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The Counterintuitive Truth: How Retailers Can Invest in Labor to Lower Costs and Improve Profits

Guest Blog by Matt Howard

Every once in a while you come across a simple idea that really forces you to stop and think…and then it makes you stop again and think some more.

For me that happened just the other day when I purchased and read a copy of Zeynep Ton’s new book entitled The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits.

Ms. Ton is an Associate Professor of Operations Management at MIT Sloan School of Management.  Over the past 10 years she’s conducted a vast amount of research focused on the critical role of store operations in retail supply chains and exploring how retailers can design and manage their operations in a way that satisfies employees, customers, and investors simultaneously.

Professor Ton’s simple, but powerful, idea is that retailers can invest heavily in store employees and simultaneously deliver lower prices, higher profits, and better customer service than their competitors.

Does that sound impossible to you?  Well, you’re not alone?

Conventional wisdom is that low cost retailers have no choice but to cut labor expense so they can attract customers with low prices and drive sales.

For most people, it’s simply counterintuitive to think that top performing low cost retailers are doing the exact opposite – choosing instead to invest heavily in labor.

But that is exactly what Professor Ton’s 10 years worth of retail research shows.  The presumed trade-off between investment in employees and low prices is a fallacy in certain situations.

The trade-off is specifically false for 4 low cost retailers – Costco, Trader Joes, Quicktrip, and Mercadona – each of which delivers superior financial performance by combining investment in labor with operational best practices including:

  • Offering less:  fewer products for sale reduces costs, improves labor productivity, increases category expertise and improves customer satisfaction.
  • Standardizing and empowering store staff:  non-selling tasks are completed efficiently and consistently plus employees make decisions that work best for local customers.
  • Cross train:  store employees are well-rounded athletes and remain productive doing different things.
  • Operate with slack:  stores are deliberately over-scheduled to ensure enough staff with positive attitudes are available to care for customers and complete critical non-selling tasks.

So, if increasing investment in store labor is such a good idea for low cost retailers, then why aren’t more doing it?  Professor Ton says the main reason is that labor is often a retailer’s largest controllable expense often accounting for 10% of revenues.  She also observes that many retailers see labor as a pure cost rather than a sales driver.  Finally, she notes that the financial benefits of cutting employees are immediate, direct, and easy to measure — whereas the downside of cutting labor is indirect, long term, and difficult to measure.

Now that I’ve read the book, and now that I’ve stopped and thought about it, it’s easy to see why certain retailers like Costco, Trader Joes, Quicktrip, and Mercadona do what they do.  It’s not because they are altruistic.  Rather it’s because they’re dedicated to operational excellence in retail, which leads to great experiences for consumers and superior returns for investors.

For me personally, the moral of the story is that retailers should avoid the familiar temptation to respond to short-term pressures by automatically cutting labor.  Instead, they should make the hard choices necessary to rededicate themselves to operational excellence and schedule sufficient staff to simultaneously care for customers and consistently tend to critical non-selling tasks.

Matt Howard leads global sales and corporate marketing for Natural Insight, a SaaS platform that provides workforce management and structured task management solutions to retailers.

Real-Time Shopper Data Takes the Guesswork out of Retail Planning

Guest Blog by Rich Scamehorn

Market research is a crucial part of a successful business venture. When you know what your customer is thinking and what drives consumer behavior, you can successfully target them and make your product a success. 6.7 billion dollars are spent on market research each year, and it’s an ever-growing business especially as technology and social media sites continue to spawn anew each day.

However, in the past, market research on shopping behavior has been very limited. For example, if a retailer or manufacturer wanted to monitor customer behavior, they would simply strive to track in-store behavior and purchases. Alternatively, companies could survey shoppers about their in-store behavior to try to understand why they bought (or didn’t buy) the products on the shelves.

For example, they might notice that shoppers appeared to prefer whole milk to skim milk, or that cereal on the middle shelf was more popular than cereal on the lower shelf – but it was difficult to understand why. Essentially, companies would try to make educated guesses about shopper behavior based on shopping trends, attitudinal surveys and tracking how people behaved while inside a supermarket.

Although such information was helpful, it was also very limited. The scope was narrow and results could be flawed.

However, thanks to advancements in virtual technology, manufacturers now have access to real, verifiable data that shows exactly how people shop and what leads them to make purchases. Shopper research can now be taken to the next level thanks to virtual simulations and 3D displays that allow manufacturers and retailers to try out store displays and packaging ideas before they invest time and money in them in the real world.

With these new technologies, the days of trial and error are over. And that’s great news, because in today’s world, stores are looking to do more than just offer the goods and services customers want. In order to compete in an over-saturated market (including online options), stores have to make sure that they offer a streamlined experience. That means that they have to make the shopping experience as seamless and smooth as possible. With the advent of simulations, stores can really put the needs and wants of their customers first and foremost.

With virtual store simulations, for the first time, we are able to see into the mind of consumers and actually predict their next moves. This means that we can help clients create in-store marketing plans accordingly and ensure that our clients don’t waste thousands of dollars on ineffective displays. From packaging to shelf arrangement, we provide data to ensure that every decision is made with real, first-hand knowledge and unquestionable statistics.

Virtual simulations are also invariably useful when it comes to working with manufacturers in different locations and perhaps even from different cultures. Unlike traditional in-person meetings that feature a Power Point presentation and plenty of talk, a virtual simulation allows clients to interact with the data no matter where they are on the globe. That means that even if your team is spread out across the country, they can still take part in the important process of shopper market research.

In particular, this is true for franchisees who come from different countries and might not be well-versed in English. With the simulations, it’s much easier to get the point across and bridge the language gap, which helps to ensure that everyone is included in the conversation and everyone’s voice gets heard.

We all know that the Internet has forever changed our society, and it has also forever changed the way that people shop and the way that people interact. In order to keep up with these trends, it’s time for market research itself to change. We have to continue to be innovative and progressive, and to change with the demands of the day as well as stay one step ahead of the curve. And, with virtual simulations and high-tech shopper research abilities, we can do exactly that.

Rich Scamehorn is CRO of InContext Solutions