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Store Labor vs. Customer Service: Collision Course?

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Last March, my RSR partner Paula Rosenblum published a piece in the Retail Paradox Weekly and Forbes Online proclaiming 2015 to be the Year of the Store Employee. The news of the day suggested that it would indeed be a good year for employees, especially because a growing list of retailers (that included Walmart, TXJ, Home Depot, and others) announced plans to raise base pay from $9 to $15. Since then, various U.S. states are attempting to take up the issue; for example, in October the Massachusetts legislature considered a bill to raise the minimum wage for fast food and big box retail workers to $15 by 2018.

As we wind down on 2015, the fact remains that wages are still very low in the retail sector. The most recent U.S. Department of Labor Statistics numbers indicate that the average wage for hourly retail workers is $12.38/hour, or about $25,760/year. For a reasonability check, I looked for average retail wages in the UK. Although it was harder to extrapolate that from British government published data, I arrived at an average of £8.2, or about $12.63/hour.

To put those numbers into a larger context, the U.S. Government’s Poverty Guideline for a family of four is currently at $24,250. You get the picture: retail might be okay as a short-term job, it’s certainly not a career opportunity for most people who want to get ahead. The result is what you’d expect- high turnover and poor in-store customer service.

In February 2015, the Wall Street Journal reported that, “turnover in retail averaged around 66% for part-time hourly sales associates in 2014….For full-timers, who are more likely to be tethered to a company with benefits like health insurance, turnover was 27%”. But the same article, which focused on Walmart’s wage increase announcement, quoted Walmart US CEO Greg Foran to explain the company’s move, “you got to ensure that your associates are retained, you have to take into account turnover, and you have to take into account their engagement. It’s part of the puzzle to help the company lean in and improve the store experience for our customers.”

Opposing Forces

None of this focus on the relationship between store labor spend vs. customer service should be a surprise to anyone in Retail. The short and not-so-sweet explanation of the current dilemma is that retailers continue to believe that store labor as an expense that has to be militantly controlled, while today’s consumers are demanding more and better service. This seemingly intractable problem has only been made more difficult by click’n’collect order fulfillment. Store customers used to collect their own purchase choices, put them in a basket, and take them to the checkout counter. Now they expect someone in the store to do that for them.

Where’s that labor to perform those tasks going to come from? It comes right out of the store’s operating income. An April 2015 article published by UK’s Retail Times highlighted the results of s CEO study commissioned by JDA:

“A new JDA study reveals … an unexpected and disturbing fact: despite these significant investments in omni-channel capabilities, only 16% of companies say they can fulfill omni-channel demand profitably today… What is eroding retailers’ margins as they sell and deliver products across multiple channels? It’s simple: the high cost of fulfilling orders. A full 67% of respondents reported that these costs are growing as they increase their focus on selling across channels.”

Obviously, something has to give. Perhaps not surprisingly, English retailers Tesco and John Lewis, both industry leaders when it comes to click’n’collect, recently moved to change the dynamic. This summer, Tesco announced that it would charge £4 to fulfill orders under £40, and John Lewis announced that it would charge £2 to fulfill orders under £30. According to the UK Guardian, John Lewis managing director Andy Street said, “we are sure customers will understand why we are doing this…There is a huge logistical operation behind this system and, quite frankly it’s unsustainable….”.

Three Options

What can be gleaned from all of this is that at least one of three things has to happen:

  1. customers will have to pay for additional in-store services
  2. retailers will spend more on labor
  3. retailers will find the labor to execute the new tasks. 

A 4th option is for the store to take the hit in profitability, but no one reasonably expects retailers to do that for very long and survive.

The industry consensus seems to be that #1 won’t happen any time soon in the U.S. The reason is simple; online companies like Amazon are forcing the issue with free shipping direct to the consumer. And because price transparency is a fact in today’s world, retailers can’t reasonably hope to bury the service charge in a higher per-item price charged to all consumers (spreading the extra labor charge across all purchases) — consumers are just too price sensitive or that.

It also seems unlikely that some — or even the majority of retailers, given their brutally slim net profitability percentages, will spend much more on labor (option #2). But RSR’s most recent Store study (Empowering The Store Employee, March 2015) showed that Winners (over-performers) are doing just that! In that study, 52% of Retail Winners claimed that the ratio of payroll as a percentage of sales increased over the last three years.

The 3rd option open to retailers is the hardest. That is, to find the money for customer-service labor by ratcheting down the labor spend in ways that the customer doesn’t see. Various schemes to squeeze labor have recently come to light, and not in a flattering way. For example, it was recently reported that some companies have tried to implement “on call” scheduling, the practice of just in time staffing based on real-time monitoring of sales and traffic in stores. The idea is to more closely tie labor spending to actual activity in the store (as opposed to planned activity). In such a scheme, employees are required to check in by phone, email or text shortly before their shift is scheduled to begin, so that if the store is expected to be busy, they clock in, but if it’s not, they lose the hours.

But in April, the New York Attorney General announced that his office was investigating 13 companies, including Target and The Gap, for violating a state rule that requires companies to pay at least four hours at minimum wage subject to employees who report to work for a scheduled shift even if they are sent home. Perhaps as a result of the scrutiny, last week Urban Outfitters announced that it would end it’s on-call scheduling practices, following recent similar announcements by Gap, Abercrombie & Fitch, Victoria’s Secret, Bath & Body Works, and J. Crew.

Here’s another example: there’s also been some talk in the industry about adopting two innovations introduced by Uber, the sharing economy alternative to taxi cabs. In Uber’s labor model drivers are classified as independent contractors. And that’s not Uber’s only new idea. The company also implemented surge pricing in 2015, the practice of raising the cost of a ride during peak demand times.

While you may not think these Uber ideas have any applicability to retail stores, both innovations have been bandied about in conversations the RSR team has been privy to recently. I think they both would work against the objective — to deliver better customer service — and here’s why: a recent study of the effects of surge pricing in San Francisco and Manhattan indicated that surge pricing practice actually kills demand (Uber stoutly refutes this claim). And as for the independent contractor status of Uber-workers, a U.S. Federal court has recently granted class action status to drivers who claim that they should have employee benefits.

The question for retailers might be, “do you really want to get into this stuff and risk lawsuits, negative press, and customer push-back?”

What’s left to try? Another option is to optimize non-selling functions by implementing engineered processes and measuring actual activity to plan. That’s what workforce task management is all about. We were discussing task management with a major software vendor last week. The conversation revolved around the fact that back in the 2011 timeframe, many industry observers (including RSR) thought that task management’s time had finally come in Retail. But the concept hasn’t been widely adopted.

Collision Course?

This almost sounds like a physics experiment to see what happens when two forces collide – in this case retailers’ need to control store labor costs vs. persistent customer demands for better service. The person stuck between those two forces is the store employee.

Ultimately some combination of all three options mentioned above must occur; consumers sooner or later have to pay for services rendered, store employees need to be compensated to be true Brand ambassadors in the store, and non-selling functions have to be optimized. What combination of those options will be depends on each retailer’s Brand. And that gets us back to RSR’s baseline recommendation for all retailers when it comes to transforming their businesses for the new age of retailing: design the desired Brand experience, and then make every decision in the context of the desired outcome. Without that, retailers will default to option #4.

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Articles & Opinions November 3, 2015
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