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Supermarket Use and Exclusive Clauses, Part Two-the Industry Gains a Foothold

Posted on: Friday, 16 September 2005, 03:00 CDT

Editors' Synopsis: This Article aims to help lawyers better negotiate supermarket leases by better understanding the history of their clients' retail businesses. In the mid to late 1930's, America was struggling to recover from the Great Depression. Events were taking place in Europe and Asia that would eventually lead to American involvement in World War II. From the midst of this strife came the change from small, limited grocery stores to giant, self- service supermarkets. This Article focuses on the second of four phases that trace this monumental transformation in the landscape of the American grocery and specifically examines how world events between 1937 and 1939 helped shape the contemporary supermarket business model.

I. WHAT You NEED TO KNOW TO NEGOTIATE USE AND EXCLUSIVE CLAUSES IN SHOPPING CENTER LEASES

A. Retail Customs and Practices are More Important to Lease Negotiators than case Law

You might think of it as an eccentricity, but I admit that supermarket use and exclusive clauses fascinate me. I enjoy reading them when they're long and I enjoy reading them when they're short and compact. I think about them, study them, and negotiate them. If that weren't enough, I write about them.

My family thinks I'm obsessive about this subject. My article, Supermarket Use and Exclusive Clauses, was published in the Hofstra Law Review in 2001.' That was only four years ago, and now I'm at it again with a sequel. Why the sequel? Like any other author who writes a sequel, I have much more to say.

My interest in use and exclusive clauses in general and supermarket use and exclusive clauses in particular started more than forty years ago when my boss put a use clause in front of me and asked me to read and analyze it. I confess that I faced the task with none of the delight I feel today. The task was perplexing, and I was more than a bit frightened. As a recent law school graduate with all the wisdom and knowledge I gathered in school, I was ill- equipped to analyze a lease or, for that matter, any contract.

What I say in this Article and what I said in its predecessor addresses my concern that my formal education didn't prepare me adequately for my life's work. Few lawyers who spend their working lives negotiating shopping center leases (or, for that matter, any other kinds of leases or contracts) are well trained for that pursuit.

We study court decisions about leases and contracts in law school, but reading court decisions and statutes about leases and contracts doesn't teach you how to negotiate leases and contracts. Few judges or legislators have ever been in the retail business or, for that matter, any business. By reading a court decision, you might learn whether a contract provision is enforceable or what a poorly drafted sentence means to a judge, but you won't learn what clauses your client needs or how to analyze a lease or contract from your client's point of view. The skill of a shopping center lease use and exclusive clause negotiator is inseparably linked to his or her knowledge of the retail businesses governed by them. You can't formulate sensible rules for the use of a retail store unless you understand the nature of the business being conducted in the store. More than any court decision or statute, I and every other lease negotiator need business knowledge.

Perhaps more than any other shopping center lease clause, use and exclusive clauses exemplify this principle. Their function is to regulate the way shopping center landlords and tenants do business. They allocate power between the landlords and their tenants, and they delineate the boundaries among the tenants' retail operations. The use clause imposes limits on what the tenant is allowed to do and what it's allowed to sell in its store, while the exclusive clause imposes limits on what the tenant's cotenants are allowed to do and sell in the shopping center's other stores. When taken together, use and exclusive clauses serve as a code of conduct for the landlord and tenants of the shopping center.

Use clauses encourage retail diversity and help avoid conflicts among tenants. Diverse product categories, diverse sales techniques, diverse layouts, diverse service policies, and diverse architectural shapes among a shopping center's stores enhance the center's consumer appeal and prosperity. Diversity makes a shopping experience interesting. Consumers are attracted by it. A diverse mix of merchants inspires fantasies. It gets shoppers thinking about what one store might have to offer that another doesn't. It gets them to wonder whether hidden treasures can be found in the store next door or at the other end of the center. It attracts consumers who love to comparison shop and find what appears to be an incredible bargain, and almost everybody loves bargains. You can't have diversity if all tenants sell the same product in the same way. A shopping center composed of stores doing that would be a very boring place and would be unlikely to attract the consumer dollar.

Excessive duplication is diversity's worst enemy. It makes a shopping center less interesting from the consumer's point of view and less desirable from the tenant's point of view. It would be difficult to avoid excessive duplication among the tenants of a shopping center without use clauses. Since a tenant is entitled to use the demised premises for any legal purpose unless its use is restricted by a use clause, it would be impossible for a shopping center landlord to prevent his or her tenants from encroaching on each other without use clauses. But for the constraints set forth in use clauses, all of the tenants of a shopping center would have the right to sell exactly the same products.

A shopping center developer's effort to achieve true diversity among the center's tenants depends largely on how well the use and exclusive clauses in the shopping center's leases define store categories and the distinctions among them. Consequently, a shopping center lease negotiator must understand how to distinguish one kind of retail store from another and incorporate the distinctions in use and exclusive clauses.

It may not be entirely prudent to entrust this task to a lawyer, especially a recent law school graduate. Distinguishing retail stores from each other is a very difficult task for members of a profession who spend three years studying court decisions but no time at all studying retail product lines and retail policies. The product lines and retail policies of the types of stores that gather in shopping centers tend to differ from each other, but not necessarily completely. Product lines and retail policies overlap frequently. Unless a fledgling lease negotiator is an avid shopper, he or she may well be amazed at what a consumer can buy in a store known principally for selling other things. Some bookstores (even small ones) sell greeting cards and gifts. Some gift shops sell books, greeting cards, and candy. Some video stores sell food. Some coffee shops sell recorded music, and some bookstores sell coffee.

Distinguishing a supermarket, a drugstore, and a department store from each other is not an easy task either. A supermarket carries drugs; a drugstore carries food; and they both carry school supplies, cameras, and thousands of other products. A department store also carries food, drugs, school supplies, cameras, and thousands of other products. To complicate the problem, all of these types of stores are adding and dropping product lines all the time. Besides, you can't distinguish one retail operation from another solely by the products they sell. You also need to consider the size of the store, its layout, its service policy, its credit policy, its delivery policy, and its cost and price structure.

The shifting sands of retail policy also complicate the lives of professional lease negotiators. Even with a thorough knowledge of current retail product line boundaries, store size, layout, service policy, delivery policy, and cost and price structure, a lease negotiator's background might still be inadequate. Despite bargaining successfully for a use clause limiting the tenant's use to a retail store category they think they understand, they might live to see the tenant routinely sell products they never expected to see in their most dismal nightmares. Conversely, they might discover the tenant dropping products for which it was famous when the lease was signed.

A shopping center landlord's lawyer needs to anticipate that the tenant might change its product mix a bit or even change the character of its retail operations dramatically some day in the future. Retailers do that all the time, and they introduce new products and discontinue others all the time. Some retailers start out with very small stores and leap into a big box program. Others start their business operations with gigantic storerooms, find themselves overstocked season after season, and then turn to smaller stores. Some retailers known for lavish credit policies make a U- turn and institute a cash-and-carry policy. A decade or two later they might chuck the cash-and-carry policy with a big splash and announce their willingness to wait two years for their money.

Changes to a shopping center tenant's product mix or retail policies can have a negative effect on its cotenants and even the shopping centeritself. Cotenants might not be strong enough to stand up to the new competition and throw in the towel. When tenants go out of business, the landlord suffers in duplicate. Vacant stores make the shopping center unattractive, and bankrupt tenants with vacant stores usually don't pay rent. More problems can sprout from drastic changes in a tenant's product mix or store operation policies, much more.

B. Defining the Relationship Between the Supermarket Tenant and the Shopping Center Landlord

Well-drafted use and exclusive clauses make it possible for supermarket tenants and other merchants to coexist harmoniously in neighborhood-type2 and community-type3 shopping centers, a most felicitous arrangement for shopping center landlords and their supermarket tenants alike. Neighborhood-type and community-type shopping centers and supermarkets need each other. Each can thrive separately, but they tend to do better when they join forces.

Landlords of neighborhood-type and community-type shopping centers, by far the most numerous kinds of shopping centers in the United States, need supermarket tenants for many important reasons. The good credit ratings supermarkets bring to the table facilitate the landlord's ability to borrow mortgage money. The supermarket's ability to draw customers to the shopping center helps induce other merchants to sign leases. Consumers tend to visit supermarkets at least once a week to restock the family pantry, refrigerator, and freezer. That tendency alone brings a whole lot of shoppers to the supermarket. If the supermarket is in a shopping center, it brings a whole lot of people to the shopping center, and that's not all. Supermarkets advertise profusely. Advertising considerably enhances their ability to draw customers. Once a shopper gets to like a supermarket, he or she tends to return week after week and year after year to the shopping center in which the supermarket is located. Small store merchants are eager to lease space in a shopping center with a supermarket anchor, and they do so for a very good reason. They get the opportunity to entice the supermarket's customers to drop by and do some extra shopping.

Supermarkets usually prefer shopping center locations to freestanding units. Although supermarkets want consumers to believe that they can and should buy everything they want in a supermarket, they just can't satisfy every consumer's needs completely. Supermarket executives know this and favor locations near other merchants who cater to consumer needs that the supermarket can't fulfill. I've been told more than once by supermarket executives that their stores tend to do more business in the shopping center environment than they do as freestanding operations.

Neighborhood-type and community-type shopping centers in the United States tend to be much smaller than gigantic regional shopping centers and have many fewer tenants than regional centers. Use and exclusive clauses for them should be negotiated with special care. The merchants who become their tenants live or die on the strength of the centers, and the centers live or die on the strength of the merchants who become their tenants.

Their smaller size and the dearth of merchants competing for the consumer's favor within neighborhood-type and community-type shopping centers make it imperative that direct competition among their tenants be limited. A merchant operating a small store in a neighborhoodtype or community-type shopping center can usually withstand competition from the center's anchor tenants and usually has no choice but to compete with them. However, a small store tenant cannot tolerate direct competition from another small store that even roughly duplicates its function. Supermarkets and other neighborhood-type and community-type shopping center anchor tenants usually tolerate considerable competition from all other tenants. However, some kinds of competition will simply not be tolerated by an anchor tenant. In a community-type shopping center, a department store anchor won't tolerate another department store. A supermarket usually won't tolerate another supermarket or even a small store selling fresh meat, fish, dairy products, fruit, or vegetables in any kind of shopping center.

Supermarket use and exclusive clauses perfunctorily negotiated by an inadequately prepared lawyer can cause years of heartburn and financial loss for a shopping center landlord. The impact of a supermarket or other anchor tenancy on a neighborhood or community- type shopping center is so great that a poorly drafted use or exclusive clause can severely injure the shopping center or one or more of its tenants. A severe use clause restriction on a tenant's product mix can impair its ability to survive in a highly competitive market. Likewise, a severe exclusive clause restriction on a shopping center's tenant mix can severely impact the shopping center's ability to survive in a highly competitive environment. A supermarket use clause that permits the tenant to convert the demised premises to any kind of retail entity that suits its fancy could scare away potential new specialized small store tenants in the future. A very desirable clothing store chain eager to lease 2,000 square feet of floor area might be eager to be a supermarket's cotenant even if the supermarket sells some clothing. However, the mere possibility that the supermarket tenant might exercise a right to convert its premises to a 65,000 square foot clothing store could outweigh the benefits of being in that shopping center in the mind of the prospective new tenant. Likewise, excessively severe restrictions in today's supermarket exclusive clauses can impair the landlord's chance to lease space to tomorrow's very desirable tenants. So many shopping center tenants sell food of one kind or another that an exclusive clause restriction against the sale of food might significantly reduce the pool of potential future tenants.

Supermarket tenants aren't fond of any limitation on the products they're allowed to sell or the way they sell them. Their form leases tend to include use clauses that impose no significant restriction on the use of the demised premises. On the other hand, many supermarket chains demand wide-ranging restrictions against potential competition from cotenants. Since almost every store competes with a supermarket in one way or another, these restrictions can be strict and extensive.

Many supermarket tenant form lease use clauses state that the tenant will have the right to use the demised premises for any legal purpose, which doesn't restrict the tenant's use at all. Given the importance of the supermarket in the shopping center's financial structure and its role as an anchor tenant, many landlord lawyers are quite willing to concede the point. They shouldn't. Such a broad use clause provides no effective boundaries on the tenant's use. With the right to use the demised premises for any legal purpose, the tenant could stop selling food. It could also stop selling merchandise altogether and replace the merchandise with video game machines or pool tables. It could convert the demised premises to a skating rink, swim club, church, or mortuary (depending on the zoning laws). Each of these drastic changes in use would impair the shopping center's ability to attract consumers and compete with other shopping centers, and they would also impair the landlord's ability to lease space to other merchants.

Somewhat less destructive is a use clause that grants the tenant the right to use the demised premises for any legal retail purpose. Although it's still a difficult standard for the landlord, it's less difficult than the right to use the demised premises for any legal purpose. Rigid insistence on the right to use the demised premises for any legal retail purpose would still permit the tenant to transform the supermarket into a furniture store, a retail entity of little interest to most landlords and almost all small store cotenants.

Supermarkets that sign leases for shopping center locations need and usually demand exclusive clauses to mold the shopping center's character, bar the landlord from leasing space to repulsive tenants, and impose restraints on the rights of other tenants. To this end, a supermarket exclusive clause might bar cotenants from selling categories of merchandise it might like to reserve for itself, prohibit the landlord from leasing space for an unsavory business such as a massage parlor or an X-rated video store, or proscribe activities that might impair the shopping center's consumer appeal. Many supermarket exclusive clauses are appropriate, but some of them can be quite dangerous to the landlord's pocketbook and mental health.

Although supermarket executives prefer shopping center locations because of their cotenants' positive contributions, they try hard to stop cotenants from encroaching on their core product lines. This poses a potentially difficult problem for a shopping center landlord and a challenge for a landlord's lawyer. In the best of all possible worlds for a supermarket tenant's lease negotiator, the exclusive clause would bar all cotenants from selling anything edible by humans, dogs, cats, and birds. In pursuit of this goal, some supermarket negotiators propose that the exclusive clause forbid the sale of any kind of food or beverage by any other tenant. Lawyers representing landlords can't afford to treat such farreaching restrictions lightly. Restrictions like these would make it impossible for the landlord to lease space to many tenants that routinely sell food without discernibly harming the supermarket: Stationery stores, restaurants, theaters, gift shops, and candy stores are among them.4 Considerable harm can result from a landlord's lawyer's failure to understand that a restriction against the sale of food might effectively bar his or her client from leasing space to a wide range of importa\nt prospective tenants.

Real life supermarket use and exclusive clause compromises often permit the sale of food by a supermarket's cotenants a little more than the supermarket tenant would like in-its own fantasized-best of all possible worlds. One of the most popular compromise exclusive clauses prohibits the landlord from leasing space to another supermarket and requires the landlord to prohibit all other tenants from selling fresh meat, fish, dairy products, fruit, or vegetables. Of course, this combination of use and exclusive clauses raises the question, what is a supermarket! The answer is more complex than you might imagine at first blush and is the principal subject of this series of articles.

Conflicts between one tenant's use clause and another tenant's exclusive clause can make life very difficult for a shopping center landlord. Lawyers representing shopping center landlords should make every effort to avoid them. However, that's more easily said than done. Use clauses often itemize long lists of products or product categories the tenant is allowed to sell, and exclusive clauses often itemize long lists of products the landlord is required to prohibit other tenants from selling. All too frequently, a shopping center landlord will sign onto a use clause permitting the sale of a product already prohibited pursuant to another tenant's exclusive clause. The converse is true also. Some landlords forget they have already signed leases with use clauses permitting the sale of a product and then agree to prohibit the sale of that very product in a new tenant's exclusive clause. The consequences of such foolishness can be gruesome. Allowing any tenant to sell a product barred by the exclusive clause of another tenant's lease is a sure path to a nervous stomach and high anxiety. Think about it. Both tenants are likely to sue the landlord as well as each other, and the landlord would have no defense (except insanity which doesn't seem to work in lease litigation). I'd hate to be his or her lawyer.

Many potential conflicts between one tenant's use clause and another's exclusive clause (and vice versa) can be avoided by simple mechanical steps. A landlord's lawyer starting a new supermarket lease negotiation should review the use and exclusive clauses of all existing leases. Then, he or she can match any existing tenants' exclusive clause restrictions against the supermarket's proposed use clause. If the sale of a product or an entire product category in the new supermarket premises violates the existing tenant's exclusive clause, the landlord has only two rational courses of action, and agreeing that the supermarket tenant will have the right to use the demised premises for any legal purpose is not one of them. He or she might try to convince the supermarket tenant to accede to the restriction and incorporate it in its use clause. If that's not in the cards, the only rational alternative is to beg the existing tenant to amend its lease to delete or waive the offending provision. If the landlord can't convince the prospective new supermarket tenant or the existing tenant to relent, he or she simply shouldn't execute the new supermarket lease.

Unfortunately, matching an existing tenant's exclusive clause against a supermarket use clause is rarely a simple mechanical procedure. Most supermarket use clauses aren't long lists of product categories the tenant is allowed to sell. They're painted with broad brush strokes and are more likely to state that the premises may be used for any legal purpose, for any legal retail purpose, as a food supermarket, or as a supermarket. Unless the lawyers representing the landlord and tenant understand what these words mean, one party or another is bound to be frustrated.

Use and exclusive clause conflicts and many other potentially dangerous problems often stem from misunderstandings about what a tersely stated description of a retail operation means. Many use and exclusive clauses restrict the tenant's use to a type of store with only one or two words and describe the type of store as a supermarket, drug store, grocery store, or bookstore. Thus, a supermarket lease use clause might state: Tenant shall use the demised premises solely as a supermarket, and a supermarket lease exclusive clause might tersely state: Landlord shall not use any other part of the Shopping Center as a supermarket or permit any other part of the Shopping Center to be used as a supermarket. Designating a tenant's permitted use with one or two words or describing an activity a landlord is required to prohibit with a few words seems easy, but it can lead to unanticipated consequences. Although these words refer to specific kinds of retail businesses with recognized product mix boundaries, many lease negotiators don't know what the boundaries are.

Test yourself by trying to answer these questions: How do you distinguish a supermarket from any other type of food market? How do you distinguish a supermarket from a department store that sells food or, for that matter, a drugstore that sells food?

Avoiding conflicts between existing leases and the one you are currently negotiating now is a tough job, but it's relatively easy when compared to an effort to avoid conflicts between a lease you are negotiating now and all leases you might be negotiating in the future. Today's use and exclusive clauses can be dangerous quagmires that could make it impossible for a shopping center owner to lease space to very desirable tenants in the future. They can even force a landlord to keep large blocs of space vacant in the future. To minimize future problems, the landlord and his or her lawyers need to anticipate the demands of potential future tenants and potential shifts in retailing to the extent possible.

Does the need to anticipate future changes in retail operations suggest that a lease negotiator needs the ability to foresee future events? It does, and on the surface, it seems to impose impossible demands on lease negotiators. After all, neither real estate developers nor lawyers are prophets, astrologers, tea leaf readers, or clairvoyants.

How, indeed, can a lease negotiator seek the knowledge and perhaps develop the skills to anticipate future changes of a retail business? Our only guides to the future are the present and the past. If you know how a retail store sold products in the past, you might be able to anticipate how it might want to sell them in the future. With this knowledge, a lease negotiator is in a much better position to anticipate future use and exclusive clause demands and evaluate and negotiate current use and exclusive clause demands.

C. Economic, Political, and Social Conditions Combine with Technological Advances to Spawn a Revolutionary Retail Entity, the Supermarket

In this series of articles, of which this is the second, I define the supermarket by tracing the steps that led to its birth and shaped its business model in light of the economic conditions and world events to which the industry's founders responded. Economic, political, and social conditions aren't glossed over quickly here, and I don't relegate them to footnotes.

The entrepreneurs who devised the supermarket did so as a response to the problems of their era-an era that began late in 1929 with a gargantuan stock market crash, that included the Great Depression and World War II, and that ended in 1945 with the victory of America and its allies. Although they are long dead and largely unknown today even to contemporary supermarket executives, their solutions to these problems are embedded in the industry's business model and still influence decisions supermarket chains make today.

The relationship between the supermarket's business model and the turbulent world of its origins is not merely coincidental. An artifact of the world in which it was born and developed, the supermarket business was shaped by the economic, political, and social conditions of its times. Since the supermarket industry, now closely linked to good times, peace, and abundance, was born and shaped in an era principally remembered for catastrophic economic conditions and war, we who seek to define the supermarket and understand its business model must look to the Depression and the War to begin our search for clues. A quick review of the events of that era won't do. To understand this revolutionary system of distributing food, how it functions, and how it came to be what it is, we need to know (among other things) how people worked, shopped, and ate in the momentous sixteen-year period between 1929 and 1945.

Understanding life in a bygone era is a difficult task. When I discuss the Great Depression with students, most of them know that it happened, that the stock market plunged, and that millions of people were impoverished. However, only a handful of them grasp the extent of the poverty, hunger, homelessness, and despair that characterized the 1930s here in America. When I lecture to students about World War II, most of them know that the War occurred, that millions of people were killed, and that millions more lost their homes and their families. However, few of them know that victory for America and its wartime allies in World War II was far from certain or that all of the resources of the U.S. economy including its food, human resources, and vital raw materials were marshaled in a supreme effort to achieve victory over a malignant and very powerful foe. Moreover, few of them know that prices were controlled in the United States or that food, gasoline, tires, and items were rationed in the United States. In this era of unparalleled material prosperity, the massive unemployment of the Great Depression and the shortages and rationing of World War II may simply be inconceivable to most of us.

The supermarket was molded over four distinct periods that cumulatively spanned approximately sixteen years of depression and war. They \were years of unprecedented poverty and despair, of slowly progressing recovery, of approaching conflict, and of total warfare. They were also years of adaptation. To survive the Great Depression and World War II, the U.S. government, American consumers, and American retailers had no choice but to adapt to the events and circumstances in which they found themselves. Unexpectedly, the methods they used to adapt to the Depression and the War laid the foundation for a new and more efficient way of food distribution in a post-war period of unparalleled abundance.

The first phase of this story began in 1930 when the first supermarket opened for business. It was the first full year of the Great Depression, the worst economic downturn in the history of the United States and only about a year after the disastrous stock market crash that preceded the Depression. Hunger was widespread and so severe for many that some people survived only by eating pet food. Paradoxically, in that era, an era in which people didn't have much money for food, grocery stores, America's predominant food retailers at the time, were increasing their markups to compensate for higher sales expenses and thereby pushing food prices up. I should explain at this point that a grocery store was not and is not a supermarket. It's a much smaller store that concentrates its product mix on groceries, which, in turn, are nonperishable food items. The average grocery store in the early part of the twentieth century contained only about 600 square feet of floor area and was about only about one-fourth as large as the contemporary shopping center small store.

The nucleus of the supermarket business model was devised by an Assistant Store Manager at a Kroger grocery store. Deeply affected by the economic crisis and how it affected food retailing, he conceived of a new type of food market that would severely cut the cost of selling food and, as a result, be in a position to seek much lower profit margins and charge much less for the food it sold.

Spurned when he brought his ideas to the attention of Kroger's executive officers, he quit his job (not a prudent thing to do in 1930). Then, he laid plans for opening his own retail business (also not a prudent thing to do in 1930). His retail business, a food market (oversized for its times), became the world's first supermarket when it opened for business that year in the Jamaica (Queens) section of New York City. As planned, he cut expenses drastically and passed the savings on to consumers in the form of low prices. The enterprise was a big success, the industry was born, and his new idea was copied many times and refined.

At first a tiny but venturesome factor in the U.S. food distribution system, the fledgling supermarket industry grew slowly. By 1936, it had established a small but tenacious toehold in American retailing. It had also earned the wrath of the most powerful food retailers in the United States at the time, the national grocery store chains (of which the Great Atlantic & Pacific Tea Company, Safeway, and Kroger were the most prominent). Before the end of 1936, the national grocery chains were doing everything they could to thwart the upstart supermarkets. The chains had long prospered with the old ways and clung to them. So, while independent merchants with scant resources were opening supermarkets ranging between 7,500 square feet and 50,000 square feet of floor area and more, America's powerful grocery chains continued opening tiny stores ranging between 600 square feet and 2,500 square feet of floor area.5

By 1937, when the second phase of the industry's growth began, the Great Depression had eased, but the international scene had deteriorated. Japan invaded China, and Adolf Hitler forced Austria to yield its sovereignty and become part of Germany. Then, Hitler acquired Czechoslovakia after bullying England and France, and laid plans for invading Poland which he did on September 1, 1939. Sensing that a new World War was on the horizon, European armed forces ordered large quantities of munitions from American manufacturers, and America's armed forces began a modest expansion of their own.

American manufacturers benefited from the turbulence in Europe and the war in China. Nations at war and preparing for war need munitions and supplies aplenty. With so much of its manufacturing capacity idle as a result of the Great Depression, the United States was a good place to shop for munitions and supplies. War orders and federal government sponsored pump-priming policies were stimulating the U.S. economy a bit, and consumers had more money to spend. Many of them chose to spend it on food. Supermarket expansion continued at a somewhat accelerated pace while other retail businesses were falling by the wayside as victims of the Great Depression. The expansion was fueled partly by the improved economy and partly by the infusion of new and powerful players. Finally realizing that their tiny grocery stores were destined to lose in a pitched battle with supermarkets, the mammoth national grocery store chains faced facts and entered the supermarket business with a big bang.

Early supermarkets were daring experiments but not nearly as daring as the industry founders' imaginations. Many, if not most of, the supermarkets of the 1930s, especially those launched by the national grocery chains, were slow in instituting some of the founders' most important policies and ignored key elements of their business principles until the early 1940s. In part, the glitch was caused by their failure to resolve technological gaps, and in part it was caused by their reticence to adopt the business model fully. Supermarket technology progressed significantly during this period- largely because of the efforts of a few especially creative merchants. However, most supermarket operators, including the new guys on the block, the national grocery chains, played the game cautiously and hesitated to adopt the founders' business model wholeheartedly.

Supermarket operators built more stores and solved more technical problems in the industry's third phase of development that began on September 1, 1939 and ended on December 8, 1941, the date on which the United States declared war on Japan. The U.S. economy improved considerably during this period, in part, because of war preparations. More people were working and had enough money to buy food. Supermarkets found ways to get them to spend their food money in supermarkets. As war preparations accelerated, food, raw materials, and labor became scarce. Shortages were developing, and they were beginning to affect supermarket operations.

The fourth phase of the supermarket industry's development began on December 8, 1941, the day after the Japanese attack on American installations at Pearl Harbor on the Hawaiian island, Oahu. America's declaration of war on Japan on December 8,1941 was followed by declarations of war against the United States by Germany and Italy on December 10, 1941. In less than a week, the wars already raging in Europe and Asia were merged into a single world war, World War II.

The second World War was no minor skirmish; it was one of the most horrendous conflicts (if not the most horrendous conflict) in the history of mankind. It was a struggle to the death against psychopathic but exceedingly competent and ruthless enemies. All of America's resources were mustered for the War effort and necessarily so. Halfway measures would have materially reduced the nation's chances for victory. Food, petroleum, raw materials, and labor were diverted from the civilian economy to the armed services and foreign aid. What was left for civilians was subject to rationing and price controls. Widespread shortages resulted from the diversion. Supermarket operators had a hard time finding employees and food.

Although the shortages caused considerable misery during World War II, their long-term effects were beneficial to the supermarket industry. When confronted with wartime labor shortages, supermarkets breathed new life into the business model promulgated by the industry's founders and found ways of making their operations much more efficient. They added new and innovative practices of their own, practices that remain as integral parts of the supermarket business model to this day. Note these examples: A wide array of nonfood products you expect to find in a supermarket today got to be there because of past shortages. Self-service policies were extended to many departments of the supermarket that, until then, had been full service departments (where retail clerks fetched products for customers who had no access to the shelves). Produce, meat, and dairy departments were among them. Frozen food was able to establish a toehold in supermarkets because of raw materials shortages, particularly shortages of tin. The already diverse product mix of the supermarket became more diverse by a vast expansion of supermarket nonfood departments to fill shelves that would have displayed food products in better times.

Altogether, it's a long story and too big for one edition of a law review. As I indicated above, this is the second, and by no means the last, installment of a series. The first installment, published four years ago in the Hofstra Law Review, focused on the birth of the supermarket industry in 1930, only about a year after the disastrous 1929 stock market crash and the first phase of the industry's development from 1930 through 1936 during the most distressful years of the Great Depression. In this installment, I concentrate mostly on the second phase of the supermarket's development from January 1, 1937 through September 1, 1939. I also begin my discussion of the third phase that began on September 1, 1939 (when the Nazi German invasion of Poland ignited the European phase of World War II) and ended on December 8, 1941 (when the United States entered World War II). \Soon to follow in the next issue of the Real Property, Probate and Trust Journal will be a third installment that concludes my discussion of the third phase and starts my discussion of the fourth phase. Subsequent installments will illustrate how technology devised for World War II and the shortages caused by the War combined to complete the supermarket business model as envisioned by the industry's founding fathers and mothers.

So, let's get started.

II. PHASE 1: 1930-1936, DEVISING THE SUPERMARKET BUSINESS MODEL AND LAUNCHING THE FIRST WAVE OF SUPERMARKETS

To make life easier for the reader who prefers not to read the first installment, here's a brief summary of what I discussed in it.

A. An Unlikely Retail Genius Conceives of the Supermarket in a Difficult Time

Most of the fundamental principles that would, in time, become the backbone of the supermarket industry were enunciated in 1930 by that obscure grocery store Assistant Manager named Michael Cullen. A New Jersey native, Cullen had drifted west to Herrin, Illinois where he worked for the Kroger Company; then one of America's three most prominent grocery store chains and now one of America's most prominent supermarket chains.6

As I mentioned above, 1930 was not a happy year in the United States, not by a long shot. It was the first full year of the Great Depression. The stock market had crashed on October 29, 1929, and long before the Depression subsided, twenty percent of the U.S. labor force was out of work. Twenty percent unemployment then was an even greater catastrophe than it would be now. In the 1930s, women represented only a tiny portion of the nation's work force, and the federal government had not yet established the unemployment insurance and safety net programs on which we rely today. Men were the sole breadwinners of almost every family then, and twenty percent unemployment meant that one out of every five households had no source of income. People with jobs worried about losing them. Wages were dropping. So, almost every working-class American felt the pain, and there was plenty of pain to go around.

The stock market crash devastated the upper crust as well as the working class. Huge fortunes disappeared in the short period between the day of the crash and the spring of 1930. So many of the rich and famous, overwhelmed by an abrupt separation from their wealth and position, turned to suicide. Persistent news of executives leaping to death from high floors of tall buildings spawned bad jokes. A comedian could expect a good laugh by telling his audience that he heard a hotel reservation clerk ask a prospective guest whether he wanted a room for sleeping or jumping.7

Food retailing was very different in 1930 from twenty-first century food retailing. In 1930, most American consumers bought food from small and specialized food markets such as grocery stores, butcher shops, dairy stores, bakeries, and greengrocers. Most of these stores were tiny by contemporary standards. Exceptionally large food stores (for that era) called combination stores with about 2,500 square feet of floor area (the size of an average contemporary shopping center small store) and carried meat, fruit, vegetables, and dairy products as well as groceries. They were gaining ground on the grocery stores and other specialized food markets during the 1920s, but they were still in the minority. Still larger (and still fewer) food stores that provided free parking facilities for their customers had been developed in parts of California and Texas and may have inspired all or a portion of Michael Cullen's newfangled idea. Providing free parking facilities was a natural and economical move for food markets in these parts of California and Texas. The automobile culture rooted early there, and land was more plentiful and affordable than in the east. Food shopping in 1930 was also very different from twenty-first century food shopping. Most grocery stores and other food markets sold food on credit, and I don't mean that they were willing to accept bank- sponsored credit cards as they do today.8 In 1930, as long as you were on reasonably good terms with the storekeeper, you could walk into a neighborhood food market with an empty wallet or no wallet at all and walk out with enough to eat for a day or two.9 Since the stores were small, the merchants knew almost all of their customers. In 1930, most grocery store customers walked a block or a few blocks to the nearest grocery store, but they had no concern about carrying heavy food bundles home. Food markets made home deliveries then, and they usually didn't charge for delivery. They needed to provide delivery services because they didn't provide parking lots, and many people bought too much to carry home in their arms. You didn't find a shopping cart when you entered a food market. Shopping carts hadn't been invented yet, and you didn't need them. Almost all food markets were full service stores; customers didn't fetch the things they wanted. Instead, they waited in lines (sometimes interminably) and recited their orders to retail clerks standing behind a counter. You wouldn't find a checkout counter either (at least not in most food markets). The clerk who fetched your order also bagged your purchases and collected your money.

Although it was a time-tested system, the food market business wasn't very efficient in 1930. Despite the nation's desperate economic condition, retail food margins were rising, and the rising margins were boosting food prices. The nation's food merchants couldn't lower their prices because their prices weren't much higher than their costs. People couldn't afford to pay the prices the grocers charged because they weren't earning enough money. People were going hungry. Some got by only by eating dog or cat food. Somebody had to do something.

Although Michael Cullen was no politician or preacher, he was sensitive to the physical and emotional pain around him. seeking a way to relieve other people's suffering as well as a path to his own prosperity, he came up with a big idea, a better and more efficient system of food distribution. He pursued the goal with messianic fervor and may have ruined his own health in the pursuit. He died only seven years later-a very successful man, an admired man, and a rich man, but also a dead man. Some people said he worked himself to death.

The core of Michael Cullen's antidote was eliminating waste from the merchant's cost structure. Since people couldn't afford to buy food at prices that grocers needed to charge, a new kind of food merchant who could eliminate waste and frills could charge his or her customers less-much less. In an era in which people had little money to spend, Cullen surmised correctly that a merchant who did that would reap great rewards and devised a plan to achieve that goal.10

Kroger's assistant store manager, Michael Cullen, submitted a letter outlining his plan to Kroger's president, William H. Albers.11 The plan's underlying theme was that developing very large (monstrously large, as he put it), self-service stores with low overhead and a cash-and-carry policy would make it possible for a food merchant to charge very low prices without sacrificing profits.12 Very low prices for 1,000 staple food products would draw unprecedented hordes of people to the stores. Replacing the ubiquitous retail clerks with self-service would sharply reduce payroll, and it would also encourage impulse buying. Shoppers would be free to browse about, inspect the merchandise, and retrieve the things they wanted from the shelves themselves-something they could not do in the vast majority of grocery stores of that era. By the standards of that era, Cullen's new stores would not be merely large or even very large. As Cullen put it, they would be "monstrous in size." Monstrously large stores with merchandise within easy reach of shoppers would further stimulate impulse buying. After quenching their thirst for the low-cost items that attracted them to the store in the first place, customers who could afford a bit more would see enticing displays of another 1,000 items with very healthy markups. Temptation would be too much for many of them, and they would emerge from the store with much more than they planned to buy. The proposal advocated leasing sub-prime locations a few blocks away from the main drag.13 Leasing space a few blocks away from prime neighborhood shopping districts (usually well-served by public transportation but with a dearth of parking facilities) would accomplish more than saving big rent dollars. It would also provide an extra dividend for the monster store's customers and an important one. Free curbside parking was readily available in sub-prime neighborhoods in 1930.

It was a new idea and a creative idea, but it didn't flow into his head from thin air. He was influenced by an array of avant- garde business policies devised by earlier creative merchants. These policies had been widely accepted individually long before the first supermarket opened for business. Each had been so effective in its own right that it had been the centerpiece of another retail business and the characteristic that distinguished it from still other retail businesses. He combined them, and combining them was an act of genius that revolutionized food distribution world wide.

Michael Cullen didn't provide a name for the new type of food markets he described in this proposal. To him, they were merely monstrously large stores. The name "supermarket" became popular later on. No one knows for sure where it originated.

As fate would have it, Kroger President William Albers didn't get to see Cullen's letter when it was submitted and regretted it for the rest of his life. Kroger's Vice President of Retailing, John B. Bonham, rejected the proposal out of hand and never sent the letter upstairs to the big boss's office. Fortunately, extensive excerpts from Cullen\'s letter still exist, and anyone who wants to understand the supermarket industry can study it now.

Not easily discouraged, Cullen went ahead on his own and found another backer. On August 4, 1930, he successfully launched King Kullen, the world's very first supermarket business, in an abandoned garage at 171st Street and Jamaica Avenue, in the Borough of Queens, in New York City.14 The rest is history.

We learn much from Michael Cullen's proposal to Kroger. The new methods of selling food, as conceived by Michael Cullen (all of which have been incorporated in the contemporary supermarket business model), differed considerably from the established methods of the early 1930s.

B. Michael Cullen's Supermarket Business Model

1. Store Size

As perceived by Michael Cullen, the new monster stores would be significantly larger than the approximately 600 square foot traditional American grocery stores, butcher shops, and green groceries. They would also be significantly larger than the approximately 2,500 square foot combination stores of the era. Considerably larger stores would sell considerably more merchandise than small stores. They could display many more products than a grocery store or combination store could display; and the depth of merchandise could be much greater than a grocery store or combination store could hope to achieve. Significantly greater sales would make it possible for Cullen to buy in great quantities and negotiate for deep discounts at the wholesale level.

2. Availability of Parking Facilities

Michael Cullen advocated ample free parking facilities for the food markets of the future. He foresaw that most of the new monster food markets would own or lease their parking lots, but, in his head, it might be feasible for a really thrifty monster food market operator to rely on curbside parking. With the obvious exception of some congested urban locations, parking facilities were then and are now a crucial element of the supermarket business model.

3. Credit and Delivery Policy

In accordance with Cullen's manifesto, early supermarket operators refused to extend credit and they refused to deliver groceries to customers' homes. The new monster stores would be operated on a cash-and-carry basis. As Michael Cullen planned it, his customers would pay cash for the merchandise before it left the store, and they could not expect free home delivery. Customers with automobiles would bring their food purchases home in their own vehicles. Although some contemporary supermarkets in urban areas provide delivery services, few supermarkets do so these days, and virtually no supermarkets did so in the 1930s and 1940s. Although almost all contemporary supermarkets honor bank-sponsored credit cards, they do not take responsibility for their customers' accounts receivable, a common practice of the grocery stores of the 1930s and 1940s. Honoring bank credit cards isn't the same thing as offering credit to customers. Contemporary bank credit card issuers absorb their cardholders' defaults and can't charge them back to the merchants who honor the card. Food merchants of the 1930s who extended credit had no one but themselves to absorb credit losses. They absorbed plenty of losses, and these losses became a material element of the cost structure.

4. Product Mix

Although the new monster stores would be food stores primarily, they would also sell a wide range of nonfood products. A wide range of food products, especially inexpensive groceries, would entice customers to visit the store. The ample sales floor of the monster stores would make it possible for the food merchant to display nonfood products with higher markups. Once in the store on a food buying expedition, customers would be exposed to the nonfood products with higher markups, and customers who could afford to do so would buy them. Nonfood products sold well in supermarkets but, for many years, only on a limited basis. In time, they became an accepted and expected component of the contemporary supermarket as a result of wartime shortages. Although the primary mission of the contemporary supermarket still is to sell food and household products, the contemporary supermarket's product mix includes a considerably larger share of nonfood products than that of the early supermarkets.

5. In-store Service Policy

The new monster stores conceived by Michael Cullen would be operated on a self-service basis. Unlike customers of full service groceries, customers of the new monster food markets would fetch a great many of the things they wanted from open access shelving themselves and without the intercession of a retail clerk. At first, self-service would be limited to the grocery department but not to meat, fish, bakery, produce, deli, and most other departments. Self- service spread through most of the supermarket during World War II.

6. Price Policy and Cost Structure

The lower cost structure that would inevitably result from these efficient policies would make it possible for supermarket operators to reduce prices drastically, and they did. For many Americans struggling to get by in the devastated economy of the 1930s, the chance to buy nutritious food at low prices meant the difference between surviving and not surviving. True to the Michael Cullen principles, low food prices and low operating expenses are still basic to the supermarket movement. Early supermarkets kept their expenses way down and sold groceries at rockbottom prices. Although contemporary supermarkets can be very different from each other in price policy and cost structure, they tend to sell food far more efficiently and less expensively than other kinds of food stores.

7. Efficient Facilities and Merchandise Movement System

Although early supermarkets did business from old, worn, and sometimes decrepit facilities, the low-cost structure envisioned by Michael Cullen was better served by more efficient buildings. The early supermarkets, housed in abandoned factories, vacant garages, and warehouses had one wonderful quality in common-cheap rent. As heartwarming as cheap rent may be to a retailer, many early supermarket operators realized that the operating cost of an inefficient structure with cheap rent can be much greater than the operating cost of an efficient structure with higher rent. In only a few years after the industry was born, large new buildings with modern conveniences replaced the early derelict buildings. The new buildings were designed to accommodate store layout policies devised by the supermarket industry's founders, policies regarded as revolutionary in the 1930s but taken for granted today.

Among the most important of these policies was, and still is, the grid system layout. We take it for granted now, but it was a radical idea then. Supermarkets were then, and still are, typically organized with a grid system layout. Merchandise was displayed within reach of shoppers prepared to abandon the supposed convenience of being served by grocery store clerks who fetched the merchandise for them. Early supermarket shoppers were willing and even eager to serve themselves.15

To facilitate self-service, supermarket industry founders advocated wide aisles. At least in theory, the aisles were to be wide enough to allow shoppers to browse the shelves comfortably and retrieve the products they wanted. The aisles led, and still lead, the shopper to a checkout station where his or her purchases are tallied by a retail clerk.

These seven ideas became the nucleus of the supermarket business model, but not all of it. Many creative retailers followed Michael Cullen's path into supermarket merchandising. They did some things better and some worse, and they added a few additional ideas, ideas that fused with Cullen's ideas and with them comprised the supermarket business model.

C. More Supermarkets Sprout and the Industry Expands

The news of Cullen's success spread quickly and prompted a legion of grocers and other merchants to try their hands at supermarketing. Some of the first wave of startup supers that followed were pale imitations of King Kullen, the vibrant enterprise launched by Michael Cullen. Others, just as successful if not more successful than King Kullen, were inaugurated by a new breed of food merchants. Audacious and creative in their own right, they contributed significant additional features to the supermarket business model and accelerated its growth. Five innovative merchants come to mind: Robert Otis, Roy Dawson, Sylvan Goldman, John Hartford, and George Jenkins.

Robert Otis and Roy Dawson were fascinated by Michael Cullen's plan and King Kullen's success. Convinced that King Kullen's impressive sales volume was due in large part to its store size (it was around ten times as large as the average grocery store and more than twice as large as the average combination store of its era), they resolved to open an even larger store that would do even better. With more daring than prudence, they leased a derelict factory building in Elizabeth, New Jersey to house their version of the new and sensational kind of food market. On December 8, 1932, their new enterprise opened for business with a most peculiar name. Dubbed the Big Bear, the new food market imitated King Kullen in almost every respect with one very significant exception. The Big Bear was really big. With 50,000 square feet of floor area, it dwarfed the first King Kullen. The 15,000 square foot Big Bear grocery department (twenty-five times as large as the average sized grocery store of 1930) was surrounded by eleven other departments selling such diverse products as drugs, cosmetics, auto accessories, and paint.16 Big Bear succeeded beyond the fondest dreams of Otis and Dawson.

After 1932, the number of supermarkets in America grew rapidly.17 News of the success of King KuI len and Big Bear inspired wave after wave of grocers, butchers, and other food merchants to convert their small store opera\tions into supermarkets.18 Many of the neophytes were innovative entrepreneurs and others were screwballs. Some found ways to improve on the Cullen-Otis-Dawson business model, but others were so intrigued by this new way of selling food that they followed the path taken by King Kullen and Big Bear as closely as they could. Some neophyte supermarkets mimicked the King Kullen and Big Bear trade names as well as their business methods. New enterprises, given business names projecting images of royalty and powerful animals and intent on competing for the American consumer's food dollars, sprouted everywhere (like weeds on my lawn) and were given business names projecting images of royalty and powerful animals.19 While King Kullen wowed shoppers in New York City's Borough of Queens, King Arthur was trying to do the same in nearby Newark, New Jersey.20 A Kingston, New York entrepreneur was so convinced that the consuming public associated food buying with powerful animals that he named his supermarket the Great Bull Market.2' That was a winning notion during the Great Depression when just about everybody longed for a bull market. Nevertheless, bears continued to be perfectly acceptable when it came to food markets. If one Big Bear was successful, why not two or even three? It wasn't merely that Otis and Dawson opened additional Big Bear supermarkets. As you may expect, they did that, but they weren't the only ones who did. New Big Bear supermarkets were launched here and there by people who had no relationship with Otis and Dawson at all. They knew that people in New Jersey liked buying food from Big Bears, and they figured that people (for example) in Massachusetts would love to do the same.

Somewhat improved economic conditions contributed to the growth of the supermarket movement. U.S. industrial earnings improved a bit in 1934, and that boosted the fortunes of consumers and food merchants alike. By then, the supermarket movement had spread to twenty-four cities. Altogether, ninety-four supers were open for business that year.

The U.S. economy, world politics, and the supermarket industry all changed significantly in the short period between 1932 and 1936. By 1936, as Europe and Asia were swerving toward a new world war, the Great Depression receded a bit in the United States, and the supermarket business expanded.

The American economy advanced again in 1936. Although the Great Depression still held sway, the federal government's pump priming policies softened the devastation wrought by the Depression and sparked a modest economic recovery. In its turn, the mild upswing of the nation's economy bolstered the American supermarket industry. A huge increase in federal spending had spawned a long list of government agencies dedicated to the cure of economic or social ills. At $4.361 billion, the 1936 federal deficit set a new record.22 Although $4.361 billion doesn't seem like much by twenty- first century standards, it was perceived as a formidable sum in the mid-1930s, and the 1936 federal government deficit dwarfed the 1932, 1933, 1934, and 1935 federal deficits.

Although the Depression continued to maintain a stranglehold on business investment and consumer confidence, its worst days seemed like a distant memory. Fears of impending doom were yielding to a grudging acceptance of improved but still hard times with a tinge of hope.23 Many more people were working than the year before,24 and people had more money to spend on food. The Index of Industrial Production (issued by the Federal Reserve Board) climbed to 72 (1923 - 1925 = 100), a considerable jump from its low at 58 during 1932. Better yet, the Index continued to rise during 1936. It hit 104 in June, 108 in July, and 114 in October.25

By 1936, the supermarket industry had grown considerably, and the industry's pioneers, primarily former independent grocers and regional grocery chain operators, could justifiably conclude that their new way of selling food had become an established institution and an aggressive competitor for the food dollar. Approximately 1,200 supermarkets were doing business in the United States, more than twelve times as many as in 1934, a spectacular growth rate. The industry's founders had learned how to reduce operating expenses; how to attract large crowds of customers seeking lower prices; how to stimulate sales by making it possible for consumers to touch, feel, smell, and see the merchandise up close; and how to facilitate the process of transporting supermarket merchandise from the store to the home by providing automobile parking.

Be that as it may, the number of supermarkets in America was still tiny when compared to the mountain of grocery stores, combination food stores, meat markets, and produce markets with which they were competing. Moreover, supermarkets had achieved only a few of the goals enunciated by Michael Cullen, and these significant impediments hindered the supermarket industry's forward march:

1. Despite the significant economies they had achieved in displaying groceries on a self-service basis, supermarkets weren't moving merchandise through the stores efficiently enough. Sales growth was hampered by the lack of an effective way of transporting heavy quantities of food and other merchandise from store shelves to customer automobiles.

2. Most of the store buildings were seedy retreads, and many consumers recoiled at the mere thought of shopping in supermarkets. A great many of them were awkward and uncomfortable, and some were dirty.

3. Although supermarket operators knew that self-service operations significantly reduced operating expenses and increased sales, they had converted little but their grocery departments to self-service by them.

4. The supermarket business model envisaged the sale of a wide range of food products, but many of the food products (such as frozen foods) that we usually see in supermarkets these days had not yet made the

Source: Real Property, Probate and Trust Journal

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