Slashing Payroll Cuts Into Profits

Understaffed stores and lack of employee training hurt retail operations, says Wharton Business School research.

February 21, 2019

PHILADELPHIA, Penn. - Payroll is the second-largest expense for most retailers, so when sales are down, its common to boost profits by cutting. But this quick fix is “business school thinking gone wrong,” according to three Wharton Business School professors.

Wharton professors Marshall Fisher, Serguei Netessine and Santiago Gallino, believe it’s imperative for retailers to recognize that employees are the most valuable asset on the sales floor. As online shopping threatens the existence of many brick-and-mortar locations, superior service can make the difference between a customer making a purchase or walking out the door.

In their latest research, the professors make the case for having an adequate, well-trained staff as the long-term solution to stable profit margins. They also unveil a mathematical approach to help companies determine how much staffing is needed at which locations.

The research is detailed in a paper titled, “Setting Retail Staffing Levels: A Methodology Validated with Implementation.”

“Understaffing stores and undertraining workers was never a good idea, but it’s especially bad now, because it takes away the biggest advantage traditional stores have over e-tailers: a live person a customer can talk with face-to-face,” the professors wrote in an article for Harvard Business Review.

Yet for many managers, underinvesting in training for employees who could be gone in six months seems like a sound decision. “Cutting cost is okay if you’re cutting fat, but if you’re cutting muscle, that does more harm than good. And we see this in the data that we analyze,” Fisher said.

Using statistical software tools, the professors created a three-step methodology for retailers to set staffing levels at each store location:

  1. Use historical data on revenue and planned and actual staffing levels by store to estimate how revenue varies with the staffing level at each store. Use employee absenteeism to help you: If an employee does not show up for work at the last minute, check sales impact.
  2. Using historical analysis as a guide, validate the results by changing the staffing levels in a few test stores.
  3. Implement the results chain-wide and measure the impact.

The professors employed this method with several retailers, including a large specialty retailer, with significant results. For one retailer, right-sizing the staff in 168 stores over a six-month period produced a 4.5% revenue increase and a nearly $7.4 million annual profit increase, after accounting for the cost of the additional labor.

“I hope that our methodology can help retailers start thinking about sales impact of labor,” Netessine said. “All retailers think about, for example, the sales impact of marketing activities. But very, very few retailers systematically think about what is the value-added of an extra dollar of labor in a particular store. In some stores, it’s negative. And in some stores, it’s a huge positive effect.”

The key to retail success isn’t just the right staffing numbers. The professors advocate for employees to be trained properly in both the products and the processes of the store. “One surprising thing we found is that when you train store employees on a particular product, it’s not that they increase sales of only that product. What we found is they actually increase sales across a product category,” Netessine said.

NACS ongoing relationship with the Warton School of Business includes the NACS Financial Leadership Program from July 14-19, 2019 in Philadelphia. This program is aimed at high-potential executives, including CEOs, controllers and rising accounting and finance executives, who have been challenged by their companies to expand their financial insights. The program includes customized case studies that use information from the NACS State of the Industry Report. For more details, contact Brandi Mauro, education coordinator at bmauro@convenience.org.

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