Labour as an asset, not an expense

What do QuickTrip convenience stores, Mercadona, Trader Joe’s, and Costco all have in common?

If you guessed lowest prices, you’re only half correct.

Not only do these retailers have the lowest prices, but they also invest heavily in store employees, which in turn results in better customer service than their competitors.

In an article in Time, Zeynep Ton, a professor of operations management at MIT’s Sloan School of Management, says that her research has shown that by underinvesting in their employees, retailers are actually making their operations much more inefficient, and less profitable.

With globalization, companies have moved good paying manufacturing jobs overseas, leaving low-wage, low-skill service jobs in retail outlets that don’t offer many benefits.

But Prof. Ton  says in her research on low-cost retailers who spent more on labour and still competed on price showed that there are more efficiencies that result with a highly trained, and motiviated employees.

Ton’s research showed that in a typical supermarket that carries nearly 39,000 products, runs 100 promotions a week, and serves 2,500 customers a day, store employees must constantly shift inventory from storage into the right shelves to meet demand.

She writes: “In my field visits, I consistently found that with so many products, promotions, and storage areas, a task that ought to be simple–such as shelving toothpaste–is not. Such a surprisingly complex operation requires something uniquely human: judgment. Poorly paid, poorly trained, and poorly motivated employees have to monitor which products have sold, decide what to keep on the selling floor and what to move to and from backrooms, and remember which backrooms contain which items.”

She adds that the best information technology in the world can’t help you if your products aren’t where they’re supposed to be and your employees can’t find those products; you’ll only lose a lot of sales.

Simply put, Ton’s research showed that cutting labour costs would only help short term.

Here's how some retailers are doing things differently and succeeding, according to the Time article:

Full-time employees at Trader Joe’s earn $40,000 to $60,000 a year, while Costco promotes from within (98 per cent of store managers being promoted from within); QuickTrip meanwhile has a huge “floater” staff to allow employees to take more vacation and sick time; and Spanish supermarket Mercadona employees are cross trained so that everyone can do a variety of tasks.

Not surprisingly, Ton’s study showed that turnover in these companies is much lower than the industry average.

And with the growth of e-commerce, investing in human resources is more important for brick-and-mortar retailers.

At a time when consumers can buy anything, anytime online, the key differentiator for grocers could be about the people again.