Supermarket employees with an ownership stake in their companies are likely to provide better service and eliminate corporate waste. That's no ESOPs fable for the clutch of privately held regional chains with employee stock ownership plans, or ESOPs.
"An ESOP turns associates into shareholders and gives them a little skin in the game," Steve Smith, president and chief executive officer of K-VA-T Food Stores, Abingdon, Va., told SN.
John Bole, president and CEO of Yoke's Washington Foods, Spokane, Wash., offered a similar view: "There's a passion among associates in an ESOP company and a commitment to the company's success that's greater than anything I've seen elsewhere. Having an ownership stake appeals to the best instincts of people and allows them to take a longer view of what's best for the company, rather than asking what the company can do for them this week."
The latest supermarket operator to embrace an ESOP is RPCS, Springfield, Mo., a 32-store chain that encompasses the Ramey, Price Cutter and Smitty's banners. RPCS became 100% employee-owned on Jan. 1 following a leveraged buyout.
"We had a lot of time to do due diligence to figure out the best way to buy the company," said Erick Taylor, president and CEO. "We looked at four or five different scenarios, and we decided an ESOP was the one that made the most sense because we felt it would be a lot easier to manage a company that was owned by employees who would be more motivated. There was also the incentive of not paying tax on the money that goes into the ESOP."
An ESOP is an employee benefit plan operating through a trust that accepts tax-deductible contributions from the company to accumulate stock, which is then allocated to individual accounts for qualifying employees. Designed to motivate employees in the present, ESOPs also provide a retirement nest egg for the future.
ESOPs, which were created in the mid-1970s, can be used for a variety of purposes, including borrowing money to buy out an existing owner -- the most common reason for ESOPs among the operators contacted by SN -- and creating a retirement benefit plan. ESOPs can also be used to finance new capital, or buy new or existing shares.
Ron Calton, vice president of operations at RPCS, said the company is already seeing a positive impact just five months after becoming an ESOP. "Everyone is looking at ways to reduce shrink and control waste in the stores," he told SN. "There's also more awareness about labor costs, with a better focus on hitting our budgeted numbers. In addition, there's a heightened awareness at our weekly staff meetings with store directors about every number that's produced, with someone always pointing out this is our money we're dealing with and how we have to protect the interests of the company."
Most ESOPs Private
According to the ESOP Association, Washington, employee ownership improves competitiveness and productivity through greater employee participation in the workplace and maximizes human potential by enhancing the self-worth, dignity and well-being of people.
The association estimated there are 8 million employees in ESOPs at 10,000 U.S. companies, of which approximately 90% are privately held businesses. Roughly 2,500 companies are majority-owned by the ESOP; 1,000 are 100% employee-owned.
Corey Rosen, executive director for the National Center for Employee Ownership, Oakland, Calif., said ESOPs provide the typical participant "with a nest egg of company stock worth nearly three times more than a comparable employee in a non-ESOP company in terms of retirement plan assets.
"Employee-owned companies can afford this generosity for a simple reason: They tend to perform better," Rosen said. "[One study] concludes that broadly based employee ownership increases overall productivity 4%, and that ESOPs have an even greater positive impact, stimulating companies to grow about 2.5% per year faster ... than would have been expected without an ESOP."
SN identified 19 supermarket companies with ESOPs, all of which are privately held. The largest is Publix Super Markets, Lakeland, Fla., which converted a long-standing, profit-sharing plan into an ESOP in 1975. Company officials declined to speak with SN about the chain's ESOP, although they acknowledged employees own 31.5% of the company's shares through the ESOP.
Executives at various ESOP companies told SN they are enthusiastic about the opportunities offered by the plan.
"There's nothing like the impact of owning 100% of the company," said Roger Collins, chairman, president and CEO of Harp's Food Stores, Little Rock, Ark. He noted that turnover has fallen more than 25% since 2001, when the ESOP assumed full ownership of the company.
"The really strong thing that motivates associates [in an ESOP] is their understanding that the company will be what they make it," Collins added. "This is not some grandfather giving something to them. It's about each person making his own way. The real dream is to build a company where everyone -- from cashiers and clerks on up -- thinks of this as their own company, as if their name were on the sign outside the store."
"The ESOP has been very good for employees because it's fair, with each person getting a return based on whatever he's earned over the years," said Jimmy Gipson, president and CEO of Houchens Industries, Bowling Green, Ky.
ESOPs are also a good recruitment tool, Gipson added. "Having an ESOP makes it easier to recruit qualified management-level people with a better retirement offering than most of the grocery industry," he told SN.
Key to Survival
For Carter's Food Stores, Charlotte, Mich., the ESOP has been the key to its survival against Wal-Mart Stores supercenters and Meijer, Tom Robinson, co-president, told SN. "I doubt we would have survived without being employee-owned," he noted. "But with the ESOP, we have enough skin in the game to protect the company, and our people are going way above and beyond to help us survive this onslaught of supercenters.
"It's doubtful we would see our associates busting their butts for somebody else the way they're doing as employee-owners. What they're doing, they're doing for themselves and the people working alongside them. That's a tremendous asset that's enabled us to keep ourselves afloat."
The ESOP was an issue in a labor dispute last year between Tidyman's, Greenacres, Wash., and the United Food and Commercial Workers union, Mike Davis, Tidyman's president and CEO, told SN. He said employees at a store in Kalispell, Mont., opted to decertify the union they had voted in a few months earlier "because they decided they preferred to be part of an ESOP, rather than rely on the union's pension plan, which is a good example of how an ESOP is seen as a value by employees and something they don't want to lose."
Edward Schmitt, treasurer and chief financial officer of Riesbeck Food Markets, St. Clairsville, Ohio, said his company's ESOP "definitely creates an esprit de corps that results in a very positive atmosphere to work in, and results in a greater emphasis on treating everyone with dignity and respect."
At Niemann Foods, Quincy, Ill., the ESOP has made associates more aware of the role they play in making the company better, Chris Niemann, CFO, told SN. "From talking to associates, I feel the ESOP has raised their level of awareness, and allowed them to take real pride in what they do and how they respond to customers," he said.
Ross Nixon, president and chief operating officer of Dahl's Food Stores, Des Moines, Iowa, expressed another positive opinion. "For employees, being owners of the company they work for means that as the company grows and does well, so do they," he said.
With employees as part-owners, Pat Raybould, president of B&R Foods, Lincoln, Neb., said, "They take more pride of ownership in doing their jobs, which helps them do a better job taking care of customers, controlling shrink, and improving profits in their departments."
On the downside, some companies have seen a different attitude among younger employees toward the plans.
At Riesbeck, older, more experienced employees "really appreciate having ownership in the company," Schmitt said. "It makes them more invested in the decision-making process, but it means less to younger people -- recent college graduates and those in their early- to mid-20s -- who don't focus very much on retirement plans. But the older employees are very conscious of their stake in the company and very proud of it."
Nixon said the ESOP has more meaning for Dahl's employees who have been with the company for 20 to 25 years, "whereas newer, younger employees want quicker access to their retirement funds, and the 401(k) [the company instituted in 1996] gives them more flexibility."
Asked if Dahl's might ultimately decide to get out of the ESOP altogether, Nixon said, "That's possible, but it would probably be at least 15 years until that might happen."
Davis said the ESOP at Tidyman's, which has been in place since 1979, has lost some of the appeal it once had in driving employee performance. "The experience is different after being 100% employee-owned for so long," he noted.
Companies with ESOPs that declined comment or didn't return SN calls were Brookshire Bros., Lufkin, Texas; G&R Felpausch Co., Hastings, Mich.; Harris Teeter, Matthews, N.C., a division of Ruddick Corp., Charlotte, N.C.; Redner's Markets, Reading, Pa.; Remke's Markets, Covington, Ky.; WinCo Foods, Boise, Idaho; and Woodman's Food Markets, Janesville, Wis.