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Grocery stores find productivity and service improve when employees become owners

Frank Budwey was halfway up the stairs to City Hall when someone stopped his car, rolled down the window and honked the horn, hollering kudos. He gets pats on the back at the Post Office. Passers-by shout thanks. At a recent Frankie Valli concert, two women made their way to Budwey’s seat to let him know they had begun traveling from Niagara Falls just to shop at his grocery store.

When Budwey announced he would grant ownership of his North Tonawanda supermarket to his full-time employees, his generosity prompted an outpouring of praise and support in the community and across the country. But if the success of other employee-owned grocery stores is any indication, his gesture of goodwill also could turn out to be a very successful business move. Other employee-owned companies have found that when employees own the store, efficiency and profits increase, as do customer service and consumer satisfaction.

Four grocery stores – Iowa-based Hy-Vee, Idaho-based WinCo Foods, Florida-based Publix and Minnesota-based Coborn’s – have seen greatly increased profits and vast expansion since their employees took over. What’s more, consumers’ growing desire to support locally owned and socially responsible companies could give Budwey’s customer base a hefty boost.

Of course, no leadership transfer is ever without its troubles, and there’s no telling how such a unique arrangement might shake out, but for now, experts are bullish on the Budwey way.

After the untimely death of his son Justin in 2009, Budwey was left without an heir to the grocery business his family had run since 1922. He had planned to cash out and retire, but customers urged him to stay. They needed a small store with good prices, they said, and they had shopped Budwey’s for generations.

So Budwey came up with the idea to put ownership in the hands of his employees – people with the expert knowledge necessary to keep the store running for generations to come.

Budwey is staying on for another 10 years, retaining just over half of the company’s shares. He’s investing $1 million in the store to get employees off to a solid start. The store’s 33 full-time employees will get the remaining shares, pocketing profits in proportion to the amount of stock each holds. Workers will sell their shares back to the company when they leave, benefitting from any accrued value.

Working elsewhere

Though he is the first known grocer to outright make a gift of a store to workers, other supermarkets have divvied up company shares using an Employee Stock Ownership Plan. That employee ownership structure has brought excellent results for companies, employees and customers alike.

WinCo Foods went to employee ownership in 1985, allowing hundreds of cashiers and shelf stockers to retire with pensions worth more than $1 million apiece. The company has become known as “Walmart’s worst nightmare,” outselling the behemoth retailer in key shared markets despite stores several times smaller than Walmart’s supercenters. WinCo has 98 stores with $5.6 billion in sales. Employee stocks regularly outperform other growth stocks, rising at a compounded annual rate of about 20 percent since 1986.

Under employee ownership, Minnesota-based Coborn’s has grown from a single store to a 120-store retail chain across the Midwest with revenues of $1.2 billion.

Hy-Vee had 37 stores and 1,200 workers before establishing its Employee Trust Fund in 1960. Soon after employees gained ownership, the company implemented several new ideas, such as express checkout lanes and in-store delicatessens. Today, it has 235 stores in Iowa, Illinois, Kansas, Minnesota, Missouri, Nebraska, South Dakota and Wisconsin. It is the largest employer in the state of Iowa and employs 60,000 people overall.

Publix Super Markets has been employee owned since its start in 1930. It was among the first to offer innovations such as air conditioning, automatic doors and fluorescent lighting. It now has 1,098 locations in six states and is the seventh largest private company in the country, with $30.6 billion in sales last year. It’s also one of the most profitable grocery stores, if not the most profitable: Its net profit margins were at 6.52 percent last quarter, compared to Walmart’s 2.86 percent and Whole Foods’ 4.33 percent, for example.

Publix, WinCo and HyVee are regularly ranked among the country’s best supermarkets in the country by Consumer Reports magazine. Last year, they landed in the No. 2, 11 and 12 spots, respectively.

The ‘unWalmart’

Retail expert Burt Flickinger III, managing director of Strategic Resource Group, calls Budwey’s “the anti-Walmart,” in reference to the retailer that has come under fire for paying such meager wages and benefits that some employees qualify for food stamps. In his autobiography, Walmart founder Sam Walton said his greatest regret was his “chintzy” behavior toward employees, and said his proudest legacy was the profit-sharing program he instituted for his workers. But in 2010, on the 40th anniversary of the program’s debut, Walton’s heirs ended the profit-sharing program to trim expenses.

“So you have the Goliath Waltons, the wealthiest family America has ever seen, taking away profit sharing, and then you have the proverbial David in Frank Budwey, who came up the hard way but always took care of the community and the team members that took care of him and his family,” Flickinger said.

It’s that “unWalmart” attitude that could spell Budwey’s greatest success. It is an odd twist, considering Budwey has attributed a 15 percent loss of business to Walmart in the past. The first chunk of sales disappeared when he joined a group of residents to fight the big box’s arrival in North Tonawanda. His involvement angered some shoppers who wanted the store in town, prompting them to boycott. The second wave of losses came after the Supercenter opened and customers migrated there, just as he feared they would.

But Budwey already has begun to reap the benefits of his latest benevolent business practice. Sales have increased about 6 percent since he announced his exit plan last month. A one-day sale held during Mother’s Day weekend broke all previous single-day sales records, and Budwey’s ended the week with 20 percent higher sales than it had the same week the year before.

“They were telling me the numbers, and I couldn’t believe it,” Budwey said. “I thought they were pulling my leg.”

Employee morale is through the roof. New customers have come in from as far as Clarence saying they want to support what they see as the ultimate local business.

“It’s beautiful. We’ve been really blessed,” Budwey said. “We’re all tickled pink to see the changes happening so quickly.”

Future expansion?

Flickinger believes Budwey’s is ripe for profitable expansion across the Buffalo Niagara region, and thinks it could expand successfully throughout the Great Lakes region and into Pittsburgh, Cleveland and Chicago. Budwey’s supplier, Olean Wholesale, would be a good ally in identifying the right locations and markets, he said.

“By working together, the employees can get tremendous financial returns from one store,” Flickinger said. “If they decide to grow on it like WinCo did, they can get exponential returns on the value of their stock.”

It’s common for companies to see “dramatic transformation” upon becoming employee owned, said Loren Rodgers, executive director of the National Center for Employee Ownership.

Workers are more invested in their jobs and work harder toward the success of the company. Employee-owned companies go bankrupt less and survive longer than traditionally owned companies, and their employees retire with 2.5 times more wealth, the NCEO found.

“I think work is a pretty frustrating experience for a lot of people and employee ownership can be something that makes it feel like we’re all working together toward a common goal,” Rodgers said. “It’s profoundly transformative. It makes people feel like they’ve got agency in the economy instead of being tools of the economy.”

Job expertise

Too, workers’ ground-level expertise leads to better operations and efficiencies. For example, a production line employee-owner of one NCEO member found a simple way to replace a machine’s $1.25 cotton applicators with 2-cent Q-Tips, saving the company thousands of dollars per day.

But such advances don’t come automatically.

“It’s companies that make an effort to act employee-owned that see the changes,” Rodgers said.

Budwey’s, which gives full- and part-time employees sick days, personal days and vacation time, as well as retirement and health care benefits, has been doing things that way all along, Budwey said. And as he has eased away from daily operations at the store over the past five years, employees have stepped up without missing a beat.

“These people have grown into the business and know what they’re doing,” he said. “The people I have lined up to run the store don’t need Frank Budwey.”