3 minute read
Action Alert: If You Manage Labor by Sales per Labor Hour, Adjust for Inflation Now!
Jeff Duce, Director of Product Management
There are multiple ways retailers manage their company’s highest business expense, labor. I have written a prior blog post—“Setting Labor Expectations and Effective Retail Reporting: Managing Labor”—discussing the various ways companies manage labor, with sales per labor hour (SPLH) being one of them. In fact, in that post I pointed out how SPLH does not work well with inflation. That is exactly what I want to talk about now.
I’m not here to preach again about why managing labor using SPLH is not ideal. My previous post speaks to those points. But if you are using SPLH, or even fixed and variable factors like fixed hours and a variable SPLH, then it’s crucial to adjust for inflation if you haven’t already and make sure you have adjusted enough.
For several years we lived with moderate 1-4 percent inflation rates. But since October 2021, inflation has been abnormally on the rise, as captured by the U.S. Bureau of Labor Statistics (see chart below: 12-month percentage change, Consumer Price Index, selected categories, October 2022, not seasonally adjusted.)
Times now are anything but typical, but organizations that are using SPLH metrics in their budgeting still may only be accounting for slight increases in the SPLH goals due to the recent history of low inflation.
We are no longer living in typical times
If you are still operating under a budget that was conceived before anyone had any idea food inflation would be at historic highs, and if you haven’t yet made changes to store SPLH goals, then your labor costs may be much higher than you intend or expect. Some retailers are looking for ways to reduce labor costs by removing services, reducing store hours of operations, moving work to other parts of the day and so on, but for those that are not on an Earned Hours Program and are managing by SPLH, change needs to begin with raising SPLH goals to account for the change in sales due to inflation.
Let’s do some basic SPLH math:
Let’s assume there is a store with weekly sales of $500,000 and an SPLH goal of 200. That will equate to 2,500 hours to spend on total store labor.
$500,000 ÷ 200 = 2,500 hours
Now, if 200 is last year’s SPLH goal, then based on an 11.2 percent food inflation amount, the SPLH should be 222.4 versus 200 just to keep up with the inflation impact. Otherwise, you will be overspending for labor, as this example shows:
(200 x 11.2% = 22.4) (200 + 22.4 = 222.4 SPLH)
$500,000 ÷ 222.4 = 2,248 hours
2,500 hours – 2,248 hours = overspending by 252 hours
I think it’s clear that overspending hours by more than 10 percent is unsustainable and just not a very good operating model. Earned hours is the more dynamic approach versus SPLH. Earned hours focuses on work content instead of sales. However, even utilizing the SPLH approach, it’s important to make the necessary adjustments methodically to each department. You should not take 11.2 percent of labor away from all departments. Inflation rates differ by category. The best approach would be to work with your merchandising teams and determine what the appropriate inflation adjustment should be based on their systems department data. Then make those appropriate adjustments for all departments and all stores.
Another important step is communicating the changes to the stores. In fact, even if you’ve already made the appropriate adjustments, have you talked with and explained the whys to your store directors and department managers? You don’t want them to think you are simply removing hours. They need to understand you are appropriately adjusting labor to account for the change in the cost of products and not the number of products they process.
Customers’ buying habits are changing due to inflation and what they must buy to get more for their money
Another factor impacting sales and SPLH with the rise in inflation that should be taken into consideration is change in what customers are buying. What they bought last year may be completely different than what they want or are able to buy this year. They may buy chicken instead of steak. They may buy less in traditionally higher-grossing departments like bakery and deli and opt to buy commercial bakery products, pre-packaged meats and cheese. They may make salads at home versus ready-to-eat from the deli. So, the dollar is very much affected by the cost of everything going up but equally important is to remember that customers are buying different items than before, and labor is likely much different on those purchased items.
Inflation and deflation are cycles that happen. They must be dealt with appropriately in your labor model. Right now, adjusting for inflation in a timely manner is critical to managing your business. And, once the economy settles down, making the appropriate adjustments to account for lower inflation or even deflation will also be a business imperative.