To Demoulas Supermarkets Inc.’s directors: Smarten up

On July 31, 2014, in Latest News, by The Somerville Times

shelton_webBy William C. Shelton

(The opinions and views expressed in the commentaries of The Somerville Times belong solely to the authors of those commentaries and do not reflect the views or opinions of The Somerville Times, its staff or publishers)

Since your actions demonstrate that greed is your primary motivator, let’s realistically assess your chances of fulfilling those dreams of avarice. Considering the breathtaking rate at which you are destroying shareholder value, chances are slim.

Under the wise leadership of Arthur T. Demoulas, your chain grew to 71 stores. Last year’s profits were $217 million on sales of $4 billion.* Revenue growth was 6%. That’s enviable in a mature and hypercompetitive industry with notoriously thin profit margins.

Over ten years, that financial performance earned the nine of you a half-billion in dividends. But for your family’s greedier half, that wasn’t enough. They wanted to suck out another $1.5 billion, and last year they succeeded in extracting $250 million that could have been invested in growing the business.

With few exceptions, there are essentially only two strategies whereby a competitor in a mature industry can achieve exceptional profitability. Market Basket owns New England’s cost-leadership space, while Whole Foods dominates its differentiation space.

Now you want to abandon Arthur T’s conservative financial management in favor of extracting more cash. But if you sell off your extensive real estate inventory, you will initiate a cascade of consequences.

You will burden your cash flow to make rent payments to the properties’ new owners. You will be obligated to raise prices, which will lower your sales volume. Declining sales volume will reduce your bargaining power with vendors, increasing the prices that you pay for the goods that you sell, advertising that you buy, and supplies that you need.

A truly effective strategy, whether cost-leadership or differentiation, requires alignment of all a business’s elements—from market positioning, to operations management, to company culture. As you implement your new business model (assuming that you have one), these elements will become misaligned. You will be stuck in the middle with Stop-and-Shop, Shaws, and Hannaford, struggling to achieve ordinary profitability.

And that’s if everything in your new plan goes well. But it can’t, because you are destroying brand equity.

The essence of a brand is trust. Not trust in a company’s leadership. You have already eroded that. Rather, trust that the customers know exactly what they will be getting. Think McDonald’s or CocaCola. The changes that you contemplate will confuse the market regarding what constitutes Market Basket’s brand.

In fact, your foolish actions are already destroying value at a deeper, less abstract, and more human level. They are betraying the loyalty of workers, customers, and vendors alike.

These are groups whose relationships have ripened over generations. I feel personally connected to all the deli workers at the Somerville Market Basket, and I look forward to my conversations with them. Your actions make manifest where our true loyalties lie, and they aren’t with you.

Can you offer any other example where

  • Employees at every level took action to support their company’s fired CEO?
  • A non-unionized workforce effectively organized and mobilized itself in just a few days?
  • A company’s customer base, with little prompting, imposed a crippling boycott, buying from competitors and pasting competitors’ receipts to the boycotted store’s windows?
  • Elected officials across the political spectrum spoke out against a company’s management and in favor of its workers?

So even if you were able to beat your employees into submission, what would you have? A workforce that gleefully practices what organizational behaviorists call “malicious compliance,” and hundreds of thousands of customers who conduct the most effective form of advertising—word of mouth—against you.

If you and your CEOs’ management of current events is any indication, you understand little about how the company works and could not effectively manage whatever plan you devise.

Rather than showing the public a human face and making your case, Arthur S, Felicia Thornton and Jim Gooch have lurked in the shadows. They have abjectly lost the market communications war. They have no coherent or credible message.

They tell us that they “saw no alternative” to taking the “difficult step” of firing eight senior employees. No alternative to firing people simply for speaking their minds at a rally? This transparent rationalization proclaims that you have no mind, or no heart, or both.

There are, however, a few good things that you have accomplished. You’ve given courage to workers and consumers across New England to act against greed-inspired, short-term, bottom-line management. You’ve shown them that what they have in common is more important than their differences.

And you have given pause to financial industry analysts who exhort corporate leadership to milk their companies. Those analysts may be too myopic to compare Costco’s and Walmart’s price-earnings ratios, but they can’t ignore the populist reaction that you have inspired.

Now we learn that Arthur T has made an offer to buy a 50.5% interest. We don’t know what that offer is. But he has a universal reputation for fairness and honesty, and he understands the company’s value much better than you ever will.

So your wisest response would be to accept the offer and put the proceeds into the kind of exploitative investments that you favor. Otherwise, there is only one direction that your shareholder value is going: down.

* Note to ST readers: Profit rates cannot be determined from sales and profit figures alone, particularly in the supermarket industry where mark ups are only a few percent, but average inventory turns can be as many as thirty per year.


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