Lessons from Market Basket
An MIT Sloan and Boston Review roundtable.
October 8, 2014
Oct 8, 2014
22 Min read time
It's the business story of the year. An MIT Sloan and Boston Review roundtable.
Market Basket, with seventy-one stores, three warehouses in two states, and 25,000 employees, made history this summer when employees and customers banded together to protest the firing of their beloved CEO, Arthur T. Demoulas, by his cousin, Arthur S. Demoulas. They were fighting to protect Arthur T.’s business model, which featured low prices and good wages. As the protests continued over many weeks, store shelves emptied, warehouses froze, customers boycotted, and Market Basket made national headlines. At the end of the summer, Arthur T. Demoulas returned to buy out his cousin’s share of the company, and these employees had, effectively, wrested control of a $4 billion company.
Watch Curt Nickisch's fantastic introduction to the Summer of Market Basket below:
This was, at its heart, a family dispute. The Demoulas’ grandfather was a Greek immigrant who opened up the first market in 1917. His children expanded it from a small mom-and-pop store into a grocery store chain. Down the line, two sides of the family fought over ownership and management. As WBUR Business & Technology reporter Curt Nickisch put it:
Picture the house, grandma’s house, and picture the two grandchildren who each own half of it, can’t buy each other out. One of them says, “Why are we giving below-market rent to that tenant who’s been there for thirty years?” The other one says, “They’ve been there for 30 years, they’ve been great, it’s important to have a good tenant, let’s keep it that way.” And the first one says, “Let’s get more rent out of this!” Neither is necessarily wrong, but they’re at odds.
Arthur T. cared for the company and its employees. He was able to maintain low prices, high wages, and good revenue through his management style. Arthur S., on the other hand, wanted to increase dividends to shareholders.
After years of fighting, CEO Arthur T. was ousted by his rival in June, signaling a change in the management style of the company: workers feared thinning benefits, customers higher prices. Market Basket workers immediately began organizing protests. In their off-hours they picketed individual stores and the corporate headquarters, holding up signs of support for the former CEO. It was not a strike; the stores were open. It was not a union action, either; Market Basket employees aren’t members of a union. It was a group of individual workers making their voice heard.
What is really important to know about this is that not only workers were behind this, but managers too; sixty-eight of seventy-one store directors were openly in support of bringing Arthur T. Demoulas back. Each store, while remaining open, asked customers to boycott. The distribution centers and warehouse workers kept the food from getting to the stores, and stores refused to accept deliveries or to stock the shelves. The board threatened to fire people, but no one went back to work. Customers pledged not to shop at Market Basket until Arthur T. Demoulas was reinstated as CEO.
And they were, collectively, able to cripple the company. The saga came to an end when Arthur T. Demoulas made an offer to buy the other half of the company. It took weeks to negotiate this deal but once it was announced, within minutes, workers were back in the warehouse and the stores. Customers cheered and were back as soon as the fresh produce hit the shelves.
We are left with one question: And how did a CEO inspire collective action by non-union employees, and effectively force the sale of a $4 billion company? This is the business story of the year.
On Thursday, September 25, the Sloan School of Management’s Institute for Work and Employment Research, the MIT Political Science Department, and Boston Review convened a diverse group of faculty and community leaders to discuss the lessons that can be drawn from these astonishing events. The event attracted a full auditorium of students, faculty, Market Basket customers, and others eager to share their thoughts and hear from others, and 649 additional participants via live streaming. We offer the videos and excerpts from the panelists below.
Panel on Corporate Leadership and Governance
and a note from John Davis, Harvard Business School
Panel on Finance, Marketing, and Operations
Panel on Labor and Public Policy
And a final comment from Thomas Kochan.
As an advisor to employee-owned companies, what struck me is the language of ownership that pervaded the Market Basket protests. I heard people saying, “These are our stores, Arthur T. is our CEO” and “They may own the shares, but we own the company.” That employees and customers would use the language of ownership is a challenge to the dominant model of the corporation that emphasizes shareholder rights and maximizing shareholder value. The stakeholders were saying, “Shareholders are important, but we deserve our jobs and bosses that we respect, and we’re not going to submit to the dictates of the prevailing model. We want a voice over who our leader is going to be.” It became pretty clear as the story unfolded that it was the plan of the other side of the family to sell to Delhaize Group, the Belgian company that owns the Hannaford’s chain. This is a piece of the story that gets neglected. The employees of Market Basket (especially the store managers) saw a step or two down the road; if the prerogatives of the shareholders were to be followed, the company would be sold to someone else, and there goes the high-wage, low-price model that distinguished Market Basket as an independent leader in the industry. Had the other side of the family prevailed, Market Basket would have gotten sucked in, rationalized, normalized to conform to the prevailing models in the retail industry, simply so that shareholder returns could be increased.
I saw a number of leadership lessons in what happened with Market Basket.
First, we learned that it is possible to pay employees a living wage, provide profit sharing, treat people with dignity and respect, and give customers low prices—and still make a profit. Of course, it depends on how much money you need to make, but it doesn’t have to be a trade-off between making money and treating people fairly.
Second, this is not a story of the hero leader — Arthur T. Demoulas. This is really a story of distributed leadership—which Market Basket demonstrated long before this crisis. Distributed leadership means having effective and confident leaders at all levels who are ready and able to step into leadership positions, from executive store managers to clerks to people who work in the warehouse. These leaders sense what is going on around them and seize opportunities. We saw this in the crisis: each store had different responses, but they were aligned, whether they organized rallies or walk-offs, or halted deliveries. They also reached out to one another and to stakeholders outside the boundaries of the firm. Customers became involved. Other employees did not fill their spots. Academic leaders took stands, and even the governors of Massachusetts and New Hampshire were pulled in.
Distributed leadership works. Loyalty breeds loyalty.
In summary: Distributed leadership works. Loyalty breeds loyalty. You need leaders at the top, at the middle, and at the bottom. You can combine old-fashioned conversation with social media for change, and leaders can go across boundaries to pull people with power and resources into the negotiations. What is unique about this story is that distributed leadership is sometimes about a vision where you don’t know what the end will be, but everybody is in there anyway.
The Market Basket board was torn between two, very different interest groups: those in favor of higher dividends in the short term, and those who support building the company and opening new stores. Because of that division—a division that starts at the ownership level with the stockholders, all within the family—the board was conflicted about everything from degrees of expansion to bonuses to workers. Because ownership was so divided, there was no way the board alone could have solved this issue.
In a privately-held company, where you don’t have the barometer of a stock to give you evaluation of how things are going, the people who wanted dividends now had no way to get value out of expansion. If you had a price in the market, that would reflect the future earnings of expansion. The private arena built conflict, which is not unusual for family-held boards. Over 40 percent of privately held companies are in conflict three to four times a year. Some of this is generational: the grandfather had the vision, but younger members are only interested in the ownership. To moderate this, you need a strategic plan, more transparency, and a way to value the company regularly.
The public loves a good Greek tragedy, and this summer we had Market Basket. Family businesses rarely receive much public attention unless they are in crisis. Indeed, the media focused mostly on the shareholder war, but Market Basket also showcased the strengths of a family business, like the loyal culture and stunning outpouring of employee support for the deposed family CEO, Arthur T. Demoulas.
Whether public or private, on average, family businesses perform significantly better than non-family businesses. They are stronger financially, have higher stakeholder loyalty, live longer, and are more trusted by the public. These strengths have a lot to do with their family ownership and family leadership. Family business owners are largely stewards of their business—who want to grow and pass their company into the next generation and take only affordable dividends from the business—provide a stable, committed ownership base that allows management to focus on customers, quality, and long-term growth. Good family leaders like Arthur T. Demoulas nurture a strong corporate culture and keep the company focused on its mission. This is the story of Market Basket too.
Then there is the Greek tragedy side of the story. The Demoulas ownership base was not stable. It was split in two camps that warred for thirty years. The war was both business and family based, as is usually the case. The company’s board (the creation of a wise judge) provided enough stability, slightly favoring the approach of the family “steward-owners” for Market Basket to perform admirably for years. But when a board member switched sides (we don't know yet why these things happened), the board became “investor-owners,” fired CEO Arthur T., and the drama unfolded.
Avoiding a crisis like this involves specific shareholder agreements and a clear, fair process for buyouts. It requires independent board members that insist on these actions and who guide the process. And it involves the family committing to maintaining unity (on mission and values) in the family. Family owners have an obligation to their many stakeholders to govern well, and this family failed that test.
There are two important lessons for marketing strategy here:
First, relationship metaphors can help us to understand the true meaning that consumers ascribe to their brands. That is, consumers can form relationships with companies much in the same way that people form relationships with one another—a brand relationship can be viewed like a fun fling, a stranger, an enemy, and even a friend or family. That is how the true equity of a brand can be assessed and the context in which brand strategy should be developed. In any relationship, the needs of both sides must be addressed, or the relationship breaks down. In the case of Market Basket, the new co-CEOs thought it was one kind of relationship, and it turned out to be another. They underestimated the commitment of consumers and employees to the company and its values (embodied by "Artie T."), and the extent to which consumers treated the company like a friend. So the boycott was quite rational when viewed through this lens because the activists were standing up for a member of the family, not a mere store. The Mad Men era of “what you should believe is what we tell you” is long gone. Companies must understand how consumers relate to their brands and work hard to preserve and build trust.
A second lesson can be found in the power of a narrative—a story—in shaping consumer attitudes. Research has shown that our brains encode the same information quite differently when it is in a narrative form. Simply put, stories allow us to more easily recall and retrieve information when it comes time to make a decision (that is why, in childhood, moral lessons are taught in story form). Marketers and educators need to understand that in the era of social media and unprecedented corporate profits the public's perception all boils down to the story—and marketers are not in control of the story any longer. The authorship of a brand's story is diffuse now—and potentially viral—with thousands contributing to how this story was crafted and shared. The Market Basket story is one of real local people standing up for "the people's CEO" at great personal risk, which resonated nationally as a David and Goliath narrative. Of course it can be scary for executives to lose complete control of the brand's narrative. But the brand does not solely belong to the company; it also belongs to the people. So co-authorship of a brand's story should be embraced as a key part of marketing strategy. Because, as my research shows, consumers are much more likely to connect with a story constructed by fellow consumers, or a company and consumers together, than one constructed by a corporation alone.
As a finance professor, I have to confess that to someone with a hammer, everything looks like a nail. The finance aspect is really critical here, and there are three elements of the story that offer a broader lesson about capitalism in society and the proper role of finance as a means to an end.
First, we should acknowledge a key aspect of this messy situation: a family-owned business without liquidity is going to have tension. This problem has been simmering in the Demoulas family for decades. If there were liquidity, if this were a publically traded company, then a lot of solutions would have existed that are currently unavailable for the family. Now what we’re seeing is capital markets trying to come up with a solution to this family disagreement.
Second, the special nature of the Market Basket culture played a critical role in the company’s salvation. The reported deal is that Arthur T. Demoulas is buying out the company with help from private equity—whether it is structured as debt or equity or both is unclear. Currently, the press is saying $1.3 billion of debt will be used to finance this purchase. The reason this is possible is that we are in a period of extremely low interest rates—there is a huge amount of debt financing available. This is yet another benefit of capital markets, broadly defined.
Investors are probably thinking what the employees and customers already know: Market Basket has built a culture and a movement beneficial to stakeholders, which increased shareholder value. When you think about the future value of the company, you should include the value of this culture. So I suspect that in the end, it’s going to be a good deal for bondholders. Market Basket taught us that finance doesn’t always have to be a zero-sum game.
Third, perhaps because I’m also an immigrant, the power of the American dream in this story really resonates for me. The Demoulas family launched this small business in 1917 and turned it into a behemoth with over $4 billion in annual revenues—it’s remarkable. But what’s more amazing to me is that all of the machinations we’ve observed from the various factions have been playing out quite publicly in the courts, and not a single shot was fired, not a single law was broken, but in the end, control of a $4 billion company has been wrested from one party by another. In my opinion, the hero here is not Artie T. as much as the employees and customers. They made this incredible transaction happen, and it wouldn’t have been possible in most other countries. This is pretty clear evidence, to me at least, that we are living in the greatest country in the world.
It is amazing how little the importance of foot soldiers — store clerks, truck drivers, people that work in warehouses and distribution centers — is understood for low-cost, highly efficient operations.
Many people look at Market Basket and are puzzled. How could it be that this company offers the lowest prices, and they are able to pay their employees more and treat them better? The dominant view in business is to see labor as a cost, and Market Basket challenges this assumption. So people then say, Market Basket is unique. On the contrary, my research shows that what Market Basket did is replicable. I found four other low-cost retailers that are exactly the same, with low prices, good jobs, and great returns: Costco, Trader Joes, Mercadona, and QuikTrip. All these companies manage their operations differently than other companies — increase their productivity, decreased turnover, and put their employees at the center of their success.
We know the ingredients that make a good job, and we have the evidence that it is better for shareholders, in a wide range of industries. Costco, for instance, has done a much better job for shareholders than, say, Walmart. Now, we have to change this mindset. We can play a big role as professors in encouraging this change, and inspire our students to run better businesses. The mission of Harvard Business School is to “Educate leaders who make a difference in the world,” and the mission of MIT Sloan is to “Develop principled, innovative leaders who improve the world.” Notice that neither of these say, “Maximize short-term profits.” People are not a cost, people can be a strategic asset.
When telling the story to the public, it is important to have a simple and clear message: What do we want? And how can you help us? The Market Basket employees had this message: We want Artie T. back. How can you help us? Boycott the stores!
Their message resonated strongly with the populist streak in American political culture. There is a resentment in the United States about things that are big, across the political spectrum: big government, big oil, big business. When you hear that the other side wants to “take money out of the business,” that sounds like a big business move: increase profits, line your own pockets at the expense of customers and workers. And it is a direct attack on customers’ and shoppers’ self-interest. A lot of the appeal of Market Basket is in its low prices. The same product will be 2 or 3 dollars less than at other stores. But also, shoppers have a concern for the employees. You see the same people week after week. That low turnover is part of the business model—it reduces labor costs and fosters excellent customer service by knowledgeable employees—but it also contributes to the business. Shoppers feel close to the employees.
My heart was in my throat during this whole episode, because I was concerned about what would happen to the workers. Many of the shoppers could relate to the impact corporate practices have had in recent years for workers: reducing hours, laying off people, thinning out benefits. The share of GDP that goes to workers is the lowest now that it’s been since the twenties. The whole fight became symbolic of a larger fight, and consumers were willing to join in.
People in labor were inspired by what you [the Market Basket employees and store managers] did, and they were inspired because you went against the natural law with an idea of how it could be different: that workers are an asset. Labor looked at what you did and recognized it: we in labor tell stories, we care for each other, we provide mutual aid, we organize, we take risks, we make sacrifices.
But there are things in labor that we can’t do now. Labor did a lot of wonderful things. You see bumper stickers that “we are the people that brought you the weekend.” That’s true! But collective bargaining is not the future of the labor movement, and there are other organizations—worker centers, immigrant centers, Save Market Basket, food activists—that are now part of redefining the labor movement. What Market Basket did, bringing management and labor together, is something that unions don’t normally do on a shop floor. The idea that a worker would be defined by his position in the company and care about the company—this is an idea that could save labor, frankly. And it is one that is hard for labor to talk about, because the line between middle management and workers goes back so far.
We have a lot to change in the labor movement.
We’ve got this idea in America that is really wrong: that good employers don’t need unions. But this idea is labor’s error, I think, in defining who can create a workplace democracy. People think that unions will screw up the relationship with the company, and ruin some of the unorthodox ways of being paid, etc. Unions can be tone-deaf. So we have a lot to change in the labor movement: do we need to organize against the employer? Do we need to organize around issues? Or, do we need to have some way to create healthy, community-based organizations that know how to problem-solve, who understand business, who can work at strategic levels and solve problems on the shop floor? Unions that do this are still rare. We did some great things in labor, and it’s not completely over, but the structures and belief systems we have are burdensome.
I have many more questions than answers about Market Basket. Sometimes things are so old they look new.
Richard Walton distinguishes between what he calls control organizations and commitment organizations. Control organizations produce one widget after another with a certain kind of management structure and incentive structure. But the more that relational, adaptive, innovative dimensions of production become important, the more you have to become a commitment organization. Commitment organizations treat people as assets, not as costs, and see investment in people as creating capacity. It seems like Market Basket is an example of that kind of management. I am curious about how the leadership and ownership of this company decided to build that kind of an organization, in which everyone feels a sense of ownership.
My second question has to do with the relationship between owners and managers: do they have the same or divergent interests? In this case, the managers found more common interest with workers than with owners. Managers were so central to the whole enterprise. In my experience organizing unions, people who played leadership roles were the opposition. Our problem was how to develop worker leadership to challenge front-line management so that we are able to assert or defend our interests. That is not the story here. Management all the way up played an important role against the owners. So why is it such an exception?
Thomas Piketty points to the exploding salaries of executives in this country and talks about how they almost seem like owners, operating with boards of directors, unrelated to production and productivity. What would it take to privilege the commitment organization over the control one, since we know it’s so much better? And what kind of structural shifts would it take to bring workers’ interests more aligned in the way that Market Basket was? How can we make more Market Baskets?
I am grateful to my colleagues for sharing their insights on lessons Market Basket taught us. My hope is that all those who shape business strategies and employment relationships will now put these lessons to work. How might we do so?
Business executives and board members would be well advised to ask whether their business models and leadership styles are achieving the productivity, loyalty, and sense of ownership evidenced of Market Basket employees. If not, why not? Answering this simple question inevitably leads to a reassessment of the very purposes of a business enterprise—is a business simply an instrument for maximizing shareowner value, or can it serve the interests of owners, employees, customers, and communities? A healthy reexamination of this fundamental question is long overdue.
Labor leaders should ask how they can mobilize workers around a positive vision, a cause they and their members can explain clearly and cogently to their neighbors, customers, and the public. Breaking out of the chains of current labor law and union-management traditions would, if viewed as a fight for justice and fairness at work, find lots of allies ready to stand with them, just as legions of bystanders stood with Market Basket employees.
Government leaders ought to recognize that the employees, executives, customers, and vendors who engaged in this collective protest cut across party lines. This sends a clear message: Break out of the stale ideological gridlock that has blocked sensible and long overdue efforts to reform and modernize labor and employment law. Give all workers a voice in the issues that affect their livelihood and encourage them to work collaboratively so that all those who contribute to an organization’s success share fairly in the profits. And strengthen the ability of employees to negotiate in more traditional ways with employers that still don’t get it.
Finally, educators entrusted with the next generation of business leaders need to put these ideas to work across the curriculum so that we live up to our mission at MIT Sloan to “develop principled, innovative leaders who improve the world and to generate ideas that advance management practice.”
If I had written these words before the Summer of Market Basket they could easily have been dismissed as idle “pie in the sky” musings. But now these courageous Market Basket employees have demonstrated the proof of concept and lit a path forward.
Thank you to our panelists and to all who contributed to this historic, teachable moment.
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October 08, 2014
22 Min read time