How this retailer increased profit by $8.9m from rostering more hours
There has been a lot of speculation on why we are losing retailers so fast. An interesting research piece from the US presented an alternative hypothesis that generalises the issue down to rostering for profit rather than rostering to control costs.
For context – If you were given the choice of increasing revenue by 5% or reducing costs by 5% in order to create the most profitable outcome, what would choose?
A “back of the hand” calculation would show that reducing costs increases profit more than the equivalent uptick in revenue.
Accordingly, most retailers choose option two.
This makes sense if you assume the two scenarios are independent of each other, but what if the cost was your employees?
This is where the problems arise. For industries like retail, where staff have a direct impact on sales, it’s not as simple of a question as cutting costs to increase profit.
In a study led by Professor Marshall Fisher from Wharton, he and his research team constructed a conceptual model from historical data to identify stores within a US-based retail chain that had the highest potential to benefit from increased labour spend.
Importantly, the strategy was actually implemented at 168 retail sites over a 26-week period to validate the model, with the retailer electing to implement the strategy further.
The result: A near $8.9 million increase in profit of the stores included.
The labour cost challenge
The challenge in allocating labour budgets lies in the tradeoff between the known immediate payroll cost and the less certain increase in sales that could be achieved with more staff on hand.
The researchers point out that retail managers have a tendency to overweigh the decision to reduce the known payroll cost than the less certain increase in sales which could be achieved by allocating additional labour spend.
The labour budget death spiral
The study highlights the limitation of the most common retail strategy — setting labour budgets as a portion of sales. Fisher points out that this approach creates a circular problem by failing to take into account how store labour spend can positively impact sales, with the worst case leading to a spiraling effect of reduced sales forecasts reducing labour spend which reduces sales further and so on.
Quantifying the impact of labour spend on revenue
Creating labour budgets that are designed to maximise profit requires retailers to know on a store-by-store basis the correlation between labour-spend and sales. One way to do this is by looking at times when staffing levels deviate from the original schedule.
If ten staff were scheduled on a particular day, but on that day only eight turned up, did sales also decrease by the same portion? If not, by how much?
If the answer to the above is that sales didn’t decrease at all, the store is likely overstaffed. If there is a measurable impact, the inverse scenario is likely true and the store may be losing sales by being understaffed.
This is the same approach used in the study, which found the relationship between random staffing deviations and impacts on sales was statistically significant. Results showed an increase in labour spend pointed to increased sales at varying degrees, depending on known store attributes.
Implementing the strategy for profit
The study identified stores in a US retail chain which had the highest market potential, making them good candidates for an increased labour spend. The market potential factored in attributes like average basket value and proximity to competitors, which would create scenarios that allow workers to have the highest impact on converting sales.
In the study, 168 stores were selected this way, then allocated a 10% increased labour budget over a 26-week period, of which 75% of the increase was actually consumed in practice by the stores.
The outcome was a 4.5% increase in revenue at the impacted stores and resulting in a near $8.9 million profit increase.
Learning from the strategy
The study shows empirically why the common practice of setting labour budgets as a fixed proportion of forecasted revenue is often self-defeating when applied in a retail setting.
An opportunity exists to all retailers to leverage this same profit-centric model for defining labour budgets. The data required is available to all retailers however, it may just be a matter of leveraging that information with the right systems.
An integrated forecasting strategy that integrates foot traffic, sales, and employee scheduling data is a practical opportunity afforded to retailers of any size to optimise their labour resource allocations.
The interesting part is, Fisher’s research is readily available to all retailers who are looking to drift away from the traditional method of fixing labor budget rosters. The next step is to get this method of labour resource allocation battle tested in the Australian markets.
Industry Insights UK |
The next stage in retail evolution?
Three reasons why you should integrate your POS software The advances in credit card technology and the creation of the of the electronic payment terminal in 1982 revolutionised payment processing for businesses around the world. It leads to better cash flow management, and an increase in sales processing efficiencies, ultimately influencing customer spending behaviour. Over the years the technology has developed, and advancements like contact-less payments, NFC and card-free payments have emerged. However the next technological wave of retail evolution is upon us, and it’s time for businesses to dive in head first. Cloud software has been the latest revelation in technical advancements. POS, Payroll and Workforce Management, the list could go on. While each of these individually represents a leap in innovation in their own right, the true value lies in their interconnectedness. On one level integrating Workforce Management software and Payroll software makes sense. It’s practical, efficient and creates order in what can potentially be a frustrating and time-consuming process. However, integrating POS and Workforce Management software goes further as it enables the user with the ability to make smarter decisions, such as: 1. Create rotas with the right amount of staff every time Ever look across the store to see staff twiddling their thumbs or a huge line at the checkout? Welcome to the complex world of accurate rota management, where you’re either increasing your staffing expenses or losing potential revenue. But, it doesn’t have to be this way. By integrating your rota system and sales data, you can make smart decisions to have the right amount of staff every time. 2. Make decisions in real time Thought you were going to be run off your feet this week, only to find that sales are slowing and business is quieter than expected? Once you’ve integrated your sales data into your rota system, you can make real time decisions on staffing levels, rather than reviewing at the end of each month. Track your revenue and wage percentage costs in real time, so you can alter and adjust the roster as the day or week changes. Of course, all your staff are immediately notified of changes, so everyone’s kept in the loop. 3. Be future orientated, move your business forward Stop looking backwards at last week’s rotas, timesheets and payslips to make next week’s decisions. Workforce Management software has come along way from the paper rotas and time sheets. It’s now possible to not only forecast future costs, rotas and staff requirements but also automate the entire rota making process with cognitive rota software. The rise of internet shopping and retail giants like H&M and Zara means that traditional ‘brick and mortar retailers’ need to be using every edge possible to stay competitive, relevant and front of mind for customers. Businesses that fail to embrace technology as a tool for success, are likely to struggle under the weight of the world that is rapidly embracing a more digital and connected world. How many times have you walked into a store, only to find that you can’t be served because the company is understaffed? While the economic benefits that come from an optimised roster are apparent, the value that comes from roster optimisation is expressed tangibly on a daily basis through customer service and customer retention. According to customer experience research conducted by thinkJar’s Esteban Kolsky, 66% of consumers who switch brands do so because of poor customer service and 85% of this customer churn could be prevented. Kolsky also notes that attracting customers is an expensive exercise costing businesses approximately six to seven times more to attract new customers, rather than retain existing customers. Building on this, further research shows that you’re 14 times more likely to sell to an existing happy customer than a new customer. It is therefore essential that retailers are providing the best customer service experience, to ensure customer retention. Businesses that optimise staffing rates for peak sales periods, will have the correct staff to customer ratios, creating efficient and favourable customer service experiences, resulting in higher customer retention rates. For traditional retailers, customer retention is paramount, as it not only ensures business continuity but also becomes a significant channel for acquiring future customers. Differentiating your business through excellent customer service and optimised staff efficiency, not only provides the competitive edge but also allows for financial stability and security as you can confidently make future oriented decisions to grow your business both financially and professionally. POS software integration is the next step in retail evolution. Like the payment terminal revelation before it, POS data integration will change the way businesses operate and what it means to be a traditional business in a digital world.