Retail’s Big Mistake: Slashing Payroll Cuts into Profits

A common strategy for retailers to boost profits is to cut labor, but this quick fix is “business school thinking gone wrong,” according to Wharton professors of operations, information and decisions Marshall Fisher, Serguei Netessine and Santiago Gallino. It is imperative for retail companies to recognize that employees are the most valuable asset on any sales floor.

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 unveiled a mathematical approach they have devised to help companies determine how much staffing is needed at which locations. The research is captured 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.

Temporary reductions in personnel or hours often become permanent or cyclical, and stores get caught in what the professors describe as a downward spiral until there is little or nothing left.

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 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.

The professors also 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,” Dr. Netessine said. Their research found that for every hour a month an employee spent on simple online training, the revenue from that employee went up about 6% that month.

The bottom line? Employees are an essential part of any retail operation’s top line.