The Market Basket open thread…

In my last mini-post, Saul Degraw mentioned a company called Market Basket, a New England-based grocery store chain that easily falls under the definition of good corporate citizen.  Historically, the company has been able to offer very low prices to its customers while paying its employees very well (including benefits, profit participation and pension contributions).  Not only has it been able to maintain a profit, but has been able to generate profit margins at or better than its competitors.  In the grocery store business, that’s remarkable.

What’s even more remarkable is that the company has been able to retain this business model in a world where people are subordinate to profits as well as the decades-long feud between two groups of shareholders, each one headed by a grandson of the company’s founder, Arthur S. on one side (his side owns 50.5% of the shares) and Arthur T. on the other (his sides owns 49.5%).  A detailed overview of the drama can be found here and here – it’s a decades-long power struggle between two cousins that don’t appear to like each other and have very different visions for the company.

This dispute boiled over when the Board of Directors removed Arthur T. from his position as the company’s Chief Executive Officer.  While I could have anticipated there being protests from employees loyal to Arthur T, I never anticipated the level of outrage coming from consumers, especially outrage over the loss of a CEO.  The combined effect of employees refusing to work and customers refusing to shop has crippled the chain’s ability to operate (empty shelves galore) costing it millions of dollars a day in lost sales and that much in profits.

In my view, what started as an impressive if not unprecedented show of solidarity has become a disaster.  Five weeks later, the situation isn’t resolved.  Not only is the company losing money, but the store employees are as well in a big way.

It will be interesting to see how this situation resolves itself, but it appears that the only likely outcome may happen: The Arthur S. shareholders sell their interests to Arthur T.  One interesting tidbit about the deal is this:

So why can’t the two sides — Arthur T. Demoulas and Arthur S. Demoulas, rivals for a long time — get a deal done? Griffin said Arthur T.’s offer price to buy the company has been accepted, but Arthur S.’s side has levied burdensome terms on the loan for that purchase.

If the response to Arthur T’s firing was successful in one respect, it was successful in chilling any attempt made by Arthur S. to sell his shares to a third party investor.  Between the disruption in business making it impossible to accurately value the company and the prospect of dealing with a very difficult minority owner, I can’t see why any third-party investor would want to step into this situation.  Too much risk and too many headaches.

However, and I’m speculating here, the same issues that would keep private equity investors away would also keep away potential lenders that Arthur T. could access in order to help come up with all the required money.  Why else would he negotiate terms of a loan with the side of the family he so strongly dislikes?

Rather than go through a long analysis of a situation that yet to resolve itself, I open the floor to discussion.  The whole “family business” vs. “modern finance” angle should be interesting.

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52 thoughts on “The Market Basket open thread…

  1. Quick note to readers – I can’t recall a business situation that has fascinated me as much as this one on so many different levels.

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    • Sigh. That’s only because I haven’t told you about mine.

      My understanding is that Hannaford is trying to buy the company? Hannaford’s a really interesting company; pretty innovative in several ways. One of my favorite is their POS/inventory management system — they run a linux/open-source back end so that they can incorporate whatever front-ends a grocery store already comes with, and not have any ongoing investment in the proprietary software; as I understand it, one of the big investments in turning over a store. I also find their produce sections better then most of the other northeastern grocery chains, including the few Market Basket’s I’ve shopped.

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      • I heard about that, but with situations like these. How can anyone value a company in this kind of condition? It’s not like anyone can accurately forecast cash flows or earnings over any period of time since no one knows what it’s going to look like after all of this blows over.

        There’s far too much uncertainty.

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      • There are a lot of people out there who specialize valuations, and they’re not just based on cash-flow, also on inventory, equipment, and the always-elusive goodwill. That’s the real loss here; customer goodwill. A chain like Hannaford actually capitalizes on that loss, negotiating a lower price for the sale, and rebranding with their own goodwill, which (at least in New England) exceeds all the other chains, including Whole Foods.

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      • I completely agree with you that companies can use alternative methods to come up with values, but a lot of those seem like methods that would be used in situations where companies are distressed or in liquidation. None of them will produce a valuation that is as high as a valuation based on the entity as a cash flow generating going concern.

        It could be that the only possible buyer looking at it that way now is Arthur T.

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      • but a lot of those seem like methods that would be used in situations where companies are distressed or in liquidation.

        I would think, given the loss of customer base, the company is distressed.

        A secondary aspect of that is suppliers; there are fewer and fewer large suppliers for grocery chains; I haven’t looked at the market for a while now, but I know that’s behind the closing of several independent grocery stores in the Northeast.

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      • I would think, given the loss of customer base, the company is distressed.

        I agree; however, if Arthur T. returns as CEO, assuming he buys out the shares of Arthur S., the expectation is that the company will resume operations. The two parties are negotiating a price on that basis.

        If this continues and there is a forced sale due to bankruptcy, liquidation, etc., the methods you mentioned will be used to value the real estate, inventory, goodwill, etc.

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    • “You’re not my real dad!”

      Expressed in the form of a 4% price cut for 2014 knowing full well that his job was in jeopardy and his cousin wanted to sell his shares to a private equity firm and cash out.

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    • After the father of Arthur S. died, Mike D., the father of Arthur T., attempted to transfer shares from his late brother’s side of the family to his own side. It resulted in a very costly and high profile court fight.

      If the cousins didn’t get along before that, they definitely don’t get along now.

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  2. Thanks for the shout out.

    I have a lot of friends from college who live in the Boston-Metro area so I hear a lot about this on facebook. They are all on the side of the workers and Arthur T*.

    I’ve never been a fan of the idea that business or economics makes people act in their rational self-interest because in rational self-interest world, Arthur S and his allies would realize that they were in a bad situation as soon as the protests started and the shelves were getting empty. They would have given some quick mea culpa.

    I think the reason this became a disaster is because he always disliked his cousin and I mean a real and intense dislike that went on for decades. IIRC the parents of Arthur T and Arthur S did not get along either. I would add in that Arthur S potentially feels like the employee’s were being paid too much and this is also probably an intensely held personal thought and belief. His side wanted more money and cutting employee pay and benefits was the best way to do so. Or at least the quickest.

    I don’t know what is going to solve the problem at this point. It feels like trench warfare. Everyone has their side and most of New England seems to be with Arthur T and the workers including top Massachusetts politicians. Someone is going to need to find a way to let Arthur S concede while also saving face. People underestimate how important saving face is. Now his side is doubling down for a variety of reasons between thinking they are right, disliking the other side, and seemingly going for a mutually assured destruction approach. Maybe they thin because they have the stocks, they can hold out the longest and eventually the other side will have to fold?

    I wonder what our fearless risk manager would make of the situation.

    *Can I say that I love that his middle name his Telemachus like the son of Odysseus.

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    • I’m not the fearless risk manager of these parts, but I’ll tell you what I think of the whole thing…

      I’ve never been a fan of the idea that business or economics makes people act in their rational self-interest

      There will always be exceptions to this rule. For every businessman that does this, there’s a Donald Sterling. What makes this situation messy is that both cousins are like this towards each other. I see a HUGE battle of egos here.

      Arthur S and his allies would realize that they were in a bad situation as soon as the protests started and the shelves were getting empty. They would have given some quick mea culpa.

      Arthur S. isn’t the only one that caused a bad situation here. In fact, I’d argue that Arthur T. may be just as responsible. See, as you probably know, shortly after the Arthur S. side took control of the board, attempted to remove Arthur T. as CEO (and failed), expressed its intention to increase profits and approved a $300 million payout to shareholders, Arthur T. announces a 4% price cut across the board for an entire year. Keep in mind that the chain is already known for some of the lowest prices in their markets and cuts them even more?

      I don’t doubt that he cares about the customers, but the price cut also serves two purposes. First, it further bolsters his image to those customers. Second, holding all else constant, profits drop. I think there’s another motive for this. You said:

      His side wanted more money and cutting employee pay and benefits was the best way to do so. Or at least the quickest.

      The best way to get more money as quickly as possible without dealing with all of the associated headaches is to sell out. I had read that Arthur S. had kicked around the idea of selling his family’s shares to a private equity firm a few years ago. I’m sure in order to make that happen, three things had to happen: 1) all the voting shares on his side were in lockstep (which they became in 2013); 2) his side controlled the Board of Directors (happened in 2013) and 3) Arthur T. had to be removed as the CEO and replaced with a capable management team outside the family. No one in their right mind would buy a majority interest in this company only to have to deal with the headache that is Arthur T.

      Arthur T. has plenty of incentive to interfere with these plans any way he can. He can decide on a 4% price cut across the board and put 2/3 of the company’s profitability at risk in order to drive down the value of the company long enough to scare away potential buyers. He can also sit back and allow the carnage that has been occurred to scare away any and every possible outside buyer, which I think he effectively has done.

      Consider this:

      http://www.wcvb.com/blob/view/-/27382344/data/1/-/io43ynz/-/Independent-statement-8-8.pdf

      To achieve this goal, the three Independent Directors have formally offered Arthur T. Demoulas (Mr. Demoulas) a path forward that would allow a return to normal for associates, vendors, customers and communities, and would allow Mr. Demoulas to simultaneously continue to pursue his stated intent to acquire the entire ownership of the Company from the majority owners.

      Arthur T. is the only possible buyer left at this point. I’d be shocked if anyone stuck around long enough to want to get themselves into this mess. If it’s no longer an issue of “if” he is selected as the buyer. If he wants it, it’s his to buy so long as they can agree on price.

      So why not take the advice of the independent members of the Board? Why not show that he can put the interests of the customers and employees in front of his own desire to screw over his cousin and continually blame him for everything that happens?

      The darling icon of the protests has shown no interest in doing so and would rather take to the media and complain about how his cousin is screwing him over on loan terms. He must have built up a hell of a lot of goodwill for people to be patient with him. It seems to me he’s asking more like a petulant child than the person he was known as while he was CEO. It really seems to me that he will only care about that company to the extent that he can control it.

      Please do not take this as support for Arthur S. As far as I’m concerned, his ego and greed is just as much of a contributing factor here. He could have addressed the latter if he could have swallowed his pride and attempted to work out a deal with his cousin in the first place. Now, it’s a mess.

      Now his side is doubling down for a variety of reasons between thinking they are right, disliking the other side, and seemingly going for a mutually assured destruction approach. Maybe they thin because they have the stocks, they can hold out the longest and eventually the other side will have to fold?

      All sides have doubled down on this, and it is mutually assured destruction if not a high stakes game of chicken.

      I don’t know, but if I had to guess, my guess is that Arthur T. really wants control of the company so it’s a matter of how badly he wants to pay up to his cousin who I think will do everything he can to not only push for the highest value possible but make the cost of whatever capital Arthur T. needs to borrow from him as expensive as possible, leaving Arthur T. with a pretty paltry return on invested capital.

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      • “I had read that Arthur S. had kicked around the idea of selling his family’s shares to a private equity firm a few years ago. I’m sure in order to make that happen, three things had to happen: 1) all the voting shares on his side were in lockstep (which they became in 2013); 2) his side controlled the Board of Directors (happened in 2013) and 3) Arthur T. had to be removed as the CEO and replaced with a capable management team outside the family. No one in their right mind would buy a majority interest in this company only to have to deal with the headache that is Arthur T.”

        Let’s take this all as true. I have some questions on number 3.

        Why would a private equity firm need Arthur T to be out as CEO before buying the shares of Arthur S? Arthur T was by all objective measures a successful CEO who was loved by his employees, loved by the New England community at-large, and running as you said above a company with above-average profits in a generally low-margin industry.

        The only reason I can think of is that private equity would find the various employee pay and welfare policies as being too generous and those would be the first things that need to go.

        I don’t have much sympathy for this kind of reasoning or logic or necessity. And I am fully willing to say that Arthur S had plenty of money and the desire of a private equity buy out that would screw the employees is unethical and I fully willing to be a bit anti-market and anti-capital to say this as true. I don’t see why Arthur S and his side should get more wealthy by selling out to private equity at the expense of the employees.

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      • None of that makes you “anti-market” as far as I’m concerned. Heck, I don’t even approach these conversations from a pro-market vs. anti-market conversation. Everyone ought to know by now how much I hate that kind of stuff. ;)

        The only reason I can think of is that private equity would find the various employee pay and welfare policies as being too generous and those would be the first things that need to go.

        From everything I’ve read, that’s one big reason. I speculate that another reason is because people have watched the drama between the two cousins and have wisely decided that they don’t want to have to deal with Arthur T. in any capacity whatsoever. It’s obvious that he will do things his way, everyone else be damned. He also seems to have an itchy trigger finger for litigation, which is what he attempted to do when the Board approved the $300 million payout.

        Perhaps there’s one other reason, if you recall, the Board attempted to remove him over a year ago and it was thwarted amid employee protests. Anyone looking to buy the company may want to have that issue out of the way and have any outrage blow over prior to taking ownership. Given what has happened, I can see why.

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    • the idea that business or economics makes people act in their rational self-interest

      Respectfully, that’s not really the idea. Rather, the idea is that markets reward rational behavior. An irrational person won’t do well in markets, because they’ll make choices that undermine their goals.

      As to what rationality means from an economic perspective, j r covers that below, but I’d just emphasize that in the economic sense, rationality does not refer to ends, but to means. To most people it might seem irrational to want a full body (including face) tatoo, but to an economist, if that’s an end, a preference, it’s not properly classifiable as rational/irrational.

      Of course if the guy also wants to be a successful corporate attorney, and yet gets a full face tat, then he may in fact be irrational, or he may just value the tats more than being a corporate attorney. It’s not really possible to directly assess someone’s preference order, and what they tell you is just words, not necessarily truth. That’s why economists tend to rely on “revealed preference”–looking at what a person does instead of what you they say. That’s also fallible, as it surely overestimated the frequency of rational behavior, but it’s in general a safer assumption than irrationalitu, because the latter assumes you have some insight into the person’s real (unrevealed) preference order.

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      • I would add, also, that the claim is only that markets are better at encouraging rationality in a relative sense. That is, because people’s actions in a market context have significant personal costs and benefits, they’re more likely to act rationally than in a political context (such as voting, activism, or blogging) where they are largely insulated from the consequences of their actions.

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  3. I do think that there is a sort of corporate mentality that does see labor as interchangeable cogs and wants nothing but gratitude for whatever scrapes is thrown to labor from management. WEB Du Bois would call these psychic wages.

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  4. This is a fascinating struggle. Obviously it touches a political/social hot button about how workers are treated but mixing in long term family feuds making is wild. There is no hate like a long family feud. It is interesting the amount of loyalty and emotion people put into something like a grocery store. It’s both heartening and weird at the same time. I do appreciate that a business went with the treat workers well plan and made it work. That is the sort of thing that if it hadn’t been done many people would say couldn’t work. And the family naming traditions, i wonder if they both go by the same name in actual life aside from both being named Arthur.

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  5. Its a melodramatic family saga being played out in real life. Like Saul, I’m struggling to think why Arthur S. and his allies are being so stubborn about this or why they would make the changes in the first place. Don’t fix something if its not broke. By all reliable statistics, Market Basket was doing very well by any standard but especially so for the grocery business, known for its traditionallly thin profit margins. The entire thing is just the right combination of greed, family rivalry, and politics that would make for a really great novel or TV miniseries if it were fiction.

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    • Perhaps it’s that whole idea of cutting off one’s nose to spite their face.

      I’ve never been a fan of the idea that business or economics makes people act in their rational self-interest because in rational self-interest world

      In general, this is true. But there are always exceptions that prove the rule.

      Also, this statement assumes rational actors. By his demonstrated behavior, Arthur S. may not entirely fit the definition of rational in this matter. That doesn’t mean he isn’t acting in his own rational self-interest*, only that it is possible that his definition of rational in this instance is being skewed by an emotional weighting that is probably ill-advised.

      *I didn’t read the background articles Dave linked, but it sounds like A.S. may have decided to fire A.T. in an attempt to raise prices & cut employee compensation so as to boost his share value prior to a buy-out, or some such?

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      • *I didn’t read the background articles Dave linked, but it sounds like A.S. may have decided to fire A.T. in an attempt to raise prices & cut employee compensation so as to boost his share value prior to a buy-out, or some such?

        At the very least, having him out of the way and having a proven outside management team in charge would be very attractive to private equity buyers. Even if AS wouldn’t be the one doing the cutting, the company would be positioned to do just that. AS would get paid for providing that upside to someone.

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      • An aside on the idea of rational self interest:

        This is one of those areas where I often see people making claims about how economics views the world based on ideas that aren’t really held by economists. The idea that people make rational choices is not the claim that people make good choices. It is the claim that people can, and generally do, make choices that rationally align with their preferences. Really, this is a tautological claim, because economic analysis cannot directly observe preferences, only the choices that people make in constrained circumstances (constrained by limited resources).

        There are lots of reasons why people may not make very good choices, ether from an objective standpoint or even by their own standards. And that is true whether they are acting as economic actors in a market environment or as political actors in a highly regulated environment or just as individuals going through their daily lives. What people need to make good decisions is accurate feedback. When you do something right and you get rewarded, you are more likely to do right things in the future. If you do something wrong and you get punished… you get the idea. The relevant question is what sort of system does the best job of exposing people to the most accurate and helpful feedback.

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      • It is easy to say that everyone is acting in their rational self-interest when rational self-interest is defined subjectively.

        In a sense, it is true, in that everyone applies subjective weighting to economic choices that may not be obvious or understood. Understanding a target demographics weightings is a big part of what marketing does.

        If A.S. was maneuvering for a buyout, his actions might be quite rational. Even his failure to back-peddle may have a rational basis besides ego (if, perhaps, his interested buyer expressed a desire to buy a company where A.T. was already out of the picture).

        Or he’s just really a hateful man & willing to destroy everything out of spite.

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      • I had a similar discussion with someone who insisted that “economists are wrong about self-interest” because he once knew a waitress who refused to work one particular night at which she would have gotten a huge amount of tips. His argument was that if people really act in their “economic” self-interest, she would have consistently worked that night.

        I tried to explain that she probably valued having that leisure time a lot more than the money (and the stress that probably came along with earning it). I didn’t make much headway.

        Having said that, I think our conversation was confused by the fact that “economic” can mean “what economists believe/that which is explained or addressed by economics” or “financial/monetary.” If we limit self-interest to the latter, then my friend was probably right. It probably wasn’t in that waitress’s financial self-interest to skip working those nights (assuming she didn’t have to pay child care, etc.).

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      • Why should economists be any better at avoiding tautology than physicists?

        GRAVITATION, n. The tendency of all bodies to approach one another with a strength proportion to the quantity of matter they contain— the quantity of matter they contain being ascertained by the strength of their tendency to approach one another. This is a lovely and edifying illustration of how science, having made A the proof of B, makes B the proof of A.

        from The Devil’s Dictionary by Ambrose Bierce

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      • There is nothing wrong with tautological frameworks. Math is mostly tautology, but it is useful because it does the work that we need it to do. It’s when you start trying to use tautological concepts to justify things outside of the appropriate realm where you start getting into trouble.

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      • Jim Heffman : You’re saying that like it’s a silly joke, but how should we define self-interest other than subjectively?

        My question (really a question, not meant as a wisecrack) is “How do we define rational self-interest in a way that makes the claim ‘People act in their own rational self-interest’ anything but a tautology?”

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      • Math is mostly tautology

        In mathematics, we state very explicitly what our assumptions are. Assuming your conclusion (e.g. proving that all numbers are equal by first defining equality as a relationship between numbers that’s always true) is highly disdained and will get you talked about. In, say, business,not only is it not disdained, so long as you’re making money people will insist it’s a sign of genius.

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  6. What strikes me about this episode is that it’s just a more extreme version of something that happens all the time. Not in the sense of family members dueling for control (which also happens all the time, I suspect) but that we have a company that made a decision to cut payroll so they could make a better profit, and end up without any customers.

    In 2009, it happened, mutatis mutandis, to the the grocery store I used to work for. The corporate office decided to significantly cut hours and freeze raises due to the recession–even though as a discount grocer, the recession was actually increasing our business. We lost some of our best employees–who had better things to do than work a 25 hour week–and the low staffing levels crippled our customer service–lines were long, the store was a mess, staff didn’t have the time to respond to customer needs.

    It balanced itself out when half of our customers stopped showing up. And corporate decided “oh well, looks like the recession is worse than we thought. Good thing we decided to make those drastic cuts.”

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  7. As a customer who always goes for the best value, I will break that rule by never going back to Market Basket (or whoever buys the company) unless it is managed by Arthur T. The Market Basket I use is an older, narrowed aisle store. Two major grocery stores moved in within sight of the Market Basket . As you looked at the parking lots before this mess, Market Basket was always full with a few cars in the other two lots!! Most of the people I have talked to feel as I do. It is great that customers are standing up for what is right. Too bad we don’t do that with politicians

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  8. This reminds me of the New York Giants’ ownership situation until 1991.

    The team was equally co-owned by Wellington Mara and his nephew Tim. They didn’t get along. In fact a partition was put up in the owner’s box at Giants Stadium so they didn’t have to encounter each other during games.

    Tim finally sold his share in the team to Bob Tisch. Tim died in 1995. His cousin John currently owns Wellington’s half of the team.

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