Impact of Higher Labor Costs in Retail

The New Normal: The Impact of Higher Labor Costs in Retail

Dan Bursik, Vice President of Product Management

No one will disagree that higher labor costs are here to stay for retailers. There are many contributing factors: aging baby boomers, competition for retail workers between employers, elimination of high-hour “almost full-time” part-time jobs that don’t trigger full-time benefits, etc. A constant search for new employees and the expectation of regular training and turnover is now the new normal across almost every market in the US. New regulatory requirements around predictive scheduling with employee expectations of better work-life balance have added new requirements for store labor planning and associate retention efforts.

This new normal of higher labor costs has driven fundamental changes in retail organizations as the add-on labor costs have resulted in fewer, less-experienced associates having to deliver the service and format of their retail brand. We see these changes impacting staffing at both the store and corporate offices. Concurrent with these trends on the cost of labor are significant changes in what defines success at retail, including initiatives to extend multichannel shopping, pickup and delivery options to customers. Grocers are challenged to further differentiate perishable departments as defining signature elements of each store—and the company brand collectively. Specialty retail differentiation is also undergoing rapid reinvention to defend the brick-and-mortar store shopping experience from diverse online competitors.

In response, many businesses have applied lean approaches to curtail or discontinue low-value programs or activities in order to redeploy labor to higher-profile customer activities. We also note that corporate staffs have been cut back to reduce overhead and fund new customer-facing initiatives in a push to protect or build top-line sales growth. Labor management teams, for example, are leaner than ever and must rely on system automation and exceptions rather than old-style reporting and analysts’ work. Suffice it to say that all aspects of the business are under renewed scrutiny to drive efficiencies and maintain profitability against these headwinds of change.

This post will touch on some of the biggest impacts of this environment on retail organizations. I’ll leave out the evolution of workforce management technology, store format and facility design for another discussion.

New demands on managers and human resources

If the old-school definition of a store manager was someone who could “get it done” using whatever top-down style they were exposed to coming up through the ranks, newer managers have more considerations to manage with a less-experienced and constantly changing workforce to execute their duties. Some of these expanded considerations include greater regulatory compliance for food safety or other business imperatives, more detailed brand expectations for store conditions, and multiple execution layers associated with promotional activities to engage customers. As such, today’s managers must be better communicators, trainers and coaches to their associates in order to carry these imperatives to successful completion within their stores. Accomplishing this with less-experienced employees who have ample job opportunities elsewhere requires managers to be constantly working on engaging and motivating associates to both meet objectives and get the right things done, in the right way. These managers are the orchestrators of change management and team alignment, albeit with a constantly evolving playbook.

Along with their partners in human resources, store managers also face the need for constant recruiting, onboarding and training to an extent not seen in prior years. Some organizations offer higher wage rates, employee discounts, scholarship opportunities and a variety of other perks to combat turnover, but the common thread for every form of retail boils down to more time and effort expended on employee acquisition, onboarding and training.

A new mandate for centralization and outsourcing

While consumers expect more for their hard-earned dollars—including a memorable shopping experience—labor-intensive elements of store operations have come under increased scrutiny. This is especially true in grocery retailing, where fresh-prepared food offerings require consistent execution from day to day and across stores within a retail banner. If your local store offers true scratch bakery, I suggest you enjoy it while you can. Retailers have been caught in the challenge of staffing these departments and producing consistent products with fewer trained or trainable workers than ever before. And while innovation on the product side has brought us mix and bake, bake off or frozen/shelf-ready products with longer shelf life, these options cannot fully replace the taste, theater or scents of a true scratch operation. Many choose to focus on a handful of orchestrated items and supplement with alternatives.

Prepared foods and kitchen functions are similarly facing attrition given the complexity of worker training over a shorter employee job span. Centralized kitchens or outsourced prepared or partially prepared foods make for easier execution in stores without the small-batch cooking processes normally associated with competing restaurant culinary options. As the challenge to execute consistently at the store level becomes more problematic, offerings are often pared down to the items that are the easiest to execute with reduced worker training. Innovation in robotic food preparation may eventually help in some areas, but the imperative is to align your offerings to what you can execute with the workforce you expect to have.

Not every retailer is trimming away these offerings completely, but most are evaluating which components might be reconsidered based on the volume, performance and the associate skills required to successfully execute.

Focus on simplified execution in stores

Every company we talk with is reviewing store labor models and task frequencies in search of low-value activities to eliminate in order to free resources for higher-value customer-facing activities. This critical exercise not only drives shopper engagement across every business channel but also helps to defend and build topline sales. 

Work simplification (what gets done), process simplification (how it gets done), and workplace design and organization (facility design and automation supporting process execution) are new targets for incremental optimization. More companies are looking to outside consulting firms for guidance and innovation in this realm and are streaming continuous improvement initiatives back to the stores. The best of these also focus on what stores need to stop doing, so the mission of store associates is truly streamlined and not just buried in new layers of add-on expectations.

Many of these initiatives are moving to stores with less support from leaner labor management teams and without structured training and deployment guidance. Store management teams must sort it out, communicate it, and adapt scheduling and performance expectations to deliver the package. Often managers are still left feeling they are building a second story on a house while the foundation is being built or rebuilt.

Encouraging employee retention and development

The cost of employee turnover has never been higher, and the best companies and managers are working harder to retain and develop people to fight turnover. Whether driven by state or local regulations or by proactive company policies, most companies are making efforts to accommodate associate availability and schedules to allow for more consistent schedules and better work-life balance for their people. 

Some companies are also doing more to assess associate skills and potential and to map development plans to retain the best employees and prepare them for next-level opportunities. Often this also serves to create better cross-utilization of associates. Given the high cost of acquiring, onboarding and training new associates, who can afford not to develop the best prospects already within the organization?

Automation and optimization in store systems

If there is a bright spot of opportunity, it is introducing next-generation technology and artificial intelligence (AI) assistance to simplify and streamline store execution. New checkout options offer the ability to meet customer expectations with fewer cashiers, while robotics experiments are becoming more common for tasks like floor cleaning, aisle inspection and out-of-stock replenishment identification. Smarter systems offer optimization potential for production planning, inventory management, and the systematic adherence to food safety requirements and log reporting in all food production areas. Workforce management systems can now produce more accurate forecasts and truly automate wall-to-wall scheduling. These welcome advancements replace the complex manual jigsaw puzzle that managers face in matching workplans and customer service needs to associate skills and availability. For the early adaptors, these improvements have all resulted in the effective redeployment of management time to associate coaching and on-floor activities that engage customers and drive sales.

Closing thoughts

Rising labor costs associated with wage growth, fierce competition for qualified associates, higher turnover, and other related issues represent the new normal. Meanwhile, competitive pressures continue to change the store’s mission and focus.

We see the store as the last frontier of optimization. That’s an exciting opportunity for reinvention and differentiation! However, actualizing this potential requires savvy change management and the effective automation of processes, systems and tasks that free managers to prepare and motivate their people. This sets everyone up to execute consistently and successfully deliver on your unique brand promise. 

Those organizations who do this best will be most likely to reap the significant rewards.