Optimizing Store Labor in Retail Maximize Efficiency and Reduce Cost

On January 3rd, the Wall Street Journal reported this ground-breaking story:

"Early this year, Wal-Mart Stores Inc., using a new computerized scheduling system, will start moving many of its 1.3 million workers from predictable shifts to a system based on the number of customers in stores at any given time... The change is made possible by a software system that can crunch an array of data, part of a shift toward computerized management tools that can help pare costs and boost companies' bottom lines."

How Key Trends Impact Retail

Why is this article so important? If you scan the News Room at Wal-Mart, or do a search of retail articles appearing in the Wall Street Journal or other major business publications, you will rarely find articles on labor, operations, or productivity. Most of the news relates to quarterly revenue numbers, forecasts, same-store sales, leadership changes, acquisitions, and business expansions. The above article suggests a major change in focus by Wal-Mart leadership from revenue growth to labor expense reduction. Wal-Mart is not alone. Other leading retailers (e.g. Radio Shack, Payless Shoes, Mervyn’s, Target, Best Buy, and Petco) are launching similar programs that optimize productivity to increase profitability and reduce expense. This is not limited to hard-goods retailers. Retail banks like PNC, ATB, Charles Schwab, and First Trust are also diving into their numbers in order to shift excess staff to new locations.

Store Labor Matters

It should come as no surprise that Wal-Mart and others want to optimize store labor. It represents the single largest expense within the store, outside of the cost of the products on the shelves. It can exceed occupancy costs, merchandise management, marketing, and technology expense combined. As an example let’s look at a $30 million retail store with 50 employees. Assume that their fully loaded labor cost is $3 million out of a total overhead expense of $6 million. This can represent as much as 50% of total expenses. Assuming an 8% operating margin, the company would need to generate an additional $6 million of annual revenue to achieve the same profit enhancement as shedding $500,000 in expenses. Before they embark on an aggressive marketing and promotional campaign to boost sales by 20%, it behooves this retailer to first make sure that they have optimal staff levels. There are several reasons why store labor has not been a central focus historically.

[ read more ]