Consumer Behavior, Strategy and Operations

The Personal Touch Replaces Product

Back at the founding of American retail, led by 19th and early 20th century visionaries like John Wanamaker, Rowland Hussey Macy, Marshall Field, Richard Warren Sears and Alvah Curtis Roebuck, the big idea was finding and delivering products for the American consumer. The much-needed service that retailers provided at the time was gathering products into one place and making them available to customers hungry to acquire consumer goods to improve their lives. Back in the day, retail was a product-first, product-led, product-centered business.

Fast-forward to today, and finding and getting product is definitely not a problem. Quite the contrary. The very product-centric foundation on which retail was based and grew so aggressively through the 20th century has completely changed.

The retail paradigm has shifted from the model of Product-Product-Product to People-People-People. Today’s retail visionaries including Jeff Bezos (Amazon), Angela Ahrendts (Apple), Steven Lowy (OneMarket) and Andy Dunn (Bonobos, now Walmart) understand that meeting the new needs, desires and aspirations for the people whom their enterprises are designed – customers – is the key to success. Serving the needs of people, not selling product, is the real goal of retail today and it’s how money is made.

Product remains part of the mix, but it’s been eclipsed by the service side of retail, especially in brick-and-mortar retail. Success at retail today is less about what you sell and more about how you sell it. That’s why people – both the people the retailer serves, i.e. the customers, and the people who do the serving, i.e. retail staff — are the two most critical factors in retail success today.

In-store Staff Are the Critical Cog in the Wheel

America has reached, even exceeded, a state of full employment, according to Goldman Sachs economist Daan Struyven. But one sector in the economy is shedding jobs not adding them: retail. While U.S. nonfarm employers have added nearly two million jobs this year, retail has lost 71,000 jobs during 2017, with general merchandisers, clothing and accessories stores, food and beverage and electronics and appliance stores shedding the most workers this past year.

Based on a study from the Massachusetts Institute of Technology Sloan School of Management, visiting professor and lead researcher, Rogelio Oliva, reports, “The ability to efficiently match store labor with incoming consumer traffic is crucial.” Whereas retailers historically based staffing levels on sales quotas, Oliva proposes store traffic, not sales as the key metric on which retailers should base staffing decisions. “Retail sales are also affected by store traffic and might result in labor-to-traffic mismatches, which can negatively impact revenues,” he said. “The scheduled labor may not be enough to meet customer traffic flows.”

By not having enough boots on the ground in the store, retailers are frustrating customers and losing sales, something they can ill afford to do. Oliva’s data-driven analysis found that having optimum staffing levels increased sales performance by 10 percent in the fashion retailer’s stores in the study, with those incremental sales outweighing the added labor costs — going straight to the bottom line. “The big takeaway,” Oliva concludes, “is that retailers need to move past the inclination to minimize cost by understaffing stores because it has a big impact on profitability. They could generate more sales if they staff at the correct level. Stores should staff to maximize sales and profits, not to minimize costs.”

These findings are especially important to fashion and general merchandise retailers, both of which have been hardest hit by the “retail apocalypse,” which coincides with these retailers also being among the biggest jobs losers in the economy. But it could be a case of the chicken or the egg. Are declining sales in these sectors caused by the reduction in staff or do fewer staff result in a drop in sales? Oliva’s research points to retailers’ poor staffing decisions as the root cause.

Law of Diminishing Returns

There is no question that consumers’ changing shopping habits and rapidly growing competition from online retailers is putting a serious dent in the traditional retail market, causing many retailers to focus on operational improvements to drive profits to the bottom line. That often includes controlling expenditures in inventory and labor, two of their biggest costs. Supported by today’s data-intensive merchandising systems, most national retailers are now able to optimize in-stock inventory levels so they have inventory largely under control. Controlling staffing costs, on the other hand, is still very much an intuitive process set by corporate-wide quotas based upon historic sales. But, as Oliva’s research identifies, retail staffing decisions based upon sales forecasts don’t take into account lost opportunity costs of sales due to inadequate staffing.

Another study, “Setting Retail Staffing Levels: A Methodology Validated With Implementation,” led by Marshall Fisher, Wharton School, University of Philadelphia, reveals the problem with using only sales forecasts to determine staffing needs. Fisher says, “This approach leads to a spiraling effect: a low sales forecast leads to reducing labor which leads to lower sales and so on.” Fisher explains that in making management decisions about retail staffing, managers tend to focus on the immediate and known costs of reducing payroll and overlook the unknown and uncertain prospects of future gain in increased sales due to more staff in store.

Fisher took the theories about properly allocating staffing levels to maximize sales and profits into the field working with a specialty retailer with more than 700 stores and over $2 billion in annual revenue. The results of the system-wide implementation of their demand-based staffing allocation strategy was a 4.5 percent increase in revenues and nearly $8.9 million increase in profits. Across the large store base, they found “significant variation in the impact that staffing had on revenue,” but were able to identify 168 stores (about 25 percent of the total) that achieved significantly more sales with more staff. Those stores with the greatest sales to gain by adding staff were the ones with the “highest potential demand, as indicated by average basket size, number of households and household growth, the greatest competition and the most experienced managers.”

In other words, retail executives already know which of their stores would benefit most from adding more staff, but as Fisher says, too many corporations set staffing levels corporate wide without thinking through the consequences on sales at the individual store level. He adds, “Contrary to common practice, store staffing levels should not be set to the same level across all stores, proportional to revenue, but to varying levels dependent on the impact store sales associates can have on revenue at each store.”

How to Drive the Costs of Retail Staff to the Bottom line

These two studies by Oliva and Fisher et al. have important implications for retailers. Instead of determining corporate wide that labor costs should be X-percent of sales, corporate managers need to identify those individual stores with the greatest growth potential and give them X+percent budgets for staff based upon the factors identified by Fisher, i.e. highest average sale per customer in large and growing markets run by the most experienced managers. This approach will have the biggest impact on growing revenues and profits corporately and help them beat back the competition not just locally but from the growing incursion of e-commerce retailers.

Retailers are competing in today’s marketplace where consumers’ expectations of the customer experience is elevated far beyond simply finding and buying a product. The human element in retail is the most important factor in attracting customers and driving sales in-store. And consumers are driving all changes in retail. Listen to them, serve them and delight them.

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