The foundation’s failure to sell its shares promptly would prove a tragic mistake



On September 20, 1951, following a board meeting of the Chrysler Corporation, John A. Hartford collapsed with a heart attack in an elevator in the Chrysler Building in New York. He was not immediately identified, because he had left his wallet in his office, a block away. A physician declared him dead on the scene. His funeral, at Buena Vista Farms, drew four hundred mourners, so many that some had to listen through loudspeakers set up on his private golf course. With John’s death, A&P lost its most visible leader and the man most responsible for navigating the company through changing markets and political headwinds. Even after substantial gifts to the John A. Hartford Foundation during his lifetime, John’s assets were valued at $55.6 million—the equivalent of half a billion dollars in 2011. Almost everything, including the mansion, was left to the foundation, a charity he had set up in 1929 but had never taken an active role in running.1

John was seventy-nine years old at his death. He and George had made careful preparations for succession. They had named David T. Bofinger executive vice president in 1947, and had put him in charge of the grocery business in February 1949. Bofinger, sixty-three, had joined A&P as an office boy in 1899, and had run the vital purchasing operation for three decades. His post as president cast him in a public role for the first time. In December 1949, the Senate Agriculture Committee asked him to testify on the price of coffee, and threatened him with a subpoena when he requested a delay. Two weeks later, Bofinger died of a heart attack at a company banquet, leaving the succession plan in tatters.2

The brothers’ second choice was an executive unknown outside the company, Ralph W. Burger. Burger, then sixty, was also an A&P lifer. His father had worked for A&P at the turn of the century, and Ralph had joined in 1911, working as a part-time store clerk and then helping on a horse-drawn wagon. In 1912 he had moved to the Jersey City office as a bookkeeper, working directly with George L. and John Hartford, and had later become the corporate secretary. Since 1927, when headquarters moved to the Graybar Building, his office had been between George’s and John’s on the twenty-second floor, literally putting him in the middle of every major decision. He had never run a store or a factory, purchased an advertisement, or negotiated with a supplier. Like the Hartford brothers, he was childless. In the late 1940s, after Pauline Hartford’s death, Burger and his wife spent most weekends with John Hartford at Buena Vista Farms, frequently accompanying him to visit stores. As a longtime executive said of Burger in 1945, “The average person at headquarters looks upon him as an assistant to Mr. John Hartford.”3

John Hartford’s death left Burger in an entirely unaccustomed position. Long a backstairs operator, he was now head of the fourth-largest business enterprise in the United States, ranked by sales. George L. Hartford was still chairman of the board and came to the office daily, but at age eighty-six he wanted no management responsibilities. A&P was Ralph Burger’s to run, but he had to run it without John Hartford’s vision to aid him. Burger had another job as well. John Hartford’s will directed that he become president of the John A. Hartford Foundation. John had convinced Burger to take on the position, but Burger had refused the proposed $25,000 salary. Instead, the two had agreed on a fee of one carnation per day—often, a red carnation, of a strain developed and worn by John Hartford.

Burger’s priority was to end the quarter century of conflict between the government and A&P. The 1949 antitrust suit still threatened A&P’s breakup. Truman’s latest antitrust chief, H. Graham Morison, seemed sympathetic to the company, as he criticized state laws restricting price discounting and called for repeal of the Robinson-Patman Act. But scandals enveloped the Justice Department in the autumn of 1951, and Attorney General J. Howard McGrath’s resignation in April 1952 was followed by Morison’s departure at the end of June. Settlement of the lawsuit had to await the inauguration of Dwight Eisenhower in January 1953 as the first Republican president in thirty years. A deal was struck late that year: A&P would close down the Atlantic Commission Company, its controversial produce brokerage, but the government would abandon its other demands to break the company apart. For the first time since the 1920s, A&P could do business without Washington watching over its every move.4

* * * *

The company Ralph Burger took over was a dominant force in American retailing. A&P’s balance sheet was extraordinarily solid, thanks to George Hartford’s aversion to debt. Its market share had rebounded from wartime lows: in 1951, A&P accounted for 12 percent of all sales at U.S. grocery stores. It operated in forty of the forty-eight states, making it the only grocer with a national footprint. Sears, Roebuck & Co. was the only retailer in the United States with even half its sales (Table 4). A&P was still, by a very wide margin, the largest retailer in the world. Although price controls and an excess-profits tax enacted in response to the Korean War decimated profits, they also meant that A&P faced few competitive threats to its position.5

When wartime controls ended in 1953, though, all bets were off. With steel for construction available once again, food chains raced to the suburbs with bigger, fancier stores, building more supermarkets in 1953 than in any year since 1940. Those new stores, on average, were twice the size of the stores built in the late 1940s, and frequently featured two amenities unknown a few years earlier—air-conditioning and regular evening hours. The cost of building a supermarket was three or four times what it had been in 1948, putting new construction beyond the reach of many independent grocers. In 1954, Congress changed federal tax law to provide generous tax benefits for owners of new retail buildings, further stimulating construction of suburban shopping centers with supermarkets. America’s new way of selling food attracted worldwide attention: when Britain’s Queen Elizabeth visited Washington, D.C., in October 1957, she requested her State Department hosts to arrange for her to visit a supermarket.6

As supermarkets surged, mom-and-pop grocers were roadkill. In 1948, the retail census had recorded 504,439 food stores in the United States, including many small stores bought or started by ex-servicemen using low-cost government loans. The store count had dropped nearly one-fourth by 1954, despite robust population growth, and another 30,000 food stores disappeared between 1954 and 1958. Independent stores still held two-thirds of all grocery sales, but most of the thriving independent stores were supermarkets whose owners had ascended into the upper middle class, with homes of their own, 1.7 cars, kids in college, and an average income six times that of all Americans. Although the vast majority of food stores had three or fewer paid employees, those traditional grocery stores, collectively, sold only one-fifth of the nation’s food. One-third of all food was purchased at stores with thirty or more employees and sales exceeding $1 million. The world Wright Patman feared had come to pass: in food retailing, there was almost no way an ambitious young man could go into business for himself and hope to make a living.7

Yet even as the grocery chains triumphed, the world was beginning to turn away from A&P. The 1950s were California’s golden years. The state’s population grew by half as it added 5.1 million residents. A&P, though, had only a modest presence in Los Angeles, and no stores at all in most other California cities. The Los Angeles stores were an afterthought, managed as part of the Eastern Division, based in New York. There were no high-ranking executives located in the Golden State, and no one in A&P’s executive ranks pushed hard to expand there. A&P, led entirely by men who had spent their entire careers east of the Mississippi, chose not to invest in the state that would have the nation’s fastest population growth in each decade through the end of the twentieth century.8

In those places where it was expanding, A&P’s fiscal orthodoxy began to have dire consequences. Burger had inherited the financial views of George L. Hartford, who preferred to avoid owning real estate and rarely agreed to long-term leases. This caution had saved the company during the Great Depression, but it was disastrous in an era when developers were building new shopping centers designed around the needs of specific tenants. A&P was locked out of the most modern structures in the best locations, because its competitors would sign long-term leases while A&P would not. Its new supermarkets were disproportionately located in older buildings in the urban neighborhoods that upwardly mobile households were starting to flee, not along the highways where affluent suburban housewives went to shop.9


Nor did A&P push to broaden its product line. Other supermarket operators in the 1950s dedicated space in their large new stores to nonfood items, from pots and pans to ready-to-wear clothing, which typically offered much wider profit margins than food. By 1959, the average supermarket carried fifty-eight hundred items, some two thousand more than at the start of the decade. A&P resisted the trend. Its stores did not even carry toothpaste and shaving cream until it undertook a cautious test of one hundred items in the autumn of 1951—by which time 85 percent of supermarkets were selling nonprescription drugs and toiletries. A brief trial of magazines and comic books, which other supermarkets sold profitably, was discontinued in 1954. “We have always considered ourselves food merchants,” Ralph Burger told a reporter. That attitude, reflecting the inbred nature of A&P’s top management, would strand the company on the wrong side of economic change. In 1951, when Burger took charge, more than 21 percent of consumer spending bought food and alcoholic beverages for at-home use. A decade later, food and drink for at-home consumption captured barely 17 percent of the consumer’s dollar as rising incomes gave Americans the money to spend on cars, clothes, and household goods—things A&P did not sell.10

A&P’s conservatism brought disaster. While its largest competitors were adding popular product lines to big stores in the best locations in fast-growing parts of the country, A&P voluntarily confined itself to its traditional line of business in places it had operated for decades. No longer was there a voice in the executive suite insistently pushing the company to change with the times.

Of all of A&P’s strategic missteps in the 1950s, perhaps the most serious was forgetting John Hartford’s dictum that volume was the key to growth. Gaining market share by discounting should have been easier than ever, because the spread of large retail outlets was turning public opinion against anti-discounting laws. Only fourteen states had chain-store taxes by the middle of 1953, down from twenty-nine states in the late 1930s, as legislatures repealed their laws or state courts voided them. A New Jersey court threw out a state law allowing only pharmacies to sell aspirin and cough syrup in 1953, and in early 1955 courts in Georgia, Arkansas, and Nebraska annulled those states’ laws letting manufacturers fix retail prices. Two months later, a federal antitrust advisory committee condemned such laws. “It seems evident that the absence of competitive pricing under ‘fair trade’ results in higher pricing for the consumer,” said Eisenhower’s attorney general, Herbert Brownell, recognizing a trade-off that the Roosevelt and Truman administrations had been unwilling to acknowledge.11

Such powerful assertions of consumers’ interests freed A&P to slash its margins without political repercussions for the first time in thirty years—but it did no such thing. Instead, perhaps chastened by decades of legal battles over pricing, Burger seems to have backed away from John Hartford’s insistence on being the lowest-price grocer in any local market. Although A&P still had the slimmest profit margin among the ten largest food chains, its margins edged wider, irreparably damaging A&P’s cherished position as the price leader—with precisely the disastrous consequences of which John Hartford had frequently warned. From 1950 to 1960, while A&P’s sales were rising 65 percent, each of its four top competitors saw sales growth above 200 percent. A&P’s customers began defecting in droves.

* * *

George L. Hartford commuted almost daily to the Graybar Building until 1955, when he was ninety years old. Two years later, on September 23, 1957, he died in the New Jersey house where he had lived since 1908. He was buried in the family mausoleum in Orange, accompanied to the grave by an honor guard of longtime A&P executives. His entire estate, including one-fifth of A&P’s shares, was willed to the John A. Hartford Foundation, instantly making it one of the largest charitable foundations in America.12

Mr. George’s death was the end of an era. Under the arrangements made by his father in 1915, the George H. Hartford Trust was dissolved upon the death of his last surviving son. Forty percent of the shares, representing the ownership stakes of George L. and John, were turned over to the John A. Hartford Foundation. The remainder was divided among the two children of Edward V. Hartford, the two children of Marie Louise Hartford Hoffman, and the six grandchildren of Minnie Hartford Clews Reilly. Ralph Burger, not a family member, owned little stock, but he held a position of strength nonetheless. He was the boss of the thirteen other members of A&P’s board of directors, whose total service to the company came to more than six hundred years, and as president of the John A. Hartford Foundation he had sole power to vote 40 percent of the company’s shares.13

The ten Hartford heirs who held the other 60 percent had few sentimental ties to the company run for so long by their uncles and granduncles. Just one worked for A&P, as did the spouse of another. The others knew little about the performance of the firm whose shares they had just been given. Around the time of John Hartford’s death, seven of the heirs had signed a legal agreement to pool their voting power as soon as they received it. Collectively, though, these seven descendants of George H. Hartford controlled only 40 percent of the shares. The balance of power rested with Rachel Carpenter, a granddaughter of Minnie Hartford Clews Reilly, and Edward Hartford’s daughter, Josephine Hartford Bryce, a noted philanthropist and sportswoman. Each of the women had 10 percent of the votes. Josephine Bryce sat with Burger on the board of the John A. Hartford Foundation and was thought to be friendly with the chief executive. With her support, Burger was in a position to maintain control.

In anticipation of a public stock sale, the price of the company’s nonvoting common stock, mainly held by employees, rose from $175 in October 1957 to $485 in November 1958. That month, fourteen months after George Hartford’s death, A&P announced two major changes. Six outsiders were appointed directors—the first non-employees ever to sit on A&P’s board. At the same time, the company was reorganized. Preferred stock and nonvoting common shares were exchanged for common stock with voting rights, putting 18 percent of the shares in the hands of some twelve thousand people unrelated to the Hartfords. The shares were listed on the New York Stock Exchange, giving family members and the John A. Hartford Foundation a way to sell. Huntington Hartford and his cousin Marie Hartford Robertson each put 900,000 shares on the market almost immediately, allowing outside investors to acquire a further 8 percent of A&P. That sale, at $44.50 per share, placed a market value of $1 billion on the entire corporation.14

There may never have been a major company so ill suited to public share ownership. A&P was still extraordinarily secretive, as it had been under George L. and John A. Hartford and under their father before them. When researchers from the government’s Bureau of Labor Statistics came to check prices for the monthly consumer price index, A&P sent them away. When the National Labor Relations Board sought to interview supervisors to resolve union complaints, A&P refused. A&P, unlike its competitors, declined to provide data on sales of individual items to A. C. Nielsen, the market-research service; it alone saw proprietary value in its internal information—an attitude that would be emulated half a century later by Walmart. Unlike other retailers with publicly traded shares, which published their financial results once a quarter, A&P released its financials only once a year and omitted information routine in other retailers’ reports, such as the cost of goods sold.15

The public listing of A&P’s shares subjected A&P to attack from shareholders and investment analysts, two unfamiliar sources of criticism. News articles drawing on information from unhappy family members highlighted A&P’s conservatism, pointing out the embarrassing fact that the giant company still operated several door-to-door truck routes first served with horse-drawn wagons in the nineteenth century. Analysts noted that A&P’s sales were growing far more slowly than those of most other chains, and more slowly even than those of independent grocers. When a stockholder asked at the first public shareholders’ meeting in December 1958 why A&P did not increase its profits, the chairman and president could offer only a strained explanation: “The company does not believe in profiteering on food.” It was only in January 1959, in his eighth year of leading one of the largest companies in America, that Burger finally granted his first interview to the press.16

The speed of A&P’s decline was shocking. At the start of 1961, it was still the largest retailer in the world, with 4,351 stores selling an average of $1.2 million of groceries. Its profits in 1960, up 13 percent on the previous year, hit a record as a growing economy helped A&P achieve the highest sales in its history. Yet signs of rot were everywhere.

John A. Hartford had always kept an eagle eye on A&P’s gross profit—the difference between the amount it paid for goods and the amount it received by selling them. In the years before the 1925 reorganization and again in the early 1930s, when the company refused to cut wages despite falling grocery prices, gross profit had been over 20 percent of sales. For John, a high gross profit was a warning, a signal that the company was failing to hold down operating costs. Between 1933 and 1941, his constant push to make A&P more efficient had driven gross profit down from 22 percent to 13 percent of sales, creating huge savings for A&P’s customers and bringing in throngs of shoppers. In the 1950s, after John’s death, gross profit began to creep higher, year after year. Gross profit was rising across the industry, but the rise at A&P was especially steep. In 1960, A&P resumed handing out trading stamps for the first time in decades, and that alone raised costs by around 2 percent of sales at the stores where stamps were given. In 1968, gross profit would top 20 percent for the first time since 1934. Its wide margins meant that A&P was no longer delivering bargains to shoppers, and shoppers responded, as John Hartford always feared they would, by taking their patronage elsewhere.17

At the store level, higher prices meant lower volume; dollar sales at the average A&P store would not exceed the 1960 level until 1969, and the company’s total grocery tonnage would be lower in 1970 than it had been in 1952. Inventories were rising rapidly, a sure sign of poor management; by 1964, A&P’s inventories, relative to sales, would be the highest since 1947. While A&P still had hundreds of small urban stores with minimal parking and few amenities, shoppers were flocking to bigger, newer stores, often featuring clothing, toys, small appliances, and phonograph records along with food. By 1961, discount stores collected around 2 percent of all grocery-store sales, selling food slightly cheaper than supermarkets and personal-care products at much larger discounts. A&P couldn’t decide whether to embrace the discount-store concept or run from it. In early 1960, Burger declared that the average housewife, possessing a bigger refrigerator and more cabinet space than ever before, was buying so much food on each supermarket visit that she did not want to shop for anything else. A year later, reversing course, A&P discussed joint ventures with a discount operator and a drug chain. Then it opened its own nonfood discount store in Pennsylvania as a test—only to close it two years later. The company had lost its way.18

Many poor decisions in the early 1960s sped A&P’s downfall, but one factor stands out: A&P paid generous dividends. From the time of its public share listing in late 1958, shareholders both inside and outside the family called for dividend increases. The John A. Hartford Foundation was A&P’s largest shareholder, and it is here that the dual role of Ralph Burger, serving as head of both A&P and the foundation, was problematic: high dividends may have been in the foundation’s interest even if they damaged the company’s long-run prospects. In the year ending February 1961, nearly half of A&P’s earnings went for dividends. In 1962 and 1963 the payout topped 70 percent.19

High dividends, alongside construction of a huge cannery, a new bakery, and the company’s first dairy, starved A&P’s stores of investment. The investment needs at store level were immense: the average supermarket, a thirty-six-hundred-square-foot space with eleven employees in 1951, grew to a fifteen-thousand-square-foot establishment with forty-five employees in 1961, so even stores built within the previous decade were badly outmoded. A&P lacked the funds to replace them. The number of new stores it built each year was around 4 percent of its total store count, meaning that on average a supermarket would be replaced after twenty-five years—not rapidly enough to keep the stores up-to-date at a time of great change in the way Americans shopped for food. A&P’s aging store base drove customers away. In Cleveland, where A&P had operated since the early 1880s, A&P’s grocery market share plummeted from 22 percent in 1960 to 15 percent in 1965, and market research showed that A&P was not among the four chains most favored by high-income households. Shareholder meetings featured complaints about dingy stores and wilted produce, and comments about A&P’s poor maintenance began to appear in the press.20

The outside directors recognized that things were not going well, and they began to push for new management. In January 1963, the seventy-three-year-old Burger announced he would resign as president while staying on as chairman. As his successor, he proposed John Ehrgott, the company’s vice president and treasurer. Ehrgott, then sixty-seven, had been employed by A&P for forty-six years, since the era of the Economy Store. As corporate controller, he had worked closely with the Hartfords and Ralph Burger for decades. Like Burger, he had never managed a store, run a manufacturing plant, or overseen a warehouse. He was a numbers man. The reaction by A&P’s board was rare in the annals of American capitalism. All fourteen A&P executives serving on the board voted in favor of Ehrgott’s promotion. All six outside directors voted no. After the board meeting, the six issued a most unusual statement urging the promotion of “younger executives.”21

Dissident directors forced Burger to surrender the chairman’s job to Ehrgott later in 1963, but the change did not stanch the flow of bad news. In 1963, when almost all of its competitors saw sales gains, A&P’s sales fell 2 percent, despite the addition of forty supermarkets. Profits per store declined 5 percent. Earnings per share were off 3 percent. When the full-year totals were in, sales at Sears, Roebuck, the department-store chain and mail-order house, exceeded those at A&P. After a forty-three-year run, the Great Atlantic & Pacific was no longer the largest retailer in the world.

A&P, its executive ranks filled with men who had joined the company back when Henry Ford was making Model Ts, now fell victim to the creative destruction it had once dispensed. It could not adapt to a world in which novelty—new stores, new products, new ways of shopping—was an essential part of the consumer experience, and in which suburbia was where most Americans lived. In 1962, the variety-store operator S. S. Kresge opened its first Kmart discount store, and Dayton’s, a Minneapolis department store, inaugurated a discount format called Target. Shoppers crowded department and clothing stores in enclosed malls far from the city centers that were A&P’s traditional home. The competition was no longer mom-and-pop stores but flashy new supermarkets, run by companies as tightly managed as A&P. A&P had no counterpunch. Its stores seemed as tired as its brands, like Ann Page and Eight O’Clock Coffee, which stood as emblems of a store where Grandma might once have shopped. A&P no longer had anything special to offer.

As Ehrgott was taking charge, Huntington Hartford, George and John’s nephew, inaugurated his Gallery of Modern Art in a curved marble building on New York’s Columbus Circle, at the edge of Central Park. The gallery was Huntington’s dream, a place where connoisseurs could experience non-abstract paintings, many of them owned by Hartford himself, for a $1 admission fee. His enthusiasm was not widely shared. After the New York Times architecture critic Ada Louise Huxtable called it “a die-cut Venetian palazzo on lollipops,” the structure was universally derided as the “lollipop building.” Few art lovers came, leaving an operating deficit of $580,000 per year plus $320,000 in annual interest and amortization payments. Unable to dispose of the gallery, Hartford sold most of his remaining A&P stock in June 1966 to cover the costs. He used the small stake that was left to launch public attacks on the company, holding press conferences and writing articles to denounce Ralph Burger for using the John A. Hartford Foundation to exercise control.22

Investors abandoned the company that only a few years earlier had been a glamour stock. In 1961, A&P’s stock had traded at $70.50 per share. In mid-1964, despite a 20 percent rise in U.S. share prices overall, A&P’s stock sagged to $34.50. In his first-ever newspaper interview, Ehrgott shrugged off investment analysts who called for A&P to raise prices, reaffirming the basic strategy of selling food as cheaply as possible. “I don’t think we will ever change that,” Ehrgott said. But A&P’s disastrous performance brought vultures swarming. In July 1968, a group headed by Nathan Cummings, the retired chairman of Consolidated Foods Corporation, offered the Hartford Foundation $284 million for its one-third stake in A&P. The offer was rejected. Four months later, a computer-leasing company, Data Processing Financial & General Corporation, proposed to buy the foundation’s holding for $330 million, but that bid, too, was turned down. Burger, although seriously ill, remained in charge of the foundation until his death in 1969, and he was not ready to turn its huge stake in the Great Atlantic & Pacific over to outsiders. In 1973, after A&P omitted its dividend for the first time ever and its share price fell below $17, Gulf & Western Corporation, a conglomerate, offered $20 per share for 19 percent of A&P’s stock, but A&P’s lawyers blocked the offer in court.23

The foundation’s failure to sell its shares promptly would prove a tragic mistake. In 1959, after receiving the proceeds of George L. Hartford’s estate, the John A. Hartford Foundation was the fourth-largest foundation in the United States. The Hartford brothers having directed only that they “strive always to do the greatest good for the greatest number,” the foundation’s trustees decided to focus on bringing medical research findings into clinical use, and the foundation became a major source of funding for research into arteriosclerosis, diabetes, and other ailments. But under Burger’s leadership and after his death, the trustees imprudently failed to diversify their assets, which consisted almost entirely of 8.4 million shares of A&P common stock. As the company’s shares spiraled downward, the foundation had less money to dispense; after making more than 270 grants per year in the late 1960s, it was able to finance only a handful of new projects in 1973. By May 1976, when the foundation sold 1.75 million of its shares to the public, it received $12.50 per share, one-sixth of what they had been worth at the peak.24

In the fall of 1978, the foundation’s trustees finally decided that the game was up. The investment banker they hired to peddle their shares found Tengelmann, a German grocer that was eager to expand in America, and that did not understand how far A&P had fallen. Tengelmann bought effective control in February 1979 by acquiring 42 percent of A&P’s stock. The price set an implied value of a mere $190 million on a company that had been worth $1 billion twenty years earlier. After fending off decades of government efforts to destroy it, A&P had all but destroyed itself.25 (Loc 4864)

WE&P by: EZorrillaM.

“The Great A&P and the Struggle for Small Business in America” by Marc Levinson