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6 Secrets for Creating Fierce Employee and Customer Loyalty Employees are on strike at New England's Market Basket to win back their old CEO. Here's why they care so much and what entrepreneurs can learn from this grocery chain.

By Peter S. Cohan Edited by Dan Bova

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Why do companies exist? Is it solely to enrich their owners or do workers and customers matter as well?

I think the answer matters to entrepreneurs: In 2003, I argued in my book Value Leadership that doing well by employees, customers and communities enriches shareholders over the long run.

In the United States, the answer usually ends up being that all these groups are important but when resources become scarce, shareholders and debt holders are the ones who matter most. (In Germany, things are different: Workers also have a seat on corporate boards.)

So the thousands of workers on strike at Market Basket, the Tewksbury, Mass.-based, 25,000-employee grocery chain, probably won't be enough to convince its board of directors to reinstate the CEO, Arthur T. Demoulas, it let go last month.

Related: Create a Culture of Engagement With These 7 Measures

What probably will make a difference is whether the board – which last fall paid out a $300 million special dividend to shareholders -- accepts the offer by Arthur T. Demoulas to acquire the 50.5 percent stake in the $4.6 billion company now controlled by his cousin Arthur S. Demoulas and other family members.

Whatever the outcome, the 71-store Market Basket offers lessons for running a successful business that are very important. Former CEO Arthur T. Demoulas has demonstrated that a company should serve all of its stakeholders -- that is, workers, employees, shareholders and the community.

This is particularly significant for companies where many of the employees are in contact with customers, such as the in the grocery industry: Cashiers, butchers and all sorts of other people interact with customers. And if those employees have deep functional expertise in the business, develop relationships with customers and convey a positive attitude about the company, shoppers will keep coming back.

Moreover, even employees without direct customer contact -- like those purchasing the goods stocked on shelves -- will be more productive if they are happy and loyal. The reason is simple: They know the business so well that they can do their jobs more effectively.

A closer look at Market Basket's operations under Arthur T. Demoulas suggests that its industry-beating 7.2 percent operating margins in 2012, cited by the Boston Business Journal, derive from six secrets: long-term employee relationships, low overhead, bulk purchasing, low prices, no debt and treating employees and customers like family. Here's a look at these six key variables:

Related: 10 Secrets to Building Trust and Credibility With Your Customers

1. Developing long-term employee relationships.

As Kevin Griffin, publisher of The Griffin Report of Food Marketing, explained to The Boston Globe, Market Basket has some employees at its headquarters who have been at the company 40 years. Market Basket accomplishes this by promoting from inside the ranks, with "once-grocery baggers ascending to senior positions."

And the company pays staffers more than rivals do: Experienced cashiers earn more than $40,000, while full-time clerks receive salaries that start above the minimum wage at $12 an hour, according to the Globe. Four-times-a-year bonuses are granted, amounting to as much as to six to eight weeks pay.

The company contributes 15 percent of each employee's pay to a retirement plan (worth $552 million in 2013). Market Basket made $43 million in contributions in 2012, the Boston Business Journal noted.

2. Keeping overhead low.

The long-term employee loyalty seems to boost productivity. Compared with its rivals, Market Basket had only six employees working as grocery buyers, about one-fifth the number of grocery buyers as would be found at a similarly sized chain, the Globe reported.

"By the time they've reached leadership positions, employees have been with the company long enough that they are deeply experienced across many levels of the company, meaning they're able to operate more efficiently from a staffing perspective," the Globe noted, summarizing Griffin's reasoning. "The lack of turnover also cuts down on the costs of recruiting and training."

3. Buying in bulk at a discount.

Like many successful large retailers, Market Basket takes advantage of its size to negotiate volume discounts, the Globe noted, with Griffin explaining that the company builds long-term relationships with suppliers to assure it can deliver low prices.

4. Maintaining low prices.

Market Basket has a reputation for low prices. As shopper Nathan Mudhall emailed me: "I always wondered how low margin products could vary so much in price from company to company." He singled out Market Basket's price for Land O Lakes Butter, $3.79, as considerably lower than other stores'. "There is no other market that is even close to them in price, selection, service, and cleanliness."

5. Carrying no debt.

Unlike many grocery chains, Market Basket is said to have no debt, which saves it from having to make monthly debt payments and gives it room to earn a profit despite charging low prices.

6. Treating employees and customers like family.

The former CEO Arthur T. Demoulas kept a close emotional connection with his workers, behaving as if each employee were a member of his family.

For example, he took an interest in manager Steve Paulenka's "autistic son, Joe, after the boy broke two front teeth and needed reconstructive surgery," Paulenka told the Globe. "For weeks after the accident, Demoulas would ask about the boy whenever he saw Paulenka." Now Paulenka is one of eight managers fired for participating in the protest.

Market Basket's employees extend loyalty to customers. "They even make a point of getting my 96 year old mother a shopping cart in the parking lot to use as a walker," Mudhall wrote. "This happens repeatedly. I'm amazed. Courtesy ... what a concept."

I bet that if Arthur T. Demoulas does not win his bid for the other 50.5 percent of Market Basket, the company's stakeholders will be worse off.

The biggest lesson for any entrepreneur is that the best investment to make in a company is to create and sustain the loyalty of employees and customers.

Related: Join the League of Extraordinary Bosses: 4 Habits to Cultivate

Peter S. Cohan

President of Peter S. Cohan & Associates

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He is the author of Hungry Start-up Strategy (Berrett-Koehler, 2012) and a full-time visiting lecturer in strategy at Babson College in Wellesley, Mass.

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