An article by James Surowiecki in this week’s New Yorker Magazine highlights the problems with excessive cost-cutting by retailers. In the drive to keep labor costs low evidence shows that retailers often hire too few salespeople and pay them too little.
An MIT professor recently published a study of four large discount retailers who are more profitable than their leading competitors, and sell more per employee and per square foot. The big difference? They have higher labor costs, more salespeople, and they spend more on training.
A Wharton study of a retailer with more than 500 stores showed each dollar of added payroll was worth four to twenty-eight dollars in new sales. Surowiecki provides these two telling examples of what happens when sales staff is cut:
- “In 2007, Circuit City fired more than three thousand of its most experienced salesmen, replacing them with newer workers whom it could pay less. Its sales dropped, and it was bankrupt within a couple of years.”
- “When Bob Nardelli took over Home Depot, in 2000, he reduced the number of salespeople on the floor and turned many full-time jobs into part-time ones. In the process, he turned Home Depot stores into cavernous wastelands, with customers wandering around dejectedly trying to find an aproned employee, only to discover that he had no useful advice to offer.”
Previously, I wrote that only a myopic managment would attempt to increase sales by reducing the number of salespeople available to help customers. Yet we see this insanity repeated even today as sales are beginning to rise.
It will be an expensive lesson.