Rethinking the Retail Model
Zeynep Ton's terrific new book titled The Good Jobs Strategy strengthens the case that many retailers might be well-served to reconsider their strategy and put human-capital investment higher on their priority list.
By Peter Cappelli
One of the major changes in the U.S. economy has been the shift in who the big employers of less-educated workers are: It used to be manufacturing; now it's retailing.
Wal-Mart replaced General Motors as the largest employer in the country years ago. And while manufacturing jobs paid well, retailing jobs do not. In fact, they are about the lowest-paying jobs in the country, many of them at or near minimum wage.
Why is that? For one thing, unlike manufacturing, retail does not have to compete with low-wage foreign competition. You still can't pick up your groceries from a store in China. Yes, retail jobs may require little skill, but that's true in many other industries as well.
The fundamental reason for such low-paying retail jobs has to do with the business strategy of most in the industry. Profit margins for retailers are often really low, so the companies have to put pressure on costs to make money. Fair enough, but why do we think low wages translate into the lowest costs, given that we know low wages are associated with higher turnover, lower employee engagement and so forth? Well, the companies say that not many of those factors matter in retail work. But here is what always bugged me: Has anyone checked to see if this is correct?
So now we come to a terrific new book, The Good Jobs Strategy, by Zeynep Ton, an author, speaker and adjunct associate professor at MIT. She actually did check, and it's not true. Her field is operations research -- industrial engineering -- not human resources, and her specialty is studying retail operations.
Here's the key insight: We think of retailing as being a very simple business model, but behind the scenes it is as complicated as a factory. The big challenge affecting the profitability of these stores is logistics. Stores that succeed keep products that people want to buy on the shelves where customers can find them and do it without having tons of expensive inventory in the back.
We have heard how companies such as Wal-Mart have become great at inventory management, but what Ton finds is that those systems break down once the inventory arrives at the store. If you don't think so, next time you are in one of those big stores, ask an employee in one department where something is in another department, just to see if he or she knows.
A major reason the systems break down, Ton finds, is because the stores underinvest in human resources. They don't hire enough people, they don't pay enough to get good ones and they don't train or empower them to use good judgment to solve problems. So the companies fall into a vicious cycle: Wall Street analysts yell at them to cut costs, they squeeze even harder on labor, which is one of their few controllable costs (or so they think), store performance doesn't go so well and they are forced to squeeze even harder on costs.
Fortunately, as Ton points out, there is another model. It is to retail almost exactly what the Toyota system was to traditional assembly operations in manufacturing, and there are stores in most segments of the retail market that do it, even fast food. (For those fans of West Coast burger chain In-N-Out Burger, it is one of the operations that does things differently.)
The alternative model changes many things in order to get the logistics right, and one of them is to offer fewer choices. How can that be good? Partly because having 20 varieties of toothpaste does not cause customers to buy more. In fact, it turns them off, and, in terms of the logistics system, it complicates the operations of the store enormously to have to stock 20 different brands, keep track of the different vendors that supply them and their inventories, and keep all 20 stocked on the shelves. (Multiply this by thousands in a typical store.)
This model also requires a lot more from employees. Successful inventory systems cannot be managed completely from the center. In a well-run system, employees on the floor have to make lots of decisions and have to use their judgment. They typically don't understand enough about how their inventory systems work to make the right decisions – thanks to a lack of training -- and companies trying to manage from the center don't give them the ability to make those decisions. And we haven't even gotten to customer service yet.
There are sophisticated models using data from retailers that shows how the performance of a store improves if it invested more in human capital: higher wages that would get better workers and keep them, cross-training to handle the fluctuations in customer demands without crazy work schedules and part-timers, and empowerment. One of these models was developed by my colleague Marshall Fisher and his co-authors.
In her book, Ton tells a great and revealing story about the reaction of a retail CEO when he was shown how store profits would go up were the company to spend more on employees: He just refused to believe it. I'm sure if the study had demonstrated how more spending on computers would improve profits, he would have been all for it.
So here is the evidence, with all the fancy math and statistics behind it. A few of them already use it. Will the big-box retailers change their practices to improve profits? Or will they also refuse to believe it?
Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School of the University of Pennsylvania in Philadelphia. His latest book is Why Good People Can't Get Jobs: The Skills Gap and What Companies Can Do About It.