether non-price competition is to be considered responsible f o r the growth of tobacco consumption during the last two decades. If this growth is the result of social forces and the only effect of non-price competition has been to exploit these forces for the benefit of particular brands, the producers of raw materials have gained nothing f r o m this competition. On the other hand, if this growth is the result of non-price competition, and particularly of advertising, as most of the manufacturers will maintain, then the farmers have benefited f r o m it because it has enlarged the market f o r their product. Unfortunately there are no data on which to base a conclusion as to which of these forces is responsible f o r the growth of tobacco consumption, so that a definite answer to the question whether the farmer has benefited f r o m non-price competition is not possible. Stockholders and officers of the companies apparently have benefited f r o m the adoption of this kind of competition, provided, of course, that they have been successful in it. In the first place, whether or not advertising can create demand f o r tobacco as such, it has repeatedly proved its ability to increase the sales of individual brands, so that stockholders of individual companies may reasonably attribute increases in their volume of sales to this form of competition. In the second place, it is probable that in the tobacco industry nonprice competition is a cheaper method of achieving a given volume than is price competition. If it were not cheaper, the managements presumably would have found it more

CONCLUSIONS

319

profitable to fall back upon price competition. This motive is powerfully reinforced by the fear that price competition, if it is started, will become cutthroat. As to consumers, it is difficult to see that they have gained anything from this substitution of non-price for price competition. If advertising is responsible for the spread of smoking and the use of tobacco is to be commended, non-price competition can be given the credit for improving the standard of living of many millions of consumers; but both propositions are of doubtful validity. It seems more reasonable to conclude that the principal effect of advertising upon consumers has been to make them willing to pay a higher price than they would have to pay if they steeled themselves against its wiles. § 4. As to the fourth question, evidence that competition has been somewhat limited may be found in the records of the companies' earnings during the post-partition era. Whether these earnings are as high as they would have been had the industry continued under the control of a monopoly, it is impossible to say. There is reason to believe, however, that the return on their investment earned by these companies and particularly by the " big four ", has been higher on the average than we should expect under free competition. This is true whether competition be thought of as expressing itself in price or as confining itself to non-price forms; for in either event under free competition we should expect the price cuts or competitive expenditures to be carried to the point where further changes would result in a return on capital smaller than would be received by investment elsewhere. Each manufacturer would be forced to proceed to this point by the fear that failure to do so would make him lose business to competing manufacturers or to newcomers attracted by the high profit level. The failure of the companies to show this fear forces the conclusion that there are

320

COMPETITION

IN THE

TOBACCO

INDUSTRY

limitations on the competition between the companies already active in the industry and that a barrier stands in the way of those who would enter the industry to take advantage of this situation. The barrier in the way of newcomers who would enter the tobacco industry is a double one. In the first place, a tobacco manufacturer needs a large amount of capital. The most economical size for an enterprise in this industry is very large, partly because the advantages which arise out of production in a large factory are great, partly because advertising can be conducted most efficiently on a very large scale. Evidence of this fact may be found in the circumstance that the large companies have been increasing their aggregate output at the expense of the small ones for a great many years. Since the capital required is large, the small business man is automatically excluded. On the other hand, those who have the necessary capital would hesitate to invest in such an enterprise because it would be extremely speculative. In the second place, even if a would-be newcomer to the industry were both willing and able to raise the necessary capital, he would be held back by the possibility that his entry into the industry would itself destroy the exceptional profitability it now offers. This second check would not be very strong during periods of rapid growth, which have characterized most of the years since the partition of the " trust ", but would be effective in an industry which was standing still or actually declining. Entirely different obstacles stand in the way of free competition among the manufacturers already in the industry. Here the difficulty is that the competitors are not numerous enough to permit each of them to assume his output to be so small when compared with the total output of the industry that his direct influence upon the unit price and upon the conduct of his competitors is negligible. Theoretical analy-

CONCLUSIONS

321

sis shows that at any given moment a situation in which producers are so few that each pays full attention to the probable effects of his policies upon the market and upon the policies of his competitors, tends to correspond in its prices to what would be expected under a monopoly. This result follows even though the various competitors are completely independent, as seems to be true in tobacco, where the years have broken down the interlocking control of all the companies by a compact group of stockholders which prevailed immediately after the partition. In practice it is partly offset by the fact that a producer's calculations will be altered if, when he shifts his attention from a given moment to a long period of time, he finds that the demand for his product is growing. This means that the only substantial protection the consumer has against being forced to pay a price closely approximating what would be charged by a monopoly is the rapid growth of the industry. Since it is inevitable that this shall eventually slow down or perhaps cease altogether, we are forced to conclude that there is every possibility that sooner or later even such competition in price as now exists will be stopped. It is probable, too, that non-price competition will be considerably reduced, since large manufacturers whose only chance of increasing their sales substantially would be in taking business away from a handful of other large manufacturers would soon realize the expensive futility of strongly competitive advertising and so would tend to restrict themselves to just enough advertising to prevent their sales from falling. Thereafter opportunities for strong competition would appear only in the event of further important shifts in the tastes of consumers. § 5. Would any alternative plan have produced better results? Attorneys for the independents urged that the " trust " be broken up into a great many more successor companies, partly because they doubted whether competition

322

COMPETITION

IS

THE

TOBACCO

ISDUSTRY

could be expected to grow up among a handful of companies with a substantial number of interlocking shareholders, but chiefly because they felt that the independent producers would have a better chance if they were t o compete against smaller competitors. It is undoubtedly true that if the court had broken the " trust " into more companies the chances for the independents to challenge them effectively would have been improved; but because of the advantages of large-scale production in this industry, such a situation could hardly have been permanent. If the successor companies were prevented f r o m merging, they would have had to hold their own by growing to large size through superior skill or see themselves overtaken and perhaps eliminated by independents not so restricted. In the end it is not at all unlikely that a situation very much like the present one would have appeared. The industry, in other words, seems to be one in which competition when working itself out in the survival of enterprises of the optimum size also works itself out in the survival of too few companies to permit the survival of free competition. T h e paradoxical result of competition is to kill competition. T h e cigar industry, long the stronghold of the small producer, may verify this analysis in the next few years now that the principal obstacle to production on a very large scale, the predominance of hand methods, has been destroyed by the invention of cigarmaking machines. Price competition in cigars has always been very keen, the use of non-price competition being limited by the small scale on which most of the factories operated. W i t h the appearance of machinery, the price advantage of the large manufacturer over the small one has become very great. T o some extent this advantage is offset by the fact that in order to sell enough cigars to warrant installation of the machine, the larger manufacturers must expand their advertising greatly; but the advantage is still great. It will be interesting to see whether

323

CONCLUSIONS

in the course o f time cigars, like cigarettes, are concentrated i n t o a f e w hands until the number o f m a n u f a c t u r e r s is t o o small to permit free competition to survive. A s a n o t h e r alternative policy, it might have been wiser t o m a i n t a i n the " trust " but either bring it under close g o v e r n mental supervision or convert it outright into a governmental monopoly.

T h o s e alternatives were beyond the power o f the

c o u r t t o provide and, since they would necessitate

wide

changes in the political and social organization o f the country, involve problems f a r beyond the scope o f this s t u d y ; but the question m a y well be raised whether a monopoly under g o v e r n m e n t supervision or a government-owned monopoly would not be preferable to a situation which produces m o s t o f the results o f monopoly without the outward machinery o f monopoly and which is much more difficult t o control.

As a

third alternative the government could have adopted a policy o f e n c o u r a g i n g monopoly prices and using its t a x i n g power to syphon the monopoly profits into the public treasury. A s s u m i n g that the widespread objection to direct g o v e r n m e n t participation in business were overcome, the dominant consideration in choosing between this and the preceding alternative would presumably be that o f determining which plan would produce the greater revenue.

I n any event, it is evi-

dent that in so f a r as the present situation produces results equivalent t o those produced by monopoly, the usual j u s t i f i cation f o r heavy t a x e s on tobacco, that these are l u x u r y products, is powerfully reinforced. § 6.

A s to the sixth question raised above, the old abuses

t h r o u g h manipulation o f securities have g o n e ; but a new danger has appeared in the separation o f ownership

from

control, partly through special voting provisions and other legal devices, but chiefly through the mere dispersion ownership.

of

W h i l e this development, which is by no means

peculiar to the tobacco industry, is not an unmixed evil, since

324

COMPETITION

IN THE

TOBACCO

INDUSTRY

it relieves the management from having to guide itself solely according to the interests of the stockholders and so permits the exercise of a broader social view, it is subject to serious abuse. Some of the dangers have been illustrated in the instance of the American Tobacco Co., where directors who are in control of the company chiefly because they hold a strategic position in the management, were able to induce the stockholders to present the employees with an opportunity to buy stocks worth some $37,800,000 for approximately $7,500,000 and to leave to the directors the task of determining how much each individual employee should be permitted to buy. A s events have worked themselves out, the bounteous generosity of the stockholders has been reduced, partly by a decline in the market value of the securities offered, partly by the self-restraint of the directors, who decided to distribute for the present only a part of the total, and partly by litigation instituted by a militant minority of the stockholders. The danger remains, however, and its implications are evident in the fact that the directors voted themselves more than half of the offering, each director carefully refraining from voting when his own share was up for determination. It is clear that when control and ownership become separated, as is happening not only in tobacco but in American business generally, opportunities for division of interest between management and owners and therefore for abuses appear. The court could not foresee this; but the fact remains that the value of its safeguards designed to protect the " outsider " from the machinations of the " insider " has been greatly reduced, if not destroyed.

APPENDIX T H E U N I T E D CIGAR STORES C O M P A N Y

EVEN before the formal separation of the Corporation of United Cigar Stores from the tobacco " trust " , rumors began to fly through the trade that it planned to become a manufacturer of tobacco products. 1 A t that time, as for many years afterward, the major executives of the company were George J. Whelan, president of the corporation, his brother, Charles A . Whelan, president of the operating subsidiary, and a handful of close associates, among whom may be mentioned Herbert S. Collins and Edward Wise. Early in 1912 it was announced that the surviving individual defendants in the government's suit against the " trust " had sold their holdings in United Cigar to the Whelans and their associates. In so doing they complied with the suggestion of Attorney General Wickersham, who had unsuccessfully urged the court to require this action,* and incidentally concentrated control back in the hands of the individuals originally responsible for the company. T w o of the most important of the individuals in the old American Tobacco Co., James B. Duke and Thomas Fortune Ryan, nevertheless continued to take an active part in its affairs. The Whelans speedily entered upon a policy of piling corporation on corporation to form an organization of bewildering complexity. Their first move, in 1912, concentrated most of the real estate under their control under a single corporation, which was owned by the United Cigar Stores Co., 1

United States Tobacco Journal, Nov. 4, 1911, p. 5.

2

Cf. ch. i, § 2, supra.

325

APPENDIX

subsidiary of the Corporation of United C i g a r Stores.* N e x t followed the organization of a new company, the United Cigar Stores Co. of America, which acquired the assets and assumed the liabilities of the Corporation of United Cigar Stores, stockholders of the latter company receiving $ 3 0 0 par value of new common for each $ 1 0 0 of the old and the privilege of buying $ 1 0 0 par of new preferred for each $ 2 0 0 of the old common held. The older company was then dissolved. 4 Late in the same year, persistent rumors of a new " cigarette trust " in the making with plans to consolidate nearly all the large cigarette independents, eventuated in the appearance of the Tobacco Products Corporation, with an authorized capitalization of $50,000,000, and its acquisition in rapid succession of a substantial part of the cigarette output not already under the control of the successor companies through its purchase of the Surbrug Co., M. Melachrino and Co., and the Booker Tobacco Co. and of a large interest in Stephano Bros. 5 T h e corporation's close connections with United Cigar were not emphasized at this time, the directors being a group of widely known financiers; but George J . Whelan was listed as a stockholder.® F o r some months no further acquisitions followed. United Cigar in the mean time was reaching out into new worlds, its managers having intimated that they were planning to establish a chain of stores in various parts of the British Empire. 7 Whelan and his associates also made their 3

United States

Tobacco

Journal,

April 20, 1912, p. 3 ; May 25, 1912,

p. 5-

* Poor's Manual of Industrials, 5

1930, p. 3061.

United States Tobacco Journal, Sept. 28, 1912, p. 3 ; Oct. 4, 1912, pp. 3, 27; Oct. 19, 1912, p. 3 ; Dec. 14, 1012, p. 3 ; Dec. 28, 1912, p. 3. 6

Ibid., Oct. 19, 1912, p. 3.

7

Ibid., Sept. 26, 1913, p. 3.

UNITED

CIGAR

STORES

COMPANY

327

first venture into the drug business about this time by acquiring control of the Riker-Hegeman Drug Co., which they later sold to the L. K . Liggett Co., and taking over five stores in a small New Jersey chain to be operated as the United Retail Chemists Co.* This move was followed by a decision to offer United coupons to manufacturers for sale with their products. To further this project another United subsidiary was formed, the United Profit Sharing Corp., which reported by the end of 1 9 1 4 that 4,000,000,000 coupons were in circulation, of which only about one-fourth had been distributed by United Cigar, and by the end of 1 9 1 5 that 100 manufacturers and merchants were using these coupons.* This policy concerning coupons was promptly imitated by the Schulte stores, which organized a similar company, the Mutual-Profit Coupon Corp., and opened an unusual " price war " in which each company endeavored to outdo the other by its generosity in redeeming the coupons. 10 Still another corporation, the United Window Advertising Co., undertook to lease display space in the chain's windows to manufacturers. The purpose of this corporation was, obviously, to take advantage of the advertising allowances granted by manufacturers ; but why a separate corporation should be formed for the purpose remains to be explained. 11 In any event, this much accomplished, George J . Whelan let it be known that he was retiring from business, his friends saying, according to the United States Tobacco Journal, that he intended to " interest himself in sociological work of broad importance." 12 In the meantime, Tobacco Products continued to expand 8 9

Ibid., Nov. 29, 1913, p. 1 2 ; Jan. 9, 191s, p. 3 ; Feb. 19, 1916, p. 3. Ibid., April 11, 1914, p. 3; Oct. io, 1914, p. 7 ; July 17, 1915, p. 5.

10

Ibid., Feb. 13, 1915, p. 6; April 17, 1915, p. 9; July 3, 1915, p. 26.

11

Ibid., Feb. 13, 1915, p. 3 ; ch. vili, §9, and ch. χ, §7, supra.

" March 27, 1915, p. 3.

328

APPENDIX

and seemingly to prosper. Acquisitions during 1 9 1 5 included the Standard Tobacco Co., of Fayetteville, Ν. Y . , and the Nestor Gianaclis Co., one of the few remaining important independent manufacturers of Turkish cigarettes. Early in that year George L. Storm, who had resigned from the General Cigar Co. to become vice-president of Tobacco Products, announced that the corporation had now broadened its manufacturing activities to include high-, mediumand low-grade Turkish cigarettes, Virginia cigarettes, little cigars and all types of smoking and chewing tobacco.1* Expansion continued into 1916, when the corporation acquired Schinasi Bros., another cigarette manufacturer, and organized a Canadian subsidiary. 14 About this time rumors began to circulate that James B. Duke had become heavily interested in the corporation. Whether they were true or not as to the particular time, it is certain that the most conspicuous figure in the " trust " , who had presumably withdrawn from the American tobacco industry to devote his time to management of the British-American Tobacco Co., became interested in George J . Whelan's stock-market operations and in Tobacco Products particularly at some time a few years after the disintegration. 15 Early in 1 9 1 7 Tobacco Products took one of the rare steps in its history designed to simplify rather than to complicate its structure by making itself sole selling agent for its wholly owned subsidiaries. 18 Prior to that time each company had sold its own products. About this time, too, the corporation acquired the Prudential Tobacco Co. a very obscure cigarette manufacturer which had sprung into prominence in 1 9 1 3 when Secretary of the Treasury McAdoo, 13

Ibid., Feb. 6, 1915, p. 20; Aug. 14, 1915, P- 6.

14

Ibid., March 4, 1916, p. 3 ; June 10, 1916, p. 3.

15

Pound and Moore, They Told Barron, passim. United States Tobacco Journal, Jatx 13, 1917, p. 9.

10

UNITED

CÍGAR STORES

COMPANY

329

responding to a Senate resolution, had reported the ten largest producers of each type of tobacco product and listed this company as one of the ten largest cigarette manufacturers." The company had remained obscure because its output ( 1 1 5 , 000,000 cigarettes in 1 9 1 2 ) had been sold almost exclusively in the neighborhood of its factory on the lower east side of New York City. Tobacco Products also now began to establish foreign agencies and announced plans to build up trade in all parts of the world. 18 A year later followed the acquisition of the Falk Tobacco Co., of Richmond, manufacturer of smoking tobacco and cigarettes, including the widely known " Herbert Tareyton " brand. 1 " It was in 1 9 1 8 that the close connection between United Cigar and Tobacco Products became an open one. Daniel G. Reid, one of the financiers who organized the corporation, had given way in 1 9 1 7 to George L. Storm as president, retiring, together with a number of other prominent Wall Street figures, from the board of directors. Storm held office only a few months and then retired to be succeeded by George J . Whelan, who had presumably now abandoned his " sociological work of broad importance " and returned to the marts of trade." Contemporaneously the Federal Trade Commission took a hand in the proceedings, filing a complaint in which it charged Tobacco Products with violating the anti-trust laws by secret ownership of five tobacco companies, by establishing interlocking directorates in the subsidiaries, and by giving to certain buyers (the Liggett drug chain being cited as an example) special discounts ranging from 1 to 14 per cent of the preceding month's purchases, the discounts being paid 17

/b«f., Aug. 9, 1913, pp. 3-5 ; March 3, 1917, p. 6.

18

¡bid., March 10, 1917, p. 10.

19

¡bid., Jan. 26, 1918, p. 6. ¡bid., June 9, 1917, p. 3! Nov. 24, 1917, p. 22.

20

33°

APPENDIX

ostensibly as a payment for advertising services but actually as a reward for failure to advertise the goods of other manufacturers. In response to the complaint the company filed an answer denying that it was a tobacco manufacturer and affirming that it was only a selling agent for manufacturers, denying control of one of the companies named, Stephano Bros., but admitting ownership of one-third of that company's stock, admitting ownership of the other companies named but denying secrecy concerning such ownership and admitting giving customers commissions ranging from ι to 1 4 per cent but denying that they were given on condition that the goods of competitors should not be advertised. The proceeding dragged along in the usual manner of litigation, but in due course came up for a hearing before the commission, which dismissed it. 21 In the meantime, nothing daunted by the commission's action, Tobacco Products continued to expand by absorbing, first, Robert Harris and Bro., a Reidsville, N. C , manufacturer of smoking and chewing tobacco, the American interests of Philip Morris & Co., Ltd., a much larger English manufacturer of cigarettes, and the United Paper Box Co. of America.' 2 It also moved to consolidate its foreign business, organizing the Tobacco Products Export Corp., to take over its foreign properties, chiefly two factories in Canada, one in Egypt and one in China, and participating in the formation of the American Foreign Trade Corp., an ambitious enterprise organized under the Webb-Pomerene Export Trade Act by more than a dozen manufacturers of a wide variety of products to trade in the Near East. 2 ' George J . Whelan now stepped out of Tobacco Products to 21

Federal Trade Commission, Annual Report, 1922, p. 141 ; United States Tobacco Journal, Oct. 26, 1918, pp. 3, 7 ; Dec. 21, 1918, p. 3. 22 23

Ibid., Jan. 18, 1919, p. 3 ; Feb. is, 1919, p. 3. Ibid., Feb. 27, 1919, p. 3 ; May 24, 1919, p. 3.

UNITED

CIGAR

STORES

COMPANY

331

devote himself to retailing once more, being succeeded as president by James M. Dixon. 2 * Grandiose projects were in the making. Backed by James B. Duke, Whelan had organized and become president of the United Retail Stores Corp., whose purpose was announced as being " to organize a system of retail stores throughout the world for merchandising of all kinds." 25 " I n a nutshell," said the United States Tobacco Journal, " the plan of the United Retail Stores Corp. is to sell everything m a n consumes throughout the world, with special attention and decided preference, of course, to American-made merchandise." 2e In view of its parentage, the corporation's first interest must be tobacco, so that at the outset it assumed control of the United Cigar Stores Co. Whelan told Barron his plan was to enter the grocery business next ; 2 7 but what he actually did was to negotiate the purchase of a large interest in the widely known mail-order house, Montgomery, W a r d & Co., a purchase, incidentally, which was made over the strong opposition of Duke and which eventually resulted in a loss. 28 It was in connection with United Retail Stores that definite reports first began to get about linking together Schulte and United and forecasting their joint acquisition of one or two large cigar manufacturers, plans which did not come to fruition for several years. 29 T h e activities of the year were completed by the formation of the International Trademark Co. 30 21 Dixon and Thomas B. Yuille, whom we have already met as the president of the Universal Leaf Tobacco Co. and subsequently president of Tobacco Products, were looked upon in the trade as representatives of Duke. Both men had been trained under the head of the " trust ". United States Tobacco Journal, June 3, 1922, p. 3. 25 28

Ibid., June 14, 1919, p. 3. Idem.

27

Pound and Moore, op. cit., p. 220.

28

Ibid., p. 54; United States Tobacco Journal,

29

United States Tobacco Journal,

so

Ibid., Oct. 25, 1919, p. 6.

June 14, 1919. p. 3.

June 14, 1919, p. 3.

APPENDIX

332

In 1920 Whelan, Duke and Thomas Fortune Ryan started negotiations to buy the French government's tobacco monopoly. Fantastic offering and asking prices were reported. Nothing came of the project; but it continued to bob up in the trade journals for several years.* 1 More concrete evidence of expansion was the opening of the first of a proposed chain of candy stores. The results proved somewhat unsatisfactory; for in 1920 the United Retail Candy Store Corp., which reported some twenty-five stores in operation early in 1 9 2 1 , had an operating loss of $ 2 0 , 2 9 7 . " The financial depression now began to affect all the companies, and Whelan returned to active charge of United Cigar, which had been " going very badly " . " Charles A . Whelan returned to the presidency of United Cigar, replacing Edward Wise, who had held it for several years."* Rumors of the merger of United and Schulte appeared again, accompanied by a report that control of Schulte was held secretly by Lorillard." Again the merger failed to take place. Perhaps the most interesting development of the year for United Retail Stores was the sudden appearance in its portfolio of a large block of the class Β common of the R . J . Reynolds Tobacco Co., which had been sold by the executors of the late R . J . Reynolds. The exact size of the holding was never announced; but it was carried at $4,000,000 on the books." 1922 saw Tobacco Products and United Cigar officially joined, the beginning of the group's withdrawal from inter81 United States Tobacco Journal, Feb. 14, igeo, p. 10; July 10, 1920, p. 3 ; Feb. 17, 1923, P. 8; April 28, 1923, p. 18; Nov. 21, 1925, pp. 3, 46.

*l Ibid., May 8, 1920, p. 3 ; March 5, 1921, p. 7. • 3 Pound and Moore, op. cit., pp. 45, 224. ** United States Tobacco Journal, Nov. 19, 1921, p. 6. 85

Ibid., Oct. 29, 1921, p. 6.

" Ibid., March 12, 1921, p. 6.

UNITED

CIGAR

STORES

COMPANY

333

ests other than tobacco and drugs and the start of plans to expand anew in tobacco manufacturing. The merger of the two big Whelan units was accomplished through an exchange of Tobacco Products shares for United Retail Stores Shares." The beginning of the withdrawal from lines other than tobacco was evidenced in the decision to distribute to United Retail Store stockholders, its holdings in the various subsidiaries owned.'* The Reynolds stock had disappeared from its portfolio without explanation. Proposals to expand further in tobacco manufacture were revealed by the formation of the Philip Morris International Corp., the latter owned entirely by Philip Morris & Co., in which Tobacco Products held a large minority interest. Philip Morris International acquired from the American Tobacco Co. the American selling rights to a number of brands of the Imperial Tobacco Co. which it had been permitted to hold after the disintegration." There being no further use for United Retail Stores, the corporation was dissolved in 1923. Through distribution of its assets Tobacco Products, as its principal stockholder, became the direct owner of a large majority of United Cigar Stores common.40 John J . Bagley and Co., Detroit manufacturer of medium grade smoking and chewing tobacco, came under Tobacco Products control about this time, and a new company, the Union Tobacco Co. of Manhattan, made its appearance, along with reports that it intended to acquire control of Philip Morris and Co. and several other cigarette manufacturers. 41 United Cigar also expanded its operations "Ibid., "Ibid.,

June 3, 1922, p. 3 ; July 1, 1922, p. 7 ; July 15, 1922, p. 10. Sept. 9, 1922, p. 3 ; Nov. 18, 1922, p. 47.

»· Ibid., May 27, 1922, p. 6; July 29, 1923, p. 3 ; Aug. 5, 1922, p. 10. Ibid., Feb. 28, 1923, p. 1 1 ; June 9, 1923, p. 7 ; Sept. 1, 1923, p. 50; April 14, 1924, p. 51. 40

41

Ibid., Feb. io, 1923, p. 3 ; Oct. 20, 1923, p. 3.

APPESDIX

334

directly by purchasing the United Cigar Stores of Canada, operator of some eighty-five stores in the Dominion with which it had had no connection despite the similarity of name." During at least part of the time thus far, the relations of Porto Rican-American Co. and United Cigar, seem to have been close. In 1 9 2 3 , Luis Toro, president of the company, announced two recapitalization plans whereby Tobacco Products Corp., would purchase a large block of its stock. T h e plan finally approved was to convert the outstanding common into class A stock entitled to 7 per cent cumulative dividends and to issue an equal amount of new class Β non-voting common, the two classes to share alike after seven dollars were paid as dividends on the common. Tobacco Products was to buy as many shares of the new common at $ 2 5 as were outstanding of the old common plus enough to permit redemption of outstanding dividend warrants. 4 3 Although the company was successful in defeating suits brought by minority stockholders to prevent the reorganization and the plan was approved by the majority, it was subsequently abandoned without announcement of reasons. 1 * Relations between the two interests seem to have continued close f o r some years; but in the decision of Porto Rican-American in 1 9 2 8 to " open " some of the brands heretofore sold exclusively through United Cigars is an indication that the bond had been weakened. 45 The election of Joseph F . Cullman, J r . , as a director in 1929, indicates a community of interest between this company and some of the other cigar consolidations Ibid., Sept. 29, 1923, p. 3. 43

Letters from President Toro to the stockholders, March 22 and May 10, 1923. 44 United States Tobacco Journal, March 17, 1923, p. 3 ; March 24, 1923, P· 7 ; April 14, 1923, p. 3 ; April 28, 1923, p. 7 ; May 5, 1923, p. 7 ; July 14. 1923, p. 40; Nov. 24, 1923, p. 5. 45

Ibid., Jan. 21, 1928, p. 7.

UNITED

CIGAR

STORES

COMPANY

335

which now have little or no relationship to United Cigar. More recently the resignation of Luis T o r o as president and chairman and the taking of his place as chairman by the former head of Waitt and Bond, would seem to put the management into the hands of those who have no historical connection with the " trust More connecting links between Schulte and United came to light during 1 9 2 3 . Official confirmation was made of a report that a minority but substantial interest in Schulte had been sold to some unidentified purchaser. 47 Schulte was also reported to be the power behind the throne in the formation of the Continental Tobacco Co., which took over the Barkmahn Co., manufacturer of " B a r k i n g Dog " cigarettes and tobacco and was reported to be planning acquisition of Philip Morris and Co. 48 Schulte had also acquired control of Park and T i l f o r d , widely known grocers, confectioners and manufacturers of cigars, and had formed Dunhill International, Inc., to acquire the world-wide business of A l f r e d Dunhill, English tobacconist and pipe manufacturer whose American and Canadian business had been acquired some time before. 49 F a r transcending any of these in importance, however, was the withdrawal of Tobacco Products from the ranks of operating companies through the lease of American rights to its brands of tobacco products to the American Tobacco Co. These brands, of which the most important were " Herbert Tareyton " and " Melachrino " cigarettes, were leased to American Tobacco for ninety-nine years beginning Nov. 1 , 1923, for a consideration of $2,500,000 a year. The tangible manufacturing assets of Tobacco Products, including leaf tobacco, plants and equipment, were sold to American 48

New York Times, Oct. 23, 1931.

47

Ibid., April 7, 1923, p. 3.

48

Ibid., Dec. 15, 1923, p. 3.

49

Ibid., Oct. 27, 1923, p. 7 ; Nov. 3, 1923, p. 5.

336

APPENDIX

Tobacco for approximately $12,000,000. 5 0 of Tobacco Products explained:

T h e president

The Tobacco Products Corporation has never employed a sufficient number of men to be able to thoroughly cover the country. Its business is that of high-grade goods, and in sparsely populated sections of the country it has not been found profitable to employ an efficient staff to cover the entire field. The American Tobacco Co., with its large organization, will be able to see that these brands acquired from the Tobacco Products Corporation are properly represented in every hamlet of the United States. 51 The change left Tobacco Products a holding company, part of its income coming from the lease to American Tobacco, the rest from its holdings of United Cigar Stores, Tobacco Products E x p o r t Corp. and Stephano Bros, securities. The net effect of the first chapter of this ambitious venture thus became merely the throwing of a large part of the country's formerly independent production products into the hands of American Tobacco. A second chapter followed. T h e trend it would follow became evident in a number of steps bringing the Schulte and United interests into closer alliance. Philip Morris & Co., entered into a contract with Stephano Bros., the Tobacco Products affiliate, whereby cigarette brands of both companies were to be manufactured by Stephano and marketed by M o r r i s . " Reuben M . Ellis, president of Tobacco Products Export Corp. became also president of Philip Morris & Co. Reports were shortly abroad that Morris would be merged with the Continental Tobacco Co., which had in the 50

Ibid., Oct. 27, 1923, p. 3 ; Nov. 24, 1923, p. 3 ; Poor's Industrials, 1930, p. 3058. 51 52

United States Tobacco Journal,

Manual

of

Nov. 3, 1923, p. 3.

This contract was for five years and was not renewed when it expired March 31, 1929. Poor's Manual of Industrials, 1930, p. 3066.

UNITED

CIGAR

STORES

COMPANY

337

mean time acquired the American rights to Dunhill brands." This led in turn to renewed reports of a direct United-Schulte merger; but D. A. Schulte eventually announced that, although negotiations had been under way off and on for some time, they had now been definitely abandoned.54 In the mean time, American Tobacco reported that it was finding the lease of Tobacco Products brands quite profitable; while Tobacco Products, using funds obtained from the sale of its manufacturing assets and from its sale of its Montgomery, Ward and Co. stock to a New York syndicate, retired its preferred stock." Various of the Tobacco Products subsidiaries, now no longer active operating companies, while they were not dissolved reduced their capitalization to nominal figures." The intermittent negotiations between Schulte and United came to fruition in 1926, not in a direct merger but in the building up of a complicated community of interest. A new corporation, Philip Morris Consolidated, was formed and acquired by exchange of shares control of Continental Tobacco and working control " of Philip Morris and C o . " Much more important was the formation of the Union and United Tobacco Corp. through which the two chain interests were to be tied together. This company owned control of Philip Morris Consolidated and made the offer through which Morris and Continental were combined. It also made 53 Dunhill during 1925 acquired E. P. Mesthene and Co., New Y o r k , manufacturers of Turkish cigarettes. United States Tobacco Journal, Oct. 10, 1925, p. 6. 54

Ibid., April 19, 1924, p. 3 ; June 28, 1924, p. 7.

65

Ibid., March 8, 1924, p. 3 7 ; March 15, 1924, p. 5 1 ; April 5, 1924, p. 1 8 ; Oct. l i , 1924, p. 3 ; March 14, 1925, p. 3. se

Ibid.,

67

Jan. io, 1925, p. 46; June 13, 1925, p. 18.

37 per cent of the outstanding stock.

58 Poor's Manual of Industrials, 1931, p. 2735; United Stales Tobacco Journal, Aug. 21, 1926, p. 5 ; Aug. 28, 1926, p. 3 ; Oct. 23, 1926, p. 3.

33«

APPENDIX

an offer to Schulte stockholders through which it was expected that a 30 per cent interest in Schulte would be obtained, and tentative plans for a similar offer to United stockholders were announced, presumably with the idea that Tobacco Products' large holdings of United stock would be exchanged." About the same time, United branched out its real estate operations by acquiring a half-interest in the Charles F. Noyes Co., a large New York real estate broker, and forming the Charles F . Noyes National Realty Co. to manage its properties, while Schulte branched out into drugs by turning manager under a ten-year agreement of the American Druggists' Syndicate, a cooperative manufacturing organization owned by some 18,000 druggists. 60 Union and United lasted only a little more than one year, since by 1927 American Tobacco under its new president, George W. Hill, had entered on its policy of concentrating its selling efforts on " Lucky Strike " cigarettes and was in the mood to negotiate a sublease of the Tobacco Products brands. For purposes of this transaction, still another company appeared on the scene—the Union Tobacco Co., incorporated in Delaware, the Union Tobacco Co. of Manhattan incorporated some years before being dissolved. T o this company American Tobacco leased four cigarette brands and six smoking tobacco brands, including two Tobacco Products brands and several of the Imperial Tobacco brands, rights to which had been obtained prior to the disintegration. The lease, dated Aug. 8, 1927, was to run to Oct. 3 1 , 2022. American Tobacco was to continue to manufacture the pro59 Poor's Manual of Industrials, 1927, p. 3 1 0 1 ; United States Tobacco Journal, March 27, 1926, p. 3 ; April 3, 1926, p. 3 ; New York HeraldTribune, Dec. 7, 1926; New York World, Dec. 30, 1926. What was described as " a substantial block " of Schulte common was also bought outright. United States Tobacco Journal, Jan. 8, 1927, p. 3. 60 United States Tobacco Journal, May 1, 1926, p. 3 ; Oct. 2, 1926, p. 5 ; Aug. 21, 1926, p. 43.

UNITED

CIGAR

STORES

COM PAX Y

339

ducts, the lease being only of selling rights. Under its terms Union Tobacco was to pay an annual rental of $ 1 , 5 1 2 , 0 0 0 a year plus $92,000 a year f o r three years and $ 2 5 2 , 0 0 0 a year thereafter out of first profits after provision of preferred dividends plus one-third of the remaining profits. T h e lease could be abrogated if the capital of Union Tobacco were impaired so as to fall below $7,000,000 and not restored on due notice or if for three consecutive twelve-month periods the profit on the leased business before counting in the rental failed to average $ 1 , 5 1 2 , 0 0 0 a year. 81 In the same series of transactions, Union Tobacco acquired all the assets of Union and United in exchange for its capital stock. 92 T h e Union Tobacco stock was then distributed to shareholders of Union and U n i t e d . " All this was accompanied by further acquisitions on the part of both Schulte and the Whelan interests and a luxuriant crop of rumors of more or less validity. The Schulte acquisition included control of Huyler's, Inc., manufacturer of candies and operator of fifty-one confectionery stores, W m . 41

Details of the lease may be found in various company announcements reprinted in United States Tobacco Journal, Nov. 9, 1929, p. 7 ; Dec. 7, 1929, PP. 7, i l , 31 and 34. 62 The first strong drive made by Union Tobacco during its short manufacturing career was on cigarettes bearing the Imperial's " Three Castles " brand. Introduced under this trademark, the cigarettes were subsequently changed for some unexplained reason to " Three Kings ". It may be that by this change there would be some savings in lease payments if the brand were exceptionally successful. One suggested reason f o r the change was that under the new brand the company could sell the cigarettes anywhere, but under " Three Castles " it could sell them only in the United States. (United States Tobacco Journal, April 14, 1928, p. 3.) The cigarette was quite different from the English cigarette whose name it took, having been, to quote a company advertisement, "reformulated to conform to the American taste". (United States Tobacco Journal, March 17, 1928, p. 9.) 63 United States Tobacco Journal, May 14, 1927, p. 3 ; July 23, 1927, P· 3 ; July 30, 1927, P· 3 ; Sept. 10, 1927, p. 3 ; Sept. 17, 1927, p. 3 ; Oct. 1, 1927, P. 3 ; Nov. 5, 1927, p. 3·

APPENDIX

340

De Muth & Co., manufacturer of pipes, and M. E. Bernhardt, manufacturer of cigar lighters.84 The Whelans acquired 50,000 out of 425,000 shares of the Beech-Nut Packing Corp., which was endeavoring to expand its confectionery business, and merged the stores of the Mirror Confectionery Co. with those of the Happiness Candy Co. already controlled.65 The rumors included one that Union Tobacco would take over control of the Consolidated Cigar Corp., another that it would absorb Porto Rican-American Tobacco, a third that it would acquire United States Tobacco, and a fourth that Tobacco Products was now to be dissolved, since it was selling some of its United Cigar Stock in the open market.88 The fourth rumor was denied as a matter of course, but early in 1928 Thomas B. Yuille retired as president of Tobacco Products to be succeeded by George J . Whelan, who admitted his purpose was to dissolve the company and shortly thereafter appointed a committee consisting of Thomas Fortune Ryan, Albert H. Wiggin, chairman of the Chase National Bank, William C. Potter, president of the Guaranty Trust Co., and Charles A. Whelan, to work out a plan for accomplishing this dissolution. Although " progress " was reported from time to time, three problems prevented consummation of the proposal for several years—that of keeping intact the corporation's holdings of United Cigar, that of distributing the corporation's other principal asset, its right 64

Ibid., Jan. 22, 1927, p. 5 ; May 14, 1927, p. 3 ; July 9, 1917, p. 12.

65

Ibid., July 2, 1927, p. 8; Oct. 22, 1927, p. 7. The stock-market boom of the late 'twenties was just getting into its stride at this time, and the Whelan group had many other activities than tobacco. Pressed Steel Car Co., Universal Pipe and Radiator Co., Walworth Manufacturing Co. and Trademark Products Corp. were some of the companies with which their names were connected. United States Tobacco Journal, Feb. 5, 1927, p. 3 ; March 26, 1927, p. 6. ee

Ibid.,

May 7, 1927, p. 3 ; Dec. 24, 1927, p. 3 ; Dec. 31, 1927, p. 51.

UNITED

CIGAR

STORES

COMPANY

to the income of $2,500,000 a year from the brands leased to American Tobacco and in part subleased to U n i o n Tobacco, and that of adjusting the rights of the t w o classes of s t o c k . " Meanwhile United and Schulte continued to expand in various directions. Particularly important was their entry into the cigar industry through acquisition of the WebsterEisenlohr properties. In 1 9 1 1 , O t t o Eisenlohr and Bros., a partnership which under one name or another had been in business nearly forty years, had the reputation of being the second largest independent cigar manufacturer in the country, and its principal brand " Cinco " had the reputation of being the first nationally advertised nickel c i g a r . " Otto Eisenlohr, head of the firm, died in 1 9 1 4 ; but the business was continued, first as a partnership and then as a corporation, by his brothers, Louis and Charles. In 1922, after Louis Eisenlohr died, control of the company was sold, ostensibly to t w o department heads of the company, but actually to interests affiliated with Cullman Bros., w h o in 1923 put Joseph F . Cullman, Sr., and Joseph F . Cullman, Jr., on the Eisenlohr board.™ Cullman Bros., a very wealthy and influential firm of dealers in leaf tobacco, w a s apparently very active in a number of cigar mergers during the 'twenties. The full extent of their activities has never been made public ; but in addition to their interests in the companies built around Eisenlohr, they apparently had holdings at one time or another in Porto Rican-American, Consolidated C i g a r Corp. and American Sumatra Tobacco Co. 7 0 Late in 1923, the •7 United States Tobacco Journal, Feb. 11, 1928, p. 3 ; Feb. 18, 1928, p. 7 ; Nov. 10, 1928, p. 11; New York Evening Post, Nov. 5, 1928; Dec. 26, 1928. 68

United States Tobacco Journal, Feb. 18, 1911, p. 27; Dec. 26, 1914,

p. 3. The only companies reputedly larger were American Cigar and United Cigar Manufacturers. ·» Ibid., Oct. 14, 1922. P· 3 ; Feb. 24, 1923, p. 3. 70

Cf. ch. iii, § 6, supra.

APPENDIX

34-

sole surviving member of the Eisenlohr family retired from the business, which was left under the direction of the two former department managers. 71 Their incumbency lasted only a short time, for in 1 9 2 4 Eisenlohr contracted to buy the entire stock of the Webster Cigar Co., and the officers put in charge were those of the Webster organization, headed by S a m T . Gilbert, another conspicuous figure in the cigar mergers of the last two decades. 72 The Webster Cigar Co. had been formed by Gilbert and some associates in 1 9 2 1 after he retired as president of Consolidated Cigar to manufacture cigars under the " Webster " brand. 73 Webster in turn held control of the Kleiner Cigar Manufacturing Co., a reorganization of a well-known Detroit manufacturing concern." T h e principal function of the Gilbert administration seemingly was to remodel a down-at-heel organization, a task completed by 1 9 2 7 , when Gilbert resigned and was succeeded in the presidencies of the company and its affiliates by men he had brought into the organization. 75 In 1928 the Union Cigar Co. secured control of Eisenlohr and its subsidiaries by purchasing the large block of Eisenlohr stock held by Cullman Bros., whose representatives then retired from the board of directors. 76 Union Cigar had already acquired control over E . Kleiner & Co., 77 B. G. Davis & Co. and A . Santaella & Co., interests subsequently passed directly to Eisenlohr. 78 More ambitious projects were evi71

United States Tobacco Journal,

72

Ibid,, July s, 1924, p. 3 ; Aug. 23, 1924, p. 3 ; Aug. 30, 1924, p. 3.

Feb. 24, 1923, p. 3.

« Ibid., April 2, 1921, p. 3 ; May 7, 1921, p. 12. 7i

Ibid., May 13, 1922, p. 3 ; Feb. 24, 1923, p. 7 ; June 28, 1924, p. 3.

75

Ibid., Jan. 23, 1926, p. 9 ; Feb. 6, 1926, p. 5 ; Jan. 29, 1927, p. 3.

76

Ibid., Jan. 14, 1928, p. 3.

77

Not to be confused with the Kleiner Cigar Manufacturing Co.

78

United States Tobacco Journal, p. 7 ; Dec. 22, 1928, p. 7.

May 12, 1928, p. 3 ; Oct. 13, 1928,

UNITED

CIGAR

STORES

COMPANY

dently in mind, for late in 1928 all Eisenlohr directors and officers resigned to be succeeded by a slate headed by David A . Schulte and W. T . Posey, representatives of the two cigar store chains affiliated in Union Tobacco. This change of management was accompanied by reports that two of the largest cigar manufacturers in the country would be brought under the control of the company.™ At the end of the year, the stockholders approved a proposal to change the title of the corporation to Webster-Eisenlohr, Inc., and increased its capitalization.80 In this year also, Schulte and United together went into the " five-and-ten " field through organization of SchulteUnited 5 cents to $ 1 Stores, Inc. 81 United Cigar started rapid expansion in drug retailing this same year by adding to the chain of sixty-four stores already operated by the United Retail Chemists' Corporation the first stores in a new chain, later named Whelan Drug Stores, some of them being units of the Happiness candy chain now converted into drug stores, and by buying into Neve Drug Stores, Inc., and Pennsylvania Drug Co., Inc., operators of stores in the New Y o r k area.82 United Cigar also participated in the formation of the Consolidated Automatic Merchandising Corp., a merger of several manufacturers of automatic vending machines, and acquired a substantial interest in L i f e Savers, Inc., confectionery manufacturers and in the L a Lasine Corp., manufacturer of antiseptics.83 Schulte for its part announced its 78

Ibid., Oct. 13, 1928, p. 7.

80

Ibid., Dec. 15, 1928, p. 7.

81

Ibid., Jan. 21, 1928, p. 3 ; Journal of Commerce (New Y o r k ) , Jan. 18, 1928; Feb. 7, 1928. 82 United States Tobacco Journal, July 21, 1928, p. 1 0 ; Dec. 15, 1928, p. 1 0 ; New York Times, April 26, 1928; New York Evening Post, Dec. 14, 1928. 83

United States Tobacco Journal, Jan. 14, 1928, p. 5 ; June 9, 1928, p. 1 0 ; New York Times, Oct. 23, 1928.

344

APPENDIX

intention to open ι ,000 grocery stores and organized for the purpose Park & Tilford Retail Stores, Inc.84 This expansion program continued into the early months of 1929, with United Cigar buying into the Reiss-Premier Pipe Co. and the American Safety Razor Corp., Union Tobacco embarking on a national advertising campaign for " Herbert Tareyton " cigarettes, and Continental Tobacco offering a new cigarette, " Paul Jones," at ten cents for twenty, the pre-war popular price.85 But this patchwork craft was not built to ride out the financial storm whose clouds were then gathering over the country. Already much of its strength had been sapped by the cigarette war with the grocery chains.88 The accompanying table shows what had happened—a severe decline in earnings for both Schulte and United in 1928, and a continued decline thereafter. This information was not available immediately; but there were obvious signs that all was not well early in 1929. To raise capital United Cigar passed title to much of its real estate to a new corporation, Cigar Stores Realty Holdings, Inc., which in turn floated $10,000,000 of twenty-year 5^2 per cent sinking-fund gold debentures. United Cigar, which leased back all the properties for ninety-nine years and guaranteed the issue unconditionally as to principal, interest and payment of sinking-fund charges, received four-fifths of the proceeds of the loan to be used for " its general corporate purposes ", 87 Schulte found it necessary to announce aban84

New York Times, Oct. 25, 1918.

85

United States Tobacco Journal, Feb. 2, 1929, p. 10; March 16, 1929, p. 9 ; April 20, 1929, p. 9 ; May 11, 1929, p. 9. 88 Ch. χ, supra. There can be little doubt, too, that the Whelans had felt keenly the deaths of their two principal financial backers, James B. Duke at the end of 1925, and Thomas Fortune Ryan, in 1928. 87 Advertisement of the issue in the New York Times, Jan. 3, 1929, which said : " It is conservatively estimated that for the year 1928 . . . net earnings will exceed $9,500,000." This statement made when a fairly

UNITED

CIGAR

STORES

COMPANY

donment of its plans for a farflung grocery chain because " a complete survey of the retail grocery business has convinced the management that an extension of its present chain of retail stores by adding thereto high-class luncheonettes would be more advisable at the present time than the separate organization of a chain of retail grocery stores." 88 The SchulteUnited " five-and-ten " chain sold twenty-four sites acquired for future stores to a new corporation, Schulte-United Properties, Inc.89 Philip Morris & Co. decided to close its cigarette plant at Philadelphia and consolidate its manufacturing operations with those of Continental Tobacco at Richmond.90 At the annual stockholders' meeting, the Schulte management had to pacify an irate group of owners who wanted to know, first, why the company's earnings had dropped and, second, why the directors of the company had reduced or entirely sold out their personal holdings in the company. In May, Schulte passed its dividend.91 In the roseate glow that was Wall Street during the summer of 1929 these distress signals attracted little attention. When the Whelan crash came in June of that year, it was hailed by the financial editors, not as a wreck but as a " giant new tobacco combine " backed by J . P. Morgan and Co. which would eventually have some 25,000 stores.92 What happened was the formation of a new Delaware corclose estimate should have been possible may be compared with the figures actually reported as $8,352,763 and revised by the new management so as to be only $4,525,609. 88 United States Tobacco Journal, Jan. 26, 1929, p. 11. Why the " complete survey " had not been made before the retail store corporation was formed remains to be explained. 89

Ibid., March 9, 1929, p. 10.

90

Ibid., March 16, 1929, p. 18.

91

New York Sun, April 16, 1929; United States Tobacco May 4, 1929, p. 42. 92 New York Evening Post, June 6 and 10, 1929.

Journal,

346

APPENDIX

E A R N I N G S AVAILABLE FOB DIVIDENDS OF UNITED CIGAX STORES C O M P A N Y , TOBACCO PRODUCTS CORPORATION, AND S C H U L T « RETAIL STORES: CALENDAR YEARS 1 9 1 2 - 1 9 3 0

United Cigar Stores 1,879,361 2,'7'.5'7

2,241,78 3

Tobacco Products Corporation

«

Schulte Retail Stores

1,103,076 876,808

2,892,072 2,873,500 4,010,205 5,021,369

921,766 1,364,540 2,006,209 3,276,283 2,072,886

5,929,005 4,101,656 4,359,806

2,023,882 2,148,431 5,499,985

646,535 1,947,000

4,757-928

4,379,556

3,"9,878

2,4°4,4 7 '

6,696,699 8,813,228 9,854,869 9.952,457 b 4,525,609 " 2,846,630 ',55',980

7,616,832

7,310,604 10,389,528 7,888,279 8,386,963 4,574,636 M37.224

* Compiled from Poor's Manual of Industrials Investments: Industrial Securities.

31,106 140,726 179,621 4 S 6,899

3,897,219 5-972,'73

6,143,960 6,225,9Q1

4,360,321 1,072,2· I 739.385

and Moody's Manual

of

b A f t e r loss on Happiness Candy Stores, Inc. The figures for 1928 and 1929 are the earnings as revised by the new management which assnmed control in 1929. The old management reported for 1928 earnings of $8,352,763. The 1929 earnings before Federal taxes and company's proportion of loss of Happiness Candy Stores, Inc., disposed of during 1930, were $3,132,095.

poration, the United Stores Corporation, to take over T o bacco Products, United Cigar and Union Tobacco through an exchange of shares. T w o items of the plan gave a hint as to what was to come. First, it was announced that the Whelans would take a less active part in the management of the enterprise, although they would have a large financial

U SIT ED CIGAR interest in United Stores.

STORES

COMPASY

347

Second, despite this " large finan-

cial interest " , it was made plain that the new management, headed by George K . M o r r o w and closely affiliated with several large food enterprises, would have absolute

control

through a voting t r u s t . " Despite these clear warnings, there seemed to be considerable surprise in the financial community when in A u g u s t it was announced that the Whelans and their associates had sold control of the various affiliated companies to the M o r r o w interests, the transfer being accomplished chiefly through the sale of a majority of the stock of Tobacco Products.

The

exact amount of stock transferred and the terms of sale were not announced; but it was reported that in return f o r the controlling interest in Tobacco Products the Whelan group received stock in the new holding company organized by the Morrows. 8 4

Following the transfer, new slates of directors

and officers for United Cigar and Tobacco Products were voted into office. A f t e r this upheaval even a W a l l Street in the last boiling 93

Sew York Times, June 10 and n , 1929; Poor's Manual of Industrials, 1931, pp. 2753-2755. Of the three classes of stock entering United Stores capitalization, the preferred and class A have voting powers only after default of four quarterly dividends. At the time of the above transactions it was announced that the common would be placed in a trust dated June 1, 1929, and running for ten years but terminable earlier at the discretion of the trustees. Later the names of the voting trustees were announced as Frederick K. and George K. Morrow, Wilbur L. Cummings, John Foster Dulles and Eugene W. Stetson. The Morrow brothers, who are Canadians, while very little known to the public at large, were very active in the post-war merger movement, heading a financial group with wide ramifications in finance and particularly strong in food manufacture. Large companies in which they or their associates hold directorates include the Gold Dust Corp., Corn Products Refining Co., National Dairy Products Corp., Dominion Stores, Ltd. (Canada), and a number of flour mills. Cummings and Dulles are members of Sullivan and Cromwell, widely known New York attorneys. Stetson is connectcd with the Guaranty Trust Co. 84 New York Times, Aug. 20, 1929.

APPENDIX

34«

months of a flamboyant stock boom could not overlook the significance of the events that now followed each other in rapid succession, as the community of interest which had held these various companies together was reorganized and the companies split off into several groups. Just before the management changed hands formally, United Cigar had made a last-minute purchase in taking over a " substantial " stock interest in the Hygrade Food Products Corp., meat packers ; 8 5 but the time for purchasing was over, and the time for selling had come. The United Cigar holdings in BeechNut Packing were sold to the Gold Dust Corp.®8 Other investments were sold, although the exact holdings disposed of were not announced, the management contenting itself with the statement that all bank loans of United Cigar and Tobacco Products, totaling about $12,000,000, had been paid off " through the liquidation of assets not essential in the conduct of the regular lines of business of these companies ". βτ Simultaneously the close connection between the Schulte and United groups was broken down. A large block of stock in the Schulte Retail Stores Corp. passed to the Morrow interests when the Whelans sold out; but control remained with D. A. Schulte and his associates.®? Since then the two units have to all appearances operated in complete independence. Whelan and United Cigar holdings in Schulte-United 5 Cents to $ 1 Stores, Inc., were sold to Schulte.®" A further division of interest between the two 85

Journal of Commerce (New Y o r k ) , July 31, 1929.

·· United States Tobacco Journal, "Ibid., 88 88

Sept. 21, 1929, p. 14.

Sept. 28, 1929, p. i l .

New York Times, Aug. 20, 1929.

Ibid., Oct. 8, 1929. This company passed its preferred dividend beginning with 1930 and went into bankruptcy in 1931. In 1929 its directors authorized a $10,000,000 issue of 7 per cent bonds, each holder of preferred stock to have the right to buy one $100 bond at $70 f o r each share held and to pay only 60 per cent of the purchase price immediately,

UNITED

CIGAR

STORES

COMPANY

formerly associated groups came when the Schulte associates resigned from Union Tobacco, Union Cigar and WebsterEisenlohr. On Nov. 6, 1929, the Chase National Bank, of New York, sold at auction 189,760 shares of Webster-Eisenlohr common, representing 41 per cent of the 453,000 shares outstanding, which had been posted with it as collateral for a loan. The bank itself bid in the shares, which at one time had been as high in the market as $ 1 1 3 ^ , for $2*/jj per share. Ownership of the stock was never announced; but subsequent events indicated that it rested with Union Cigar. 100 A few days later Cullman Bros, reappeared on the scene, this time with Joseph F. Cullman, Jr., as president of Webster-Eisenlohr; and a drastic reorganization started, in the course of which holdings in A . Santaella & Co. were sold and good will was reduced from $ 6 , 8 1 2 , 0 1 6 to $ 1 , investment in and advances to subsidiaries from $2,745,372 to $27,523 and inventories from $4,841,309 to $2,909,618. T o meet these markdowns, the common stock was changed from $ 2 5 par to no par and the capital applicable to it was reduced to $ 1 a share. 101 Further bad news came when the new directors of United Cigar passed the dividend on the company's preferred stock, which would have been payable Nov. 1, 1929, saying: Since the election of the present board on August 19, and the change in the company's management, which was subsequent to the remainder to be payable on sixty days notice from the company. As a further feature of this extraordinary offer, it was announced that each $100 bond would have a warrant attached to it entitling the holder to receive after Dec. 31, 1931, one share of common stock without payment and that 91 per cent of the common stock needed for the offer had been provided by the directors without cost to the company. 100 101

United States Tobacco Journal, Nov. 9, 1929, p. 7.

Ibid., April 5, 1930, p. 7; Poor's Manual of Industrials, 1931, pp. 1631-1632.

APPEXDIX

35°

the declaration of the last dividend on the company's stocks, an investigation of the company's affairs has been proceeding, including an audit by Price, Waterhouse and Co. This investigation and audit will probably not be concluded f o r some little time. It has proceeded sufficiently f a r , however, to convince the directors of the necessity of a complete rehabilitation of the company's business and the conservation of all its cash resources. It is apparent that for some time part of the dividends have been paid very largely out of the company's surplus. It is also apparent that important surplus adjustments will have to be made. 1 0 2 O n e of its two m a j o r sources of income cut o f f , T o b a c c o Products also passed its dividends, beginning with 1 9 3 0 . 1 0 3 U n i o n Tobacco's lease of A m e r i c a n T o b a c c o ' s brands w a s abrogated in December, another of the threads of this complicated network of

interests being thus broken.

Union

T o b a c c o ' s assets consisted almost entirely of stocks of subsidiaries.

In October, A m e r i c a n T o b a c c o notified its man-

agement that because of the collapse in the market value of these stocks the capital had been impaired and that if the impairment were not corrected, the lease would be abrogated and liquidated damages provided f o r under its terms w o u l d be demanded.

Union T o b a c c o sued to prevent the cancella-

tion, admitting that its capital had been reduced because its assets of $ 1 2 , 5 3 5 , 9 4 7 included $ 9 , 9 8 0 , 5 3 5 as the cost value of securities, the market value of which w a s below this cost value, and that if these securities were taken at market value its capital had fallen below $ 7 , 0 0 0 , 0 0 0 but maintaining that the stock should be valued f o r purposes of the lease not at market value but at an undefined " f a i r value " .

A settle-

ment was negotiated which provided f o r prompt termination of the lease, return of the brands to A m e r i c a n T o b a c c o , dis102

New York Times, Oct. 19, 1929.

103

United States Tobacco Journal,

Nov. 2, 1929, p. 1 1 .

UNITED

CIGAR

STORES

COMPANY

351

continuance of the suit to prevent cancellation and waiver of liquidated damages by American Tobacco. Stockholders accepted the directors' recommendation that they approve the settlement on the grounds that even if the suit against cancellation were won after expensive litigation, it would be a barren victory because ( 1 ) earnings thus f a r had been below the minimum rental of $,1,512,000, so that eventual cancellation with damages demanded was probable, ( 2 ) an attempt to build up the business so as to provide a large profit would be costly and the outlook for success doubtful, and ( 3 ) even if earnings were built up enough to pay the rental, enough to pay more than the preferred dividends was unlikely. 104 Control of Union Tobacco did not pass to United Stores, although it was included in the offer for exchange of shares. A s of Dec. 3 1 , 1930, United Stores owned only 25,295 out of 172,596 class A shares of Union Tobacco and only 5,030 out of 7 6 3 , 7 1 6 common shares. The directors and officers of Union Tobacco, headed by Jesse R . Taylor, are former officers and directors of United Cigar under the old regime. T h e company after surrendering its lease dropped its manufacturing and distributing activities and sold its corresponding assets so as to become strictly a holding company. B y reduction of a number of items, chiefly accounts receivable on the one hand and call loans on the other, its total assets were reduced from $14,626,405 at the end of 1928 to $ 1 0 , 6 1 5 , 8 7 2 at the end of 1 9 3 1 . Even this latter figure is fictitious, however, since securities carried at cost of $9,595,908 had a market value on that date of approximately $ 1 , 7 3 6 , 9 1 9 and were pledged as collateral for a loan from the Guaranty 10i

Ibid.,

Nov. 9, 1929, p. 7; Dec. 7, 1929, pp. 7, 11, 31 and 34; Dec.

28, 1929, p. 7.

T h e company reported its business in the leased brands

as approximately $23,000,000 a year, and its earning on these brands f r o m Sept. I, 1927, to Oct. 3 1 , 1929, as an average of $ 1 1 8 , 0 0 0 a month or less than $1,416,000 a year, against $1,512,000 required.

APPENDIX

352

Trust Co. 105 While the individuals to whom control of Union Tobacco passed were not made public, there are indications that the Whelans and Schulte and their immediate associates sold their interests to another group drawn from the old United Cigar management and that the new owners declined to enter the United Stores group. 108 An announcement by the Morrow management that United Cigar had withdrawn from all manufacturing activities and the personnel of the various companies, indicate that Philip Morris and Tobacco Products Export Corp. have also stayed outside the Morrow control, although no longer controlled by the Whelans and Schulte. 10 ' The full story of United Cigar's disaster came out in 1930 when the new management in a special report to stockholders announced that after audit it had been forced to reduce the profits for 1928 from $8,352,762, as reported by the former management, to $4,525,609 and, through an unitemized entry labeled " surplus adjustments," to change a reported surplus of $ 2 1 , 9 1 5 , 5 2 3 as of Dec. 3 1 , 1928, into a deficit of $776,286 as of June 30, 1929. The principal deductions from the reported earnings of 1928 were $3,325,886 representing the appreciation in market value of securities owned, which the new management restored to cost value, and $469,632 representing expenses and losses of the Whelan Drug Co. in 1928, which had been carried as a deferred charge. Profits from store operations on $82,644,431 of gross sales in 1928 were only $379,980, or 46/100 of 1 per cent before income taxes. For the first six months of 1929 ios Letters from President Jesse R. Taylor to stockholders dated Jan. 8, 1932. The chief stockholdings were 61,100 class A and 372,230 common shares of Tobacco Products Corp., about 3 and 11 per cent, respectively, of the amounts outstanding. 109 United States Tobacco Journal, Sept. 6, 1930, p. 7 ; Jan. 10, 1931, p. 9. 107

New

York Times, April 21, 1931; Poor's Manual of

1931. PP. 1791, 273s and 2760.

Industrials,

UNITED

CIGAR

STORES

COMPANY

353

the net loss from merchandising operations was $ 1 , 2 7 1 , 9 8 7 , if proportionate share of Happiness Candy Stores loss is counted in. The conservative nature of the changes in the statement was shown by the fact that some of the securities had been sold before the October-November stock-market break well above cost, so that, thanks to the bookkeeping, a profit of $2,931,930 was secured from this source. 10 ' The report naturally led to severe criticisms by stockholders of the old management and to an informal and fruitless investigation by the New Y o r k State Bureau of Securities to see whether the state securities statute had been violated in any way. Charles A. Whelan appeared for the family, George J . Whelan being reported ill. Samuel Untermeyer, as counsel for the Whelan management, protested against the special report of the new management as being designed to make the best possible showing for the new management and in doing so placing the Whelans in an unfair light. Elimination of approximately $3,300,000 from the book value of securities sold within a few months for $2,900,000 more than the values to which they were reduced, and the listing of two dividend-paying stocks as valueless, he cited as examples of unfair reflection on the Whelans, who, he maintained, had lost the bulk of their fortunes in the collapse. The troubles of the company he held to be the result primarily of the stock-market crash and the cigarette price war, not of incompetent management. 109 Unmoved by this criticism, the Morrow management reported for 1929 a loss of $ 1 , 4 2 4 , 1 2 4 on store operations and $185,465 on Happiness Candy Stores and subsidiaries. Against this there was a profit of $4.556,220 from real estate and financial operations, which, after provision for Federal 1,8 108

United Stales Tobacco Journal, Jan. n , 1930, pp. 7, 31.

New York Times, Jan. 1 1 , 1930; New York Evening Post, Jan. 12, 1930; United States Tobacco Journal, Jan. 18, 1930, pp. 7, 34.

354

APPENDIX

income taxes, left a net of $2,846,630 and gave the company a surplus of $691,828. In view of the general outlook, the management felt that good will, leaseholds and other intangibles were greatly overvalued at $34,440,622, of which more than $21,500,000 represented good will alone, and recommended reduction of the item to $ 1 . T o do so without changing capitalization would " unduly defer the resumption of dividends out of current earnings " by impairing capital heavily, the management said, and so it recommended that, first, par value of the common be reduced from $ 1 0 to $ 1 and then the stock be changed to no par, a step which was duly approved by the stockholders. 110 T o offset the drop in the market value of United Cigar stock caused by these troubles, an analogous change was necessary in Tobacco Products, whose class A stock was reduced from $20 par to no par value and a stated value of $ 5 a share. 111 Thanks to these capital write-downs, Tobacco Products resumed its dividend on class A stock in August and United Cigar on its preferred in January, i 9 3 i . 1 1 J Further moves were made during the year to consolidate operations and reduce expenses. The company gave up its own building and moved into leased quarters less than a third as large. Arrangements were made to pay the major 110

United States Tobacco Journal, May 17, 1930, p. 7; May 31, 1930,

P. 7111

Ibid., June 14, 1930, p. 9. The conservativeness of the new management's bookkeeping is again shown by the fact that no effort was made to increase the book value of the lease to American Tobacco from $4,217,805, a low figure for a property bringing in a revenue of $2,500,000 a year. 112 Ibid., Feb. 27, 1930, p. 1 3 ; New York Evening Post, June 27, 1930. While the recapitalization of United Cigar probably was desirable from the point of view of the stockholders it was certainly essential from the point of view of the management, which stood in danger of losing control to the preferred stockholders if dividends on the preferred were passed for four consecutive quarters.

UNITED

CIGAR

STORES

COMPANY

355

executives of the company stock bonuses aggregating 60,000 shares of common stock a year for five years and options to buy 100,000 shares at $ 5 a share during each of three years in lieu of cash salaries. Minor executives received part of their compensation under a similar arrangement. 113 Steps to remove the burden of unprofitable subsidiaries continued. Thus in addition to the sales of stock already noted, the company sold its Happiness and Mirror candy stores to L o f t , Inc., and filed a petition in bankruptcy against Neve Drug Stores, Inc. 1 1 4 In addition to withdrawing from all manufacturing activities, the new management revised the company's merchandising policies on cigars with a view to concentrating on popularly branded goods rather than on United's own brands. 1 1 5 Although sales advanced from $84,678,558 in 1929 to $91,862,872 in 1930, and this in the face of falling commodity prices and generally poor business conditions, and although the loss from Happiness Candy Stores affected only a part of 1930, earnings available for dividends declined, as is shown in the table. The major reason was that profits from the sale of real estate, securities, etc., were only $620,643 in 1930, as compared with $2,952,464 in I929. 1 1 6 Schulte also fared poorly in 1929 and in 1930. The very sharp drop in earnings shown in the table subjected the management once more to severe criticism at the annual meeting in 1929. D. A . Schulte blamed cigarette price cuts 113 New

York Times, July 9 and 20, 1930.

114

United States Tobacco Journal, Sept. 6, 1930, p. 7. The Neve suit was preceded by and has resulted in a number of subsidiary suits by individuals charging mismanagement by United Cigar interests. Ibid., March 29, 1930, p. 9; Sept. 20, 1930, p. 11 ; Oct. 18, 1930, p. 9; Ν civ York Times, Dec. 12, 1929. 115

United States Tobacco Journal, Oct. 25, 1930, p. 10. 11 β New York Times, April 21, 1931. Poor's Manual of 1931, P. 2758.

Industrials,

356

APPENDIX

for the company's difficulties and announced several economies which had been instituted. Perhaps the most interesting were the reductions in executive salaries, the elimination of a bonus system for employees entailing an outlay of $180,000 and abandonment of coupons. 111 At the next annual meeting in 1 9 3 1 , Schulte announced that his salary had been discontinued entirely. In answer to the criticism that directors owned little interest in the company, it was announced that the directors owned 387,000 of the 1 , 1 3 5 , 6 1 6 shares of common stock outstanding. 118 Schulte-United, Inc., holding company for the " five-and-ten " and clothing stores of the group went into bankruptcy early in 1 9 3 1 . The other Schulte companies were only lightly touched by this action, it was announced, although D. A. Schulte and his associates directly or through other channels owned approximately 40 per cent of the company's common and preferred and more than 90 per cent of its bonds. The company's troubles were blamed on long-term rentals entered into just before the stock-market collapse which later proved excessive, heavy and repeated losses from inventory markdowns and inability to obtain requisite credits in buying. 11 ® Late in 1931 the Morrow interests finally worked out a plan for the reorganization of Tobacco Products and submitted it to the stockholders of the various companies concerned. Under the plan the properties of the company, a Virginia corporation, were to be divided between two new companies—Tobacco Products Corporation of New Jersey and Tobacco Products Corporation of Delaware. The New Jersey corporation was to receive the lease agreement with lir Schulte's own salary as president was cut from $104,000 to $45,000, while the vice presidents were cut by from 26 to 55 per cent, one being eliminated entirely. United States Tobacco Journal, April 26, 1930, p. 35. 118

New York Times, April 21, 1931. 11» New York Times, Jan. 15 and April 2, 1931.

UNITED

CIGAR STORES

COMPANY

35 7

American Tobacco and the entire capital stock of the subsidiaries owning the reversionary interest in the leased brands. In return it was to issue $35,591,235 of new 6 l /i per cent collateral trust debentures to stockholders of the Virginia corporation and to turn over to the new Delaware company all its common stock. In addition the Delaware Company was to receive all the other assets of the Virginia company (chiefly its United Cigar stockholdings) and assume its liabilities. Its entire capital stock was to be issued to common stockholders of the extant corporation. In the resulting exchanges holders of class A stock in the present corporation were to receive $10 principal amount of the new debentures for each share held. Holders of common stock were to receive $4 in debentures and one share of the common of the Delaware corporation for each share held. A s the owner of the majority of each class of stock, the United Stores Corporation was to receive approximately $20,441,896 of the new debentures and approximately 1,999,124 out of 3,296,652 shares of the Delaware company's common. United Stores preferred stockholders were to be offered $50 of Tobacco Products of New Jersey debentures in exchange for each share of preferred." 0 All of these measures proved insufficient to stave off disaster. In July 1932, the Retail Chemists Corp., operator of the Whelan and Pennsylvania drug stores, filed a voluntary petition in bankruptcy. A month later the United Cigar Store Co. itself filed a voluntary petition in bankruptcy for itself and its real-estate subsidiary, Cigar Stores Realty Holdings, Inc. The company's management attributed the death blow to trouble with its real estate. In prosperous times it had been profitable to lease properties for long terms and to sublet them for higher rentals. With subtenants defaulting on their rentals, however, the company found it120

New York Times, Dec. 2, 1931 ; Jan. 5, 1932 ; Jan. 27, 1932.

APPEXDIX

358

self liable to the owners on its own lease contracts, but without income from which to meet the payments due. tion listed $9,502,029.90 as its liabilities and as the book value of its assets.

Its peti-

$8,341,634

T h a n k s to this bankruptcy,

the United Stores Corp. was left with its share in the lease of the Tobacco Products brands to the American Tobacco Co. as its only substantial asset.121

In spite of the complexity of the details, the story of this venture can be summed up in a few simple sentences.

Start-

ing immediately a f t e r the disintegration, the Whelan group ostensibly set out to build up around United Cigar as a nucleus a new tobacco manufacturing and distributing organization exceeding in power and importance any company l e f t by the decree.

T h e plan developed steadily, with a

temporary setback a f t e r the war, for nearly twenty years. In the absence of authority to go behind the scenes it is impossible to say exactly how far and in what directions the W h e l a n s reached out. an

amazingly

complex

However, little by little they built up organization,

which embraced

in

some degree of control the only other important cigar chain in the country, chain stores distributing drugs, confectionery, foods and wearing apparel, manufacturers of a wide variety of articles sold in the stores, very important real-estate holdings, practically all the important tobacco manufacturers outside of the " big four " and several important cigar manufacturers.

There can be little doubt, too, that had the plans

of the group worked out a very large cigar manufacturing company would have appeared, embracing possibly all the output under control of Union Cigar, Consolidated C i g a r and P o r t o Rican-American Tobacco. But the plans did not work out.

T h e group overreached

itself, and even before the stock-market crisis of 1929 its 121 Standard Corporation Records, A u g . 26, 1932, p. 1827; ibid., Neii'S Section, A u g . 30, 1932, p. 5746, and Sept. 2, 1932, p. 5710.

Daily

UNITED structure collapsed. of

enterprises.

CIGAR STORES

COMPANY

T h e W h e l a n s lost control o f the g r o u p

The

split

off.

V a r i o u s o f the subsidiary chain-store ventures w e n t

Schulte

interests

into

b a n k r u p t c y or were sold o r both.

were

The Tobacco manufac-

t u r i n g enterprises w e r e split at least f o u r w a y s — p a r t

to

A m e r i c a n T o b a c c o , part to U n i o n T o b a c c o and Philip M o r r i s , p a r t to Stephano B r o s , and part to the W e b s t e r - E i s e n l o h r interest.

U n i t e d C i g a r w a s l e f t w i t h only its tobacco dis-

tributing business, a comparatively small drug-retailing business and the rights t o part o f an income f r o m the cigarette business consolidated in the years immediately a f t e r the disintegration proved

and leased to A m e r i c a n

insufficient,

and

its

ultimate

Tobacco. reward

This has

has been

bankruptcy. Clearly, then, the threat the independents saw in its b e i n g permitted to continue w i t h o u t being broken into several units h a s not materialized

T h i s outcome need not be considered

a tribute to the sagacity o f those w h o d r e w up the d e c r e e ; f o r several important f a c t o r s w h i c h they could not h a v e f o r e seen have played a part in causing this result.

O n e is the rise

o f chain stores outside o f the tobacco field w h i c h , h a n d l i n g tobacco products as a side line, have become sufficiently i m portant to challenge if not to surpass the cigar chain in volume o f sales.

A n o t h e r is the increasing emphasis put b y

m a n u f a c t u r e r s o n their o w n selling e f f o r t s and their w i l l i n g ness to have the distributors p e r f o r m little more than the purely mechanical task o f h a n d i n g the consumers the g o o d s asked for, w i t h an accompanying reduction o f m a r g i n s between the m a n u f a c t u r e r s ' price and the price to the c o n s u m e r . T h i r d , out o f these t w o has come a price competition w h i c h makes the profit too small t o permit a store to subsist o n tobacco products alone.

F o u r t h , there has come the m e c h a n -

ization o f cigar m a n u f a c t u r e and the subjecting o f this p r o d uct, the stronghold o f the cigar store in years g o n e by, to

36ο

APPESDIX

the forces affecting cigarettes. Fifth, the profitability of cigars has been further reduced by their fall in consumer favor and the change within cigars from the more expensive to the cheaper types. Finally, there is the personality of the managers of United Cigar to consider. It is impossible to read the references to George J. Whelan in that inimitable journal of Wall Street, They Told Barron, without concluding that he has been primarily a stock-market operator. Whelan appears and reappears in these pages as the speculator participating in pools and manipulations, often of the stocks of United Cigar and Tobacco Products, running in and out of the market, refusing to take a salary from United Cigar so as to leave himself free, encouraging speculation in his companies' shares by various means, winning profits and taking losses.122 What would have happened had the management been interested less in the stock market and more in sound development, is an idle speculation. All that is important is that it did not happen. What will emerge from the present bankruptcy proceedings it is too early to tell. It seems safe to say, however, that unless new and fundamental changes in the industry which cannot now be seen make their appearance, there is small likelihood of the company's being built up anew to a place in the industry comparable with that it held at the time of the disintegration. 122

Pound and Moore, They Told Barron, pp. 40, 44, 47, 56, 218, 222.

BIBLIOGRAPHY M u c h of the i n f o r m a t i o n concerning the financial a f f a i r s of t h e v a r i o u s companies o p e r a t i n g in the tobacco industry, has been t a k e n f r o m t h e i r a n n u a l reports. W h e r e these w e r e not available, recourse has been had t o Moody's Manual of Investments: Industrial Securities, Poor's Manual of Industrials, Standard Corporation Records and Standard Corporation Service. Material supplementary to t h e reports of the companies h a s been f o u n d in all of these manuals and in the listing statements issued f r o m time to time by the N e w Y o r k Stock E x c h a n g e . O t h e r sources consulted w e r e : I.

PERIODICALS

Commercial and Financial Chroniclc. Journal of Commerce (New York). New York Sun. New York Times. New York World. Retail Tobacconist. United States Tobacco Journal. Wall Street Journal. 2. COURT D E C I S I O N S AND P A P E R S

American Tobacco Company v. Federal Trade Commission, 9 F e d . (2d.), 570, O c t . 20, 1925. Federal Trade Commission v. American Snuff Company, 38 F e d . (2d), 547, Feb. 13, 193°. Federal Trade Commission v. American Tobacco Company, 283 F e d . Rep., 999, Oct. 3, 1922. Federal Trade Commission v. American Tobacco Company, 264 U . S. 298, M a r c h 17, 1924. Federal Trade Commission v. American Tobacco Company, 274 U . S., 543, M a y 31, 1927. Federal Trade Commission, Petitioner, v. American Tobacco Company, Respondent. U n i t e d S t a t e s S u p r e m e Court, October term, 1925, N o . 279. On Petition for Writ of Certiorari to the United Slates Circuit Court of Appeals for the Second Circuit, Transcript of Record. International Harvester Company of America v. Commonwealth of Kentucky, 234 U . S., 216, J u n e 8, 1914. Locker v. American Tobacco Company, 200 Fed. Rep., 973, N o v . 29, 1912. 361

3Ó2

BIBLIOGRAPHY

Locker v. American Tobacco Company, 218 Fed. Rep., 447, Nov. io, 1914. Porto Rican-American Tobacco Company of Porto Rico v. The American Tobacco Company, 30 Fed. ( 2 d ) , 234, Jan. 7, 1929. Porto Rican-American Tobacco Company of Porto Rico v. The American Tobacco Company. United States Circuit Court of Appeals for the Second Circuit, 1928. On Appeal from the District Court of the United States for the Southern District of New York, Transcript of Record. Schlegel, George, Inc., v. Consolidated Lithographing Corporation and others. United States District Court, Southern District of New Y o r k , July 18, 1930. Complaint. State v. P. Lorillard Co. and others, 181 Wis., 347, M a y 1, 1923. United States v. The American Tobacco Company, 164 Fed. Rep., 700, Nov. 7, 1908, and 164 Fed. Rep., 1024, Dec. 15, 1908. United States v. The American Tobacco Company, 221 U . S., 106, M a y 29, 1911. Reprinted as Senate Document 40, 62d Cong., ist Sess. United States v. The American Tobacco Company, 191 Fed. Rep., 371, Nov. 15-16, 1911. 3. O T H E R GOVERNMENTAL

PUBLICATIONS

Brodell, A . P., Cost of Producing Virginia Dark and Bright Tobacco and Incomes from Farming, 1922-1925, Virginia Agricultural Experiment Station, Virginia Polytechnic Institute, Blacksburg, Va., March, 1927. Federal Farm Board, Annual Report, Washington, 1930-1931. Federal Trade Commission, American Snuff Company, In the Matter of the, i l F . T . C , 144, June 30, 1927. , American Tobacco Company and the Imperial Tobacco Company, The, Washington, 1925. , Annual Report, Washington, 1915-1931. , Consolidated Cigar Corporation, In the Matter of, Docket No. 1451, April 5, 1927, Complaint. , Cooperative Marketing, Washington, 1928. , General Cigar Co., Inc., In the Matter of the, Docket No. 1879, Nov. 25, 1930, Complaint. , ibid., Nov. 10, 1931, Answer of the Company. , ibid., May 21, 1932, Order of Dismissal. , Prices of Tobacco Products, Washington, 1922. , Report of the Federal Trade Commission on the Meat-Packing Industry, P a r t II, " Evidence of Combination A m o n g Packers," Washington, 1919. , Report on Resale Price Maintenance, P a r t I, Washington, 1929, Part II, "Commercial Aspects and Tendencies," Washington, 1931. , Report of the Federal Trade Commission on the Tobacco Industry, Washington, 1921, second edition 1922. T h e pagination of the two

BIBLIOGRAPHY

363

editions differs slightly. References in the present study are to the 1922 edition. Garnett, William Edward, Rural Organisations in Relation to Rural Life in Virginia with Special Reference to Organisational Attitudes, Bulletin 256, Virginia Agricultural Experiment Station, Virginia Polytechnic Institute, Blacksburg, Va., May, 1927. Hutson, J . B., Factors Affecting the Acreage of Flue-Cured Tobacco, Bureau of Agricultural Economics, Washington, 1930. (Mimeographed.) Imperial Economic Committee, Report on the Methods of Preparing for Market and Marketing within the United Kingdom of Tobacco Produced within the Empire, London, 1928. Peterson, Arthur G., Historical Study of Prices Received by Producers of Farm Products in Virginia, 1801-1927, Technical Bulletin 37. Virginia Agricultural Experiment Station, Virginia Polytechnic Institute, Blacksburg, Va., March, 1929. Porto Rico, Thirtieth Annual Report of the Governor of, fiscal year ended June 30, 1930, Washington, 1930. Scanlan, John J., and Tinley, J . M., Business Analysis of the Tobacco Growers' Co-operative Association, Bureau of Apricultural Economics, Washington, October, 1929. Shaulis, Lloyd L., Prices of Tobacco and Tobacco Products, in History of Prices During the War, edited by Wesley C. Mitchell, Bulletin No. 19, W a r Industries Board, Washington, 1919. Shoup, Carl, Sales Taxes on Selected Commodities: A Report to the New York State Commission for the Revision of the Tax Laws, Albany, 1932. Thorp, Willard L., The Integration of Industrial Operation, Bureau of the Census, Washington, 1924. Corporations, Bureau of, Report of the Commissioner of Corporations on the Tobacco Industry, Part I, "Combination," Washington, 1909; Part II, "Capitalization, Investment and Earnings," Washington, 1 9 1 1 ; Part I I I , " P r i c e s , Costs, Profits," Washington, 1915. United States Department of Agriculture, Bureau of Agricultural Economics, Foreign Crops and Markets. (Periodical.) , Bureau of Agricultural Economics, Service and Regulatory Announcements No. 120, Regulations of the Secretary of Agriculture Governing the Inspection, Grading and Certification of Tobacco, Washington, 1930. , Bureau of Agricultural Economics, Miscellaneous Circular No. 55. Type Classification of American-Grown Tobacco, Washington, 1925. , History and Status of Tobacco Culture, Separate from Yearbook, 1922, No. 885, Washington, 1923. , Yearbook of Agriculture. (Annual.)

364

BIBLIOGRAPHY

United States Department of Commerce, Bureau of Foreign and Domestic Commerce, Distribution Cost Studies—No. 6, Louisville Grocery Survey, Part I, " Census of Food Distribution Washington, 1930. , Bureau of Foreign and Domestic Commerce, Selling Cigars, Cigarettes, and Tobacco through Retail Grocery Stores: One of a Series of Commodity Studies from the Louisville Grocery Survey, Washington, 1931. (Mimeographed.) , Bureau of Foreign and Domestic Commerce, Monthly Summary of Foreign Commerce of the United States. (Periodical.) , Bureau of Foreign and Domestic Commerce, Tobacco Markets and Conditions Abroad. (Periodical, mimeographed.) , Bureau of the Census, Abstract of the Census of Manufactures, 1919, Washington, 1923. , Bureau of the Census, Fifteenth Census of the United States, Manufactures: 1929, " Industry Series. Tobacco Manufactures and Tobacco Pipes," Washington, 1931. , Bureau of the Census, Statistical Abstract of the United States, Washington. (Annual.) , Bureau of the Census, Bulletin 165, Stocks of Leaf Tobacco, and the American Production, Imports, Exports, and Consumption of Tobacco and Tobacco Products, 1928, Washington, 1929. , Bureau of the Census, United States Summary of Retail Distribution, Washington, 1931. United States Department of Justice, The Federal Antitrust Laws, with Amendments: List of Cases Instituted by the United States and Citations of Cases Decided Thereunder or Relating Thereto, Washington, Dec. 15, 1923. United States Department of Labor, Bureau of Labor Statistics, Bulletin No. 493, Wholesale Price, 1913 to 1928, Washington, 1929. , Bureau of Labor Statistics, Bulletin No. 521, Wholesale Prices, 1929, Washington, 1930. , Bureau of Labor Statistics, Bulletin No. 543, Wholesale Priccs, 1930, Washington, 1931. , Bureau of Labor Statistics, Prices, Wholesale and Retail, and Cost of Living, December 1931, Washington, 1932. United States Senate, Hearings before Committee on Interstate Commerce on the Control of Corporations, Persons and Firms Engaged in Interstate Commerce, 62d Cong., 2d Sess., 1 9 1 1 - 1 9 1 2 , Washington, 1912. United States Treasury Department, Office of Internal Revenue, Annual Report of the Commissioner of Internal Revenue, Washington, 1910-1931. , Regulations No. 8 Relating to the Taxes on Tobacco, Snuff, Cigars and Cigarettes, revised April, 1928, Washington, 1928.

BIBLIOGRAPHy 4. PRIVATE

365

PUBLICATIONS

American Tobacco Company, The, The American Tobacco Compony Employees' Stock Subscription Plan, 1931, New York, 1931. , Circular to Security Holders, New York, Dec. 9, 1911. , Letter to stockholders of, from J. M. W . Hicks, treasurer, New York, March π , 1914. , Resolution of the Board of Directors of, New York, March 11, 1914. Barney, Charles D., & Co., The Tobacco Industry, New York, 1924. , The Tobacco Industry: Supplementary Bulletin, New York, 1925. , The Tobacco Industry: Annual Review, New York, 1926-1931. Bondy, Richard C , Jr., " T h e New Era in the Cigar Industry," The Burning Question, General Cigar Company, May, 1926, New York. Breyer, Ralph F., Commodity Marketing, New York, 1931, chapter xvi, " Marketing of Tobacco Products." Chamberlin, E. H., " Duopoly : Value Where Sellers are Few," Quarterly Journal of Economics, vol. 44, November, 1929, pp. 63-100. Chamber of Commerce of the United States, Domestic Distribution Department, Retail and Wholesale Trade of Eleven Cities, Washington, May, 1928. (Mimeographed.) Copeland, Melvin T., Reccnt Economic Changes in the United States: Report of the Committee on Recent Economic Changes of the President's Conference on Unemployment, New York, 1929, vol. i, chapter ν, " Marketing ". Crowell Publishing Company, National Markets and National Advertising, New York. (Annual.) Fitzgerald, Patrick, Industrial Combination in England, London, 1927. Flügge, Eva, " Possibilities and Problems of Integration in the Automobile Industry," The Journal of Political Economy, vol. 37, Aug., 1929, pp. 150-174· Fetter, Frank Albert, The Masquerade of Monopoly, New York, 1931. Flynn, John T., " Edward L. Bernays : The Science of Ballyhoo," The Atlantic Monthly, vol. 149, May, 1932, pp. 562-571. Hill, George W., " The Newer Competition," World's Work, June, 1929. Jones, Eliot, The Trust Problem in the United States, New York, igei. Lorillard, P., Co., Letter to stockholders of the, from B. L. Belt, president, New York, Feb. 5, 1925. , Letter to stockholders of, from B. L. Belt, president, New York, April ι, 1931. Also published as an advertisement in the New York Times, April 6, 1931. Marshall, Alfred, Principles of Economics, London, eighth edition reprinted 1925, book iv, chapters viii-xii, and book v, chapter xiv. Maurer, James H., Unemployment and the Mechanical Man, leaflet issued by the Socialist Party of America, Chicago, 1931.

3 66

BIBLIOGRAPHY

Means, Gardiner C., " The Diffusion of Stock Ownership in the United States," Quarterly Journal of Economics, vol. 45, Aug., 1930, pp. 561-600. , " The Separation of Ownership and Control in American Industry," Quarterly Journal of Economics, vol. 46, Nov., 1931, pp. 68-100. Moore, Henry L., " Paradoxes of Competition," Quarterly Journal of Economics, vol. 20, Feb., 1906, pp. 210-230. National Better Business Bureau, Inc., Cremo Cigar Advertising Unfair to Industry, New York, Feb., 1930. , " Cremo " Advertising Attacks Property Rights, New Y o r k , March, 1930. Porto Rican-American Tobacco Co., Letter to stockholders of the, from Luis Toro, president, New York, March 22, 1923. , Letter to stockholders of, from Luis Toro, president, New Y o r k , May 10, 1923. , Letter to stockholders of, from Luis Toro, president, New Y o r k , Jan. 10, 1927. Pound, Arthur, and Moore, Samuel Taylor, editors, They Told Barron: Conversations and Revelations of an American Pepys in Wall Street: The Notes of the Late Clarence W. Barron, New York, 1930. Rhoades, E. L., Introductory Readings in Marketing, New Y o r k , 1927. Seager, Henry R., and Gulick, Charles Α., Jr., Trust and Corporation Problems, New York, 1929. Stevens, William S., editor, Industrial Combinations and Trusts, N e w Y o r k , 1913. Wootter, T. J., Jr., The Plight of Cigarette Tobacco, Chapel Hill, N. C., 193'· Zimmerman, Μ. M., " The How and Why of Chain Growth in Various Trades," Printer's Ink, Oct. 9, 1930, pp. 70 et seq.

INDEX A d v e r t i s i n g , 113-4, 124, 213 4, 215η, 221-33. 236-40 A m e r i c a n C i g a r Co., 23-4, 27, 30-1, 37, 50. 85-6. 92. 95. 128, 136, 16411, 237-8 A m e r i c a n D r u g g i s t s ' Syndicate, 338 A m e r i c a n Foreign T r a d e Corp., 330 American - L a France Fire E n g i n e Co., 130η American Machine and F o u n d r y Co., 50-2, 91, 131 American Safety Razor Corp., 344 American Snuff Co., 23, 26, 30-1, 34, 38, 62, 82-3, 124-5, I45n, 162, 234-6, 263η, 285, 286-7, 295, 3°3. 304 American Stogie Co., 22η, 23-4, 3θ-ι American Sumatra Tobacco Co., 126-7, 341 American Sumatra Tobacco Corp., 127η American Tobacco Co., 21, 22, 23-7, 29-32, 33-4. 37-8, 49-50, 64, 65, 66, 67, 72, 74-5, 76, 86, 102, io8, h i , 115, 116, 124, 129, 131, 133η, 137, 137". >38, 141, 146η, 162-5, ι66η, 169, 171, 172, 181, 182-3, >98, 199, 205-7, 208-9, 2ΐθη, 211-2, 214, 217, 224, 227, 228, 232, 233, 237, 248, 251-2, 259-60, 260η, 26i, 262, 263-5, 266, 268, 281, 288, 297, 298, 299, 300, 302, 303, 308-10, 312-4, 324. 333. 335-6, 337, 338-9, 341, 350-1, 358, 359; control, 22, 34, 169-70, 294-6, 297η, 2g8, 304, 3o6; dividends, 280; earnings, 20, 270, 273, 275-82, 284; history, 18-21; integration, 19-20; output, 18-9, 61-3, 68, 69, 78, 85-6, 97, 1 2 3 ; partition, ch. i ; sales, 272-4 American Tobacco Securities Corp., 297η Amsterdam Supply Co., 25 Axton-Fisher Tobacco Co., 75-6, 79

! ! ! I j I

Hall, D a v i d Η., 203η Barkmahn Co., 335 B a y u k Cigars, Inc., 93, 95, 236η Beechnut Foil Co., 133η Heech-Nut P a c k i n g Corp., 340, 348 Belt, B. L., 304 Bernhardt, Μ. E., 340 Black Horse Tobacco Co., 163 Blackwell's D u r h a m Tobacco Co., 38 Bloch Bros. Tobacco Co., 79, 261 Booker Tobacco Co., 326 Brady, A . N., 295 Brandeis, Louis D., 32-7, 39 Brands, significance, 193-4, 215-6 British-American Tobacco Co., 20, 25, 26, 27, 28, 30, 32, 34, 37, 71, 72-5. 77, "8n, 137η, i62-5, 170, 206-7, 283, 294, 297, 301, 302, 303, 328 Brown and Williamson T o b a c c o Co., 73, 78η, 21 i n Burley Tobacco Growers' Cooperative Association, 173 B u y i n g under cover, 164-5, >7°. ' 7 5 . 183-4 Chain stores, appendix and, 244-50 Chamberlin, E. H., quoted, 177, 178 C i g a r brands : Chancellor, 85 ; Cinco, 3 4 1 ; Cremo, 85-6, 124, 136, 237-8; H a v a n a Ribbon, 236η, L a Palina, 89; Mapacuba, 236η; Muriel, 8 6 ; Pall Mall, 238η; R o c k y F o r d , 84η, 86-7 ; Roi-Tan, 85 Cigarette brands : B a r k i n g D o g , 68, 3 3 5 ; Camel, 64-5, 67-9, 70, 123,

Bagley, John J., and Co., 333

(367)

193. 194. 205-6, 222, 224, 227, 232-3; Chesterfield, 64, 65, 68, 70, 194, 205-6; Fatima, 64, 65, 204; Herbert Tareyton, 329, 335, 3 4 4 ; Kensitas, 7 5 ; Listerine, 76 ; L u c k y Strike, 65, 66, 68, 69, 70, 74η, 75, 76, 193, '94. >98, 199. 201, 205, 206, 2o8-9, 214, 224, 227, 228, 232, 233. 237, 262, 281, 338; Melachrino, 335 ; Old Gold, 65, 66, 68,

3

68

INDEX

71, 113, 194, 206-7, 2ion, 228, 233; O m a r , 64; O n e - E l e v e n , 206, 207-8; P a u l Jones, 210η, 344; P i e d m o n t , 65, 68, 70; Raleigh, 73 4 . 7 7 . 1 9 3 . 2 i o n ; S p u d , 7 5 ; S w e e t C a p o r a l , 205 ; T h r e e C a s t l e s , 68, 339η; T i g e r , 65; W i n g s , 7 4 . 21 i n ; W i x , 74-5; Z u b e l d a , 64 Cigarettes, large, output o f country, 42-5, 47η; n u m b e r o f m a n u f a c t u r e r s o f , 101 ; s m a l l , o u t p u t o f c o u n t r y , 42-8 C i g a r s , l a r g e , m a c h i n e o u t p u t , 50-1, 53-7; o u t p u t o f c o u n t r y , 42-5, 47η, 54, 56; n u m b e r o f m a n u f a c t u r e r s , 55, ι ο ί , 102; s m a l l , o u t p u t o f c o u n t r y , 42-5, 47η Cigar Stores Realty Holdings, Inc.,

! I ! i ! :

i

! ι

m a n a g e m e n t , 304-7 ; s u c c e s s o r c o m p a n i e s , 31-2, 33, 34, 73. 2 9 2 , c h . x i i , 325; t o b a c c o t r u s t , 31-2, 294-5 C o p e l a n d , M e l v i n T . , 226-7 C o s t s , 107-15, 187 C u l l m a n B r o s . , 127, 128, 341-2, 349 C u l l m a n , J o s e p h F . , J r . , 128, 334, 341. 349 C u l l m a n , J o s e p h F . , S r . , 128, 341 C u m m i n g s , W i l b u r L . , 347η Dark Tobacco Growers' Cooperative A s s o c i a t i o n , 173 D a v i s , B . G . , & C o . , 342 D e i s e l - W e m m e r - G i l b e r t C o . , 93, 95 D e m a n d , s h i f t s i n , 41, 45-8, 65-b, 72 D e M u t h , W m . , & C o . , 339-40 D i l l , J . G „ C o . , 78η, 125 D i s t r i b u t i o n , e x c l u s i v e , 250-2. S e e

344. 357-8 Marketing. C o l l i n s , H e r b e r t S . , 325 D i s t r i b u t o r m a r g i n s , 253-8, 261-2 ; C o l l u s i o n , e h . v i i a n d 209-11, 217-8, o r g a n i z a t i o n s , 258-9, 260-1 290, 307-8 D i v i s i o n o f m a r k e t s , 19-20, 25, 81-2, C o m m o n a g e n t s , 165, 170, 175, 184-5 180, 182-3 C o m p e t i t i o n , e f f e c t s , 286, 317-9; e v i D i x o n , J a m e s M . , 298, 331 d e n c e s o f , 71-2, 97-8, 175, 200, Duke, Β . N „ 295 203-7, 214-5, 219, 268, 273, 281-2, D u k e , J a m e s B . , 48, 73, 217, 294, 316-7; e x t e n t , 207-8, 225, 228, 234, 295. 297-302, 303, 325, 328, 331, 236-8, 241, 247-50, 266-7, 322; 3 3 i n , 332 forms, 200, 212-6, 217, 219-22, D u l l e s , J o h n F o s t e r , 347η 224, 234-5, 236η, 236-40, 2¿I-2, D u n h i l l I n t e r n a t i o n a l , I n c . , 335 2S6, 3 1 7 ; h y p o t h e s e s i m p l i c i t i n , Duopoly, 177-9, '86. '87-8, 192-4, 176-7; l i m i t a t i o n s , 82-3, 98-9, 175201-2, 207-8, 218, 231-3, 274-5, 86, 190-1, 192, 200, 215-6, 217-8, 290-2, 308, 320-1, 322 229-33, 238-40, 241, 266-7, 281-2, 290-2, 317-21; n o n - p r i c e , c h . i x ; E a r n i n g s , successor companies, c h . p r i c e , c h s . v i , v i i i a n d 219-20, 322 xi a n d 319-20 Concentration o f cigar manufacture, E i s e n l o h r , O t t o , a n d B r o s . , 90, 128, 102-3, 107-8 ; o f c i g a r e t t e m a n u 263η, 341-2 f a c t u r e , 103, 105, 108; o f s n u f f Elasticity, demand, 144 ; supply, a n d t o b a c c o m a n u f a c t u r e , 103-4, 143-4. '58-9. 178 108 F . l k i n s , W . L . , 295 C o n g r e s s C i g a r C o . , 89, 289, 304 E l l i s , R e u b e n M . , 336 C o n l e y F o i l C o . , 22, 26, 34, 35, 96, E m p l o y e e b o n u s e s , 308-315 133η, 283, 300, 302 E x p o r t L e a f T o b a c c o C o . , 163, 164, C o n l e y T i n F o i l C o r p . , 133η 172 Consolidated Automatic MerchandisE x p o r t s , t o b a c c o l e a f , 149, 157-8, ing Corp., 3 4 3 160, 166; t o b a c c o p r o d u c t s , 71 C o n s o l i d a t e d C i g a r C o r p . , 57, 92-3, 9 5 . 127, 3 0 I n > 3 4 0 , 3 4 1 . 3 5 8 Consolidated Lithographing Corp., 5.! C o n s o l i d a t e d T o b a c c o C o . , 27 C o n t i n e n t a l T o b a c c o C o . , 137η, 2ion, 335. 337. 344. 345 C o n t r o l , a b u s e s , 308, 313-5, 323-4;

F a l k T o b a c c o C o . , 263, 329 F e d e r a l C i g a r C o . , 23, 24, 31, 86-7. F e n d r i c h , H . , I n c . , 94, 95 F o a m i t e - C h i l d s C o r p . , 130η F o i l , 132-5 French tobacco monopoly, 162-4, 166-7

INDEX

369

Fulton Sylphon Co., 133η

Italian tobacco monopoly,

G a r n e t t , W . E., 174 General C i g a r Co., 84η, gi-2, 95,

J a v a Corp., 128 Johnston Tin Foil & Metal Co., 22,

123,

128,

136,

136η,

236-7,

243P,

328. See United Cigar Manufacturers' Co. G. H . P. C i g a r Co., 93, 137η, 3o:n Gianaclis, Nestor, Co., 328 Gilbert, Sam T., 342 G o r m a n , P . Η., 164η Gravely, P . B., Co., 125 Great Atlantic and Pacific T e a Co., 249

Gulick, Charles Α., J r . , quoted, 28η, 265

H a h n , P a u l Μ., 134η H a p p i n e s s Candy Stores Co., 340, 353-4, 355 H a r r i s , Robert, a n d Bro., 330 H a v a n a - A m e r i c a n Co., 85η Helme, George W., 33, 26, 30-1, 34, 62,

82-3,

125,

162-3,

234.

285,

286-7, 295, 304

H e r n s c h e i m Tobacco Co., 22n, 84-5, 283

Hill, George W., 68, 69η, 214η, 224, 233, 309-310, 338 Hill, Percival S., 203η, 2 1 7 ,

26, 34, 135η, 283, 304

K i r k , Τ . H „ quoted, 181 Klein, D. Emil, Co., 93-4, 95 Kleiner Cigar M a n u f a c t u r i n g 342 Kleiner, E., Co., 342

259,

H i r s c h h o r n , Fred, 128 H o l d i n g off the market, 164-5, 180-3 H u y l e r ' s , Inc., 339 H y g r a d e Food Products Corp., 348

I.a Lasine Corp., 343 L a m b e r t P h a r m a c a l Co., 76 L a r u s & Bro. Co., 80, 263 Lehmaier, Schwartz & Co., 133 η Levy, Felix H., 32-7 Lewis and Leidersdorf Co., 137η Lichtenstein, Julius, 127η Licorice,

19-20, 25, 26,

28, 30, 38, 73, 75, 146η, 162-5! :6q, 170, 1 7 1 , 172, 295-6, 301, 333, 339η

I m p o r t s , tobacco leaf, 65, 128, 149 Integration, ch. ν and 218, 322; advantages, 121-6, 1 3 1 , 138-40; defi116;

126-32,

135-40;

dependents,

extent,

118-22,

forms,

126-8;

123-4, 126, 1 3 1 , 133-5,

26-7, 30-1, 32, 33-4, 64, 65, 67, 72. hi, 228,

162-165, i66n, 170, 172-3, 2 t o , 251,

260,

261-2,

263,

281,

control, 34, 295, 304, 306; dividends, 280-1;

300-1, 302, 308, 3 1 0 ;

61-3, 68, 70, 78

Liggett, Louis K., quoted, 300 Liggett, L . K„ Co., 327 Livermore, Jesse, quoted, 297 Locker, R., & Co., 38, 252 L o r i l l a r d , P., Co., 23, 24, 26-7, 30-1, 32, 33-4, 64, 65, 66-7, 72, 84, 1 1 3 · 123, 162-5, i66n, 170, 172-3, 204-5, 228,

260η,

26i,

263η,

263-4,

282, 302, 304, 311-2, 314-5, 3 3 2 ; control, 34, 295, 300, 304, 307; dividends, 66-7, 280, 281 ; e a r n i n g s , 2ion,

271,

275-82.

284;

output,

61-3, 68, 70-1, 78, 86-7, 95, 97

Luckett, W . S., 164η

123,

117-8; i n -

limitations, 139-40; suc-

cessor companies, 125-6, 128-32, ' 3 7 - 4 0 ; tobacco trust, 19-20, 1161 1 7 , 12Q, 132

International 52-3 International 50, 51 International International

96-7, 129-30, 287-8

L i f e Savers, Inc., 343 Liggett and Myers Tobacco Co., 24,

224,

nition,

Co.,

e a r n i n g s , 270, 275-82, 284; o u t p u t , 222η,

266η; q u o t e d , 212, 252, 257

I m p e r i a l Tobacco Co.,

162-4, 166-7

B a n d i n g Machine Co., Cigar Machinery Co.. Planters' Corp.. 162-5 T r a d e m a r k Co., 33t

McAdoo, William G., 67, 85η, 92, 328-9 M a c A n d r e w s & Forbes Co., 22-3, ?6, 34-5, 129η, 287-8, 304

Machinery, cigarmaking,48-59,107-8 ; other, 108, 130-1 Maloney, T h o m a s J., 304 M a r k e t i n g , 112-4, 123, 124, 224-5, ch. χ Marshall, A l f r e d , 106 Maryland Tobacco G r o w e r s ' Association, 167

37 o

INDEX

Maurer, J a m e s H., quoted, 58-9 Mazer Cigar Co., 94 Mazer-Cressman C i g a r Co., 94, 95 Means, Gardiner C., quoted, 3 0 6 Melachrino, M., & Co., 67η, 326 Mengel B o x Co., 131 Metropolitan Tobacco Co., 38, 251-2, 254 Midland F o i l Co., 133η M i r r o r Confectionery Co., 340, 355 Monopoly, earnings, 268-9, 275 ; evi dences o f , 141-3, 147, 159-60, çh. vii, 185-6, 200n, 201-8, 2 0 9 - I I , 214-5, 230-1, 274"5, 2 9 0 - 2 ; limitations, 179, 188-90, 193, 245-50, 307-8 Montgomery W a r d & Co., 331, 337 Moore and Schley, 295 Moore, Henry L., quoted, 176 M o r r i s , Philip, & Co., 75, 137η, 330, 333. 335. 336-7. 345. 352. 359 M o r r i s , Philip, Consolidated, 337 M o r r i s , Philip, International Corp., 333 M o r r o w , Frederick Κ . , 347η M o r r o w , George K . , 347, 347η, 348, 352, 353-4, 356 Mowrer, Arthur C., 3 1 0 Moxham, Egbert, quoted, 133η Mutual-Profit Coupon Corp., 327 N a t i o n a l Better Business Bureau, 238η National Snuff Co., 27 Neiley, Charles F . , 310 Neve D r u g Stores, Inc., 343, 355 New J e r s e y Tobacco Co., 252 New Y o r k - T a m p a Co., 89 Noyes, Charles F., Co., 338 ; Charles F . , National Realty Co., 338 Odin C i g a r Co., 93 Output, independents, 30-1, 61-3, 67, 68, 75-7, 78-80, 81, 90-6, 9 8 ; successor companies, 30-1, 6 1 - 9 9 ; tobacco trust, 19, 61 P a r k and T i l f o r d , 335 P a r k and T i l f o r d Retail Stores, I n c . , 344 P a r t i t i o n , alternatives, 3 2 1 - 3 ; criticism, 2 9 - 3 8 ; decree, 2 1 - 9 ; problems, 17-8 Patterson Bros. Tobacco Co., 80 Patterson, R u f u s L., 50

Payne, O. H., 295 I'enn, Charles Α., 3 1 0 Pennsylvania D r u g Co., Inc., 343, 357 Penn Tobacco Co., 79 Peper, Christian, Tobacco Co., 80 Philadelphia, Wholesale Tobacco and Cigar Dealers' Association pf, 263-4 Porto Rican-American Tobacco Co., 23, 26, 17. 34. 57. 87-90. 95, 127, 208-9, 288-9, 3 ° ° . 302, 304, 334-5, 341, 358 Porto Rican L e a f Tobacco Co., 27, 208 Porto Rico, output of cigars and cigarettes, 88 Posey, W . T . , 343 Potter, William C., 3 4 0 Prices, competitive, 190-1, 201-3, 208-9, 2 1 6 - 7 ; " d e a l s , " 2 1 2 - 5 ; discriminatory, 156-7, 194, 208, 211-2, 3 2 9 - 3 0 ; monopoly, 143-7, 185, 18791, 2 0 1 - 3 ; resale price maintenance, 187, 234-6, 253-67 ; tobacco l e a f , eh. vi and 148-54, l 6 i , 166, 168-9, 180-1, 194-5, 196, 2 0 0 - 3 ; tobacco products, ch. viii and 64-6, 68, 166-7 Prochaska, H a r r y , Inc., 53 Prudential Tobacco Co., 67η, 328-9 Publicity, 113-4, 220-40 Reid, Daniel G., 3 2 9 Reiss-Premier Pipe Co., 344 Reynolds Metals Co., 133η Reynolds, R . J . , T o b a c c o Co., 24, 26, 30-1, 32, 64-5, 66, 72, 108, i n , 123, 132, 133η, 138, 162-5, i 6 6 n , 170, 172, 181, 205-7, 208, 2iOn, 214, 227, 228, 232-3, 261, 262, 265-6, 281, 309, 310-1 ; control, 34, 295. 299-300, 3 0 4 , 305, 306, 3 3 2 ; dividends, 2 8 0 ; earnings, 271, 27582, 282, 2 8 4 ; output, 62, 67-9, 76, 77-8, 97 Reynolds, W . N., quoted, 181, 182 R i g g i o , Vincent, 3 1 0 R i k e r - H e g e m a n D r u g Co., 327 R i k e r - J a y n e s D r u g Co., 259, 262 Robertshaw T h e r m o s t a t Co., 133η R y a n , Thomas F o r t u n e , 295, 297302, 325. 332, 3 4 0 Santaella, Α., & Co., 342, 349

INDEX S a n T e l m o C i g a r M a n u f a c t u r i n g Co., 54 Scale of p r o d u c t i o n , c h . i v , 218, 322-3; factories, 100-12, U S ; e n terprises, 112-115 S c a n l a n , J o h n J., 174 S c h i n a s i Bros., 67η, 328 Schlegel, George, Inc., 53 Schley, G. B., 295 Schulte, D a v i d Α . , 337, 339, 343, 348, 355-6 S c h u l t e Retail Stores Corp., append i x a n d 244, 246η, 249, 3°°> i n , 302

S c h u l t e - U n i t e d 5 Cents to $1 Stores, Inc., 343, 345, 348-9 S c h u l t e - U n i t e d Properties, Inc., 345 S c h w a b , D a v i s y Cia., 89 Scotten-Dillon Co., 79-80, 261, 263 S e a g e r , H e n r y R., q u o t e d , 28η, 265 S e i d e n b e r g & Co., 85η Snuff b r a n d s : D e n t a l , 235-6; G a r r e t t , 82 ; H o n e s t , 235 ; H o n e s t B r u t o n , 235 S n u f f , n u m b e r of m a n u f a c t u r e r s , 80, 81, 101 ; o u t p u t of c o u n t r y , 42-5, 47η

S o u t h C a r o l i n a Tobacco G r o w e r s ' M a r k e t i n g Association, 167 S t a n d a r d Tobacco Co., 328 S t a n d i n g orders, 214 S t e p h a n o Bros., 75, 326, 330, 336, 359 Stetson, E u g e n e W . , 347η S t o r m , George L., 328, 329 Sullivan, R. G., 94, 95 S u m a t r a P u r c h a s i n g Corp., 128 S u r b r u g Co., 67η, 326 Sylvester, A. L., 128 T a m p a , C i g a r M a n u f a c t u r e r s ' Association of, 131-2 T a x e s o n tobacco p r o d u c t s , 195-8, 274 T a y l o r , Jesse R., 299, 351 T h o r p , W i l l a r d L „ 118-21 T i n l e y , J . M., 174 Tobacco, chewing, o u t p u t of country, 42-5, 47η ; c h e w i n g a n d smoking, n u m b e r of m a n u f a c t u r e r s , 101 ; smoking, o u t p u t of c o u n t r y , 42-5, 47n Tobacco Foil Co., 132 Tobacco industry, g r o w t h , ch. ii

371 T o b a c c o G r o w e r s ' Cooperative Association, 170-5 Tobacco leaf, acreage, 148-9 ; cons u m p t i o n , 41, 44, 148-54; c o o p e r a tive m a r k e t i n g , 167-75 ! dealers, 101, 128, 162-5, I 7°> 1 7 1 ; g r a d e s , 165-6, 183-4; g r o w e r s , 141, 154-5;

m a r k e t i n g , 155-7; o u t p u t , 148-54, ' 5 5 ! p u r c h a s e s b y successor companies, 32, 126, 162-7, 170-3; p u r chases b y other l a r g e c o m p a n i e s , 162-4, 166-7, 170, 172; t y p e s ,

148,

151-4; value of crop, 148-51 Tobacco P r o d u c t s Corp., a p p e n d i x a n d 67, 72, 75, 78η, 164η, 26I, 263, 297-8, 299

Tobacco

Products

Export

Corp.,

•37n, 33°. 352 Tobacco p r o d u c t s , n u m b e r of m a n u f a c t u r e r s , 101 Tobacco, smoking, b r a n d s : B a r k i n g D o g , 3 3 5 ; " B u l l " D n r h a j n , 65; Dill's Best, 125; H e r b e r t T a r e y ton, 329 ; L u c k y Strike, 74η, 260 ; Model, 78η, 125; O l d B r i a r , 125; Prinoe Albert, 77-8; S i r W a l t e r R a l e i g h , 78η ; T a r g e t , 78η T o r o , Luis, 304, 334-5 T r i - S t a t e Association. See Tobacco Crcnvcrs' Cooperative Association. Union-American

Cigar

Co.,

22n,

23-4, 84-5, 86, 90, 283

U n i o n a n d U n i t e d Tobacco Corp., 337-9 U n i o n C i g a r Co., 90, 95, 342, 349, 358 U n i o n Tobacco Co., 207, 298, 333, 338-40, 341, 342, 349. 350-52, 359 United Cigar Manufacturers' Co., 84, 91. See General Cigar Co. U n i t e d C i g a r Stores Co., a p p e n d i x a n d 34, 36-7. 68, 72, 75, 90, 91, 95, ι'6, 135. 137, 138, 164η, 205, 241, 244-50, 2 5 i n , 262, 289-90, 294, 298, 299, 300, 301, 301η, 302, 303,

304 U n i t e d C i g a r Stores, C o r p o r a t i o n o f , 25, 26, 36η, 325-6

U n i t e d P a p e r Box Co. of A m e r i c a , 330 U n i t e d P r o f i t S h a r i n g Corp., 327 U n i t e d R e t a i l C a n d y Stores C o r p . , 332

372

INDEX

United Retail Chemists Co., 327, 343. 357 United Retail Stores Corp., 299-300, 331-3 United States Commissioner of Corporations, 61, 81, 83-4, 213η, 226, 282, 283-6; q DO ted, 31-2, 81, 285-6 United States Department of Commerce, 256-7 United States Federal Trade Commission, 53, 83, Q2n, 116, 131-2, 136η, I45n, 161-7, 169-75, 179. 180. 2331, 234-6, 243n, 254-6, 260-1, 262-6, 283, 284, 301η, 329-30; quoted, 156, 173-4, '84, 211-2, 264, 266η, 294-6 United States Foil Co., 132, 133η United States Supreme Court, 17, 37, 38, 209, 260η; quoted, 21, 265 United States Tobacco Co., 78η, 8.1. 125, 28s, 286-7, 295, 304, 340. See ll'eyman-Bruton Co. United Stales Tobacco Journal, quoted, 84, 223, 233, 331 United Stores Corp., 307, 345-7, 351, 358 United Window Advertising Co., 327 Universal Leaf Tobacco Co., 162-5, 299 Universal Tobacco Machine Co., 52 Untermeyer, Samuel, 353

Voluntary chains, 136η Waitt and Bond, 89-90, 289, 304, 335 Webster Cigar Co., 342 Webster-Eisenlohr, Inc., 90, 127, 137, 341-3. 349 Weyman-Bruton Co., 23, 26, 27, 30-1, 34, 62, 78η, 82-3, 125-6, 162-3, 234-5. See United States Tobacco Co. Whelan, Charles Α., 325, 332, 340, 353 Whelan Drug Co., 343, 352, 357 Whelan, George J., 205-6, 297-302, 325, 326. 328, 329, 330-1, 332, 333, 339-40. 353, 360; quoted, 222, 297, 33» Whitney, W. C„ 295 Wickersham, George W „ 36-7, 39, 325 ; quoted, 294 Widener, P. A. B„ 295 Wiggin, Albert H., 340 Wise, Edward, 325, 332 Wix, J., & Son, 74, 299 Woofter, T. J., quoted, 141 Yearbook of A griculture, quoted, 158-9 Yuille, Τ. Β., 163η, 299, 33 in, 340 Young, J . S., Co., 22-3, 26, 34, 35, 130η, 287-8, 303, 304 Zimmerman, M. M., 244-5