Highly successful retailers invest in store employees

Saturday March 31 2012

By ZEYNEP TON Special Correspondent

Almost one-fifth of American workers have bad jobs. They endure low wages, poor benefits, schedules that change with little notice and few opportunities for advancement.

The conventional wisdom is that many companies have no choice but to offer bad jobs — especially retailers whose business models entail competing on low prices.

If retailers invest more in employees, customers will have to pay more, the assumption goes.

My 10-year study of retail operations has found that the presumed trade-off between investment in employees and low prices can be broken.

Highly successful retail chains not only invest heavily in store employees but also have the lowest prices in their industries, solid financial performance and better customer service than their competitors.

The US needs better jobs, not just more jobs. Service businesses that currently don’t invest adequately in their workers could be part of the solution.

Labour is often a retailer’s largest controllable expense and can account for more than 10 percent of revenues — a considerable level in an industry with low profit margins.

In addition, many retailers see labour as a cost driver rather than a sales driver and therefore focus on minimising its costs.

But my research suggests that understaffing retail stores amounts to a missed opportunity: In my analysis of data from 1999 through 2002 from more than 250 stores of Borders, a major bookstore chain at the time, I found that a one-standard-deviation increase in labour levels at a store increased profit margins by 10 per cent over the course of a year.

Of course the relationship between staffing levels and profitability is not linear: After a certain point, increasing the former will reduce the latter.

But instead of responding to short-term pressures by automatically cutting labour, stores should strive to find the staffing level that maximises profits on a sustained basis. In many cases, that will mean adding workers.

Retailers don’t just underinvest in the quantity of labour. They treat the quality of labour the same way — paying low wages, offering insufficient benefits and providing inadequate training.

The inevitable consequences are understaffed stores with high turnover of low-skilled employees who are often part-timers and have little or no commitment to their work.

Retailing’s vicious and virtuous cycles

Research in operations management links employee turnover and poor training to poor performance, especially in manufacturing settings.

The same is true in retailing. That is not surprising. Operational execution requires people. So stores with a gap in people will have a gap in operational execution.

Because labour budgets at many retail chains are set as a percentage of sales, they take a hit when sales drop.

When the labour budget is low, store managers cannot increase staffing levels, even when they know it will make the store more profitable.

And retail chain managers are hesitant to invest in employee training or other benefits that increase retention — and boost sales. The vicious cycle continues.

When retailers view labour not as a cost to be minimised but as a driver of sales and profits, they create a virtuous cycle.

Investment in employees allows for excellent operational execution, which boosts sales and profits, which allows for a larger labour budget, which results in even more investment in store employees.

Breaking the trade-off

The following practices allow retailers to break the presumed trade-off between investing in employees and maintaining low prices:
Offer less: In an effort to offer more to customers, retailers tend to make choices that increase the complexity of their operations.

One such choice is high product variety. A typical supermarket carries myriad types and sizes of toothpaste, for example.

High product variety adds costs up and down the supply chain. It also makes the operating environment more complex for store employees— and it doesn’t necessarily increase sales.

Retailers that operate in a virtuous cycle, by contrast, make choices that simplify their operations.

They consistently offer “everyday low prices” rather than a kaleidoscope of promotions, and they carry fewer products.

With fewer products, employees can be familiar with everything the store sells and make knowledgeable recommendations to customers.

Cross-train employees: Unpredictable schedules, short shifts and dead-end jobs take a toll on employees’ morale.

When morale is low, absenteeism, tardiness and turnover rise, increasing the variability of the labour supply, which makes matching labour with customer traffic more difficult. Retailers with high turnover cannot invest in employee training.

Instead of varying the number of employees to match traffic as much as other retailers do, QuikTrip and Mercadona vary what employees do.

They achieve this by training employees to perform a variety of tasks.

At Mercadona, every new employee receives four weeks of training, during which they learn how to manage a particular section, perform inventory checks, order merchandise, replenish products from backrooms and check for product defects or other problems.

When customer traffic is high, employees at QuikTrip and Mercadona focus on customer-related tasks; when traffic is low, they focus on other tasks.

As a result of this cross-training, employees have more-predictable schedules and customers get faster service from more-knowledgeable employees.

Let employees make small decisions: In most retail stores, merchandise planning is centralised and only managers can make decisions about product returns and customer complaints.

But at companies that operate in a virtuous cycle, employees make decisions.

Every decision is small, corporate IT is designed to assist and the decisions are monitored.

Empowering employees in these ways makes companies more responsive to local needs and preferences, it increases customer as well as employee satisfaction.

Today many retail managers believe that there is a trade-off between investing in employees and offering the lowest prices.

Retailers that persist in believing in it forgo the opportunity to improve their own performance and contribute the kind of jobs the US economy urgently needs.

Zeynep Ton is a visiting assistant professor in the operations management group at the Massachusetts Institute of Technology’s Sloan School of Management.