Dave and Saul Discuss Market Basket

Throughout the course of a series of email exchanges, Saul and I discussed the story centered around Market Basket, a regional New England-based chain of grocery stores that drew national attention after a longstanding dispute between two sides of the family that owns it boiled.  A brief introduction is in order.

Market Basket is New England-based a family-run grocery store chain that has been in business for almost 100 years.  It currently operates approximately 71 stores and generates approximately $3.5 billion in revenues.  The company’s reputation is stellar because it not only generates profits but also treats its employees very well with respect to compensation, benefits, profit sharing, etc.  This culture starts at the top with its CEO, Arthur T. Demoulas.  His reputation of being a man that genuinely cares about his employees is legendary.  Stories of him attending funerals, calling employees inquiring about sick family members and hospital visits are all over the internet.  You’d think that people would be happy with this situation, right?

Not exactly.  While it was technically a family-run business.  The two sides of the family have been at each other’s throats for decades and make the Hatfields and McCoys look like rank amateurs.

Simply put, there are two factions, each faction is led by a grandson of the late led by a cousin (Arthur T. and Arthur S. Demoulas).  Their grandfather (another Arthur Demoulas) founded the business.  Their fathers, Mike and George, eventually took over.  When George passed away unexpectedly, Mike pledged to take care of George’s children (including Arthur S.)  In 1990, Arthur S. sued Mike alleging that Mike attempted to defraud the Arthur S. side out of shares of the company. One lawsuit led to another lawsuit, more litigation, accusations of wiretapping, bad behavior and all sorts of crazy things.

Out of this mess, the court found in favor of the Arthur S. side and awarded his side of the family 50.5% of the total shares of the company.  However, because of an issue between one of the shareholders and Arthur S., the Arthur S side did not vote in a unified bloc until 2013.  Prior to 2013, despite having a minority ownership position, the Arthur T. side had the majority vote and controlled the Board of Directors.  In the meantime, Arthur T. was appointed CEO in 2008.

In 2013, the Arthur S. side, regained control, unsuccessfully attempted to remove Arthur T. as the CEO and then worked to boost returns to shareholders (something he had wanted to do but couldn’t prior to 2013).  Shortly after gaining control of the Board, it approved a $300 million cash distribution to shareholders, a move so bitterly opposed by Arthur T. that he attempted to sue his cousin to block the attempt (he lost).

Things hit the fan this past June when Arthur T. was finally removed at the CEO of Market Basket and replaced with two co-CEO’s, both of whom were outsiders to the company. Having read the background story, it was pretty clear to me that Arthur S. was prepping the company so his side of the family could sell its shares, most likely to a private equity firm that would have seen the value in the company’s market position and more value in boosting returns by cutting costs.  Smart enough to see the writing on the wall and already being deeply loyal to Artie T., employees refused to show up for work, deliver food to stores and joined rallies in support of their ousted CEO.  Despite threats of lost jobs (some in management actually did lose jobs), many employees refused to yield.  At the same time, customers supported the employees by boycotting the stores.  They wanted their CEO back and they weren’t going to stop until that happened.

To me, the really remarkable aspect of this story was the solidarity shown by the employees and the customers because for six weeks, they did exactly that.  They had successfully suspended the operations and threaten the company’s existence, so much so that the governors of MA and NH got involved in the negotiations between the two warring factions.  Given that this had gone on for six weeks and both sides needed to come to their sense, a deal was reached between the two sides – the Arthur T. side agreed to purchase the remaining shares of the company from the Arthur S. side for approximately $1.5 billion.  Arthur T. resumes CEO duties.  Market Basket remains a family business.

As Saul and I discussed this, we came up with five discussion points. In the interest of time, we limited ourselves to a single response.  We’ll have the rest of our dialogue in the comments section:

1. Does the Market Basket story fit within an ideological narrative?

Dave

I’m having a difficult time finding an ideological narrative, but keep in mind that I’m also notoriously against leaning on ideology when I approach business-related issues (as an example, categorically blaming labor unions for the woes of companies like General Motors or, more recently, Hostess, is a viewpoint I completely reject).   Where does one look for that?  If I had to try to step into your shoes, I can think of two possibilities: 1) the belief that workers deserve a larger share of the pie and greater respect from management than what’s typically given in corporate America.  Market Basket, especially under Artie T. fits that narrative.  The second possibility is the argument that labor may have helped Artie T. win this fight (more on this shortly).  There may be some truth to this, but from an ideological standpoint, wouldn’t this victory have better fit the liberal narrative if the labor force was unionized?  Isn’t one of the takeaway lessons from this the fact that unions aren’t needed if the employees are already treated well?  What could be considered one of the more significant labor victories in recent time was achieved by a non-unionized workforce.

My other concern with trying to fit this story in an ideological narrative is that I’ve never known conservatives or libertarians, as a matter of political principle, that suggests that employees have to be treated poorly.  Although I have no background in moral philosophy, it seems like how people are treated fall under that umbrella as opposed to political theory.  Then again, I’m completely outside my area of expertise on this.

Saul

I should start off by saying that despite my reputation for being a dedicated social democrat on OT, I am not a raging anti-capitalist. I am a capitalist skeptic and think that socialism works for some goods better than the free market. I admire companies that treat their workers well and earn a profit at the same time.

When we were discussing this post in e-mail, I said that I agreed with many of your points at least I agreed in theory but not necessarily in reality for some of them. One thing you wrote in an e-mail is that you found it hard to determine where this story felt on the ideological map because “there’s nothing that I can think of in conservative or libertarian thought that requires a belief in treating employees poorly.”

I don’t disagree with this as a sentiment largely or at least in theory. There are probably many conservative and libertarian bosses who treat their workers well. During the 2012 election, David Siegel was briefly infamous for sending around a letter to all his employees that said everyone would get the axe if Obama was reelected. This turned out to be an empty threat and a lot of hot air.

There have been times on OT when I have criticized the neo-liberalism of people like Matt Yglesias and Ezra Klein for treating people like they are “optimization” problems. James K and others agreed with me that people are not optimization problems but government (and probably also running a business) are optimization problems. This is true but you cannot run a business or a government without people (at least not yet) and eventually the optimization will need to interfere with people. This is nothing new. Henry Ford’s assembly line was an optimization issue. My Corporations once gave an anecdote about a Ford employee who quipped “If I turn nut #256 one more time, I am going to become a nut.” I can’t confirm whether this quip is true or not but does speak to how people dislike micromanagement and want a sense of agency over their labor. Factory workers hated Taylorism because they felt like robbed them of their agency.

I suspect we are seeing businesses getting more and more sophisticated about how they can optimize for maximum profit. There are computer programs that are very good at analyzing how many people need to be on-call and when and companies can tell shift workers to go home early if there is an anticipated lull in the business day. They can also rely more on hiring many part-time workers so benefits do not need to be paid. In my mind, all of this represents a form of burden-shifting. The people with the most resources are placing the burden of a down-time or a lull in business on the people with fewer resources.

I suppose what matters is how much you think this is intentional or not. Humans are social and tribal by nature and we have wonderful ways of maintaining hierarchy and distinction based on allegedly better status. I see this in many law firms. The non-legal staff tends to be paid on an hourly basis. In some ways this is good because they have decent work schedules and sometimes the attorneys do stay until very late at night to work on a last minute brief. On the other hand, attorneys get more work from home privilege and get to leave early if there work is done for the day. Corey Robin defines conservatism not as desiring limited government in order to preserve or increase liberty but as a practice and ideology meant to enforce hierarchy and power. I think this is true for at least some in the current American conservative movement. You can hear this in any kind of “real America” narrative from the right-wing. This is not necessarily new. Many incidents and policies in American history are a struggle between the urban and the rural or can be viewed that way. There is a school of thought that Prohibition was largely about rural and small-town protestant American trying to exert power and control one more time over the new urban masses who were starting to be dominant in American politics. The problem is that the United States is a representative democracy and no one is going to get very fair by arguing against representative democracy. The only people I’ve ever met who openly called themselves authoritarian happened to be rather dorky and unpopular teenage boys who were more likely to be on the debate team  than in a motorcycle gang. So we are forced to use the same word to mean different things and everything becomes an abuse or an attack on liberty and freedom. The fight is over whose liberty and whose freedom and when limits are acceptable.

There difference between liberals, conservatives, and libertarians is probably about where the limits should be on how far businesses can or should go in order to optimize and maximize profits. I would have no problem with laws and regulations that prohibited certain practices like letting shift workers go early because a computer program predicts a downtime and lower profits.

As for the non-union angle, I would argue that the workers effectively helped Artie T. by acting like they were effectively unionized. They went on strike and effectively shut down Market Basket as a business for the length of the fight. They were helped by politicians and consumers also deciding that Artie T was in the right and the workers did deserve their salaries and benefits. It is clear that part of Market Basket’s appeal was the well-known employee benefits. Wegman’s is another supermarket with similar appeal and large amounts of worker autonomy. So is Cost Co. These are also largely businesses that stereotypically cater to well-educated liberals but I don’t know if you can easily peg the ideology of millions of consumers easily. I would argue that this shows that union techniques are largely needed to win a battle but you also need the general sympathy of the public. This is why transit strikes usually don’t go well with the people, the inconvenience is too much. This also happened in liberal New England. I wonder if the results would have been different in a more red-state area like the South. My hunch is that Artie S. would have one in a more conservative area.

2. Who won?

Dave

In a way, everyone did.  The customers and workers won because their efforts to restore Artie T. as the CEO paid off.  They took the biggest risks and it was clear that they weren’t going to budge at all consequences be damned.  Artie T. won because he got his position back and got complete control of the company.

At the same time, even if Arthur S. wasn’t able to sell his shares of the company to a third party, his side of the family is getting $1.5 billion so it’s hard to say that they lost

Saul

I don’t have anything to add here. Everyone “won” in a sense but it seems like the battle went on for an unnecessarily long time and this is probably because of dysfunctional family dynamics between Artie S. and Artie T. I wonder how quickly it will take Market Basket to recover from the lost profits during the fight.

3. Artie T.

Dave

I don’t recall ever seeing a CEO with this kind of admiration from employees, customers and the community at large.  He’s also an excellent CEO with his ability to produce a profitable business model and expand the franchise at the same time.  That Blackstone partnered with him on his purchase of his cousin’s interest in the company says a lot about what Blackstone believes about him.  This should not be taken lightly.

At the same time, it’s obvious that the family dispute brings out the worst in him when it comes to dealing with his cousin.  His relationship with the Board, especially with Arthur S. and the independent directors representing the Arthur S. side was not good in a way that gets CEOs fired.  There were problems with transparency.  There were fights over whether or not the Board should impose any spending limits on Artie T, something that is the norm in most companies.  There was the issue over dividends and I think the Arthur S. side had a reasonable complaint about not receiving a dividend.  Yes, Artie T. was putting cash back into the company.  However, the company’s balance sheet was so strong and interest rates so low that I’m at a loss to figure out why Artie T. never considered using conservative levels of debt to expand the company, especially now that he’s using debt to acquire his cousin’s share.

There was also the issue with the interparty transactions between the company and Artie T.’s side of the family with respect to the real estate deals.

Saul

I don’t think that Arthur T. is a saint. He probably did have some or many ulterior motives with the way he treated workers. However, these have been tough years for the American working and lower-middle classes and I do believe that income inequality is a serious problem.The Great Recession was tough on many Americans. The lowest Quintile of households went from a net worth of -915 dollars in  2005 to -6029 dollars in 2011. The middle 20 percent of American households went from a net worth of 106,591 dollars in 2005 to a networth of 68,839 dollars in 2011. Arthurt T. might not be a saint but he did pay his workers good middle-class salaries and that should count for a lot and other companies should look to him for an example. Market Basket under Arthur T. should be a Harvard Case study in how to run a business with notoriously tight margins and still treat workers with dignity and decency and make very good profits.

Arthur S. did not do anything illegal. He was in full right to decide that he wants to optimize shareholder value and potentially sell of the shares to a private equity company for maximum profit. This does not necessarily mean that it is moral or ethical to do so. Arthur S. is already a billionaire and it is hard for me to feel much sympathy for a person who thinks that paying people a decent wage is a stumbling block to selling out to private equity in order to get more money.

I’ve never been one to let the perfect be the enemy of the good. The world requires moral compromises and deciding what is more important at any given moment and in general I think the treating workers well and with dignity and decency is more important than maximizing wealth for a handful of individuals. Arthur T. might not have followed best corporate practices and might have ulterior motives in treating workers well but as far as I can tell, he also seriously thinks that Market Basket is part of the New England community and he thinks that it is good business practices to treat workers like human beings instead of easily replaceable cogs even if they are relatively unskilled.

4.  Can any lessons be learned from this?

Dave

In a way, I see Market Basket having something in common with Hobby Lobby. Both companies are known for operating in accordance with moral and/or religious beliefs.  Both companies are unique in the way that those belief systems are more commonly associated with sole proprietors and small businesses.  Very few regional or national companies fit this profile.

The events that transpired were made possible by the animosity each side of the family had for the other.  In a more normalized dynamic, if the Arthur S side of the family wanted to sell its interest in the company, the first thing they do is contact the remaining family members are work out a deal from there.

This isn’t going to change the relationship between workers and management.  If the workers had any leverage here, it was because the customer base was so devoted to them and Artie T that they were willing to cripple the operation of that company.  I don’t think that can be said for Wal-Mart.  The Market Basket story will get far more traction in Hollywood than it will ever get in corporate America.

Saul

As I wrote above, I think we can learn that unionized tactics can win for workers. They might not be officially unionized by all the workers at Market Basket worked together for a similar goal or at least enough of them did. They were well-organized, cohesive, and knew their goals.

I am not sure how rare it is to see businesses like Hobby Lobby and Market Basket. Wegmans is another super-market chain known for treating workers well and having a philosophy behind it. I’ve heard of other businesses that do the same but it is probably more rare than I would like to admit.

5.  What happens now?

Dave

The reason why I put this here is because Robert Kuttner wrote an interesting article about the Artie T deal raising concerns about the fact that Artie T now has to answer to a private equity firm and pay mortgage debt.  He’s concerned about how that could impact workers if the company doesn’t perform.

I think what’s going to happen over the course of the next few years is that Artie T. will first repair whatever damage was done during the six week standoff, return the company to profitability and leverage its business model to expand its footprint. If the company is as good as it believes it is, it should have no trouble entering new markets and competing with the established grocers within them.

What is a $3 billion company today will be 40% to 50% more than that in the next few years.  I think that’s Artie T’s vision and that’s why Blackstone has made a significant investment.  Contrary to what may be popular wisdom, that private equity firm sees the upside in letting Artie T. run the company the way he has.  Time will tell.

Saul

I am in agreement with you here. I just hope that Blackstone gives Arthur T. enough room to let him return the business back to normal and treat workers well. It would be horrible for everyone involved except Arthur S. if Blackstone decides to interfere and tosses Arthur T. out in order to maximize profit by bringing in a new CEO who slashes salaries and benefits.