This situation at Market Basket has gone on far too long. The warning lights are flashing faster now, and there is only one solution:
Sell the company to Arthur T. Demoulas.
This simple solution needs one extra phrase, to avoid the redundant and meaningless response from the Board of ‘We are negotiating frantically, day and night. We’ve agreed on the price and are just negotiating over the terms.' That (paraphrased) answer was misleading to start with, and it’s now irrelevant. The complete and only solution is:
Sell the company to Arthur T. Demoulas, at a price and terms he finds acceptable.
The A Shareholders, representing the Arthur S. Demoulas side of the family, must accept the B Shareholders' price and terms, for exactly one reason—there is no other choice. So they should hold their noses and take the best offer received so far. The offers aren’t going to get any better, but could get a lot worse. The company is losing value every day these negotiations drag on.
The assumptions below are pretty tough to dispute, and could be taken as fact:
• The associates are not coming back unless Arthur T. is back as CEO, and Arthur T. isn’t coming back unless he controls at least a majority of the company. I don’t believe it’s necessary for him to buy every A Shareholders' ownership, and in fact he could actually save some money by buying some smaller percent.
• The associates cannot be replaced—the job fair was a big flop, no one new apparently crossed the picket line, and there are too many associates with too much experience. There is a very real stigma attached to taking a job at Market Basket now, and when Arthur T. returns, whoever did might very well lose their jobs.
• The associates aren’t coming back under threat of being fired. This has been tried numerous times with no success. They know that if Arthur T. returns, which looks inevitable, they will get their jobs back.
• The associates and Arthur T. aren’t coming back to ‘stabilize the company’ without a settlement. Doing so would simply take Arthur T.’s biggest bargaining chip off the table, reduce pressure to negotiate, deflect public opinion, and open up bidding to other buyers. It would be a very poor tactical decision.
• Public opinion, including among Market Basket shoppers, is strongly in favor of the associates. This uprising has taken on a populist appeal that cuts across all sorts of demographics. It’s perceived as the little guys standing up to Wall Street corporate greed. The public relations battle is unwinnable. Governor Deval Patrick’s statement that everyone should go back to work while negotiations continue was a temporary and perhaps accidental reprieve, but it amounted to nothing.
A deserted Market Basket store on Saturday afternoon. It's actually open for business. Photo courtesy of Craig Cole
• The customer boycott is remarkably effective. What percent is due to solidarity with the employees and what is due to lack of groceries to purchase could be debated, but the end result is the same. The stores are deserted and will continue to be deserted until Arthur T. is back.
• The new CEOs can’t do anything about running the company. This company and problems are both too big for any two isolated people to solve. In a real sense they are probably stuck at Market Basket until terminated, as it’s reasonable to assume they have substantial severance agreements, plus it’s also possible they get a percent of the sale price as a bonus. If they just resigned they would lose a lot financially. These costs are unavoidable and need to be somehow swallowed in the ‘terms’.
• Vendors have now joined the fray, and they too are speaking out in favor of Arthur T. returning. You could debate the motives of vendors, and maybe they just see the writing on the wall, but again, it doesn’t matter. The result is the same. The huge overpayments to these vendors are warnings signs—whether these happened as honest mistakes, or as deliberate sabotage is unknown, but neither reason bodes well.
• Arthur T. cannot and will not accept terms that prevent him from running the company as it was previously managed. In some manner this appears to be what is holding up the sale. Perhaps “well respected” financial advisors say that high interest rates are justified in this case due to Market Basket’s precarious state, but that doesn’t matter either. Arthur T. will not agree to such terms, so the A Shareholders are not going to get them.
• Time is everyone’s enemy in this, but mostly of the A Shareholders. There is no new strategy to try since, as noted above, the die is cast. Not only does every passing day cost the company more lost sales, profits, and customers, but the overall value of the company declines as well. How long can the quibbling over terms go on before Arthur T. offers a lower price for the company? No one else is going to buy it in this shape. He is the only person that can revitalize Market Basket, and he knows it, the Board knows it, the vendors know it, and in their hearts, the A Shareholders know it. The bargaining position of the A Shareholders is only going to get worse daily.
• Rumors of Hannaford’s parent company, Delhaize America (a subsidiary of the Belgian Delhaize Group), having an offer pending with the Board have again surfaced. Just my opinion, but I’d say it’s quite likely Delhaize was interested, since Market Basket was an attractive takeover target, but very unlikely that they are still interested at anything close to their prior offer. Anyone except Arthur T. who would want to step into this public relations, cash flow, money losing, boycotted disaster would have to be nuts, unless they can work out an agreement with Arthur T. himself somehow to come back as CEO. That would require a lot of guarantees that seem unlikely to be granted, particularly since Arthur T. is accustomed to doing things his way.
Hannaford on that same Saturday afternoon. I've never seen the parking lot even 30% this full.
So if it is so clear that this should have been settled a week ago, and that every day it drags on is accomplishing nothing positive but plenty negative, why are these negotiations dragging on? There nothing new in the list above, so there must be other factors. Here are a few reasons, all of which might slow down a resolution.
What exactly is Market Basket?
The first step is to define what “Market Basket” means to the different groups. Is it a chain of physical stores manned by interchangeable workers, differentiated from other grocery stores only by a sign reading “Market Basket” on the front, or is Market Basket more than just buildings and groceries? Is it also a tightly knit cultural group that believes in itself and its mission? This culture shows respect for its customers with the lowest prices around, and it shows that it values its associates, at every level, by paying competitively, profit sharing, and great benefits. This version of Market Basket rewards everyone involved in its enterprise, from baggers to SVPs to customer service reps, to customers, to shareholders. As the company grows, the rising tide raises up everyone.
The A Shareholder faction, representing the Arthur S. faction, see Market Basket the first way, as a chain of physical stores that sells groceries, and they would like to maximize shareholder income. The associates, customers, and Arthur T. view it the second way—as something special and vital to the region which is worth preserving as it is. Each view is rational, and in reality the A Shareholders’ viewpoint is certainly the more conventional, but it’s the concept of Market Basket as a culture that is driving the associates and the customers boycotting the stores. They like what they have and aren’t giving it up.
The Market Basket rebellion is a completely unique situation
“Solidarity Rocks” is a great slogan to express the success of the associates (unless of course you are an A Shareholder), but this solidarity “rocks the status quo boat” too, and the failure to adapt to the new situation is prolonging negotiations. Many people just can’t wrap their heads around what’s happening. Governor Patrick, in his televised remarks, inadvertently summed it up. “Usually companies are able to buy and sell to each other without workers walking off the job, and saying they’re not going to work unless they get the boss of their choice”. From this he then concluded that the associates should simply return to work so things can get back to normal.
These Market Basket events are definitely unusual, but that doesn’t mean they aren’t effective, or that they won’t become more common. People are forgetting that times do change and that there is always a first time. Cars were unusual in 1918 and polio was usual. Eight year old children working twelve hour days were the norm before child labor laws were passed. Maybe employees allowing a company, to which they’ve devoted their life, to be sold, milked dry for profits, and merged out of existence will become unusual in the future. Why should employees act like sheep on the way to the unemployment line if they don’t have to? The associates like things the way they are, they are extremely loyal to Arthur T. as CEO, and most importantly, they have the power to bring him back. They are more powerful than the Board of Directors and more powerful than the shareholders, which is quite unusual. The A Shareholders and a few commentators (i.e. Holman W. Jenkins, Jr. of the Wall Street Journal) have not accepted this, but it’s the reality.
There is a saying, “Might Makes Right”, to which Lincoln responded, “Let us have faith that right makes might.” The associates have the might in this rebellion, and if you step back and view it impartially, there is a very good argument that being in the “right” is what gives them the “might” to resist these changes.
Sale Price vs. Terms
It’s a misconception to think this is almost settled because the two sides agree on price. Price is not the major piece of the puzzle. Rather, since this agreement is being financed, in this case by the A Shareholders, the interest rates, conditions, and bank covenants may be much more important.
There was a mortgage analogy in my last article—what counts is cash flow, not the price, particularly when you are trying to run a business. When you buy a house you agree on a price, but you finance it with a mortgage, and that mortgage has terms, including an interest rate on the loan. If the mortgage interest rate is low, like interests rates are now—say 4%, then your monthly payments for a 30 year mortgage are about $1,200 on a $250,000 house. If the interest rate is 18% (like some credit cards) your monthly payment will be more like $3,700+ a month, triple the monthly payment for the exact same house at the exact same price. With the 18% monthly payment (i.e. debt service cost) you might have to use sheets as drapes for the windows and be furnishing your house with lawn chairs from Ocean State Job Lot. Extrapolate that $250,000 out to the $1.5 billion that might need borrowed to purchase Market Basket, and you’re talking a huge monthly payment-- you can see how important the interest rate is.
That’s the danger for Market Basket as a culture in these negotiations. The A Shareholders are providing the financing, so instead of dividends they’ll get interest payments, and interest rates are required by law to be paid, plus there will be restrictive covenants, enforceable in court, to make sure they’re paid. If the interest rates are too high, which I suspect is the holdup, Arthur T. would own the company, but be required to pay most profits to his cousin’s side of the family. Based on their history of working together, that is definitely not what he intends or will do. He cannot run Market Basket as it used to be, and as the culture demands, if too large a portion of future revenue has to be used to finance the debt.
Incidentally, I don’t think Arthur T. will agree to an arbitrator. He holds all the chips, so why take a chance? The danger is that an impartial arbitrator might come in, look at the shape Market Basket is in, and determine that it’s a very risky investment. Risk equals high interest rates on loans. In reality Market Basket will be up and running in record time if Arthur T. is back as CEO, but that does require an act of faith not always found in financial types who, just looking at the numbers, might have different opinions.
The infamous Feud: so who is the Saint?
Check out the transcripts of the Board meetings, and you’ll see neither Arthur is a candidate for Sainthood or much for turning the other cheek. In fact, at one Board meeting there were punches thrown. The most charitable way to interpret these Board Meeting arguments is that both Arthurs are strong willed, and know how to fight for their viewpoint. They should—they’ve been practicing long enough.
The Market Basket family feud is certainly multifaceted, but lately it’s really been about how the company is managed, and for what purpose. The Arthur S. side of the family is the more passive side, and is interested in income from the company. This isn’t unreasonable by any stretch. They own slightly over 50% of the stock, and want as big a dividend as possible. The Arthur T. side of the family is more active in running the business and less interested in paying out dividends, particularly to their cousins. Instead they prefer to grow the business long term, through a strategy of treating employees (the associates) very well, and keeping prices low. They also seem to do well keeping business transactions on their side of the family.
Examples of the Arthur T. approach are seen more often in the high tech world—Google or Amazon fit the model. Employees are treated great, profits and dividends are minimal or nonexistent, and the stock prices have soared.
More mature companies, which actually ‘usually’ includes grocery store chains like Market Basket, tend to be run more for quarterly profits, which is one of the things that makes Market Basket exceptional. In these mature industries, it’s more common for management to focus on the bottom line, which is usually realized by hiking prices in combination with cutting costs.
These two goals of long term growth vs. short term profits tend to conflict, and thus the previously existing, long running debacle of a CEO who won’t budge, and a board that is trying to force him to do what they want. These two factions simply couldn’t coexist. It reminded me of the Dr. Seuss story The Zax.
But in the last four weeks things have changed as radically as imaginable and now short term vs. long term growth and dividend amounts are the least of the Shareholders’ worries. The company is going down the tube, and something needs to be done. Power has shifted, and now resides decisively in Arthur T.’s court, and it’s only there because of associate support, which is unwavering.
Time to wrap it up
It really is getting to be a few minutes till midnight, when everything turns into a pumpkin. The A shareholders do have one other option besides a sale to Arthur T.—bankruptcy. If the company goes bankrupt it can be sold to anyone, but it sure won’t benefit anyone, least of all the shareholders who will lose billions. And even then, Arthur T. will probably end up back as CEO.
I believe this failure to reach an agreement hangs squarely around the neck of the A shareholders. It’s not that they are wrong or morally bankrupt or anything like that. Rather, it’s that they’ve lost but refuse to fold. Their negotiating strategy seems like the distraught man whose wife is leaving him, so he points a gun at his own head and threatens to shoot himself if she doesn’t return. That type of strategy usually ends very badly.
Hopefully some A Shareholder group comes to their senses and breaks rank—there’s too much at stake, including personal fortunes, to let someone commit corporate suicide on everyone’s behalf. The boat has been rocked, but there is no sense whatsoever in flipping the boat upside down.
About the author: Jay Shenk, currently an IT and Operations consultant, previously worked for a private equity funded company (which bought the company he worked for), where he ran distribution, IT, and other operational departments. He can be reached at
. for feedback or consulting work. He has also published a humorous novel (under a pseudonym) about his personal experiences with private equity buyouts, Keeping Up, which is available online from Amazon. This article is published by Crow Hill Associates, LLC.