Fight The Store… And The Store Wins
Direct To Consumer Is Not All It’s Cracked Up To Be
How “Bottles” And Al Capone Disrupted Milk Delivery
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It was 1934… not a great time to be a Capone.
The brains of the family, Al, also known as Public Enemy No. 1, was cooling his heels in Alcatraz prison for “tax evasion.” And President Franklin Roosevelt had just ended Prohibition – and kneecapped the Capones’ lucrative syndicate of speakeasies and moonshine.
It was up to less-famous brother Ralph – known as Public Enemy No. 3 – to save the family business. He had options, after all: prostitution, gambling, beefing up the protection racket.
He decided on milk.
It wasn’t a bad idea, actually. Ralph planned to import cheaper milk into Chicago from over the Wisconsin border, bottle it in the cheerfully-named, mob-owned Meadowmoor Dairy, and then sell it in local grocery stores at nine cents a quart – severely undercutting the 11-cent, locally produced milk that was price-fixed by the powerful Milk Wagon Drivers’ Union and delivered to customers’ doors. (As a sideline, the Capone family also forced many Chicago pizzerias to use rubbery Wisconsin-sourced mozzarella, still remembered with distaste in the area as “mob cheese.”)
Back then, milk wasn’t routinely sold in stores. The milkman and the iceman – both needed in an age before widespread refrigeration – made daily rounds, and milk delivery was a nationwide business, protected by powerful unions. It was a “direct to consumer” business – no middleman needed – and all the profit went straight into the milk cartel’s pockets.
Until Ralph “Bottles” Capone came on the scene, that is…
Bottles figured he’d price the milk-delivery union out of business by selling his own cheaper milk in stores. Then he’d be the milk cartel – and maybe Public Enemy No. 1 would be proud of him.
So he opened the doors of Meadowmoor Dairy – and a bomb immediately crashed in, courtesy of the milk deliverers. (A watchman caught it while the fuse was still sputtering and threw it back outside onto South Peoria Street, where it exploded.)
That was the start of the “Milk Wars” – a surprisingly violent conflict that during the rest of the 1930s would include 11 more bombings, 22 smashed windows, an acid throwing, stolen and tipped-over milk trucks, a grocery store set on fire, and a union man caught in a drive-by shooting, as the milk-delivery union fought to defend their turf and Bottles Capone’s gang hit back.
Through it all, Meadowmoor milk kept selling for lower prices in the grocery store – eventually, just 8.5 cents per quart, even as “delivery” milk went up to 13 cents. As thousands of Chicago housewives saw a chance to pinch pennies, the 7,000 milk delivery routes in the city shrunk to 4,500. By 1938, union boss Steve Sumner claimed that 2,500 of his drivers were out of work thanks to Meadowmoor’s cheaper store milk.
Eventually, in 1940, the mob and the drivers’ union reached an uneasy cease-fire thanks to a Department of Justice-mediated consent decree. “Independent dairies” (a.k.a., mob-owned Meadowmoor) agreed to leave the milk union alone, while the union agreed to stop price-fixing and let independent dairies sell their milk in stores.
But – maybe without realizing it – Bottles Capone (who died peacefully in his bed in 1974) had sounded the first death-knell of the direct-to-consumer milk industry…
Death Of A Milkman
Meadowmoor Dairy expanded beyond its mob roots and became a Chicago fixture; empowered by the 1940 DOJ decree, it continued selling its cheaper milk in stores. As the 1940s progressed, more dairies followed Meadowmoor’s lead. Home refrigeration blazed onto the scene, as did steel Thermos tanker trucks and one-time-use cardboard cartons. Baby boomer families moved farther from farms and settled nearer to supermarkets. Milk delivery routes grew longer and longer, driving costs rose, and the once-powerful drivers’ unions shrank.
By the 1970s, the milkman had all but disappeared from the streets of America – and every grocery store had a well-stocked dairy aisle (at the back, so you’d have to walk past all the other products in order to grab your half gallon). Big-box retail had killed the direct-to-consumer milk industry, gang style.
It was one of the first times The Store shot The Delivery Service in the back of the head. But it wouldn’t be the last.
Fast forward a century, and companies (often, flashy IPOs like Allbirds or Warby Parker) routinely get the bright idea to forego big-box stores and sell their product directly to customers – usually on their own website, or through ads on social media. Like milk delivery, it seems like a good idea at the time – what’s not to love about reaching your customer base directly, and pocketing all your profits without giving Walmart a cut?
But long term – like milk delivery – it invariably fails.
Direct-to-consumer (“DTC”) companies – particularly ones that specialize in a single product – are vulnerable to supply chain issues, high online ad costs, shrinking reach, and diminishing demand in a way that brick-and-mortar storefronts just aren’t. In 2022, as temporary COVID-fueled enthusiasm for online shopping wore off, nearly every publicly traded DTC company with a market cap of over $800 million lost money – shedding billions of dollars and underperforming an already dismal market, down 19% on average compared to the S&P’s 11%. That year alone – bedeviled by supply chain snarls and higher shipping costs from China – former DTC darlings Stitch Fix (clothing boxes) and Warby Parker (eyeglasses) fell 40%, and Allbirds (shoes) dropped 64%.
Just look at what happened to Casper, perhaps the poster child for DTC failure. The much-hyped “mattress in a box” – which you’d order online and then unfold while it fluffed out to its full glory – reached $1.1 billion valuation in 2019, six years after its launch. But sleepers only need so many mattresses – and the high cost of Facebook ads quickly ate up the company’s profits. By the time Casper limped to an IPO in 2020, its value was down to $476 million. It went private the following year at $6.90 per share. Today, you can still buy a Casper mattress – from a brick-and-mortar mattress store.
The same fate befell Warby Parker (visit the Warby Parker Kiosk at Target), Allbirds (now selling at a DICK’s sporting goods near you), and SmileDirect Club (the online orthodontics company is now bankrupt, so just visit your local dentist). They all fought the Store, and the Store won.
Our top Best Buys today was almost one of these statistics. It pivoted sharply to DTC (a hell of a drug) and sales slumped severely. Today, though, the company is helmed by a new and sensible CEO whose top priority has been getting its product back into major retailers, with encouraging results that are reflected in recent earnings.
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