Visiting Prof. Zeynep Ton on why more retailers should invest in their employees

MIT Sloan Visiting Prof. Zeynep Ton

It’s no secret that the labor market is tough these days. But the issue isn’t just the number of people who are unemployed. It’s also income inequality and the low pay of retail employees that’s concerning. Retail employees represent close to 20% of the U.S. workforce.

In retail, conventional wisdom holds that if you want to offer the best prices then you can’t afford to invest in your employees. Typical retail workers receive minimal training, irregular hours, and no benefits for part-timers. Turnover is high with understaffing common.

Wages are so low that retail workers tend to rely more on public assistance than workers in other industries. If companies actually invested in their employees by offering better jobs, many of these people could move into the middle class, which is critical in our economy.

While many retailers claim that investing in employees is not a sustainable business model, my research shows otherwise. There is in fact a small, but growing group of retailers who follow a model that benefits customers, investors, and employees. They offer the lowest prices and make profits.

A case in point is the Spanish supermarket chain Mercadona, a profitable company with more than 1300 stores. The key to its success—and its investment in its workers—lies in its operating decisions. For example, Mercadona deliberately chooses to stock significantly fewer products, offering customers less variety. But the tradeoff is that the store simplifies operations, improves its ability to forecast product demand, and can optimize inventory levels.

In addition, it’s easier for employees to manage fewer items in terms of stocking shelves, moving merchandise, and being knowledgeable about products. And the store can obtain better discounts from vendors from whom they are buying products at a higher volume.

Fewer products do not reduce customer satisfaction or sales because Mercadona operates with a very low level of employee turnover and a high level of training. Workers on the floor are able to explain to customers why a lower variety benefits them and can refocus customers who might be looking for other brands.

This is where training comes in. New full-time hires receive four weeks of training compared to the U.S. industry standard of seven hours. The goal is to ensure that the business gets the right people for the right jobs who will stay at the company.

Their strategy is working, as the company has better operational performance and sales than its competitors. Indeed, its sales per employee in 2008 were 50% higher than U.S. supermarkets. And turnover was only 3.8%.

Beyond Mercadona, other retailers are gaining a competitive advantage by making similar operating choices. Examples include the convenience store chain QuikTrip, Trader Joe’s, and Costco, all profitable companies that offer the lowest prices and still invest in employees.

And at this point, it’s not only about profits for the company. We need more retailers like these to provide good jobs to workers who are so often on the losing side of income inequality.

Read more in Harvard Business Review 

Zeynep Ton, a visiting professor at MIT Sloan, is the author of case studies on QuikTrip and Mercadona.

What do you think?

2 thoughts on “Visiting Prof. Zeynep Ton on why more retailers should invest in their employees

  1. Agree with Prof. Zeynep Ton, Human Resource is a gold mine but most company top management team are short sighted. This resulted in short term gain but long term pain for the economy.

    Well I wish the Retailer Bosses are reading this article and wake up to a New Year Resolution for 2012.

    They have to take action and learn from mistakes.

    Colin Koh

  2. you assert that trader joes (TJ) offers “lowest prices”
    do you have data to back this up?
    I occaisionally go into the TJs on washington street in Newton, MA; there prices are ok but not outstanding, and they are not a complete store – TJs is basically a shtick, they ahve a limited amount of stuff so you still have to go to shaws or stop n shop
    like starbucks, replacing hip formica at woolworths and horn and hardarts for the people who grew up in the 50s with hip stuff for people who grew up in the 90s

    I speculate that poor training is deliberate, to frustrate people; frustrated angry people are impulsive and shop worse (also control issues – anger = loss of control, = more buying to reassert control)
    there is also a sort of you don’t have a choice reverse psychology thing here: if consumers feel helpless, rather then doing the rational thing and storming out, they learn to accept bad service…

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