retail

The U.S. Needs a ‘Good Jobs’ Revolution in Retail

September 6, 2015 by Zeynep Ton 1 Comment

There’s widespread agreement that stagnant wages are a big problem in the United States. Which industry could really help do something about it? Retail.

According to the U.S. Bureau of Labor Statistics, the two largest occupations in the United States are retail salesperson and cashier. In 2014, their median hourly wages were $10.30 and $9.20, respectively. Both are below the poverty threshold for a family of four, even for someone working full-time.

But if you are one of those workers, it’s hard to even know for sure whether you do work full-time. Retail employees typically receive their work schedules one or two weeks in advance and even those schedules can change at the last minute. As a result, workers do not know when they will work and how much they will make from one week to next. Such unpredictable schedules make it harder for them to hold on to a second job or take care of their families.

A common misconception is that this is okay because retail jobs are mainly for high school or college kids looking for supplemental income. Not so. In 2014, the median age of a retail salesperson was 35. The median age of a cashier was 27. These aren’t kids looking for extra cash; these are people who depend on their jobs to support themselves and their families.

Why then do I say that retail is an industry that can help improve stagnant wages? Because improving retail jobs — which, of course, includes increasing wages — not only would help the workers; it can also help retailers and their customers. That is, it doesn’t at all have to be a concession. It can and should be a win-win-win.

If retailers want to thrive by offering better jobs, they will need to change their operations strategy from one that uses people as interchangeable parts to one that is human-centered. This is the equivalent of changing from Henry Ford’s assembly line, which depended very little on empowered, motivated, well-trained employees, to the Toyota Production System, which only works when empowered, well-trained employees constantly identify and solve problems and improve performance.

As we all know by now, Toyota’s human-centered operations strategy allowed the company to produce higher-quality cars at lower costs. In my research, I found that the same approach, which I call the good jobs strategy, allows retailers to provide better customer service at lower prices. Other researchers have made similar findings in industries ranging from steel to health care.

Transforming any company — retail or otherwise — into a good jobs strategy company requires a lot of changes to operations and will likely take time and great managerial competence. The good jobs strategy involves investing in people and making a set of operational choices. It concerns how many products and services a company will offer, the balance of job standardization and empowerment, the allocation of work among employees, staffing levels, and how employees will engage in continuous improvement. It’s a system that needs to be implemented together. That’s hard to do, but hard doesn’t mean impossible.

For retailers, now is the time to act. The competitive environment is increasing the benefits of following a good jobs strategy:

Bricks-and-mortar retailers need to create a better in-store experience. With e-commerce expected to grow more quickly than brick-and-mortar retailing, bricks-and-mortar retailers will need to give their customers more compelling reasons to shop at their stores. Low prices won’t be enough anymore; Amazon or someone else on the internet can match and probably beat your price. Those compelling reasons to come to a real store include in-stock merchandise and friendly, knowledgeable employees who are empowered and have the time to help customers. Of course, you also have to keep your store clean and appealing. But what I found in my research is that a retailer with a human-centered operations strategy can do it all.

Omni-channel retail is increasing operational demands at the store level. When customers reserve products online to pick up a few hours later, they use that store’s inventory data. Those data had better be accurate or a lot of customers will be plenty annoyed. That kind of accuracy is hard to maintain, but it’s not impossible. What it requires is not better software so much as better store operations. On top of all that, some companies are now shipping products directly from stores to customers. So store employees now also have to take care of internet orders. Good, human-centered, in-store operations will make that a great service; not-so-good operations will make it a nightmare.

Cities are raising the minimum wage, and Congress may force companies to give workers better schedules. Some cities have raised their minimum wage to $15. Consequently, unless companies find a way to increase the contribution of their employees, they will have to raise their prices, degrade their service, or just accept lower profits. Meanwhile, the recently introduced Schedules That Work Act, if approved by Congress, will force companies to provide their employees with more stable schedules. Again, that’s something that companies with a good jobs strategy already do.

Investors are on the lookout for more sustainable companies. There is growing evidence that companies with business models based on offering good jobs do better than their competitors. Some investment firms, such as Parnassus, have funds that focus on companies with great workplaces. Apart from such specialists, the amount of U.S.-domicile assets under management for investors who care about companies’ long-term competitive returns and societal impact is estimated to be $6.57 trillion.

As you can see, the times are calling for retailers to adopt a good jobs strategy. Just as automobile manufacturing was a great setting for the Toyota Product System revolution, retail is a great setting for the good jobs revolution.

This post first appeared on Harvard Business Review Blog Network.

Scoring Retailers on The Good Jobs Strategy

September 6, 2015 by Zeynep Ton 1 Comment

Executives have a choice in how they run their operations. They can run them in a way that uses people as interchangeable parts. Or they can run them in a way that leverages a skilled, capable, motivated workforce. Both ways can be profitable. But the employee-centered way is a better way — even in low-cost retail.

In my research, I’ve found that retailers using an employee-centered operations strategy, which I call the good jobs strategy, have two strategic advantages. First, they differentiate themselves by offering low prices and good service at the same time. Second, they are better at adapting to changes in customer demand, technology, and regulation. The good jobs strategy is a strategy in which everyone — customers, employees, and investors — wins.

Since my book on this topic came out in 2014, one of the questions I’ve been asked the most is: “How can investors or customers identify which companies in a particular industry are following a good jobs strategy?” To answer this question, my MIT students and I set out to create a good jobs score. We started with food retail and plan to expand it to other settings once we get feedback on our methodology. (So please tell us what you think!) Focusing on the 14 U.S. food retailers that publicly file with the U.S. Securities and Exchange Commission (SEC), we scored them in a range of 1 to 10.

Costco had the top score of 9.2, followed by Whole Foods and Publix, at 7.5 and 6.9, respectively. All the other food retailers we scored came in under 6, so there is a lot of room for improvement.

The score is a combination of three components: customer satisfaction, employee satisfaction, and productivity. Companies that follow a good jobs strategy design and manage their operations in a way that allows them to achieve high employee satisfaction, high customer satisfaction, and high productivity simultaneously. A company that does not follow a good jobs strategy will often sacrifice employee satisfaction or customer satisfaction for lower costs, which is commonly thought to be the only way to keep the “low” in low-cost retail. For this reason, we calculate the score as the geometric mean of these components rather than the arithmetic mean, so that a low score on any one of the components brings down the overall score more. In effect, we penalize the sort of trade-offs that the good jobs strategy renders obsolete.

For the good jobs score, we decided to focus on these three outcomes, as opposed to the particular operational practices that drive them. The reason: Collecting data on operational practices such as staffing, level of standardization and empowerment, and extent of cross-training was not feasible without having access to a large number of companies. In our early conversations with some companies, we found that they would not provide such data if we used those data to rank them publicly.

Even collecting data on employee satisfaction, customer satisfaction, and productivity was challenging. Although employee satisfaction and customer satisfaction are both important drivers of success, most companies do not disclose such data to their investors. We therefore had to rely on secondary data sources, which are not standardized and may have biases.

To create a customer-satisfaction score, we collected data from the American Customer Satisfaction Index (ACSI), Consumer Reports, and Yelp. Although each of these sources takes a different approach to measuring satisfaction, the results were pretty consistent. For the 14 companies we scored, the correlation between Yelp and Consumer Reports is 0.79, between Yelp and ACSI is 0.93, and between Consumer Reports and ACSI is 0.76. (As a reminder, a perfect correlation would be 1.0.)

To create an employee-satisfaction score, we collected data from Glassdoor.com and Indeed.com. Neither site can affirm that the people who provide data about companies actually work there. In addition, respondents to both sites are self-selecting; thus the data cannot be considered to have been gathered from a random sample of employees. But again, we found that these data sources were pretty consistent. For the 14 companies we scored, the correlation between Glassdoor and Indeed is 0.96.

To create a productivity score, we collected data from 10-K filings with the SEC. We looked at three measures of productivity: sales per square foot, sales per employee, and inventory turnover. Even those data are imperfect at best. Let me give you an example. Inventory turnover is calculated as cost of goods sold (COGS) divided by average inventory level. But even within the same SIC code, there is inconsistency in how companies report COGS. Some include depreciation of inventory; some don’t. Some include promotional expenses; some don’t. Some include compensation and benefits for some of their employees; some don’t. There are also differences in the merchandise mix of different companies. Of course, all the food retailers sell food, but some, like Walmart and Costco, also sell products such as electronics and furniture that are expected to have lower turnover than grocery items.

Clearly, investors concerned with how a company earns its profits — and whether it’s doing the best it could do for customers, employees, and the investors themselves — need better data to assess how well a company manages its operations. I hope that the good jobs score will encourage more companies to report these data.

On goodjobscore.com, we report a lot of other information about each of the 14 companies. Please take a look and let me know how we can improve the score and the website.

This post first appeared on Harvard Business Review Blog Network.

A Minimum-Wage Hike Could Help Employers, Too

February 2, 2014 by Zeynep Ton 2 Comments

This post originally appeared on Harvard Business Review blog network.

President Obama’s State of the Union address tonight is expected to include a push to increase the minimum wage. A lot of companies that rely on low-wage workers are worried about that. It’s obvious to them that paying employees more will result in some combination of three outcomes: (a) profits will suffer as the wage increases eat into margins, (b) prices will have to be raised to maintain profitability, and (c) operational quality will suffer as a result of cutting headcount.

But there is more to the equation than wages, prices, and quality. There’s what those wage-earners can do to earn their wages—their productivity, motivation, customer service, and contributions to continuous improvement. The smart way to deal with an increase in the minimum wage is to design work in a way that improves employees’ productivity and increases their contribution to profits. All this is possible even in low-wage settings. In fact, some companies are already doing it.

Early in my career, I did research in retail operations that showed that bad jobs with poverty-level wages, unpredictable schedules, and few opportunities for advancement were not just rotten for the employees but were hurting the companies and their customers. Retail stores were full of problems that good, motivated employees could fix, such as misplaced products that no one could find and obsolete products lingering on the shelves, which led to lost sales and profits and frustrated a lot of customers.

Later on, I began to study some retailers that thrived by managing to offer good jobs and low prices. And I mean thrived—these companies were growing and coming out on top in very competitive industries, while spending much more than their competitors did on paying and training their employees. I examined four companies in particular: Mercadona, Spain’s largest supermarket chain; QuikTrip, a large convenience store chain with gas stations; and the well-known retailers Trader Joe’s and Costco.

These four companies don’t seem to have much in common. Different products, different customers, different ownership structures, different locations, different store sizes, and different employee incentives. Whatever they are doing right, it doesn’t depend on any of those factors. But here’s what is common among them. They all follow what I call the good jobs strategy, which is a combination of smart operational choices and investment in people.

When I examined these companies, I saw that they made four choices in how they designed their work. They: (1) offer less, (2) combine standardization with empowerment, (3) cross-train, and (4) operate with slack. These choices transform their heavy investment in employees into great performance by reducing costs, improving employee productivity, and leveraging a fully capable and committed workforce. I won’t go through all four choices here—that’s enough for a book. (Hint, hint.) Let’s just go through “operate with slack” to get a feel for what the choices are like and how they support the good jobs strategy.

Workload in a service setting is always uncertain. You never know how many customers will show up when and what they will want. So it’s easy to have either too many or too few people on the job. In my earlier research, I saw retailers consistently erring on the side of too few. This was no accident; they were more worried about keeping labor cost low than about the consequences of having too few employees. Companies that follow the good jobs strategy, on the other hand, consistently err on the side of too many—they operate with slack. That obviously improves customer service and sales, but it also helps companies reduce costs—yes, reduce—by keeping mistakes to a minimum and by giving employees time to contribute to continuous improvement.

But here’s the key. Operating with slack works great for these companies because it amplifies the benefits of their other three operational choices and their heavy investment in people. For example, because these retailers offer less to their customers and standardize many processes, they have a better sense of what the workload will be at their stores. So while they deliberately err on the high side, they don’t tend to be way off. And since they cross-train, their employees can always be doing something useful (not just make-work) even when there are no customers.

Sometimes people think I’m claiming that if a company pays higher wages, it will make more money. That’s not my message at all. The good jobs strategy is much more complicated than that. Yes, it includes paying employees more, but it also includes those operational choices, which are very down-to-earth yet quite unusual in many industries.

The good jobs strategy is not easy. You have to get many things right all at the same time. You have to embark on this path with a long-term perspective—you can’t just plug the components in and start raking in profits. But it is a strategy for producing excellence. That has been proven by the companies I studied, among others. It’s a sustainable strategy where everyone—customers, employees, investors—wins.

This is why US employers shouldn’t fear the prospect of a minimum wage hike, and in fact should view it as something of a gift. If firms are forced by law to pay their employees higher wages, they will rethink their operations in ways that make sense for all kinds of reasons. A good jobs strategy will let them reward their employees without hurting their customers or their bottom line.

Crummy Retail Jobs Are a Corporate Choice, Not a Law of Nature

October 30, 2012 by Zeynep Ton 1 Comment

Right on the front page of Sunday’s New York Times there was a story about part-time work in retail. Steven Greenhouse, a Times reporter, and author of The Big Squeeze, highlighted the tough working conditions for part-time employees, especially their struggles with too few hours and ever-changing schedules.

As someone who has been studying retail for a while, I was not surprised by what I read. But looking through the readers’ comments, I saw that many were surprised and upset. Some likened the work conditions Greenhouse described to slavery and some blamed capitalism and greed for producing these bad jobs. But other readers pointed out that bad jobs are the price society pays for low prices. If companies were to pay more money to their employees or provide better working conditions, then the prices we all pay would have to go up.

For example, a reader from Manassas, VA wrote: ”If ‘we the people’ demand that companies such as Jamba Juice and Fresh and Easy (and Walmart) hire more full-time and near-full-time employees, we should not be surprised when the prices charged to us go up to cover additional employee costs. We have demanded lower and lower prices for years now. As a result, the working conditions at companies have been squeezed, the benefits packages have been nearly slimmed out of existence, and the hours allotted to each worker have been cut.”

The problem with this very common view is that it assumes that an employee working at a low-cost retailer can’t be any more productive than he or she currently is. It’s mindless work so it doesn’t matter who does it. If that were true, then it really wouldn’t make any sense to pay retail workers any more than the least you can get away with.

One reader from Austin, TX was angry enough to call for a boycott, but even he bought into the bad-jobs-for-low-prices assumption: “We have a civic responsibility to boycott establishments that abuse their workers in the name of efficiency, even though this will mean higher prices.”

But this assumption is plain wrong. Even low-cost retail work is not trivial and how you perform that work makes a big difference for the company’s bottom line. This is not just my opinion; there are successful low-cost retailers that prove it. These retailers invest in their employees and complement that investment with a particular set of operational decisions that I have identified. That way, their employees are more productive. Far from being a mere cost—a drag on profits—these well-paid employees, with all their expensive benefits and training, are seen as an asset—a generator of profits. These companies demonstrate that there is no need to choose between low prices and good jobs. It is possible (though nobody said it’s easy) to provide the lowest prices to customers and much better jobs for employees and great returns for shareholders, all at the same time.

Let me give an example that is related to part-time work. As Greenhouse’s article mentions, some retailers operate with 85% part-time workers. Their excuse is that they need that much “flexibility.” Sure, some flexibility is needed in retail. The nature of most service industries is that customer traffic varies greatly. Sometimes the store is crowded, sometimes not. But flexibility for 85% of the employees? That’s just ridiculous!

How do I know it’s ridiculous? Mercadona, Spain’s largest supermarket chain, offers the lowest prices in the country and it does so with over 85% of its employees full-time and even salaried, with very predictable schedules that are provided one month in advance. Yes, these are the same employees—cashiers, people bringing bananas out from the stockroom—that other companies need to be so “flexible” with.

Don’t Mercadona customers visit the stores at different times? Don’t the stores need flexibility? You bet they do. Go into a Mercadona store in the afternoon and it’s almost empty. It’s the siesta time, I guess. Go back in the evening and it’s full of people. But pretty much the same number of workers are there throughout the day.

How does Mercadona get away with this? It invested in its employees. Mercadona spends about €5,000 per new employee in a four-week training program which includes cross-training. So when traffic is high, employees help customers and when traffic is low, those same employees shelve goods and order merchandise. There’s always something productive to do and pretty much any employee has been trained to do it well. That’s Mercadona’s idea of flexibility.

And by the way, Mercadona doesn’t do this for charity. It’s highly profitable. At a time when Spain is struggling (to put it mildly), Mercadona is thriving!

So it’s not the need to offer low prices that produces the kind of job Steven Greenhouse describes in his article. It’s the choice made by companies to offer bad jobs. We should all be outraged to see so many companies making the choiceto rely on bad jobs. It’s the biggest waste in so many ways. It’s a waste of human talent and human dignity. It’s a waste of corporate profits and shareholder value. And it’s totally unnecessary. We all need to do our part to stop all this suffering. How? See my previous post.

WalMart’s Greeters Swept Away in the Vicious Cycle of Retailing

February 11, 2012 by Zeynep Ton 2 Comments

In The Wal-Mart Way, former vice chairman and COO Don Soderquist makes a point of how important little things such as having greeters can be for customer service. “The Wal-Mart organizational culture begins with a positive can-do attitude,” he writes, “which welcomes our customers at the front door in the person of a greeter.” Indeed, it’s often the case that the greeter is the only WalMart employee customers actually talk to.

So it seemed ominous to me when WalMart recently decided to reassign the greeters to other tasks during the day shift and eliminate them altogether from the night shift. A lot of other industry observers also disapproved, predicting that WalMart was sacrificing the personalization of the customer experience and might also suffer from greater shrinkage. Some argued that greeters, who are often older employees, may not work out that well in other tasks.

I immediately suspected that the elimination of greeters is part of something bigger. To me, it is a sign that WalMart, like many other retailers, is operating in what I call a vicious cycle (see my recent Harvard Business Review article that describes the vicious cycle of retailing in detail) and that things are therefore getting worse for the company.

Let me explain the vicious cycle using Borders as an example. As my older son says, Borders is unfortunately not with us anymore. The company went bankrupt last year. Obviously, many things contributed to the bankruptcy. Bookselling is a tough industry with many trends operating against brick-and-mortar retailers, including the emergence of Amazon during late 1990s, the popularity of digital music, and then the rise of electronic books. But still, Borders didn’t have to be the first book retailer to disappear.

In fact, Borders used to be a great company, especially during the 1990s. I say that without hesitation because I did a lot of research there. But then things started changing and the company lost its way. I could write a long article on all the things the company could have done differently to survive, but keeping to the subject—WalMart’s greeters—let me focus on a few mistakes Borders did in managing store employees.

Borders stores used to be quite profitable and store employees were a part of that. Not surprisingly, Borders used to have better labor practices than a lot of other retailers—better selection of employees, more training, and so on. But when things started getting tough and Borders management was under pressure to cut costs, one of their first moves was to cut labor costs at the stores.

It started with increasing the percentage of part-timers and cutting down on employee hours. I analyzed four years of Borders data, from 1999 to 2002, and found that the stores were on average understaffed—there simply weren’t enough employees to get all the work done. In fact, my analysis showed that the company would have made higher profits if it had kept more employees working at the stores. Understaffing then led to operational problems. At some stores, boxes of new books just sat in the backroom for weeks because there weren’t enough employees to shelve them. Thousands of books that were supposed to be replenished from storage locations just sat in storage for a long time. Books that were supposed to be returned to publishers were not pulled from the shelves.

Operational problems like these reduced store sales and profits. When sales decreased, labor budgets shrank. Store managers with shrinking budgets certainly couldn’t increase staffing levels, so the vicious cycle continued…

This cycle is not specific to Borders; most retailers suffer from it. But then something else happened at Borders. When things got worse, Borders eliminated “community relations coordinators” from many of its stores. What did community relations coordinators do? The short description for this job title was: “Responsible for creating and maintaining strong ties in the market for the purpose of creating a community presence and to increase our customer base.” Community relations coordinators localized the stores and made them part of the community.

I think we would all agree that making stores part of a community is important for a lot of retailers that have to compete with online stores; it was extremely important for Borders and they had been pretty good at it.

I don’t know if greeters are as important to WalMart as community relations coordinators were to Borders. But if they are, then their elimination could mean that the vicious cycle is getting really bad at WalMart and—as is the way with vicious cycles—will only get worse.

Using Clutter to Improve Sales: The Wrong Choice

April 10, 2011 by Zeynep Ton 4 Comments

New York Times had a recent piece about how retailers like Dollar General, JC Penney, Old Navy and Wal-Mart are increasing clutter to improve sales. So to get their customers to buy more, these retailers are adding more inventory and more variety to their stores, according to the article. I think this is a really bad way to increase sales.

Yes, these companies will see a short-term increase in their same store sales. You give customers more choices, stuff the store with inventory, and they will buy more. And yes, Wall Street will probably love this. The increase in same store sales growth will make the analysts think that these retailers are actually doing something right. But of course, the analysts will miss that since this sales increase comes solely from more inventory or variety increase, it cannot be sustained. This is just a one-time increase in sales. You cannot keep on adding more and more inventory to the store.

More importantly, this is a bad long-term decision. It does not benefit employees because their operating environment has now been made more complicated. It will not benefit store operations because employees will be less productive and make more errors when their stores are cluttered. It surely does not benefit the environment because this will increase waste from obsolete inventory. And it probably doesn’t even benefit the customer. Store clutter leads to customer confusion. Some customers even responded on the New York Times article’s comment section saying they regretted buying stuff they didn’t need.

Here is an idea. How about offering fewer but better products and investing in employees so they are knowledgeable about these products and they can educate their customers about the value they are receiving? This is exactly what retailers like Trader Joe’s, Mercadona of Spain, and Costco are doing. And you want to know how they compare to their competitors in terms of sales? Not too bad! Trader Joe’s sales per square foot is more than double the supermarket average. Mercadona’s is more than 50% higher than that of their largest competitor, Carrefour. Costco’s is more than 30% higher than that of Sam’s Club.

Today, I also learned about another retailer that has the same strategy: Patagonia. I met the Director of Advanced Research and Development at Patagonia at a panel I was moderating at HBS Retail and Luxury Goods Conference. When someone asked a question about how Patagonia responded to the economic crisis, he mentioned that they did so by cutting their product variety in half. In half! It took them 18 months to do so, but their customers loved it, their employees loved it, and their performance showed it. Of course, one reason Patagonia was able to do this was because they had invested in their store employees so that their employees could intelligently talk to the customers about the products they carry.

The panelist also mentioned that Patagonia’s salespeople are taught to encourage customers to only buy things that they need—not waste resources on stuff they don’t need. Why would they do this? Because this is aligned with their mission: Build the best product, cause no unnecessary harm and use business to inspire and implement solutions to the environmental crisis. Kudos to Patagonia!

Product Variety and Mugs at Disneyland

March 2, 2011 by Zeynep Ton 2 Comments

There have been so many things to write about the last few weeks but so little time to do it. I moderated a panel on work-life balance a couple weeks ago at HBS and I hope to write about it during the next few weeks. But now, while it’s fresh on my mind, I want to write about high levels of product variety.

On February 23rd, the Wall Street Journal reported about proliferation of toothpaste SKUs. According to the article, in January 2011, there were 352 distinct types or sizes of toothpaste at retail stores. When one examines the functions, flavors, and sizes, there could actually be more than 2,000 combinations of toothpaste! The functions include whitening, plaque prevention, gingivitis prevention, cavity protection, tartar control, long-lasting fresh breath, and baking soda & peroxide. The flavors include brisk mint, frosty mint, cool mint, crisp mint, “cinnamint”, vanilla, watermelon, and bubble gum. Toothpaste comes in gel or paste and there are multiple sizes. So maybe 352 is not that bad after all.

But 352 is utterly confusing to consumers. How on earth are we supposed to know exactly what we need when there are so many choices? And the costs of this confusion are well documented in the marketing literature. But as an operations professor, what worries me the most is all the waste associated with high product variety. Clearly there are manufacturing costs associated with high product variety. But there are also inventory related costs. While it is easy to forecast consumption of toothpaste, it’s really hard to do so at the item level when there are hundreds of different types. The difficulty of forecasting translates into poor management of inventory. And there are costs at the store level (I wrote an academic paper on this topic). High product variety drives store employees crazy because it complicates their operating environment.

On a lighter note, I was at Disneyland with my family this weekend and I ran into a situation at a store that struck me. My kids are really into Lego so our trip included spending time at a Lego store. While my kids were amazed by the huge creations at the store, including a giraffe that took more than 250,00 pieces of legos to create, I kept staring at the section that displayed hundreds of different mugs differentiated by names. Here is a photo of a small section:

Yes, maybe some people are excited to walk out of the store with a mug that shows their name. But with the proliferation of names in a multicultural world, how many of the customers will actually be frustrated that their name is not in there? Speaking of my family, none of our four names were available. Maybe we are just a weird family, but I imagine there are many families that visit Disneyland that will encounter similar disappointment.

I have no idea how much a machine that does on-demand printing would cost, but the operations junkie in me kept thinking that there must be a better way to manage this situation.

Christmas shopping and understaffed stores

December 24, 2010 by Zeynep Ton Leave a Comment

“Not all retail messes are created equal” reported WSJ yesterday. The article describes the messy shelves and tables at a retail store and comments that this is probably the result of the retailer’s staffing cuts. Long lines at the cash register, messy or empty shelves, and expired products still lingering on the shelves are all problems that we have learned to live with as customers in this country. And as WSJ predicts, one reason why we have these problems is understaffed stores.

Let me start by saying that having just the right amount of staffing levels at all times is often very challenging in retailing especially during Christmas season. There is a lot of variability in the demand for labor (customer traffic, promotions, etc.) and there is a lot of variability in the supply of labor (employee availability, absenteeism, etc.). And having too many or too few employees are both expensive. But what I have found in my research is that when faced with this challenge of matching labor supply with variable workload, many retailers err on the side of having too few employees. So retailers are systematically understaffed. Here’s why this happens:

For most retailers, store payroll is the highest operating expense. So retailers watch this expense very carefully. There is constant pressure for store managers to reduce their payroll expense. Many retailers I’ve worked with put great emphasis on managing payroll expenses in their store manager evaluations. In addition, the cost of having too many employees is quantifiable and felt immediately while the cost of having too few employees is difficult to quantify and not immediately felt. Messy shelves, expired products on the shelves, or long lines might not affect profits immediately, but they do in the longer term. So if you were a store manager operating in this environment, what would you do?

What is interesting about understaffing is that retailers lose a lot of money because of it! In a recent article, using four years of data from stores of a large retailer I find that increasing staffing levels can substantially increase profit margins. I’ll write more about this article in a future post.

As the WSJ reports, understaffing is a problem now because we live in difficult times. But I have seen this problem for more than ten years. In fact, the data I use in my paper come from 1999-2002.

The low wage problem and retail

December 21, 2010 by Zeynep Ton Leave a Comment

Alan Blinder wrote a wonderful opinion piece in the Wall Street Journal the other day. Among other things, he mentions the discrepancy between productivity and wages. Since 1978, productivity in the nonfarm business has risen by 86% while real compensation per hour is up just 37%. Is that fair, Blinder asks?

Retail, which employs about 15 million people, is an industry for which the hourly wage is way below the national average. According to BLS, in 2006 the average retail cashier made $8.62 per hour, less than half of the average of all industries, which was $20.27. So if you are a full-time cashier and lucky enough to get 40 hours a week (more on this in a later post), every week, you make about $17,900 per year. In many states this would be below poverty threshold for a family of four.

When you talk to retail executives, they often mention that they can’t pay employees more if they want to keep their low prices. So in their mind, there is a clear trade-off between how much employees earn and how much consumers pay for goods. But my research shows that this is not the case. I have recently researched a Spanish supermarket chain, Mercadona (my case about Mercadona is available through Harvard Business School Publishing). Mercadona not only pays its employees more than its competitors, but also provides lots of other benefits including job stability and internal promotion opportunities. And just today, there was new evidence that Mercadona is the Wal-Mart of Spain when it comes to prices. They have the lowest prices in Spain. Period.

For those who believe that low wages is a problem for this country, I encourage them to look into industries like retail, where companies can pay their employees higher without having to increase prices or having to decrease profits. I’ll write more about how companies do this in future posts.