It is conventional wisdom that the key to success in retail is to work to keep your costs as low as possible and your revenues as high as possible. The manifestation of that conventional wisdom is that many retail stores are populated with fewer and fewer poorly paid part time employees. As Zeynep Ton states in her recent Harvard Business Review article, "The conventional wisdom is that many companies have no choice but to offer bad jobs—especially retailers whose business models entail competing on low prices. If retailers invest more in employees, customers will have to pay more, the assumption goes."
But in her research, Ton shows evidence that the truth is counter-intuitive. In her study, she profiles four retailers that operate in the low-price arena. Trader Joe's, QuikTrip, Costco, and Spanish supermarket chain Mercadona buck the trend. All four companies pay their employees higher wages, provide them better training and have more of staff on the floor. All four of these companies have higher labor costs than their competitors. They also have higher employee loyalty. That is to be expected. What goes against the grain of conventional wisdom is that all four of these retail organizations is also more profitable than their competitors. They enjoy more sales per employee and per equivalent store.
The advantage is pretty straight forward. First, the profiled companies tended to keep employees longer. So, in the long run, they spend less per employee hour on recruitment and training costs.
On average, their employees were more knowledgeable and more experienced than the staff of competitors who focused on minimizing HR costs. That means that there is more experienced help on the floor for customers. The chances of a customer getting assistance that really helps answer their question or solve their problem goes way up.
Which leads to the second tangible benefit. It is cheaper to get existing customers to make additional purchases than it is to attract new customers to make first time purchases. By having experienced, knowledgeable staff on the floor, helping customers, Trader Joe's, QuikTrip, CostCo and Mercadona help customers find, and purchase, what they are looking for. Customers actually end up purchasing more because the knowledgeable staff helps them find answers to their problems, helps them find what they are looking for, and makes recommendations for additional purchases.
Zeynep Ton's research seems to bear this out. I am including a link to her recent blog about her research if you want to read more. http://blog.zeynepton.com/
Ultimately, there are many ways to run a retail business, some of which are actually profitable. It seems to me that striving to be the lowest cost provider is a tough position to sustain. There is always a company around the corner that will figure out how to lower their costs a bit more so that they can lower their prices a bit more.
Better, it seems to me, to be a lower cost, high value retailer. Add a little value to the customer experience and you most likely see sales and customer loyalty increase. Customer loyalty is harder for a competitor to beat you on, because all of the sudden you are not selling commodities but unique experiences. In order to provide high value, you need a knowledgeable, experienced work force that can successfully and efficiently address customers' needs and concerns. Experienced and knowledgeable staff do not tend to congregate to the low pay employer.
My nostalgia for retail management crescendos during the holiday season. I once worked as a department manager for Pottery Barn and I loved it! I managed two departments, 32 employees, decked our halls, taught decorating workshops, and treated every customer like a friend who needed to find just the right gift. During the 2008 economic crisis Williams Sonoma (our parent company) eliminated all department managers and shifted our responsibilities to lesser-paid part-time key holders to open and close the store. I can't even imagine how the GM and Assistant Manager shouldered the rest, or how the customers' experience changed when the employees were less invested in jobs without benefits that were once our careers. Fortunately, I managed to leverage my leadership experience into a GM position at the flagship Caribou Coffee downtown. Customer service is such a strong passion of mine. I still have the card a customer sent me because I dashed to the stock room to carefully wrap his anniversary gift to his wife in our expensive wedding registry paper. The workplace culture, from a leadership perspective, is completely changed dependent upon the level employees feel valued. Invested employees feel loyal and go the extra mile to contribute to the store's success. They want to be there and there is a sign up sheet because everyone wants to work on Christmas at their home-away-from-home. Employees that are less cultivated foster a dynamic of resentment towards both the business and management that negatively impacts the camaraderie needed to ensure customers feel welcomed into a positive environment and, more importantly, trust they are in capable and sincerely caring hands. Thank you for another insightful and dead-on post, Bill. I always appreciate your perspective.
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