History: Piggly Wiggly Short Squeeze
Patent For Grocery
Today when you go to a supermarket, you pick up a basket and load up the goods you want to buy and pay at the cashier. This self-service grocery experience is nothing new in modern times, but did you know that this concept actually has a patent dated back to 1920?
It was submitted for patent by Clarence Saunders, the founder of Piggly Wiggly stores. This is his patented self-serving store layout:
Here’s the link for the full 5-pages: Patent #1357521.
Before this patent, shoppers handed a grocery list to a clerk behind a counter, who fetched the goods. Saunders’ patented arrangement drastically cut store labour costs and lowered food prices for consumers. More interestingly, it encouraged the psychology of “impulse buying” by putting products directly into the hands of the shopper. It also gave rise to the necessity for modern products packaging and brand advertising that we see today, since items now have to “sell themselves” on the shelves.
The picture below shows how Piggly Wiggly looked like in 1918. See those baskets? They even charged shoppers for using them:
But, as the title of this post suggests, the history we will be talking about is much more fascinating.
Piggly Wiggly wasn’t just an innovative grocery chain, it had some greedy financial engineering. This is the story of how trying to corner a market ended up badly for everyone.
Clarence Saunders
In 1881, Clarence Saunders was born into a poor family in Virginia. Unable to afford proper education, he went through menial jobs until 1916, at the age of 35, he set up America’s first self-service grocery store in Memphis, Tennessee.
When asked why did he call it Piggly Wiggly… Saunders would often answer:
So people like you can ask me that question.
According to Tennessee Historical Society, a journal written by Mike Freeman (vol. 51 #3, 1992), Saunders was boasting after just a few months of opening his first store:
One day Memphis shall be proud of Piggly Wiggly… And it shall be said by all men… That the Piggly Wigglies shall multiply and replenish the earth with more and cleaner things to eat.
Piggly Wiggly didn’t quite conquer the earth, but by 1922 it owned or franchised more than 1,200 stores throughout the US, each painted in brown, blue, and yellow.
It also started expanding into Canada.
Because of his innovative idea of self-service shopping, the stores were very low cost and had an average annual sales per location of $120,000. This was much higher than most grocery stores at that time.
The business model was a mix of wholly owned and franchised stores. The headquarters, Piggly Wiggly Stores, owned about 650 stores, while the rest were franchised and paid 0.5% royalties on gross sales to a separate holding company, Piggly Wiggly Corp, which in turn owned trademarks and the Patent #1357521.
As the business expanded, Saunders became rich and listed Piggly Wiggly Stores on the NYSE in February 1922. It went public with 150,000 shares outstanding issued at $43/share. The shares paid a dividend of $4/share each year.
Everything was going smoothly. Profits were $1.1m in 1922, a huge increase from prior year’s $712k.
Short Sellers
However, bad news would soon arrive in November 1922, a Piggly Wiggly franchisee operating in New York, New Jersey, and Connecticut went bankrupt. 35 stores were affected, but this was a franchisee and not the holding company itself.
This bad news coincided with an announcement that Piggly Wiggly would issue 50,000 more shares — not a particularly good combination.
During this time, Wall Street was booming and many short sellers (called “bears”) were betting that the market was overvalued. Securities regulations were weak back then, so these bears would borrow shares to sell them, hoping to buy them back later at lower prices.
Piggly Wiggly became a target board for bears and they drove the stock price from $50 to below $40.
Short Squeeze
Clarence Saunders was livid. He would recount that he felt like Wall Street was swooping down on Piggly Wiggly “like an eagle on a chicken”.
So he decided to hit back by announcing that he was going to buy Piggly Wiggly’s stock. But he carried this out to an extreme.
After using all the money at his company, Saunders went to borrow $10m from investors and banks to fund his shares purchases. In a week, he had bought 105,000 shares and the price quickly rose to $60 in January 1923.
A man on a mission, Saunders was bent on beating the bears into submission. He tried to force short sellers to buy back their borrowed shares at a much higher price. This is what we term today as a “short squeeze”.
But, Saunders had to also unwind his positions to repay the money he borrowed. Since he held so many shares, the act of him selling could crater the stock price, this is assuming if he even had any buyers at all.
Knowing this, the bears were encouraged to simply come back later.
Saunders had a brilliant plan. He sold his shares directly to the public by advertising in the newspapers and offering it at a discount:
He went further to try to shrink the public shares float because a smaller volume of shares would make the bears think twice. Saunders offered shares that he acquired to small investors on an installment plan, each priced at $55/share. $25 was paid upfront, the rest paid in ten $3 installments.
About 57,000 shares were sold this way, allowing Saunders to repay some of this debts without putting shares back on the open market.
By March 1923, Saunders had controlled virtually the entire public float of Piggly Wiggly.
The set up was done and on 20 March 1923, Saunders decided that his short squeeze plan was ready. That morning, he called for the return of 42,000 shares that the group of bears owed. They had 24 hours to comply.
The bears scrambled out of their caves and bidded Piggly Wiggly’s shares from $75 to $124 in the first few hours of trading.
The Piggly’s have slaughtered the Bears!
Or did they?
NYSE saw the nefarious plan to corner the market, and indefinitely suspended all trading of Piggly’s shares. On 22 March 1923, they delisted Piggly Wiggly. They even extended the time for delivery of the shorted shares until the following week!
Behold the power of regulators!
The stock fell back down to $82, and Clarence Saunders bemoaned:
Wall Street got licked and called its “mama”. Of course, “mama” heard the cry of her petted child.
Saunders was left with $5m in debt and 100,000 shares of his own company that he couldn’t sell.
There was still some glimmer of hope though, as there were still about 11,200 shares that needed to be repurchased by the short sellers. To poke the bears one last time, Saunders declared that he would only sell his shares at $250 a piece.
Remember those small investors he sold to at $55/share on installments? Because the shares were delisted, those people saw one last opportunity to profit from this debacle. They undercut Saunders’ price.
Betrayed by his own plan, Saunders relented and offered his shares at just $100 each. The small investors followed suit, offering an even lower price, enabling the bears to close their trades.
Yes, the bears definitely lost money. But Saunders was in deeper trouble. In a few months time, on 1 September 1923, he would need to repay half of his $5m debt, the other half was due 1 January 1924.
Desperate to save himself from bankruptcy, he offered his shares to the same group of small investors at the same $55. This time, nobody was interested.
To save their own kind, local businessmen in Memphis launched advertisements to find investors to bail out Piggly Wiggly’s founder. Alas, this was not enough to save Saunders.
The last resort led to Piggly Wiggly selling off assets… 17 stores in San Antonio were sold to franchisees for $300k in May. Another 97 in Chicago sold for $1m. That’s what you call a fire-sale, considering that annual sales was more than $100k per store.
In August 1923, with payments due next month, Saunders resigned as president of Piggly Wiggly and relinquished all his property — his stock, cars, even his house dubbed “Pink Palace” — to his creditors. Some of his shares were subsequently auctioned for $1. A year later, he filed for bankruptcy.
Anyways, his residence Pink Palace was built in 1923 using pink Georgian marble. Today, it’s a museum featuring exhibits ranging from archeology to chemistry, as well as a large theatre and planetarium. Of course, one exhibit features a replica of the original Piggly Wiggly store.
Second Wind
Clarence Saunders was bankrupt at age of 43, the bankruptcy judge reminded him that he owned absolutely nothing but his own name.
Now, this was insult to injury. Indeed, Saunders was determined to bounce back and launched a new grocery chain in 1928 called: Clarence Saunders, Sole Owner of My Name. A sarcastic punt to that judge.
Although eccentric, Saunders was also a grocery retail genius. He added meat departments and bakeries and his new shops became an instant hit, expanding to hundreds of locations.
Oh yes, Saunders a millionaire once again!
By 1929, he had 675 stores generating $60m in sales.
He also established a professional football team in Memphis, with an equally long name: Clarence Saunders Sole Owner of My Name Tigers.
Remarkably, the Tigers were a success, attracting up to 8,000 paying fans for a game against the NFL champion Green Bay Packers in December 1929. The Tigers, against all odds, defeated the Packers that day 20-6.
Life has its way around Saunders as his second fortune was short-lived. The Great Depression crushed the economy, and his Sole Owner chain went bankrupt.
Never Say Die
Oh no, Clarence Saunders wouldn’t simply lay down. Afterall, that’s not characteristic of American entrepreneurial spirit!
He wasn’t done with innovations in the grocery business. Learning from his past, he pivoted away from running retail stores and instead focused on building automated stores.
In 1937, he came up with Keedoozle. The name came from the phrase “key does all”.
Customers shopping in the Keedoozle would insert a key into the bottom of a glass display cabinet to select the item they wished to purchase. The item would then be deposited onto a conveyor belt by a stock clerk and the customer would be given a punched ticket tape. By the time the shopper got to the check-out, the selected items would be boxed, and the ticket fed into a machine would automatically tally the price.
This was actually the world’s first fully automated grocery store. In essence, it was like a giant vending machine.
Unfortunately, this idea would also fail… this time due to WW2.
After the war, at the end of his life, Saunders went for one final push. He wanted to make a store called Foodelectric.
This was described in a book titled TNT: The Power Within You.
It operates so automatically that the customer can collect her groceries herself, wrap them and act as her own cashier. It eliminates the checkout crush, cuts overhead expenses and enables a small staff to handle a tremendous volume.
Alas, death would claim him before his ideas took off. In 1953, Saunders died of a heart attack at 72 years old.
Piggly Wiggly is still operational today as small local supermarkets. Franchisees operate the vast majority of the 500+ stores across rural America. The logo has a cute pig mascot first introduced in 1949:
Two Great Lessons
The story of Piggly Wiggly brings us two important lessons for investors:
Focus on the business; NOT the stock price.
Saunders was a good grocery business operator. He had a good business and a long runway of growth. However, he lost focus and turned a temporary fall in his stock price into a grudge against short sellers. He further stoked this fire with debt, blowing up a perfectly fine business along the way.
Never risk what you have for what you don’t need.
Saunders was already a rich man until he decided that he should be rewarded for punishing the bears. Even though it was smart, legitimate financial engineering — he didn’t need this extra money. In the end, he went bankrupt because he took unnecessary risks.
Thank you this is a great piece, and I I really enjoy history stories like this one