Most retailers manage budgets using a top-down model driven by the finance department. They will allocate a certain percentage of sales to cover labor costs. This strategy has multiple flaws. Sales and prices can be affected by more than just labor, and the dollar value is not necessarily indicative of the work required to sell the products or services.
More progressive retailers balance their top-down model with an activity-based model, that connects activities with costs and then measures success rates based on product consumption patterns. Activity-based models are often more reflective of the true operations of the business because budgets are predicated upon all the actual activities (service and non-service) required to operate the business with consideration to volume, product mix and specific store characteristics. Along with budgetary impacts, these activities also all have an impact on sales either directly or indirectly. It only makes sense to measure them. Using an activity-based model allows the retailer to develop standard times using engineered labor standards per activity, and then build a labor model from those activities.
One company that excels in this area is Costco. Though different from competitors like Wal-Mart and Target, Costco is actually outperforming its big box store counterparts because of its operational excellence, limited product selection and empowered employee teams. While many retailers drive profits by paying employees less, Costco is able to pay employees more by cutting costs in other areas. The company believes that well-compensated employees will be happier and more productive at work, and will encourage customers to keep coming back. It’s an example of the power of employee engagement that all retailers can learn from.
Reducing labor reduces sales, which reduces how much you can spend on labor, and perpetuates the retail death spiral. What retailers should be asking is: How do we increase sales to cover the additional costs?
One of the best ways to drive sales is to analyze barriers to great customer service and look for operational inefficiencies in need of attention. Effectively, you want to minimize non-service activities and develop service-focused activities. Measuring the time employees allocate to certain activities throughout the day enables operators to get a clear understanding of what the employees focus on and how they balance their time. This gives operators a surgical way to identify where process improvements can be made, and insights into ways to create great customer experiences.
Take a look at how a store is operating and determine if customers’ wants and needs match what the retailer is delivering.