Let me describe what is likely a familiar story to many retailers. The end of the fiscal year is in sight. Business has been good but perhaps not great and the projects necessary to deliver growth in the next couple of fiscal years require immediate funding. All departments need to take a haircut, and each department head is sent back to find efficiencies. As department heads turn over every stone looking for savings, they eventually come across retail store labor. It’s a big number so it’s certainly compelling to tap into it for savings. The challenge is retail labor is usually adjusted and readjusted based on changes to sales and profit targets, making it one of the last cost centers to be finalized usually at the 11th hour. This tends to lead to very generic budgeting decisions with all stores taking similar reductions.
There is more to the story. Unlike other efficiencies, finding savings in retail labor needs to plays out over the course of the year, and because of the nature of how retail labor is handled in organizations we don’t always see the savings we expect playing out consistently week after week. To address this, many retailers will include a labor gate as part of any incentive offered to keep labor spend aligned to plan. Make your sales plan but overspend on labor, and you forfeit your bonus. Make your sales plan and underspend on labor? Not ideal, but underspending is a victimless crime.
Add all of these factors together and you start to see some of the worst aspects of retail budget management play out in stores. As poorly allocated labor goals are exceeded, managers begin to hoard hours in order to stay in line with budget. Shifts are cut from the sales floor, merchandising and store cleanliness begin to fall off track. (See The Most Important Person in the Company)
In the short term, the store may hit its targets, but by incenting the store managers to keep to the labor gate, a vicious cycle has been set in motion. Store managers may reduce shifts and prioritize associate work to focus on basic store operations. This may turn customers off because the in-store experience feels marginalized. If senior leaders visit the store and see its poor state they are likely to quickly push labor back into the store to get it back up to speed, often with unbudgeted labor dollars and potentially at a higher cost. In this scenario, is underspending on labor a victimless crime?
The scenario above is avoidable. Two important factors can turn any retail organization from a cost cutter to a cost leader. The first is a more dynamic relationship between finance and retail operations. The status quo for this relationship is budgets being created and spread across the entire year. They are never reviewed once the year starts, and most reporting is rearview facing. Meaning, did we overspend last month? Finance and retail operations need to be collaborative when creating annual budgets.
More importantly, once the year begins they need to work together to reforecast against current trends and allocate labor to stores appropriately. This is probably a monthly or quarterly exercise, and should leverage an organizations WFM system to provide accurate data to forecast against. The goal is to spend into positive sales trends and reduce risk in stores that are trending below plan.
If taking a more dynamic approach to budgeting and forecasting addresses the gaps in labor planning, then a second more tactical factor is understanding the current labor model. Building out labor models (standards) by logical store group allows retailers a much more granular view to how and why labor is being allocated. The logical groups I refer to should be more complex than simple volume banding. The groups should represent a store configuration, or customer demographic preference before volume becomes a factor, since these complexities drive variation in the labor model, more so than volume. Once labor models are in place by group, retailers can start to see how labor is allocated within the store, zeroing in on activities or departments that may be underutilizing labor or in desperate need of more labor to drive sales.
Once a retailer has reached this level of sophistication, they can also iterate new models to see the effect of introducing new services or product handling steps. Think of the common retail practice of seasonal hiring. This business need could easily be modelled to a much greater degree of accuracy than most retailers currently even attempt. Assuming the new service is viable, changes can then be incorporated into the upcoming forecast so stores are resourced appropriately.
As a retail customer, we might not know all of the details that go into a well-run a retail store, but we know when it’s not well run. To that end, it’s important for retailers to be more flexible and thoughtful when planning out labor. They must break out of the annual budgeting cycle paradigm that sets labor inflexibly, and refuses to look at opportunities to allocate better within the year. Retailers also need to become more scientific and less anecdotal when actually building labor models/standards. The tools are available to do so with great accuracy on a store by store basis.