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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.

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