Retail Labor Costs: Solving the $50 billion puzzle

BY Adam Meiras, AlixPartners LLP

We have seen many headlines about store closing and vacant malls. Although that’s certainly a big story, another perfect storm is brewing that’s set to blow a big hole in retail P&Ls — and it has to do with mounting labor costs.

Here’s the breakdown: U.S. retail sales are expected to hit $5 trillion this year, and wages will cost retailers about 15% of those sales. A 10% wage increase means retailers would have to find at least $50 billion to stay profitable . Although 10% may sound like a stretch, it actually is not. That’s an increase from $9.00 to $9.90. In fact, Arizona, Colorado, Maine, Massachusetts, and Washington, D.C., have already hiked their minimum wages by more than 10% this year.

As salaries rise, that $50-billion gap is looking more and more likely every day. Where are retailers going to find all that cash when so many are already running lean on staff? Yes, they could try to pass those costs onto customers through price increases, or cut costs elsewhere. But they are still probably going to have to make some hard calls on staffing.

A $50 billion Structural Reset of Store Labor
Although the federal minimum wage has remained unchanged at $7.25 an hour since 2009, states and municipalities are not standing still. A total of 27 states and D.C have increased their minimum wage since the beginning of 2014  with more increases for 2017, a change that will affect millions of retail workers. Washington, D.C., Maryland, and Oregon increased their minimum wages in July. Municipalities further this trend, with cities like Seattle, New York, and San Francisco pushing for even higher local wages. Further, BLS shows unemployment has steadily dropped from 10% in 2009 to 4.1% as of November for all workers. As brick-and-mortar stores close, warehouses and fulfillment centers open to keep up with online demand. As the job market tightens, they may struggle to find workers there too.

Changes in Shopping Behavior
“Up the Ante” on ComplexityOnline shopping and the omnichannel experience have been shifting consumer behaviors.  What does that mean for the in-store customer experience? In an ever more omnichannel, or let’s call it a “no channel” world – where every transaction can start in one environment and end in another – the need to separate online from store sales is obliterated.  How does a store that currently makes all of its staffing decisions based on four-wall sales accommodate Buy Online Pickup In Store (BOPIS), Reserve Online Pickup In Store (ROPIS), ship from store, showrooming, customer interactions, brand awareness, and increased labor to provide differentiated service?

Current labor models are not equipped to tackle these challenges. Managing labor, task time, and customer demands will only become more important as wages increase, margins diminish, and complexity increases. Four-wall sales and customer traffic alone cannot determine a location’s true labor needs. Managing to old rules of thumb, such as SPH or Payroll % Sales targets, will not prove adequate in the retail world of the future.

Skills and Value Model: A New Way to Think About Labor
Retailers can turn things around by drawing up a list of all tasks their staffers do and dividing them based on the skills required and the value they drive. Let’s bring this strategy to life. Take a watch store. Their products are valuable, small, and easy to steal. As a result, store associates spend a lot of time moving merchandise between display cases and safes, or counting inventory. Those tasks do not impact service, are unlikely to generate higher sales, and require little skill, just basic training. These tasks are needed for loss prevention, thus labor should be tightly controlled or automated. Associates could quickly cover displays rather than moving products to the back, or the store could use self-locking cases and eliminate these tasks altogether.

By categorizing tasks, retailers can better understand which ones are critical and which they can stop paying people to do.  This will help to define key questions such as:

• Who should be performing this task?
• What type of wage should they earn to remain competitive?
• Where do training and retention efforts have the most impact?
• When does the activity need to happen?
• Which processes need to be simplified, eliminated or automated?
• Why is that process being completed at all?

Operations managers will always need to balance trade-offs between cost and risk. Once the retailer decides which way it wants to go, it should update the labor model to save those dollars. Many of today’s models tabulate all tasks and assign a weekly number. Unfortunately, many retailers do not manage total workload causing large fluctuations week-to-week, over burdening staff and pulling away from sales. Retailers should consider the total assigned tasks and how they support each store’s value proposition, then customize each model accordingly.

As retailers know, not all customers are equal or demand the same things. A range of tastes, needs and budgets direct consumers to the brands or outlets that best meet their needs – labor decisions should follow suit. A value-based apparel chain likely shows a high number of low skill, low value activities. A model like this focuses on customer self-service with labor directed at registers, fitting rooms and stocking. Simplification, standardization and tightly managed payroll provide the most value at the lowest cost. Conversely, a luxury retailer spends much of its time delivering a pleasant experience and educating customers on the brand. A focus on improving service standards and product knowledge should drive value most and ensure that costly, high skilled sales labor is not wasted. Different customers, different operations, thus different models – one size does not fit all.

Will throwing out outdated labor models will fix everything and bring tens of billions back to the bank? No, but it will give better control to the largest variable cost in retail. Retailers simply cannot afford to overlook this cost lever in 2018, definitely not with a $50-billion gap to bridge.

Adam Meiras is a director in the retail practice at AlixPartners LLP.


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