If you want this, then you can’t have that…at least not for the same price or level of service. We’re quick to point out tradeoffs as sellers, and we’re often quick to accept them as buyers, sometimes without question.
But questioning tradeoffs, negating them, proving them false—finding the AND in the EITHER/OR—is a path to competitive differentiation.
This was one of my key takeaways from last week’s “Retail Operations: Managing for the Long Term” conference organized by the MIT Forum and Harvard Business School. Doug Rauch, former President of Trader Joe’s, was the opening speaker and the phrase “Find the AND in the EITHER/OR” came from his presentation.
If you’re not familiar with Trader Joe’s, a successful grocery retailer with about 350 stores in 25 states, I encourage you to read a profile published last August in FORTUNE Magazine. The company is privately held and highly secretive (it doesn’t disclose much information about itself). Therefore, it was certainly a treat to get some deeper insights from a former executive.
There are many things about Trader Joe’s that go against conventional thought and practice in the retail industry, but here is one fact that surprised many of us in the room: the average full-time associate makes about $60,000 per year and store managers make as much as $120,000. And according to the FORTUNE article, the company also contributes 15.4% of employees’ gross income to tax-deferred retirement accounts.
If you invest in labor, then your costs will go up and your profit margins will shrink. This is the tradeoff most retailers, especially low-cost ones, accept as reality. But is this a false tradeoff, like you can’t improve quality and reduce costs at the same time?
Trader Joe’s is just one example of how investing in labor can actually reduce overall costs and increase profits. I won’t disclose the actual numbers Mr. Rauch shared with us, but net profit after tax and average sales per square foot are more than 2X industry averages. The FORTUNE article, for example, states that Trader Joe’s stores “sell an estimated $1,750 in merchandise per square foot, more than double Whole Foods’.” The numbers Mr. Rauch shared with us were actually higher.
Zeynep Ton, a professor from HBS (who will soon join the MIT faculty), provided other examples in her presentation titled “Keeping Employees Essential to Success in Retail.” She highlighted Mercadona, the largest supermarket chain in Spain, and QuikTrip, a convenience store chain headquartered in Tulsa, Oklahoma. In both cases, these retailers outperform their peers in terms of sales per square foot and profits, while also investing more in their employees in terms of salary, benefits, and training.
“Retailers know the cost of having too many employees,” Ms. Ton said, “but the cost of having too few employees is not easy to quantify.” And if you’re like most store managers who are evaluated on managing payroll costs, your incentive is to keep staffing levels at a minimum. The costs saved on labor, however, are often negated by the cost of lost sales due to items not being stocked on the shelf, customers not finding the products they’re looking for, or promotional displays not being put out on time; higher recruiting and training costs due to high employee turnover; and loss of a customer for life due to negative shopping experiences, such as excessive wait times at checkout, disorganized and unclean stores, and nobody available to help find a product or make a selection.
One final thought: “Finding the AND in the EITHER/OR” is a great way to approach logistics outsourcing relationships. Too often, these relationships are treated like a zero-sum game, where a credit on one side of the negotiation ledger has to be balanced with a debit on the other, as Kate Vitasek discusses in her Vested Outsourcing book. However, if you question some of the perceived tradeoffs 3PLs and their customers believe they have to make, and you take a more holistic and long-term perspective about the desired outcomes for each party, you will likely find that many of these tradeoffs are actually false, that you can indeed place two check marks on the credit side of the ledger and none on the debit. More on this in a future posting.