11998, Sec. 5.a.1, calls for an analysis and appraisal of "recent changes in the various segments of the food industry, including trends in economic concentration and related anti-competitive structures and practices.

In food retailing, the potential for moderating food price increases by reducing the profits supposedly extracted from unduly high economic concentration is minimal. We have ample evidence that food retailers are not extracting excessive profits from the consuming public.

In fact, the latest Federal Trade Commission report on profits-released on January 23, 1976-shows that the third quarter 1975 food chain return on stockholders equity was 18.2 percent below the level for all retailing and 20.2 percent below the level for all manufacturing.

Forbes magazine in its January 1976 issue lists major supermarkets as ranking 26 out of 30 surveyed industries based on 5-year average return on equity, and 24 based on 5-year average return on total capital.

This low rate of profitability means something more than the fact that a continued search for profiteering as a byproduct of concentration is fruitless.

It also means that capital formation in food distribution is in serious trouble. Food retailers are not generating the capital flow needed to replace current equipment and facilities, to develop new innovations which will hold down marketing costs, or to insure the continued employment of their huge work force.

The truth is that the real villains in the food industry are the general inflation in our economy and the failure of industry to bring about much needed improvements in productivity. These two areas represent opportunities for Congress to play a realistic role in helping to moderate food price increases.

Attacking inflation requires coordinated action on many fronts including monetary and fiscal policy. While I am not here to debate macroeconomic policy with you, I would say in passing that progress is being made on this front. However, productivity improvement is still an area in desperate need of attention. It is this very area of productivity which deserves to be the number one priority in the bills before you today.

While the other sectors of the economy have managed to bring about productivity increases, food retailing has not.

For example, U.S. Department of Agriculture statistics show labor productivity in food retailing to be at exactly the same level in 1974 as in 1964. Historically, costs of operation over and above the cost of acquiring inventory have amounted to about 20 cents out of each customer's dollar spent in the supermarket. Profits after taxes have amounted to something less that 1 cent out of each dollar. Turning your attention to the 20 cents of cost offers far greater potential for moderating food price increases than does focusing on the less that 1 cent of profit.

There are countless institutional barriers to efficiency and restrictive labor practices which the industry has not been able to remove. These add unnecessarily to the costs of operation but add nothing to the service available or to the quality of the food. Some of these barriers

are the direct result of unnecessary Government regulations. All of them are proper subjects for congressional action.

Although I have just focused on some of the major problem areas within our industry, we must not forget that our food distribution system has done a remarkably good job in spite of the difficulties cited. Food in the United States still costs the average wage earner the lowest percentage of family disposable income of all the major developed countries.

U.S. Department of Agriculture data show that domestic prices for food from September of 1974 to September of 1975 increased 7.7 percent. This compares with 275.4 percent for Argentina, 25.6 percent for Brazil, and 27.7 percent for the United Kingdom. Only Australia with 5.2 percent and West Germany with 5.8 percent showed slower increases than the United States.

Good performance relative to the rest of the world does not deny the recent trend toward higher prices and we must do all we can do to change this trend. But, there is no potential for moderating this trend contained in the bills before you. These bills propose a costly, unnecessary program to duplicate the results of research efforts already available or already in progress. Such a proposal is unworthy of your attention.

For all of the reasons stated above, the National Association of Food Chains strongly opposes this proposal.

I urge you to channel your efforts in a direction which everyone-the public, economists, lawyers, and businessmen-can agree needs your input.

Turn your attention to eliminating barriers to efficiency. Until our Nation faces and solves these issues, we will not solve the problems which H.R. 11998 and H.R. 12104 seek to address.

Thank you.

Mr. VIGORITO. Thank you, Dr. Hammonds, for your statement.

If you were to pick one item to increase productivity in the retail end of food distribution, what would that item be?

Dr. HAMMONDS. That would be restrictive labor practices.

This is not an original notion by any means.

Mr. Herbert Northrop, who was then chairman of the Department of Industry of the Horton School of Finance and Commerce at the University of Pennsylvania, looked at food retailing in 1967 and produced a book entitled "Restrictive Labor Practices in the Supermarket Industry."

If I may, I will read a brief paragraph on page 119 of that text.
Under his concluding remarks, he notes:

The various restrictions discussed in this and the preceding chapters are commonplace in the supermarket industry with its low return on sales. Moreover, they occur in an industry which is highly sensitive to public indignation, for food costs affect everybody. Yet, public officials who cry for lower food costs or even investigation of food marketing problems have not looked to the labor area for cost improvements. It would therefore seem salutory to investigate what must be done to reduce this uneconomic labor utilization and bars to productivity improvement.

Mr. ZAUCHA. If I might add, I would say that at the retail level today our operating cost of 67.28 percent of your food bill on the retail level are directly attributable to labor costs.

Mr. VIGORITO. Give me an example of labor costs where you think it could be cut if it were not for organized labor's restrictive rules, as you say.

Dr. HAMMONDS. There are three specific areas where labor practices cause difficulties in food retailing.

The three areas are in labor scheduling, the use of part-time employees, and specific restrictions.

Under labor scheduling, the practices include requiring clerks to stand by when salesmen are putting their own products on shelves. This practice is reminiscent of the former president of the musicians' union who required musicians to stand by when records were first played on radio quite some time ago.

There are restrictions on the use of baggers in supermarkets. There are pressures that they must receive checkers' wages or something close to checkers' wages. There are restrictions that they cannot serve as emergency checkers or shelf stockers.

There are also restrictions to prohibit staggering of hours to avoid overtime.

In manufacturing operations these burdens are not as onerous, but in food retailing approximately 75 percent of the business comes in less than 40 percent of the week, and labor schedule flexibility is a very important item for the retailers.

On the use of part-time employees the labor movement has made progress in reducing the pay and benefit differentials between fulltime and part-time employees. They make it excessively expensive to use part-timers on short notice when a full-time employee calls in because of illness and, in many cases, allow no unskilled labor expecially in the meat department.

In terms of specific restrictions there are restrictions prohibiting the introduction of new technology beyond a certain point in time in warehouse operations.

Perhaps a classic example which is often cited is that in Chicago, meat can only be sold between the hours of 9 a.m. to 6 p.m. even though the store may be open considerably longer than that and even though meat might be sold only from self-service counters.

Those are the major areas.

Mr. VIGORITO. Thank you.

Mr. FITHIAN. Mr. Zaucha, would you repeat the figure you gave? Mr. ZAUCHA. The percentage rate of operating cost at the retail level, as of 1975, was 67.28 percent.

Dr. HAMMONDS. That is 67.28 percent of the 20 percent of operating

costs.

This does not include the cost of acquiring inventory.

Out of each consumer's dollar roughly 20 cents goes for cost of operation; out of that 20 cents, 67.28 percent goes for labor costs and fringe benefits.

Mr. FITHIAN. I may have gotten lost out there going around between second and third base.

Mr. ZAUCHA. May I expand?

Mr. FITHIAN. Yes.

What I was trying to get at more specifically was from the dollar that the customer pays in the retail store let us say, what fraction of it is attributable to labor?

Mr. ZAUCHA. Of that dollar, by the time it gets to the retail level, 80 cents of that dollar has been spent. We have, in fact, control over 20 cents of that dollar. Of that 20 cents at the retail level 67.28 percent is attributable to labor costs.

Obviously, there is a percentage of labor input on the processing level and on the farm level, but by the time it gets to the supermarket 80 cents of that dollar has already been expended.

We have control over 20 cents. That is what I am talking about. Mr. FITHIAN. Thank you, Mr. Chairman. I just wanted to get that clarification.

Mr. VIGORITO. Dr. Hammonds, are the food chains taking any action now to increase productivity?

Dr. HAMMONDS. There are several projects underway.

I have been talking about labor productivity. There is also capital productivity. There are projects underway in both areas.

One of the areas which I think is very innovative and shows some great potential for the future is the identification of problems in food retailing and in the handling and distribution of food.

We have identified a number of areas. We have gone back to retailers to get the areas right according to their priorities.

new

We have then gone to various engineering schools and asked them if they see any technology which has not been applied or technology which might be brought to light and which would increase productivity in food retailing.

So, we are approaching this from an engineering standpoint.

We are also approaching it from the warehouse point of view through the formation of a committee to discuss and explore the possibility of developing a modular system for secondary packaging. These are shipping packages in containers.

The electronic front end is certainly an attempt to increase the checker's productivity.

Centralized cutting of meat is an attempt to cut down shipping costs and increase productivity in the meat cutting line.

There are many projects underway.

The problem which the industry faces is that so many of these problems cannot be solved by food retailers alone. They involve in many cases large and powerful unions. They involve in many cases interface with grocery manufacturers or other parts of the food distribution chain.

These are areas that we feel that, if Congress would really like to make a contribution in reducing the rise in food prices, action could and should be taken.

Mr. ZAUCHA. I would like to expand on one example: The use of the electronic checkout. It is currently being tested in some 54 supermarkets throughout the United States.

You have seen all of these little lines on the side of the canned goods in the supermarket.

To give you an example of the potential productivity, let me say this.

The most recent statistics coming out have been generated by the Severna Park Giant Food store outside of Annapolis. After 1 year of testing improved productivity in the area of front-end labor, routine ordering, register balancing, register replacement was analyzed to be $12,055 per month per store.

These are just some very, very significant statistics. If you would apply that $12,000 per month to the potential 50,000 supermarkets existing now in the United States, you can see what it can do.

But this is a first example that we have had in many a year of a cost-saving device that the industry is attempting to implement throughout the industry today.

But, I might add that we have received a lot of counterpressure for the implementation of this system from labor.

Mr. FITHIAN. May I have a question, Mr. Chairman?

Mr. VIGORITO. Yes.

Mr. FITHIAN. Don't you think it is reasonable that you would get a tremendous amount of pressure from the customer?

Dr. HAMMONDS. In what respect?

Mr. FITHIAN. For that whole device?

Mr. ZAUCHA. The customers are responding quite well.

In fact, in the 54 stores which are now in operation, especially those which have been in operation for an extended duration, there was a good response.

I will give you an example. The Giant supermarket I mentioned

and one in Detroit-

Mr. FITHIAN. In the samples, did the items remain unmarked on the shelves or marked on the shelf in addition to the label or-

Mr. ZAUCHA. Of the 54 stores in operation there is a degree of productivity which can be gained by removing the price from the

can.

In no way has the industry moved in that direction.

For example, there have only been three test stores which have taken the price off the can.

The other 51 stores have maintained the traditional price marking on the shelf and on the can.

Obviously, there are productivity gains to be established even if you keep the price on. It is the trade-off, however, in terms of the increased benefit which may be about 25 percent in the Severna Park experiment.

The customers in all of these stores are increasing their bying in the three stores I mentioned. There has been an increase in sales over the 12-month period. As customers have come in, they have not shied away from it but, in fact, the participation in the Severna Park store and in the other two stores has actually increased over that time period.

So, there is very good consumer acceptance. There has been a tremendous amount of controversy over whether the supermarket industry would, in a wholesale fashion, take all the prices away. I am afraid that that issue has pretty much been misrepresented in terms of the intentions of the industry and in fact what has been the case

Mr. FITHIAN. I am not much of a statistician.

I would have some great reservations however, drawing the correlation you do that by putting the computerized tape on it, you increase sales.

I just have some serious doubts that that could be sustained.

Mr. ZAUCHA. If you would allow me, I could show that to you a little later.

Mr. FITHIAN. Thank you.