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Too Few Retail Workers On The Floor, Too Few Retail Sales And Profits On P&L Statement

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America has reached, even exceeded a state of full employment, according to Goldman Sachs economist Daan Struyven. With the unemployment rate at 4.1% in November 2017, it’s reached its lowest level all year and a record low since the start of 2017.

But one sector in the economy is shedding, not adding jobs: Retail. While U.S. nonfarm employers have added nearly 2 million jobs this year, retail has lost 71,000 jobs throughout 2017, with general merchandisers, clothing and accessories stores, food and beverage and electronics and appliance stores shedding the most workers this year.

Yet with fewer retail staff on the sales floor, fewer retail sales are the ultimate result, as Retail Dive report reported, “Retailers are understaffing stores – and losing sales.” Based upon a study from the Massachusetts Institute of Technology Sloan School of Management, visiting professor and lead researcher, Rogelio Oliva said, “The ability to efficiently match store labor with incoming consumer traffic is crucial, especially during the holiday season when stores expect increased traffic.”

Whereas retailers historically base 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.”

The painful result of not staffing to the number of shoppers in the stores, Retail Dive notes, is, “Retailers are losing customers fast as frustration builds when store associates are nowhere to be found.”

By not having enough boots on the ground in the store, retailers are 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% in the fashion retailer’s stores studied, with those incremental sales outweighing the added labor costs and 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 does 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 also 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 led by Marshall Fisher, Wharton School, University of Philadelphia, entitled “Setting retail staffing levels: a methodology validated with implementation,” explains the problem with using sales forecasts to determine staffing needs. “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.

The result is understaffed stores, which “is particularly a problem with publicly-traded companies, which seeking to manage reported earnings, are tempted to temporarily reduce payroll near the end of a quarter to meet profit targets. However, these temporary reductions have a way of becoming permanent, leaving a retailer, over time, with a minimum number of workers earning a minimum wage,” they write.

In the Fisher study, his group took their 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% increase in revenues and nearly $8.9 million increase in profits.

Across such a large store base, they found “significant variation in the impact that staffing had on revenue,” but were able to identify 168 stores (about 25% 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. “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,” they write.

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 not just in this critically important holiday season but into next year and beyond. Instead of determining corporate wide that labor costs should be X% of sales, corporate managers need to identify those individual stores with the greatest growth potential and give them X+% 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. That 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.

At its core retail is a people, not a product business today. And brick-and-mortar retailers already have their secret weapon to beat online competitors – the personal touch. If only they used it effectively to personally touch the best customers in the best markets with plentiful happy, smiling, well trained and helpful sales associates, rather than forsaking this most powerful weapon in the name of cost control.

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