How companies like Costco, Trader Joeâ€™s and others are bucking the trend in retail and making money by paying employees well.
A recent Harvard Business Review study by Zeynep Ton, an M.I.T. professor, looked at four low-price retailers: Costco, Trader Joeâ€™s, the convenience-store chain QuikTrip, and a Spanish supermarket chain called Mercadona. These companies have much higher labor costs than their competitors. They pay their employees more; they have more full-time workers and more salespeople on the floor; and they invest more in training them. (At QuikTrip, even part-time employees get forty hours of training.) Not surprisingly, these stores are better places to work. Whatâ€™s more surprising is that they are more profitable than most of their competitors and have more sales per employee and per square foot.
The big challenge for any retailer is to make sure that the people coming into the store actually buy stuff, and research suggests that not scrimping on payroll is crucial. In a study published at the Wharton School, Marshall Fisher, Jayanth Krishnan, and Serguei Netessine looked at detailed sales data from a retailer with more than five hundred stores, and found that every dollar in additional payroll led to somewhere between four and twenty-eight dollars in new sales. Stores that were understaffed to begin with benefitted more, stores that were close to fully staffed benefitted less, but, in all cases, spending more on workers led to higher sales. A study last year of a big apparel chain found that increasing the number of people working in stores led to a significant increase in sales at those stores.
The reasons for this arenâ€™t hard to divine. As Fisher, Krishnan, and Netessine show, customersâ€™ needs are pretty simple: they want to be able to find products, and helpful salespeople, easily; and they want to avoid long checkout lines. For a well-staffed store, thatâ€™s no problem, but if you donâ€™t have enough people on the floor, or if they arenâ€™t well trained, customers can easily lose patience. One of the biggest problems retailers have is what is called a â€œphantom stock-out.â€ Thatâ€™s when a product is in the store but canâ€™t be found. Worker-friendly retailers with more employees have fewer phantom stock-outs, which leads to more sales. And happy workers tend to stick around, which saves the costs associated with employee turnover, like hiring and training.
Slashing workforces doesnâ€™t work that well.
Some of the highest-profile retailers to flop in recent years were companies that made a big deal of slashing payroll costs. In 2007, Circuit City fired more than three thousand of its most experienced salesmen, replacing them with newer workers whom it could pay less. Its sales dropped, and it was bankrupt within a couple of years. When Bob Nardelli took over Home Depot, in 2000, he reduced the number of salespeople on the floor and turned many full-time jobs into part-time ones. In the process, he turned Home Depot stores into cavernous wastelands, with customers wandering around dejectedly trying to find an aproned employee, only to discover that he had no useful advice to offer. The companyâ€™s customer-service ratings plummeted, and its sales growth stalled.
This is why the only reason I go to Home Depot is when I know exactly what I need and what to do with it. If I need help at all, I will pay extra to go to Co-Op where I get much better service and expertise.