Insight

Retail viewpoint: the $50-billion labor cost question

November 2017

As the weather (finally) started cooling down, the fall shopping season was heating up. US core retail sales rose 0.2% in October, a healthy 4.1% jump year-over-year.1 Meanwhile, the US economy has been on an absolute tear, adding 261,000 jobs last month and bringing the unemployment rate down to 4.1%, the lowest in 17 years.2

Falling unemployment may be great news for the average Joe, but it’s bad news for retailers. Why? Because a perfect storm is brewing—one that’s set to blow a big hole in retail P&Ls. Labor costs are about to soar thanks to a combination of low unemployment, minimum wage increases, new worker-rights laws, and a competitive hiring environment.

Here’s the breakdown: US retail sales are expected to hit $5 trillion this year3, and wages will cost retailers about 15% of those sales. A 10% wage increase means retailers would have to find at least $50 billion4 to stay profitable.

Some of you may be thinking, “Wow, 10% sounds like a huge pay raise. That’s not going to happen anytime soon.” Not true. In fact, Arizona, Colorado, Maine, Massachusetts, and Washington, DC, have already hiked their minimum wages by more than 10% this year.5 And at least a dozen other states are planning to bump up their minimum wages by 10% or more over the next few years.6

And that’s just half the problem. Low unemployment means a shrinking talent pool, so retailers are going to have to offer extra perks and, yes, more money to get bodies into their stores and fulfillment centers with Black Friday just days away.

That $50-billion gap is looking more and more likely every day. Where are retailers going to find all that cash when so many are already running lean on staff? Sure, they could try to pass those costs onto customers through price increases, or cut costs elsewhere. But they are still probably going to have to make some tough calls on staffing.

Divide and conquer

Luckily, we think there’s a way retailers can figure out where to make cuts that won’t hurt profitability. It starts with making sure they are not wasting precious dollars paying employees to do tasks that don’t boost sales. Think most retailers are already doing that? Think again. In our experience, most retailers aren’t getting the most bang for their buck.

But they can turn things around by drawing up a list of all the different tasks their staffers do and dividing them into four categories: time takers, superior service, required tasks, and core drivers (figure 1). Once they categorize these tasks, retailers can better understand which ones are critical and which they can stop paying people to do.

Let's bring this strategy to life. Take a watch store. Their products are valuable, small, and easy to steal. As a result, store associates spend a lot of time moving merchandise between display cases and safes, or counting inventory. Where do these tasks fall on the matrix? They don’t impact superior service much because customers can’t see products moving around the stockroom. They aren’t high-value core drivers because they don’t increase sales, unlike pushing more products or bundling products. They aren’t time takers that require a lot of skill because anyone with basic training can do them.

So, those tasks would then fall into the required task category, which means they should be tightly controlled or automated. Associates could simply cover displays quickly rather than moving products all the way to the back. Or, better yet, the store could just use self-locking cases and eliminate these tasks altogether. Once the retailer decides which way it wants to go, it should update the labor model to save those dollars.

So, problem solved, right? Are we saying that throwing out outdated labor models will fix everything and bring tens of billions back to the bank? Not exactly. But it’s an important start, and it’s definitely better than doing nothing at all—not with a $50-billion bullet train headed your way.

Data pack

For our complete data pack of retailer and macroeconomic data including many of the key economic indicators discussed above please contact retail@alixpartners.com.

 
1  Seasonally adjusted October retail sales exclude motor vehicles, gas, food services, and drinking places
2  money.cnn.com/2017/11/03/news/economy/october-jobs-report/index.html
3  Monthly Retail Trade and Food Services, US Census Bureau
4  A 10% wage increase will not lift labor cost by full 10% because full-time employees will be less affected compared to part-time employees
5  epi.org/minimum-wage-tracker
6  The Economic Policy Institute and the National Conference of State Legislatures
 

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Filip Nemeth

Vice President, New York

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