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Outside the Box

Opinion: Retailers are leaving money on the table by understaffing

MIT study concludes that companies should staff stores to maximize profits, not to save on personnel costs

If you’ve gone shopping this holiday season, you may have had the following experience.

You go into a store looking for a gift but need help from a salesperson. Maybe you need more information on the product, or perhaps you need help finding the right color or size. You look around the store, but you can’t find anyone. Giving up, you leave the store without making a purchase.

If that sounds familiar, you aren’t alone. The proportion of customers who typically leave a store because of poor service is not negligible. Prior research shows that 33% of customers who experienced a problem were not able to locate sales help when they needed assistance, and 6% of all possible sales are lost because of lack of service.

Help wanted

Effective management of store labor is clearly important, as it impacts sales performance. However, labor-related expenses also constitute one of the largest components of retailers’ operating costs. As a result, there is a widespread tendency to understaff to save on those costs.

But what is the right number of employees? This is a complex question, as retail environments are characterized by volatile store traffic, making it hard to determine the correct staffing levels and often leading to inconsistent service.

The traditional method for determining staffing is sales-driven and depends on store budget allocation. A typical sales-based staffing rule is to match a constant ratio of expected store sales to the number of store associates. However, that rule ignores the fact that retail sales are also affected by store traffic and might result in labor-to-traffic mismatches, which can hurt sales revenue. Retailers can’t reach their full potential in sales if they follow that staffing practice.

Another problem is that shopper demand may be different from past sales, as past sales include only customers who purchased and not those who had an intention to purchase but left the store due to lack of service. As noted above, this is a fairly common scenario.

Matching staff to shoppers

To address this challenge, my colleagues and I developed a method to match store labor with incoming customer traffic in an efficient manner to improve sales performance. Our method is unique, as it goes beyond the focus on past sales at individual stores to leverage performance data across different stores within a retail chain. It enables retailers to derive aggregate labor requirements by using traffic data, point-of-sale data and labor data across stores with similar attributes like store format, product mix and market demographics.

Using our method to analyze data from a specific, yet undisclosed, apparel retail chain’s stores in the U.S., we found that store managers were systematically understaffing their stores. If they even slightly increased staffing levels, they would generate incremental sales that would outweigh the labor costs. This highlights that employees are an important contributor to the sales process. When there aren’t enough sales associates, sales don’t reach their potential.

Of course there is a limit to the number of staff that can be added before stores reach a point of diminishing returns. The goal is to use retailers’ data to find that sweet spot in the ratio of sales people to customers.

99% potential sales

In our study, the retailers’ stores were achieving 85%-95% of their potential sales with current staffing levels. If they used our method to optimize staffing, they could achieve 99% of potential sales. That reflects a possible 14% increase in sales, which is quite significant.

When considering the heuristic’s performance by assessing the change in gross margins (defined as sales minus cost of goods sold) minus labor costs, the breakdown in our example of the apparel chain reveals that the average store could have improved its performance by $2,380 a week during the six weeks of the holiday period. There are 46 stores, thus the potential improvement for the chain comes to $109,480 a week, or $565,890 for the six-week holiday season. That’s an improvement of about 9% in performance.

While many retailers could use this method to improve staffing decisions and sales, the degree of the effect probably depends on the type of store. For example, self-serve stores such as grocery chains may see a more marginal contribution from additional employees. However, clothing and electronics retailers could see a bigger gain in revenue, where customer service plays a more important role in generating sales.

Regardless of the type of retailer, the takeaway is that stores need to move past the inclination to minimize cost by understaffing because it can have a big impact on profitability. Stores should staff to maximize sales and profit, not to minimize costs.

Rogelio Oliva is a visiting professor at the MIT Sloan School of Management and a coauthor of “Traffic-Based Labor Planning in Retail Stores.”

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