DeMoulas / Market Basket Inc.

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DeMoulas / Market Basket Inc.

875 East Street
Tewksbury, Massachusetts 01876
U.S.A.
(978) 851-8000
Fax: (978) 640-8390

Private Company
Incorporated: 1954
Employees: 11,900
Sales: $1.76 billion (1996)
SICs: 5411 Grocery Stores

DeMoulas / Market Basket Inc. oversees the operation of two chains of supermarkets and superstores in the Northeast, with warehouse facilities and headquarters in the Massachusetts towns of Lawrence and Tewksbury, respectively. In 1997 there were 57 DeMoulas Super Market and Market Basket stores throughout Massachusetts and New Hampshire. The chain’s holdings also included shopping malls in which its stores were located, a hotel, and a golf course. The company is perhaps best known, however, for the family feud that sprang up in the 1980s between the sons of the founder over control of the supermarkets and resdistribution of its assets. Despite the ongoing internal turmoil, which has garnered significant media attention, the chain continued to be profitable; its 1996 revenues were approximately $1.76 billion.

Humble Beginnings

In 1917 Greek-American Athansios “Arthur” Demoulas and his wife Efrosine left their factory jobs and opened a “mom and pop” grocery store in Lowell, a working-class city in northeastern Massachusetts. Their specialty was fresh lamb, processed at a slaughterhouse behind their home. The DeMoulas Market (featuring the upper-case “M” not present in the family name) managed to survive through the Great Depression, despite having allowed customers to buy on credit during the rough times. This community generosity almost cost the couple their store; in 1938 their bank threatened to foreclose on the family home if a $100 payment was not made. At this point son Telemachus (later known as “Mike”) left school to work at the store. The family raised the $100 payment, and their business stayed afloat. After World War II, the oldest son in the family, George, returned from serving in the Army and also joined the store.

Arthur and Efrosine Demoulas continued to operate the same store for over 40 years, until it was finally replaced with a new building in 1950, which was then bought by their sons, Mike and George, in 1954. The brothers expanded the store in 1956 and the business began to blossom; between 1950 and 1956 annual sales rose from $2,000 to $900,000. Members of the local Greek community were brought into key company positions.

Brothers Divide the Business in the 1960s

Mike and George Demoulas and their families were extremely close. Both brothers married local Greek women and had four children; both also named a son Arthur after their father. In 1964, the two brothers and their wives met at the office to sign the brothers’ wills, in which each was named executor of the other’s estate. At that meeting, Mike and George reportedly made a verbal agreement to the effect that whichever of the brothers lived longer would care for the other’s family, and that the business would be divided evenly between the two sides of the family. This agreement would later become the basis for a decade of lawsuits.

By the end of the 1960s, the single store had been expanded into a 15-store chain. After George Demoulas died unexpectedly of a heart attack while vacationing in Greece in 1971, his widow Evanthea and their children acquired half of the shares of the business. Mike Demoulas continued to operate it, with Evanthea and George’s son Evan sitting on the board of directors. Various members of the family were given bonuses and even homes, paid for from the company’s rapidly growing profits.

Over the next two decades, Mike Demoulas oversaw the operation of the DeMoulas Super Market stores, and also opened a new chain of Market Basket stores. The new chain was created, according to Mike Demoulas, in order to circumvent a Massachusetts law limiting the number of liquor licenses that could be held by one supermarket chain. During this time, Evanthea and her children routinely let Mike Demoulas handle all of their paperwork, trusting him as patriarch of the family.

A Family Feud Begins in the 1980s

The first sign of real trouble brewing came in 1980, when Mike Demoulas had Evanthea removed from the board of directors. According to a statement filed in one of the later lawsuits, Mike Demoulas had apparently discovered that his sister-in-law was carrying on an affair with a married man and thus found her unsuitable for sitting on the board of the family business.

In 1990, Evanthea and her children received a tax notice concerning their sale of stock in the company, an event of which they claimed in later lawsuits to be totally unaware. An investigation disclosed that Evanthea and her children now owned not half, but only eight percent of the entire group of stores. As also was revealed in later lawsuits, Mike Demoulas had begun to shift company assets into his own name, beginning six weeks after George Demoulas’ death. Many of the assets had been transferred from the jointly-owned DeMoulas chain to the Market Basket chain, which turned out to be controlled by Mike Demoulas and his side of the family. George Demoulas’ family now alleged that they had been unknowingly signing away their share of the company for almost 20 years. This discovery paved the way for a series of lawsuits that spanned the next decade and threatened to extend into the next century.

During the 1990s, the Demoulas family feud would become the most expensive and most drawn-out lawsuit in Massachusetts history, with no sign of ending as the decade closed. Nine of Boston’s most prestigious law firms became involved in the various proceedings, with one of them having earned $13 million in fees by the end of 1996. At one of the trials, a Boston Globe reporter observed a total of 19 lawyers seated with Mike Demoulas. Such legal overkill led one observer of the trials, quoted anonymously in the Boston Globe’s in-depth profile, “Demoulas v. Demoulas,” to refer to the case as “the legal Full Employment Act.” The trials also involved events of tabloid proportions: a stripper being paid by one side to obtain wiretapping evidence from her ex-boyfriend; lawyers being investigated by the FBI; jurors soliciting bribes; and fistfights in the courtroom. There were even elaborate masquerades in which the judge’s law clerk was invited to “job interviews” in other cities, which were allegedly held by Mike Demoulas’ investigators in hopes of obtaining evidence of the judge’s bias against Mike Demoulas.

The first of six lawsuits, heard in court from 1990 through 1997, was filed by George Demoulas’ heirs in 1990. These lawsuits overlapped with each other in time, but involved distinct issues: a trial challenging Mike Demoulas’ transfer of stock owned by George Demoulas’ heirs into his own name, plus an appeal by Mike Demoulas after he lost the case; a contempt trial against Mike Demoulas, for transferring $68 million more assets of the firm into his own family’s name after a court had ordered them frozen; a case in which Mike Demoulas was accused of shifting company assets into the Market Basket chain which he owned; another suit by George Demoulas’ heirs, claiming that Mike Demoulas had improperly handled the company’s pension plan fund; and two trials in which Mike Demoulas accused George Demoulas’ heirs of wiretapping company headquarters.

In the cases brought by George Demoulas’ heirs, the issues were fairly uncomplicated. They argued that they had not been aware that they were signing away their share of the business. When George Demoulas died, the children were very young; in later years, after they became adults, the children, along with their mother, still relied totally on Mike and developed little business sense of their own. In these cases, some handwriting experts suggested that their signatures on some documents had been forged, while appraisers of the stock testified that the amount paid by Mike Demoulas for the stock, even if George’s heirs had been aware of what they were signing, gave them only a tiny fraction of the stock’s value. The 1964 oral agreement between the two brothers to split the business evenly was repeatedly relied upon as a binding agreement that both brothers upheld till the day that George Demoulas died.

In the most important of the cases (deciding whether Mike Demoulas had illegally diverted stock belonging to his brother’s heirs), Massachusetts judge Nancy Lopez ruled in 1994 that Mike Demoulas had to return stock valued at perhaps half a billion dollars to his brother’s family. She also ordered 51 percent of the company to be placed under control of George’s branch of the family. The state’s highest court upheld these orders after Mike Demoulas appealed them. The stock diversion cases were also notable for a bizarre situation in which a juror phoned a Demoulas family member and offered to change his vote in the case if he was paid $220,000. Following a meeting with an undercover FBI agent to discuss payment of the bribe, the juror was arrested. In the other case against Mike Demoulas, claiming that he had improperly invested the company’s pension fund, he likewise found himself losing the decision.

In the midst of these cases, Mike Demoulas filed two separate suits alleging that George’s family had planted electronic bugs in the corporate offices, in an attempt to find out how he planned to challenge their lawsuits. At one point, Mike Demoulas’ lawyers allegedly paid a former stripper and acknowledged drug addict $500,000 (for “protection and housing”), so that she would meet with her former boyfriend and tape his admission that he had bugged the headquarters. However, in both trials the jury remained unconvinced that any illegal wiretapping had occurred.

The legal scramble did not end with these cases. Throughout the proceedings, Mike Demoulas suspected that the judge, Nancy Lopez, was biased against him, claiming that she had even discussed the case in a restaurant with an attorney for his brother’s heirs. His challenges went the whole way to the state’s highest court, but were repeatedly rejected.

In 1997, according to some critics, Mike Demoulas’ legal team perhaps crossed the line in zealously representing their client. The law clerk for Judge Lopez, Paul Walsh, made public another bizarre development in the case. He had been invited for job interviews in New York and Canada, supposedly with representatives of an international insurance firm. During the interviews he was repeatedly asked about his involvement in writing the opinions in the Demoulas case, as well as whether he thought the judge had made up her mind before the trial began.

Walsh, after returning home, called the U.S. Justice Department and claimed that two of the interviewers actually had been renowned Boston attorneys who were representing Mike Demoulas. The attorneys—Gary Crossen, a former assistant U.S. attorney, and Richard K. Donahue, once an advisor to John F. Kennedy—said that private investigators for Mike Demoulas had actually created the scheme, but justified the scheme because they felt that they had a duty to investigate possible judicial corruption. Almost immediately an FBI investigation of the attorneys was launched, and Crossen resigned as chair of the state panel responsible for nominating judges.

Despite having endured eight years of litigation already, in 1998 the two branches of the family seemed prepared to continue their legal and personal animosity indefinitely. From a tightly knit family in which business and personal matters overlapped broadly, relationships deteriorated to the point that the courts were forced to post Massachusetts State Police officers in the courtrooms during hearings. Mike Demoulas’ branch portrayed George’s children as worthless spendthrifts. George’s branch in return was so angry that, according to the Boston Globe, when George’s son Evan was killed in a car accident in 1993, Mike’s family was informed by the attorneys for George’s heirs—and told not to attend the funeral. Another of Mike and George’s brothers, John, came to the wake and was refused entrance.

Business Outlook in the Late 1990s

Despite these legal nightmares, DeMoulas and Market Basket stores continued to be successful during the late 1990s. 1996 sales were estimated at $1.76 billion, representing an increase of almost seven percent over 1995. The stores were repeatedly listed by Forbes magazine among the top 500 U.S. private companies, ranking 103rd in 1995, 90th in 1996, and 91st in 1997. The Demoulas family itself was included by Forbes in its “400 Richest People in America” list for 1997. The company also developed a reputation for community involvement in the economically struggling area where it was founded, continuing to operate in towns that other chains had abandoned and contributing heavily to local charities.

Still, the company had two reasons for concern about its future. First, its management continued to be constantly embroiled in legal battles. In addition to appeals of decisions dividing the assets, Mike Demoulas also faced new allegations of fraud by real estate partners in 1997. Moreover, the next Demoulas generation, Mike’s son Arthur T. Demoulas and George’s son Arthur S. Demoulas, had become engaged in its own legal argument involving wiretapping at the company headquarters, in addition to the ongoing family battle over assets. These ongoing battles left analysts wondering how effective management could be in the face of such disparity.

Equally important, competition among grocery stores in the Massachusetts—New Hampshire area intensified. Chief competitors (among them Star Markets Company, Inc.; Big Y Foods, Inc.; Shaw’s Supermarkets, Inc.; and Stop and Shop Companies, Inc.) brought in larger profits by developing “superstores,” stores devoted to natural and organic products, wholesale operations, gourmet food departments, and pet departments. Other growing competitors included warehouse stores and wholesale clubs. The DeMoulas chain did begin to address this trend by enhancing its offerings. For instance, the company entered into an exclusive retail relationship with the Alden Merrell Corporation, to sell that company’s highly popular gourmet cheesecakes in Market Basket stores. However, as it approached a new century DeMoulas / Market Basket Inc. would clearly have to take time out from the courtroom to keep abreast of food retailing trends in order to stay competitive.