Why some retailers are bucking trends to pay their workers more

Cashiers have to be skilled at counting nickels and dimes for more than one reason: They brought home less than $20,000 in pay on average in 2010—if they were lucky enough to work 40 hours a week. Cutting hours and workers is one of the first steps many retailers take when sales slow.

Some retailers have bucked this trend, however, while still managing to offer low prices, good customer service, and impressive financial returns. What’s their secret?

Zeynep Ton, an operations management specialist at MIT’s Sloan School of Management, studied four highly successful retail businesses: Costco, the retail giant; the specialty grocery chain Trader Joe’s; the convenience store line QuikTrip; and Mercadona, the Spanish supermarket chain.

Common to all is what Ton calls a “virtuous cycle” of success, which begins when a store opens with adequate numbers of decently paid staff. Starting wages at Trader Joe’s amount to $40,000 a year, and Costco pays about 40 percent more than its leading rival, Sam’s Club. Mercadona hires all staff on a permanent basis. Coupled with generous pay are training and promotion opportunities that give employees a way to see a future for themselves. Not surprisingly, these chains’ stores boast some of the lowest turnover rates in the industry. “Investment in employees allows for excellent operational execution, which boosts sales and profits, which allows for a larger labor budget, which results in even more investment in store employees,” Ton explains.

But it’s not so simple as “happy employees equals happy customers.” These retailers have worked hard to reduce costs in areas other than labor, such as inventory. Trader Joe’s only stocks 4,000 items, far fewer than the average supermarket’s 30,000. As does Costco, it buys many items directly from manufacturers, sidestepping fees to middlemen. A smaller inventory reduces overhead and the number of supply-and-demand mismatches. Plus, because employees get to know their wares better, they are better able to tout them to customers.

The companies also take efficiency seriously. Trader Joe’s sells many of its perishable items prepackaged so cashiers don’t need to count them individually. Quik-Trip and Mercadona have robust training programs that prepare employees to perform a variety of tasks, from operating cash registers to ordering inventory, so they can work where they are needed. In addition, fewer workers have to rearrange their schedules at the last minute to work “on call” shifts, improving morale.

It’s a winning formula, Ton says, and it’s not just applicable to retail. Hospitals, restaurants, and banks could all benefit from a similar approach. “Bad jobs are not a cost-driven necessity but a choice,” she writes.

THE SOURCE: “Why ‘Good Jobs’ Are Good for Retailers” by Zeynep Ton, Harvard Business Review, Jan.–Feb. 2012.

Photo courtesy of Flickr/Ryan Ozawa