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Why retail labor cuts are short-sighted

April 18, 2013 by Jeff Weidauer — Vice President, Marketing & Strategy, Vestcom International, Inc.

The supermarket industry is notoriously frugal. Rarely is an article written in the mainstream media that doesn’t mention the razor-thin margins retailers operate under, and for the most part Wall Street gives the industry high marks for cutting costs and keeping them low.

But the times, they are a-changing. Mobile and digital have changed the game in ways we couldn’t have imagined a decade ago. Data and analytics are bringing real science to how we go to market and how we measure success. While there are still many retailers who have yet to make real progress in these areas, the bigger players are jumping in and the writing is there on the wall for everyone to see.

However, the future hasn’t caught up with one notable area of store operations: labor. According to a recent post on The Motley Fool, labor costs as a percent of square footage are still declining. If you’ve been around this industry for any length of time you know that the first two things to go when the going gets tough are marketing and labor. If you’ve looked at the outcomes of those who overuse those two levers to manage costs, you also know that consistently hacking costs in these areas is at best a short-term win, often resulting in dire long-term consequences.

Based on the data shown in The Motley Fool post, even growth companies (notably Walmart) aren’t keeping pace with labor. And based on recent reports, the reduced labor is beginning to impact out of stocks and sales in a serious fashion. Walmart in particular has been noted recently for what appears to be an out of control out of stock problem. This from what is possibly the world’s most efficient supply chain machine.

The problem isn’t with the supply chain, though. A number of studies have been done on the out of stock problem and the net is that about 75 percent occur in-store as a result of missed orders, planogram integrity issues and—as illustrated here—not enough people to do the work of stocking the shelves. By the way, guess who is keeping up with labor as it grows square footage? Amazon.

With all the changes that have taken place over the past few years that make us better and more efficient, it seems like a good time to re-evaluate the time-worn approach of cutting labor to save costs. This was effective 30 years ago when there was something to cut, but brick and mortar stores require people to run them. Retailers worried about showrooming should worry less about that and more about how many shoppers they are driving away because they don’t have what their customers want at any price.

The retail industry is at an inflection point. What got it here won’t sustain it going forward. We have new tools, a new shopper with access to knowledge, and new problems to face; we also have new opportunities. But to move forward we need to cut loose of old, short-sighted habits like massive labor cuts in hopes of saving our way to growth. That is one thing that didn’t work 30 years ago and won’t work today.

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