Mr. Goza. The independent merchants of Montana. Mr. BALLINGER. From whom? Mr. Goza. Principally from the larger operators. Mr. BALLINGER. By "larger operators," what do you mean? Mr. BALLINGER. Would you describe briefly to the committee this act? Mr. Goza. The act has for its purpose the prevention of what had become a most vicious competitive practice in the small-business field. That was the loss-leader business, where a certain item would be selected by a large operator for an extremely low price, a price his competitors could not possibly beat, while at the same time other merchandise was either selling at a decent profit or at an excessive profit. Mr. BALLINGER. You mean that they did this to get the people into the store? Mr. Goza. Yes, sir. Mr. BALLINGER. You heard the testimony this morning of grocers and meat men who said that they have suffered from loss of leaders. Why does not this law apply? Mr. Goza. It does. I do not understand their attitude in that respect, because the law itself has been very successfully administered. The procedure is relatively simple. Under the statute, 10 or more merchants in any retail business can come in and petition the commission for a cost survey in any particular trade area. In Montana, the areas were divided geographically. As the applications were received, the machinery provided by the statute was put into effect. That was simply this: After the petition had been received, notices were published in the papers in each county to be affected. Everyone was advised, both by the public press and by personal letter, to attend the hearings. At the hearing, the commission had testimony from all of the merchants and they were questioned specifically as to their cost of doing business. The statute establishes what shall be considered in establishing that cost. After the commission had taken it under advisement, it established in each trade area what it considered the lowest efficient cost of doing business. As a specific example of that, there is docket 247 in which a cost survey was actually established. That establishes the cost of doing business at 10 percent. Now, the Unfair Trade Practices Act works in this fashionMr. BALLINGER. You mean the cost of doing business at 10 percent above inventory? Mr. Goza. Inventory out of our replacement cost, whichever is lower. The cost of doing business was at least 10 percent. Any merchant in that area finding a competitor advertising a product for sale, or advertising it for sale at a cost which the merchant knows is less than the inventory or replacement cost to the vendor, plus the minimum of 10 percent for doing busines, can file a complaint with the commission. The offender is cited to appear before the commission, a hearing is had and if, in the opinion of the commission a violation was intentional for the purpose of harming competitors it can issue and have issued in many instances, a cease-and-desist order. Under our statute, after three cease-and-desist orders have become effective, the merchant who has three of them is no longer in business. He is denied the right to a license. Mr. BALLINGER. After what? Mr. Goza. After the third offense. Mr. BALLINGER. How does this law work? Is it a 10-percent increase in the price above the cost of inventory? Mr. Goza. Yes, sir. Mr. BALLINGER. How does your cost survey fit into that? Mr. Goza. The cost survey establishes the cost of doing business by the most efficient operator in the trade area. Mr. BALLINGER. You mean on a particular product? Mr. Goza. No, on everything he handles. Mr. BALLINGER. You mean to say that in connection with a grocery store you get down to the cost of selling oranges and the cost of selling eggs? Mr. Goza. No; but we can find out what it cost him to sell eggs, cereal, and other sales by a relatively simple process. He is called in and put on the witness stand. He is asked to state from his record how much his overhead is on all of the various items that go into the cost of his doing business. Mr. BALLINGER. In the grocery business there are certain items known as staples that move at a very much lower market. Mr. Goza. That is not taken into consideration. No attempt is made to segragate dry cereals or dry foodstuffs, as you have said, from the canned goods and everything else. Mr. BALLINGER. They all get a uniform mark-up? Mr. Goza. They all get a uniform mark-up so far as the commission is concerned. Mr. BALLINGER. Does not that raise the cost of living to the poor? Mr. Goza. On the contrary it does not. Mr. BALLINGER. Why? Mr. Goza. Because the most efficient operator is not operating at 10 percent. He is operating at a great deal more than 10 percent. Mr. BALLINGER. Îf in normal times in a grocery store staples move at a 1-percent mark-up under competition, and you are going to apply a 10-percent mark-up, there is going to be a hike to the cost of living, is there not? Mr. Goza. That is not the way it operates. A grocer does not mark up every item in his store, acording to his overhead. He cannot. For instance, he cannot sell a package of cornflakes at his inventory cost plus his cost of doing business, because the people will not buy it. So he takes a lesser mark-up on that item. He has to make it up on some other foodstuffs all in a competitive situation, which brought this thing about. He is not permitted to buy coffee at 57 cents and attract customers to his stores by selling it at 57 cents. Mr. BALLINGER. That still does not answer the point I have in mind. The Federal Trade Commission made many surveys of these unfair practices acts and it was the conclusion of the commission that they tended to raise the cost of living. Mr. Goza. They cannot tend to do that. Mr. BALLINGER. Why not? Here you allow an over-all 10-percent mark-up under competition, whereas your staples might move at a lower mark-up. You are now grading them all down so they all move at a 10-percent mark-up? Mr. Goza. But they do not. That is precisely what I am getting at. Let us take, for example, the practice that this thing was designed to prevent. A large operator, a large chain operator, for instance, can buy two carloads of oranges and bring them in and sell them at 12 cents a dozen, we will say, whereas the small independent merchant is lucky if he gets five crates. All right. He cannot possibly meet that price. The chain operator is not going to take a loss on those two carloads of oranges. He is going to sell something at a sufficiently high profit to make up the difference in the profit. Consequently, he is going to draw more customers in his store with 12-cent oranges than the corner grocer can with 85-cent oranges. The equalization of price has nothing to do with the mark-up. The thing was designed to prevent the large, highly capitalized chain operator from driving everybody out of business by selling their stuff at a loss. They could come in and give it away for 1, 3, or 4 months or however long it would take to put their competitors out of business. Mr. BALLINGER. I do not want you to think my questions are hostile. One of the purposes of the inquiry is to find out whether something can be done in the field of Federal legislation, either in the enactment of a Federal Unfair Practice Act or otherwise. We are exploring the whole field. We do not know the answer, and I am asking these questions all around the lot to assemble as much information as possible for the committee. Mr. Goza. The effect of the act is not to raise the cost at all. It is designed to keep the small, independent merchant in business who, in the absence of this law, would be out of business. Mr. PATMAN. And to restrain the chiseler and the racketeer? Mr. Goza. That is right. It is the loss-leader system or the tie-up system and all of these devices that a large operator can resort to to taking customers away from his competitors, and, of course, the instant he has competition on a business he is no longer a benevolent monopoly. Mr. PATMAN. What do you do in the case of a chain store that owns its own manufacturing plant and sells at any price it wants to in retail outlets? Mr. Goza. We do not have that situation. Mr. PATMAN. You do not have that? Mr. Goza. No; the only thing we do have is the chain operator who wholesales. The Commission has by a definition and after a hearing held that a chain that wholesales to its own outlets is a wholesaler. Mr. PATMAN. You do not have the chain retail stores here? Mr. PATMAN. Is it not a fact that Safeway owns its own manufacturing plants? Mr. Goza. No, not in Montana. Mr. PATMAN. They ship into Montana? Mr. Goza. Of course, they do. Mr. PATMAN. Where they ship goods from their own manufacturing plant and dump them here at below cost, manufacturing cost into this market, what do you do? Mr. Goza. We cannot do anything. Mr. PATMAN. Then they add the customary mark-up? Mr. Goza. We cannot do anything because we have not established the cost of doing business in the wholesale industry. Mr. PATMAN. I am talking about the retail industry. Mr. Goza. We have established the cost in the retail industry. If we can show that the Safeway store or some other store are selling their own brands, for instance, which they favor over nationally advertised brands, we will say, if we can show that they were selling their own brands at less than the cost charged on the books to the retail outlet, then, of course, we could do something. But that never happens. Mr. PATTMAN. The price they put on the retail books would be the price which they can ship from their manufacturing plant and any price they can get? Mr. Goza. That is right. Mr. PATMAN. In other words, that may be a possible loophole in the effectiveness of the law. It does not reach that kind of a situation? Mr. Goza. It cannot. Mr. PATMAN. It stops at that particular point? Mr. Goza. Yes; in other words, when they get in their carload lots into a wholesale house in Butte or Great Falls then what they charge it out at we have nothing to do with. Mr. PATMAN. Do you make price surveys in this State? Mr. Goza. We never have; no, sir. Mr. PATMAN. Is there any agency in the State that does make such survey? Mr. Goza. Not that I know of. Mr. PATMAN. Do you have any information that you could give the committee as to whether prices have risen or fallen since the enactment of this act? Mr. Goza. Prices have risen since the enacement of the act, but not because of the statute but because of conditions on the outside. Mr. PATMAN. There is no way of measuring it? Mr. Goza. No. Our cost survey showed that definitely the costs have gone up continually, but this is through a process aside from the loss of leaders. Mr. PATMAN. When you put your witnesses on the stand, do you take his word, or is he under oath? Mr. Goza. Oh, yes. Mr. PATMAN. Do you have accountants? Mr. Goza. No; we have not. Mr. PATMAN. You do not have them? You then have to take his word? Mr. Goza. Yes, sir. Mr. PATMAN. Have you ever looked into anybody's books to find out whether they were telling you correctly? Mr. Goza. No. Mr. PATMAN. Do you know whether or not it is true that most grocers do not have any cost-accounting systems? Mr. Goza. I doubt if they have. Mr. PATMAN. Would you find it difficult to make a survey? Mr. Goza. It would be very expensive. Mr. PATMAN. Do you think the information that comes to you might or might not be reliable? Mr. Goza. I am satisfied that it is reliable. Mr. PATMAN. All right. Mr. Foristel? Mr. FORISTEL. No questions. (Witness excused.) Mr. PATMAN. We are honored today with a distinguished member of the United States Senate, Hon. James E. Murray, of Montana. I had the privilege and pleasure of serving with Senator Murray when he was chairman of the Small Business Committee of the Senate and I was chairman of the Small Business Committee of the House. We worked together for many, many years. We are glad to have you Senator Murray. I know you will be interested in the testimony being presented here concerning problems of your own State and your own people. Senator MURRAY. I thank you Mr. Chairman. As you stated, we have been working together in Washington many, many years. The two committees were set up at the same time. We have had splendid cooperation and I think we accomplished very substantial results. So I am very happy to be here today and to take part in your hearing. STATEMENT OF LIEF ERICKSON ON BEHALF OF INDEPENDENT LUMBER OPERATORS Mr. ERICKSON. Mr. Chairman, this afternoon I am appearing on behalf of an entirely different group than the group I appeared for this morning. But it is a group in a related industry. I cannot give you for the record the names of all the people I represent in this second appearance, but I will for the record give you names of my principal clients in this particular matter. I speak this afternoon for the Western Montana Lumbermen's Association, located at Kalispell, Mont., an organization of independent lumber operators in the Flathead area. I speak for the Tobacco Valley Lumbermen's Association, a group of independent lumbermen at Eureka. I speak for the Troy Development Association of Troy, Mont., and for the Western Forest Industries Association, of Portland, Oreg. In addition, I speak for a number of other groups that are interested in the particular problem. But those are my principal clients and will serve to identify the group I represent. The Western Montana Lumbermen's Association at Kalispell, Mont., has as its members practically all of the independent lumbermen in that area. The same thing is true of the Tobacco Valley Lumbermen's Association. We have been talking today about monopolies which come about largely by reason of the failure of the Government to take appropriate steps to prevent them and monopolies which do not have the sanction of law. In the matter that I presented this morning, we had a little different situation where, through the action, the affirmative action, of a Government agency, private enterprise and small businesses were jeopardized. What I am going to talk about this afternoon, Mr. Chairman, is a monopoly which is created by the action of the Government to the |