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Tuesday, September 02, 2014
by Kevin Coupe
One of the most interesting things I watched while I was on vacation last week (in addition to the six movies I saw over eight days, which was a pretty good run, even for me) was a video from the Aspen Ideas Festival that focused on "Values at Work: Linking Purpose, Productivity, and Performance." (You can watch it here.)
The panel - which included Dave Dillon, the chairman of Kroger - begins with a discussion of how companies should define their "purpose." What is interesting about the answers to this question is that none of the panelists talk about "maximizing shareholder value" as being a core business purpose … in fact, there even is the suggestion that companies that make "maximizing shareholder value" a top priority often end up being those that are less successful at doing so.
That's fascinating. Many companies that focus only on making money so they can grow shareholder value end up making short-term decisions that may not be in the best long-term interests of a sustainable business model. The top execs who go down this path, not coincidentally, are being rewarded based on shareholder value … in part because they are shareholders. They make short-term decisions that grow the stock price, they make more money, they get more stock, and so on.
In fact, the best way to serve shareholders is to build a great and sustainable company and business model.
This narrative resonated with me, in part because I think it has been a theme that we've often talked about here on MNB over the past dozen-plus years, and in part because I think we see elements of the narrative playing out in several stories that are playing out across the media.
Not least of these is the Market Basket story, which seems to have to come to some sort of conclusion with the purchase by Arthur T. Demoulas's side of the family of the 50.5 percent of the retailer owned by cousin Arthur S. Demoulas's side of the family. Beyond the family feud aspects of this story - which often was like watching a car wreck - the most intriguing part of this scenario was how employees rose up to oppose what they saw as a management decision to take money out of the company rather than invest in it, to reward shareholders at the expense of the front line employees.
Sure, this was about money. And sure, almost certainly the scenario was more complex and nuanced than it sometimes was being described. But I think it would be a mistake to ignore the fact that at its core, this was a debate about values and priorities. Employees at Market Basket felt that it was their company, and they rejected and fought against a management shift that was at odds with that view.
I think this paragraph from the Boston Globe is instructive:
Corporations exist to make a profit. Stockholders are considered far more important than workers. Corporate leaders have a fiduciary responsibility to maximize profits for shareholders, not maximize the contentment of workers. The Supreme Court famously decided that corporations are people, but judicial ruling can’t give them souls. Corporate leaders are supposed to do that. One legacy of the Market Basket standoff may be to underscore just how vital that executive mandate is.
At the same time, there are stories out there about how labor organizers are calling for expanded displays of civil disobedience to draw attention to the low wages paid to fast food workers around the country.
The New York Times is reporting about a "flood" of recent lawsuits "that accuse employers of violating minimum wage and overtime laws, erasing work hours and wrongfully taking employees' tips. Worker advocates call these practices 'wage theft,' insisting it has become far too prevalent."
Here's a revealing paragraph from the Times story: "David Weil, the director of the federal Labor Department's wage and hour division, says wage theft is surging because of underlying changes in the nation's business structure. The increased use of franchise operators, subcontractors and temp agencies leads to more employers being squeezed on costs and more cutting corners, he said. A result, he added, is that the companies on top can deny any knowledge of wage violations."
Sure, this is all about money. In part, that's because there appears to be a disparity - there have been plenty of stories about how corporate profits are surging, top earners are making more money than ever, and yet these improvements are not being seen throughout organizations. Many employees are still treated as a cost, not an asset …
I've long felt that while much of the discussion focuses on money, there also is something else at play - a desire by employees to be appreciated, to be treated with the same respect as their employers, to be part of a team rather than just disposable cogs in the machine. They want to have purpose, they want to contribute, and they want to be part of companies that have purpose.
And, I believe, this is only going to become more pronounced as young people come into the workforce. They have different expectations, they have different belief systems. Companies that ignore this do so at their own risk.
This is about values, not just value. It is about the soul, not just the bottom line.
Attention must be paid.
It is an Eye-Opener that MNB will return to, again and again.
As has been well documented, the six-week-old Market Basket has finally been resolved, with deposed CEO Arthur T. Demoulas reaching a deal to buy the 50.5 percent of the 71-store retailer that his side of the family does not own for more than $1.5 billion. The firing of Arthur T. Demoulas, engineered by the side of the family controlled by his cousin, Arthur S. Demoulas, resulted in a walkout and slowdown by numerous employees, a boycott by customers, and a very public conflagration that threatened to bring down the entire company.
The Boston Herald reports that "the company said Arthur T. Demoulas is returning with 'day-to-day operational authority' and that he and his management team will take charge during an interim period while the transaction is completed. Co-CEOs Jim Gooch and Felicia Thornton - who were hired by Arthur S. and company after Arthur T.’s firing - will remain in place pending a closing, which is expected to occur in the next several months."
In a statement to employees last week, Arthur T. Demoulas said, "You have demonstrated to the world that it is a person’s moral obligation and social responsibility to protect the culture which provides an honorable and a dignified place in which to work."
The Herald story notes that "the board had a range of alternative plans drawn up in the event the sale did not go through that would have closed any number of Market Basket stores, including one plan that would close 61 of the chain’s 71 locations and lay off workers. Thousands of part-timers had already had their hours cut to zero in response to plummeting sales."
Inc. reports that Market Basket now has to engage in "the real work," which comes down to two basic things - healing a culture that, despite the rallying around Arthur T. Demoulas, almost certainly has developed some fissures and stresses, and the hard physical work of replenishing the stores and getting them up to standards.
The Boston Globe reports that Arthur T. Demoulas has said that while the company may have to scale back planned store openings because of the financial realities facing the now heavily-leveraged retailer, he does expect to open at least two new stores before the end of the year.
Sales surged, I'm sure, over the Labor Day weekend, but Market Basket is going to have to work hard to make sure that the trend continues. There have been plenty of stories about how the retailer's price advantage may have been illusory, more based on reputation than fact, and this may become an even tougher to keep intact now that management is saddled with a reported $1 billion in debt. The natural inclination in such cases is to edge margins up a bit, but if that happens, Market Basket could lose some of the shopper loyalty that was so remarkable … and then the whole battle will have been for naught.
The narrative has changed, but the story remains no less interesting.
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Burger King announced last week that it plans to acquire Tim Horton's, the iconic Canadian doughnut chain, for $11 billion. The announcement immediately created a firestorm in political circles and on social media because of what is called 'inversion' - the acquisition of a non-US company and movement of headquarters to that country, resulting in a significant tax savings for the acquiring entity.
Politico reports that this strategic move "is the latest in a string of U.S. corporations, from Walgreens to Pfizer, looking to take advantage of foreign subsidiaries to avoid paying the high 35 percent U.S. corporate tax rate. Moving to Canada would mean Burger King will take advantage of its 15 percent corporate tax rate.
"The Burger King move is unique among inversions, most of which have involved big companies scooping up smaller ones to get the foreign address. Burger King actually earns less revenue than Tim Hortons, and analysts said they see a strategic rationale for acquiring the doughnut company’s operations.
"No matter, the fact that it is a consumer brand name highlights the tax inversion issue.
"Forty-seven U.S. companies have shifted headquarters abroad in the past 10 years at least, in part, to avoid paying U.S. taxes — a more than 60 percent jump compared to the prior two decades combined, according to the nonpartisan Congressional Research Service.
Acknowledging that tax reform is a ways off, lawmakers of both parties say they want to do something in the near term — but lines in the sand make prospects of any deal dim."
The problem is that, in broad terms, Democrats see the solution to inversion as legislation that penalizes companies for making such movies, and Republicans see inversion as proof that the US corporate tax code is too high and needs to be lowered.
Responding to the controversy, Burger King posted the following message on its Facebook page:
"We hear you. We’re not moving, we’re just growing and finding ways to serve you better.
"As part of the announcement made today, both Burger King Corp. and Tim Hortons will continue to operate as independent brands. We’ll just be under common ownership. Our headquarters will remain in Miami where we were founded more than 60 years ago and business will continue as usual at our restaurants around the world.
"The decision to create a new global QSR leader with Tim Hortons is not tax-driven – it’s about global growth for both brands. BKC will continue to pay all of our federal, state and local U.S. taxes.
"We’re proud of the heritage of Burger King and will maintain our long-standing commitment to our employees, franchisees and the local communities we serve.
"The WHOPPER isn’t going anywhere."
However, Politifact - the Pulitizer Prize-winning fact checking project created by the Tampa Bay Times - took a look at the press release to analyze the claim, and reports:
"To start, we turned to Burger King’s corporate press release announcing the deal.
In it, Alex Behring, Burger King’s executive chairman, explains that the deal involves 'bringing together our two iconic companies under common ownership.' Oakville, Ontario, will 'remain global home of Tim Hortons,' the release says, while Miami is 'to remain global home of Burger King.'
"That’s the justification for the Facebook post’s claim that Burger King is 'not moving' and that its 'headquarters will remain in Miami.'
"But that leaves out a significant wrinkle. The release notes that both companies will, in turn, be owned by a newly created, and as-yet unnamed, parent company. "The new global company will be based in Canada, the largest market of the combined company," the release says.
"And that’s a detail that will likely have an impact on how much the company pays in U.S. taxes.
"Burger King is planning to manage its operations - everything from the distribution of burger buns to its marketing strategy - from Miami. But the new parent company's legal location, known as its 'domicile,' will be in Canada -- an important point for tax purposes."
I loved the one comment on social media, in which a former Burger King customer said, "I’m not boycotting your product, I’m merely relocating my loyalties."
I'd do the same thing, but it would be a toothless protest - I never eat at Burger King.
The thing about this decision is that I feel worst for the folks at Tim Horton's. Burger King management has had enough trouble trying to be competitive in the burger business, and it strikes me as likely that they'll find a way to screw up the doughnut business.
A new report - prepared for the Grocery Manufacturers Association (GMA) by a coalition of consultants that includes the Boston Consulting Group, Google and IRI - says that "consumer packaged goods (CPG) companies need to plan for a '1-5-10' market in the United States during the next five years, in which digital’s current 1 percent penetration will likely expand to 5 percent and could accelerate to as much as 10 percent in short order."
The study says that "the impact of digital is felt most acutely at the early stages of the purchasing pathway. Almost 40 percent of offline shoppers and more than 30 percent of online shoppers reported that technology's impact is greatest during the discovery phase. More than a quarter of both offline and online shoppers said that its biggest impact is in the search phase. In addition, almost a quarter of in-store shoppers reported online activity as one of the three most influential factors on their purchasing pathway."
The report goes on to say that "traditional retailers face a massive wave of new competitors and competitive models. Large technology companies with deep pockets are building disruptive digital grocery businesses to serve this category and support broader strategic goals. Start-ups are using value-added services to take share and build defensible niche positions, often by combining new product offerings with digital channels.
"CPG manufacturers will need to participate in multiple retail models; the winning models have yet to be established, and it is likely that numerous models will prevail."
CPG Companies Must Plan For Digital Future? Really? Y'think?
This top-line revelation gets the prize for most obvious statement of the week.
I do think that many, if not most, CPG companies understand this. The bigger problem is that many retailers - the companies with which they partner - think that somehow they are immune from the technology revolution that has affected everybody else.
The Sacramento Bee reports that the California Assembly and Senate have passed a statewide ban on single-use plastic bags. The bill now goes to the desk of Gov. Jerry Brown, who has not said whether he will sign the legislation into law.
The story notes that proponents argued that "massive volumes of discarded bags clog rivers and landfills, saddling California with hefty cleanup costs. They point to the scores of counties and cities that have already enacted bag bans as evidence that the policy can be effective and enjoys popular support … But critics warned that the measure would cost jobs. They continued to lambaste the 10-cent fee, saying it would line the pockets of grocers and retailers."
The Wall Street Journal reports that "cities including San Francisco, Los Angeles, Seattle and Portland already have such bans in place, as do most counties in Hawaii. The California ban would prohibit the thin, commonly distributed plastic bags in grocery stores and pharmacies beginning July 1, 2015, and go into effect for convenience and liquor stores on that date a year later."
I've long said that I'm not all that fond of legislated bans, that I would prefer grass roots campaigns that create real behavior changes among consumers. But I've also long believed that these kinds of bans probably are inevitable, will grow in popularity, and that in many ways, opponents may want to start looking for fights they can win.
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The New York Times reports that Google has revealed that for the past two years it has be testing an experimental drone program, dubbed "Project Wing," that would develop products via the small unmanned aircraft. Dozens of people are working on the project, which is now focused on improving the technology and developing a mobile app that will access it.
The program is similar to one being invested in by Amazon.
And, speaking of Amazon…
The Wall Street Journal reports that Amazon may test a new ad placement program later this year, designed to challenge Google's $50 billion-a-year ad business.
According to the story, the program - at least tentatively called "Amazon Sponsored Links" - is seen as making it easier "for marketers to reach its nearly 250 million active users."
The Journal writes that "people familiar with the matter said Amazon's offering would resemble Google's AdWords, the engine that Google uses to place keyword-targeted ads alongside Google search results and on more than two million other websites. AdWords is the foundation of Google's roughly $50 billion-a-year advertising business, and Google counts Amazon as one of its biggest buyers of text link ads … Amazon now displays several types of ads on its pages, including text-based keyword ads placed by Google and other third parties, as well as product ads that Amazon places itself … To displace the Google ads on its site, Amazon is building a tool to help advertising agencies buy in bulk for potentially thousands of advertisers, the people familiar with the matter said. Building such a system could enable Amazon to boost its business placing ads on third-party websites. Google offers similar capability for advertisers using AdWords."
These days, Amazon is fighting a lot of battles on a lot of fronts. Since Google has decided to go after it with its own e-commerce business, using Google Shopping Express to allow traditional bricks-and-mortar retailers to compete more effectively with Amazon, it makes sense that Amazon would look to go after Google in one of its core businesses.
The question, I think, is how much collateral damage there will be to traditional retailers caught in the cross-fire.
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The Wall Street Journal reports that Dollar General CEO Rick Dreiling says that his company remains committed to acquiring Family Dollar, despite that company's rejection of its $9 billion cash offer. Family Dollar says that it plans to go forward with a deal to sell the company to Dollar Tree for $8.5 billion.
The Journal writes that "antitrust concerns are the main issue to bringing together the largest two players among the small discount stores. Dollar General proposed divesting up to 700 stores in its bid for Family Dollar but both sides are analyzing whether that would be enough to get the blessing of the Federal Trade Commission … One fear from the Family Dollar side is over an FTC test that would assess whether the retailers are more aggressive with prices in areas where their stores are nearby, compared with locations farther apart. If the agency finds that to be the case, they could force more store divestitures, or quash the deal altogether, over worries the merger would lead to higher prices for consumers."
The story goes on: "Dollar General and some Wall Street analysts say they believe the antitrust concerns are overblown. That is because Dollar General sets the prices for a 'vast majority' of its items on a national basis, according to a person familiar with the matter. The strategy means that a box of Oreo cookies or bottle of Tide detergent sells for the same price in Springfield, Mass., as in Albuquerque, N.M., regardless of the store's proximity to a Family Dollar store.
"Dollar General is more concerned with prices at Wal-Mart, this person said. And combining with Family Dollar would be one way to better compete with the discounting behemoth, especially at a time when Wal-Mart is making a big push into smaller stores."
Interesting piece in The New Yorker about "The Problem With GMO Labels" that talks about the tension that exists between science and politics on this issue. It is worth taking a look at, because it seems both well-reasoned and realistic.
"Let’s concede that politics is going to trump science on this issue, and that labelling is inevitable," author Michael Specter writes, adding that "it is not necessarily wrong for concerns about openness to take priority over science."
You can read the whole analysis here.
By the way, also on the GMO front…
The Washington Post reports that enough signatures have been gathered to qualify a bill requiring the labeling of genetically modified food to be on the November ballot in Colorado.
A similar initiative is on the ballot in Oregon.
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• Amazon said last week that it has expanded same-day delivery services to the metro Atlanta area, adding the region to a list of metropolitan areas getting same-day delivery service that includes Baltimore, Boston, Dallas, Indianapolis, Los Angeles, New York City, Philadelphia, Phoenix, San Francisco, Seattle and Washington, D.C.
• GeekWire reports that Instacart has expanded its personal grocery shopping service to Portland, Oregon, "giving customers a way to get groceries delivered from Whole Foods, Costco, and Uwajimaya in an hour," and Houston, where it currently is working with HEB and Whole Foods.
In addition to Portland and Houston, Instacart currently operates in San Francisco, Atlanta, Austin, Boston, Chicago, Denver, Los Angeles, New York City, Philadelphia, San Jose, Seattle and Washington, DC.
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• The New York Times reports that a federal judge in Hawaii has ruled that a local ordinance on the island of Kauai that sought to restrict and regulate the use of pesticides and genetically modified crops is pre-empted by state law and cannot be implemented.
The Times writes that the decision "represents a victory for Syngenta and three other seed and chemical companies that had brought the lawsuit, saying that the ordinance would place unnecessary and unfair restrictions on their operations.
"The law, Ordinance 960, which was enacted last year, bitterly divided the normally idyllic island and also captured global attention. Hawaii’s year-round growing season had made the state a hub for the development of genetically engineered corn seeds that are then planted throughout the United States and in other countries. Corn stalks now sprout where pineapples and sugar cane once grew. In pushing for the law, some residents had said the agricultural operations exposed them to the drift of soil and dangerous pesticides. They were joined by people opposed to biotech crops, which are also called genetically modified organisms, or G.M.O.s."
The story notes that the now-struck down law "would require the seed companies to notify nearby residents about the use of certain pesticides and to establish no-spray buffer zones around schools, homes and other sites." Speaking as a citizen, I'm really getting tired of laws that seem to put the needs of corporations ahead of the rights of citizens. (It is beginning to remind be of "Rollerball.") While that may seem counter-intuitive considering that this is a site that has a significant readership within the corporate community, my point is that tone deafness on the part of corporations - and there seem to be few industries as tone deaf as the GMO industry - will only earn enmity from citizens, which will result in greater restrictions and regulations, which in the end won't be good for these companies.
• The Sacramento Bee reports that "Raley’s has agreed to pay nearly $1.6 million in civil penalties, costs and funding for environmental projects as part of a settlement related to allegations of improperly disposing hazardous waste. The judgment is the culmination of a civil enforcement lawsuit filed in San Joaquin County to stop the West Sacramento-based supermarket chain from unlawfully transporting and disposing of retail hazardous waste, according to a press release from at least two of the 25 district attorneys who announced the suit … In addition to devoting resources to complying with California environmental law, Raley’s has agreed to purchase five mobile freshwater purification systems to provide safe drinking water to local communities during emergencies."
• The Arizona Republic reports that "Pro's Ranch Market, one of the Valley's leading Hispanic grocers, is changing names. On Wednesday, Sept. 3, the new name becomes Los Altos Ranch Market …The new owners are California-based Cardenas Markets and Northgate Gonzalez Market , a partnership that bought bankrupt Pro's Ranch Market in February for $55 million."
• The Associated Press reports that a 12-year study conducted by the Harvard School of Public Health says that Americans' eating habits have marginally improved, and that "on an index of healthy eating where a perfect score is 110, U.S. adults averaged just 40 points in 1999-2000, climbing steadily to 47 points in 2009-10." However, the study also concluded that wealthier Americans eat better than low-income citizens: "Scores for low-income adults were lower than the average and barely budged during the years studied. They averaged almost four points lower than those for high-income adults at the beginning; the difference increased to more than six points in 2009-10."
• The Chicago Tribune reports that "Peet's Coffee & Tea is embarking on a major expansion in Chicago," and is "getting ready to open 16 shops in the Chicago area in the coming months, many in former Caribou Coffee locations that were closed down by its sister chain, which is focusing on other parts of the country where it is more popular."
The company is taking direct aim at Starbucks with its expansion plans, and once the Chicago expansion has been completed early next year, "a total of 18 shops will comprise one of Peet's largest retail markets outside of California."
• AFP reports that "British supermarket giant Tesco plunged deeper into crisis on Friday after issuing yet another profits warning, cutting both its dividend and capital expenditure, and rushing in its new chief executive … The group, which has struggled in its main market in Britain in the face of stretched household budgets and fierce competition from German-owned discount chains, blamed challenging trading conditions and high investment costs for Friday's announcement."
Meanwhile, the company's new CEO, longtime Unilever executive Dave Lewis, is joining Tesco a month earlier than expected, and has conceded that he never has run a retailer before. But, he says, "I am wonderfully naïve about some of the stuff that is going to come but that is fine, it has served me well up to now."
• Home Depot announced last week that Frank Blake, the CEO who rescued the company from the disarray created by Robert Nardelli when he ran the company - destroying morale and making the stores harder to shop while simultaneously receiving what many people saw as excessive pay - is stepping down. He will be succeeded by Craig Menear, currently the company's US Retail President.
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I was sorry to hear last week about the death of Denis Zegar, who died during a Maryland bicycle race. Denis was 65.
Zegar was president of Making Change, which used to be known as the Food Industry Crusade Against Hunger, as well as the former president/CEO of the Mid-Atlantic Food Dealers Association. He also had his own firm, DRZ Management, as well as the former chief tax economist and financial analyst for the U.S. Senate Small Business Committee, and a former professor of public policy at George Washington University.
While Denis and I were not close friends, I'd known him for several decades, and it made me very happy that he was a reader and supporter of MNB. He often wrote in, bringing his strong opinions and economics background to a wide variety of subjects.
One of them was a Pew Research study saying that more Americans than ever don’t think a college education is worth the investment, which I wrote about on MNB and that Denis responded to … and I'm happy to reprint his email here:
As a former college professor, I am disturbed by these findings, but not surprised.
What we have seen over the past decade is the dumbing-down of America that politicians have embraced and fostered to their benefit. It allows for easy sound bites that often lack clarity or factual content. Technology has often become the transmitter of misleading information, but it is easy to get and even easier to promulgate. I am sadden that technology has been used in a counter-constructive manner. Whenever budgets need to be cut, education tops the list. Politicians often criticize teacher's unions for failing our students, but this is nothing more than passing the buck. There is plenty of blame to go around. Here is some disturbing data. Among secondary education worldwide, the U.S. ranks 14th in the world in reading; 25th in math; and 17th in science. Ironically, South Korea ranked first, first and third, respectively, but spends a fraction of what most developed nations spend on education. It's no wonder students question the value of college as they lack the skill sets necessary in today's global economy. Its no secret that pan-Asian nations have become the hotbed of recruitment for multinational companies. This would have been unheard of 25 years ago.
Our country needs to have an open dialogue among national, state and local politicians, teacher unions and school administrators to develop a national curriculum that meets the needs of our country and, hence, its student bodies. To be fair, our country is a microcosm of many diverse students, cultures and needs. School districts may ultimately need to be broken down into magnet schools based on specific needs and/or curriculum. Students excelling in math and sciences should be nurtured, not held back because of political correctness or other self-defeating criteria. Students talented in the arts need to be introduced at an early age to digital art media and content development, and the list goes on. Community colleges need to be seen not as "halfway houses" to education, but as technical development centers that complement tomorrows technology needs. Universities and colleges are cable of teaching today's skill sets, but only when students are fully prepared to learn. This will require an investment to elevate all schools into the 21st century. No other investment we can make as a nation will pay as many dividends as education. Every school needs to have access to new computers and software labs and, high speed internet to achieve our national goals and ensure our children's future in a global economy. A better and more relevant education will become the currency of future success for America. Paramount in importance, it will make a family's investment in higher education meaningful.
Unfortunately, our nation has become so ideologically splintered, we have lost sight of what's really important. American exceptionalism is readily becoming a myth. Educational preparedness won't change until parents demand better of their schools and demand constructive participation by their elected officials.
Continuing with the politically expedient blame game will only punish our children and the future standing of this nation.
I will very much miss Denis Zegar's voice.
…which usually appears on Tuesdays, this week will be posted on Wednesday.