Piggly Wiggly’s Short Squeeze

Forms of market manipulation that have become rarer in the U.S. after the Securities Exchange Act of 1934 were once commonplace. One of these was the ‘bear raid’, when traders collaborate to drive the price of a security or commodity lower, often by short selling, in order to profit from those positions. Another was cornering a market, attempting to control enough of the supply of a particular security or commodity to control its price, offloading the assets later at higher prices. In late 1922 and early 1923, shares in grocery store Piggly Wiggly were driven lower by a bear raid and then surged higher amidst a ‘short squeeze’ organized by the company’s founder and CEO, Clarence Saunders.

Clarence Saunders

In 1881, the grocery store entrepreneur Clarence Saunders was born into a poor family in Virginia. He worked for a local grocer before he moved to Memphis, Tennessee for better work in the grocery business. He founded a small chain of stores, called United Stores, which he sold after a few years. United Stores was really a cooperative of sorts; stores were owned separately but purchasing and advertising were centralized. Then Saunders formed Piggly Wiggly in 1916 and it introduced a new model for selling groceries in the United States.

Piggly Wiggly

At Piggly Wiggly, merchandise was picked out by the customers themselves rather than by a store clerk. This self-service model was novel. Competitors assumed no one would want to find what they wanted on the shelves by themselves, weigh the merchandise on their own, and carry their own groceries around the store as they completed their shopping. Competitors offered home deliver services; Piggly Wiggly would not. Nor would they offer store credit. Piggly Wiggly even required its customers bring their own baskets or buy one at the store. While there had arguably been a slow drifting away from some elements of the old full-service model in the industry, Piggly Wiggly fully embraced a new way of doing things.

Piggly Wiggly grew to over 1,000 locations by fall 1922 across 39 states, particularly concentrated in the South and West. The company had just begun expanding into Canada too. Popularity and efficient operations mean these stores had an average annual sales volume per location of $120,000 per year, higher than most grocery stores.

Memphis, Tennessee-headquartered Piggly Wiggly Stores, Inc. owned approximately 650 of these stores outright. The rest were franchised and paid royalties equal to 0.5% of gross sales to a separate holding company, Piggly Wiggly Corp., which in turn owned not only trademarks but even a patent on its method of selling groceries. Indeed, even something as abstract and general as the arrangement of the store received U.S. Patent #1,357,521. Piggly Wiggly Corp. also made its own point-of-sale equipment, which it sold to franchisees.

Piggly Wiggly Stores, Inc., meanwhile, had 150,000 shares outstanding which were listed first on the Chicago Stock Exchange. Then, in February 1922, the shares were listed on the New York Stock Exchange and 50,000 new shares were issues at $43 each. Once listed, shares paid a dividend of $4 per share per annum, split into equal quarterly payments. The first of these dividends was paid in September 1922. At the same time, profits were increasing, growing from $712,000 in 1921 to $1.1 million in 1922. On account of the company’s performance, shares in Piggly Wiggly were regarded as a safe investment.

Short Sellers

In November 1922, a Piggly Wiggly franchisee active in New York, New Jersey, and Connecticut went bankrupt. This company operated 35 stores and it was a franchisee, not Piggly Wiggly Stores, Inc. itself. However, this negative news coincided with an announcement that the company would issue 50,000 more shares. The price of Piggly Wiggly Stores shares fell from $50 to below $40. Short sellers drove the price lower.

Short sellers try to profit from a falling stock price by borrowing shares from their brokers who then sourced the shares from where they could, borrowing it themselves if needed. Short sellers then sold these borrowed shares, hoping to repay their loan by buying back the shares at a lower price thereafter, returning the shares to the lender and profiting from the drop in prices. Because they are selling the stock in question, short sellers not only bet that the price will fall but play a part in making that happen, especially when there are numerous of them.

Squeeze

Seeing what was happening, Clarence Saunders announced publicly that he would buy shares in Piggly Wiggly Stores to support the price. He carried this out to an extreme. Having exhausted available funds at Piggly Wiggly Stores as well as his own available liquid resources, Saunders borrowed $10 million from investors and banks in Tennessee and elsewhere to fund his purchases of Piggly Wiggly shares. Within a week, he had bought 105,000 shares, a slight majority of the outstanding shares. The price rose to $60 a share in January 1923 and then to above $70.

Saunders was looking to drive the stock higher to force short sellers to buy back their shares at much higher prices to close out their positions at a loss, a ‘short squeeze’. However, unwinding a short squeeze could present danger; after all, Saunders was acquiring a large position in a stock, lifting prices higher. When it came time for him to sell his shares and repay his own creditors, the stock price could collapse, if he could find enough buyers at all. This could also encourage the short sellers to simply try again later.

So, Saunders was also eager to shrink the public ‘float’ of the company, namely the shares that are available to be traded on an exchange. A small volume of available shares would make short sellers think twice in the future. One way of squaring this against his eventual need to sell his own shares was to put them in the hands of investors unlikely to sell to anyone else anytime soon.

To accomplish exactly this, Saunders offered the shares he acquired to small investors on an installment plan. The shares would be sold for $55 each; $25 was due upfront and the rest paid in ten $3 installments. This provided Saunders with a way of divesting of the massive quantity of shares he has acquired without causing the price to crash. Some 57,000 shares were placed with small investors this way, allowing him to repay some of his debts without putting the shares back on the open market.

By mid-March 1923, Saunders had controlled virtually the entire public float of Piggly Wiggly shares. He claimed to control 198,000 out of the 200,000 shares outstanding. This was a doubtful claim even if one includes the shares that he had distributed on installment plans but under which buyers would not receive their share certificates until they had made their final payment.

In any case, he certainly thought he controlled enough of the market to affect his short squeeze. Until Tuesday March 20, Saunders had continued making his shares available to short sellers on loan but on that day, he called in these loans meaning those short the shares had to acquire them somehow to repay Saunders. In all, 42,000 loaned shares now needed to be found by the short sellers to make good on their borrowings. However, there was no one, or nearly no one, to buy the shares from except Saunders himself. The demand from buyers and a lack of sellers meant the stock price rose to $124 by noon that day as those short the stock tried to acquire shares at whatever price they could be bought for.

Failure

The squeeze would subside as quickly as it was brought on. Before the day was over, there were rumors that the New York Stock Exchange was about to suspend trading in the shares. The exchange was also reportedly going to grant an exception to its usual settlement rules and give those short the shares more time to deliver them to Saunders. This sent the price falling back to $82. Still, this constituted a large rise from the prior day’s close of $70.

The rumors were enough to set off the drop and they turned out to be true; an announcement to this effect was made at the end of the trading day. Ultimately, short sellers were given nearly a week to settle their position and Piggly Wiggly stock would be delisted from the exchange altogether. It was not a given that this was enough time for the short sellers to cobble together enough shares though. Two days later, Saunders estimated another 25,000 shares still needed to be repurchased by the short sellers.

Clarence Saunders announced that he would only part ways with his own shares at a price of $250, meaning any short seller settling with him directly faced massive losses, likely multiples of the notional value of their short positions when the stock price was around $50. However, few choose this option and there was another avenue that had emerged.

Because the stock would no longer be listed, shares became available for sale by small holders that saw perhaps one last straightforward opportunity to sell at a very good price. There were also fewer shares sold short than Saunders had thought, perhaps just 11,200 or so. Together, these facts meant that short sellers were able to close out their positions at more manageable losses. Seeing what was happening, Saunders relented and offered his shares at just $100 each, enabling the short sellers to close their trades.

Even at that price, short sellers faced losses but Saunders was in at least as much trouble too. From his days of relentless buying, he owned many now-unlisted shares that he borrowed millions to acquire. On these loans, around $2.5 million needed to be repaid on September 1, 1923 and the rest on January 1, 1924. To offload these, he continued to offer his shares to small investors at $55, but there were few buyers. To rescue one of their own, businessmen in Memphis launched drives to find investors in the city, but local pride in the city’s grocery giant was not enough to save Saunders.

Saunders had Piggly Wiggly Stores sell off assets so that perhaps the company could raise the money needed to buy back his shares. Seventeen stores in San Antonio, Texas were sold to franchisees for $300,000 in May and another ninety-seven in Chicago sold for more than $1 million. These were just some of the transactions; further stores in Colorado, Missouri, and Virginia were also sold before the start of summer 1923. Still, this was not enough.

Saunders defaulted on his loans and gave up management of the company. At least some of his shares were auctioned off at $1 each in August 1923, taken by an unknown bidder. Saunders declared bankruptcy. He threatened lawsuits against the New York Stock Exchange; these went nowhere but neither did a criminal indictment against Saunders himself. It was one of the last undisguised attempts to corner the market for a listed stock in the U.S.; future regulations made attempting this again an illegal market manipulation.

Lesson

Clarence Saunders may have put thought into his exit plan before the short squeeze materialized but the plan did not envision the actions taken by the New York Stock Exchange. Short squeezes, when short sellers desperately try to exit their positions, are themselves often triggered by outside interventions. In this case, it was buying by the company’s management. In other short squeezes, it has been buying by an interested third party, perhaps a potential acquirer, that triggered the squeeze. Others have been set off by macroeconomic or geopolitical shocks that short sellers did not anticipate and were entirely exogenous to the security or commodity in question. Just the same, short squeezes are often brought to an end by interventions, whether by exchanges or regulators, just like that of the New York Stock Exchange in Piggly Wiggly’s case.

More from the Tontine Coffee-House

Read about a short squeeze in Volkswagen shares in 2008 and the 1920s stock market speculator Jesse Livermore, who consulted with Saunders on his short squeeze. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.