W h y s o m e c o m p a n I e s m a k e t h e
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| C HAP TE Rb b There is no worse mistake in public leadership than to holdout false hopes soon to be swept away. - WINSTON S . CHURCHILL, The Hinge of Fate 1 n the early s, the Great Atlantic and Pacific Tea Company, commonly known as AP, stood as the largest retailing organization in the world and one of the largest corporations in the United States, atone point ranking behind only General Motors in annual Kroger, in contrast, stood as an unspectacular grocery chain, less than half the size of AP, with performance that barely kept pace with the general market. Then in the s, AP began to falter while Kroger began to lay the foundations fora transition into a great company. From 1959 to 1973, both companies lagged behind the market, with Kroger pulling just a bit ahead of AP. After that, the two companies completely diverged, and over the next twenty-five years, Kroger generated cumulative returns ten times the market and eighty times better than AP. How did such a dramatic reversal of fortunes happen And how could a company as great as AP become so awful 66 Jim Collins K ROGER , AP, AND THE M ARKET Cumulative Value of $1 Invested, 1959- 1973 General Market $3 42 Notes 1. Kroger transition point occurred in 1973. 2 Chart shows value of $1 invested on January 1, 1959. 3. Cumulative returns, dividends reinvested, to January 1, 1973. K ROGER , AP, AND THE M ARKET Cumulative Value of $1 Invested, 1973 - 1998 Kroger $1 98.47 Notes 1 Kroger transition point occurred in 1973 2 Chart shows value of $1 tnvested on January 1.1973 3. Cumulative returns, dividends reinvested, to January 1, 1998. G o o d to Great 67 A&P had a perfect model for the first half of the twentieth century, when two world wars and a depression imposed frugality upon Americans cheap, plentiful groceries sold in utilitarian stores. But in the affluent second half of the twentieth century, Americans changed. They wanted nicer stores, bigger stores, more choices in stores. They wanted fresh-baked bread, flowers, health foods, cold medicines, fresh produce, forty-five choices of cereal, and ten types of milk. They wanted offbeat items, like five different types of expensive sprouts and various concoctions of protein powder and Chinese healing herbs. Oh, and they wanted to be able to do their banking and get their annual flu shots while shopping. In short, they no longer wanted grocery stores. They wanted Superstores, with a big block "Son the chest-offering almost everything under one roof, with lots of parking, cheap prices, clean floors, and a gazillion checkout lines. Now, right off the bat, you might bethinking "Okay, so the story of AP is one of an aging company that had a strategy that was right for the times, but the times changed and the world passed it by as younger, better- attuned companies gave customers more of what they wanted. What's so interesting about that" Here's what's interesting Both Kroger and AP were old companies Kroger at 82 years, AP at 11 1 years) heading into the s both companies had nearly all their assets invested in traditional grocery stores both companies had strongholds outside the major growth areas of the United States and both companies had knowledge of how the world around them was changing. Yet one of these two companies confronted the brutal facts of reality head-on and completely changed its entire system in response the other stuck its head in the sand. In 1958, Forbes magazine described A&P as "the Hermit Kingdom" run as an absolute monarchy by an aging Ralph Burger, the successor to the Hartford brothers who had built the AP dynasty, sought to preserve two things above all else cash dividends for the family foundation and the past glory of the Hartford brothers. According to one AP director, Burger "considered himself the reincarnation of old John Hartford, even to the point of wearing a flower in his lapel everyday from Hartford's greenhouse. He tried to carryout, against all opposition, what he thought Mr. John Hartford would have Burger instilled a "what would Mr. Hartford do" approach to decisions, living by the motto "You can't argue with a hundred years of Indeed, through |