False economy

Why businesses end up cutting frontline staff hours and why it is often a mistake

I was delighted to read in Retail Gazette that the leadership of the John Lewis Partnership have plans to put more staff back onto the shop floor of their department stores.

Regular readers who have been around for a while may remember that in commenting on the spat about JLP potentially raising external investment, I argued strongly that it had locked itself into a negative cycle of cutting staff hours, worsening the customer experience and losing business as a result.

Knowingly Undersold

So it is good news if this short-sighted strategy is to be corrected.

But why did it happen in the first place? And why does it happen so often? Read social media commentary or Glassdoor reviews by retail front-liners working at brands that seem troubled at the moment (Asda, for example) and you’ll hear the same refrain over and over - hours cut, standards dropped, customers leave.

People at the top of consumer businesses are rarely idiots, though - so why do brands end up making this mistake? Let’s explore the decision making that often ends up in this strategic cul-de-sac.

To do so, I’ve created a P&L for the Moving Tribes department store. The key metrics I’ve used are all estimated (remember the bit at the beginning of a novel that says all characters are fictional and bear no resemblance to any living person!). They are, however, all directionally correct for a retail business selling ‘stuff’ (e.g. not food) in largish stores in the UK.

The P&L shows two periods. One, ‘the past’ was when we used to make a small but respectable profit. The other represents the current world - a shaky economy, online competition and changing consumer trends mean we are just selling less than we used to.

Comparing the two periods, you can see the lower revenue we are earning today. I’ve kept the gross margin percentage the same, so our ability to turn revenue into a gross profit is unchanged, and as a starting point I’ve kept our costs the same too - with the result that we are now losing money.

As we look at current trading, then, something has to shift. If we carry on like this we will run out of cash reserves and end up in trouble.

So what can we do? Which of the lines in the P&L can we shift in our favour? Let’s go through them one by one:

• Getting more revenue would obviously be great, but in a weak economy where footfall is dropping and consumers very careful about what they spend, raising prices seems unlikely to work and gaining market share is also challenging

• Increasing our gross margin either requires those tricky price increases or else some tough renegotiations with our suppliers on input costs

• Store leases are more or less fixed unless we do something dramatic like a CVA which has all sorts of other negative consequences

• Other costs which includes marketing spend, warehousing costs etc also feels more or less fixed and tough to change in the short term

No wonder, then, that the eyes of the leadership team end up turning to central and store staff costs. And of these two, if we are under time pressure store hours are the quickest to change - central cost reductions often involve consultation, redundancies and complex reorganisations whereas store hours are often allocated weekly anyway and can be reduced simply by offering fewer shifts to part time workers.

In other words, of all the ‘levers’ on the dashboard the Board is looking it, the Store Hours lever is often the easiest to pull, and therefore often the one pulled earliest and hardest. “We can always put them back when things pick up”, the team will reason to themselves, and in any case surely if revenues are lower we don’t need as many hours in store anyway?

The trouble is that time and again this apparently sound reasoning goes wrong. Smoothly reducing store hours in line with declining revenue is harder than it looks - you inevitable end up losing more shifts at peak times that you meant to, with a knock-on impact on customers, and retailers often fail to account for the basic fixed element of store hours required to do things like cleaning and replenishment, again with an impact on the customer experience.

So what’s the right answer for a business in tough trading conditions?

Well, it would be foolish to argue that trimming central and store costs is never part of the answer - it is perfectly possible to have too much cost in those areas and if you do that can have its own negative consequences.

But my observation is that strong and ultimately successful retail leadership teams also force themselves to look hard at the other, more difficult levers on their dashboard.

Really digging into gross margin, for example, is hard work but can yield great results - it is no surprise that retailers with higher market shares, who are more important to their suppliers, are tending to survive better than smaller ones. The ability to renegotiate terms, product specs and to generally partner more creatively with suppliers can mean the difference between survival and failure.

Equally, the other cost levers need careful work too - there may be more you can do on property costs, for example, than my glib analysis above would indicate.

And finally, of course, there is the strongest and most sustainable answer of all, which is to get revenue growing again. If your competitors are, for example, making the mistake of worsening their customer experience then there may well be a strong case for improving yours, telling the world about it and taking market share. It is a brave retailer who responds to the P&L above by investing more in their store experience but in some circumstances it can be the right thing to do.