Tag Archives: Costco

You have to spend money to make money

How companies like Costco, Trader Joe’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 Joe’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. What’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 aren’t hard to divine. As Fisher, Krishnan, and Netessine show, customers’ 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, that’s no problem, but if you don’t have enough people on the floor, or if they aren’t well trained, customers can easily lose patience. One of the biggest problems retailers have is what is called a “phantom stock-out.” That’s when a product is in the store but can’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 doesn’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 company’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.

Wal-Mart Super Centre

On Saturday, Wendy and I went out to the new Wal-Mart Super Centre in Saskatoon.  Despite not being a Wal-Mart fan, I am not a Wal-Mart hater like some of you.  Despite that, I wasn’t really impressed.

The Pros

  • Wendy said that the grocery prices were cheaper than Co-op or Safeway or but about the same as at Superstore.
  • There is a Tim Horton’s and a McDonald’s there.  Both were too crowded to go inside but at least it is an option.

The Cons

  • Horrible line up with too small of space between the tills and the aisles.  It mean that I have to “excuse me, pardon me, just sliding through” all the way through the front of the store.
  • Not enough parking.  Way less parking then at Stonegate and even less than at Preston Crossing.  About 2/3 of what there is at Costco.  This is going to be an ongoing problem for them.
  • Way too much merchandise in the main aisles.  We had a cart and it was a pain to navigate.
  • There is no competition nearby.  I used to go to the Confederation Mall location because I knew that if they wouldn’t have what I wanted, I could check out Superstore or Canadian Tire.

In the end I found myself lamenting the closure of the Confederation Mall Wal-Mart and I can’t see us going out there for anything, despite it being closer to us than the other two.  I know their grocery prices are going to cheaper than our neighborhood Safeway but there an amount I will pay for a better shopping experience and Safeway provides that (Wendy also works there).  As for Wal-Mart, I think Preston Crossing Wal-Mart has become my Wal-Mart of choice.