Having lots of well-paid staff around is good for retail profits

Why "Good Jobs" Are Good for Retailers, a Harvard Business Review study by MIT's Zeynep Ton, argues that the success of retailers like Uniqlo and Trader Joe's can be attributed, in part, to maintaining high levels of well-paid staff. This runs contrary to contemporary retail wisdom, which has relentlessly focused on cutting staff levels to the bare minimum. Ton's research shows that having lots of well-paid staff around increases how much customers spend, bringing in enough money to cover wages and turn a profit besides. I think this is likely especially true in the Internet age: no retailer will be able to match the self-serve convenience of Amazon, so to compete with Amazon, they need to provide something Amazon can't match: personal service.

James Surowiecki comments in The New Yorker:

The big challenge for any retailer is to make sure that the people coming into the store actually buy stuff, and research suggests that not scrimping on payroll is crucial. In a study published at the Wharton School, Marshall Fisher, Jayanth Krishnan, and Serguei Netessine looked at detailed sales data from a retailer with more than five hundred stores, and found that every dollar in additional payroll led to somewhere between four and twenty-eight dollars in new sales. Stores that were understaffed to begin with benefitted more, stores that were close to fully staffed benefitted less, but, in all cases, spending more on workers led to higher sales. A study last year of a big apparel chain found that increasing the number of people working in stores led to a significant increase in sales at those stores.

The reasons for this aren’t hard to divine. As Fisher, Krishnan, and Netessine show, customers’ needs are pretty simple: they want to be able to find products, and helpful salespeople, easily; and they want to avoid long checkout lines. For a well-staffed store, that’s no problem, but if you don’t have enough people on the floor, or if they aren’t well trained, customers can easily lose patience. One of the biggest problems retailers have is what is called a “phantom stock-out.” That’s when a product is in the store but can’t be found. Worker-friendly retailers with more employees have fewer phantom stock-outs, which leads to more sales. And happy workers tend to stick around, which saves the costs associated with employee turnover, like hiring and training...

If investing in employees yields such big dividends, why don’t more retailers do it? Partly, it’s a matter of incentives: store managers are typically evaluated on their payroll costs. Moreover, the benefits of keeping payroll costs low are immediate and easy to see, whereas the benefits of hiring more people are long-term and harder to track. On top of this, keeping a large staff runs counter to one of the most important trends in retail: making customers do more of the work. We’re all familiar with the phenomenon of outsourcing work to foreign companies. But there’s also been a great deal of outsourcing work to customers. Often enough, this is a good thing: the self-service layout of a modern supermarket offers more freedom than an old-fashioned grocery counter, where you have to ask for things. It seems easier to pump your own gas at a gas station than to wait for an attendant, and people are increasingly happy to use a self-service kiosk at an airport instead of standing in line for a check-in agent. But you can only outsource so much work before alienating your customers. And in retail stinting on employees doesn’t actually save you money. It just gets you less for less.

How Hiring Makes Uniqlo a Successful Retailer : The New Yorker: (via Kottke)