Retail’s big mistake: Why slashing payroll cuts into profits

When sales are down and the quarterly report is due, a common strategy for retailers to boost profits is to cut labor. Payroll is the second-largest expense for most stores, so reducing associates’ hours is a fast, easy way to make the numbers work. But this quick fix is “business school thinking gone wrong,” according to Wharton professors of operations, information, and decisions Marshall FisherSerguei Netessine, and Santiago Gallino. It is imperative for retail companies to recognize that employees are the most valuable asset on any sales floor, especially now. Increased competition from online shopping threatens the very existence of many physical stores, so top-shelf service can make the difference between a customer making a purchase or walking out in frustration.

wall with time cards and a timeclock

In their latest research, the professors make the case for having an adequate, well-trained staff as the long-term solution to stable profit margins. They also unveil a mathematical approach they have devised to help companies determine how much staffing is needed at which locations. The research is captured in a paper titled, “Setting Retail Staffing Levels: A Methodology Validated with Implementation.”

“Understaffing stores and undertraining workers was never a good idea, but it’s especially bad now, because it takes away the biggest advantage traditional stores have over e-tailers: a live person a customer can talk with face-to-face.” 

Read more at Knowledge@Wharton.