Fifteen states have increased their minimum wage in 2016, with more on the way. In Seattle, for example, large employers will have to pay a $15 minimum wage by January 2017. These increases will seriously affect low-wage employers such as retailers and restaurants, which means investors should be asking some tough questions to see which low-wage employers in their portfolios will benefit from the wage hikes and which will lose:
How are you increasing your labor productivity?
If a company raises wages, it needs to increase labor productivity or either raise prices or lose profits. Simply cutting employee hours is not a viable solution. Companies that rely on understaffing to squeeze more profit out of fewer people will never get to the land of high productivity and great service that creates customer loyalty. The operational problems caused by understaffing will stymie attempts to lower costs and reduce service. So how can a low-wage retailer increase productivity? There are three possible approaches.
Automate. This can make sense in some environments, especially for routine information processing. But it’s a different story for retailers and fast-food companies — the largest low-wage employers. Robots are not yet good at social interactions or tasks that require dexterity, such as unpacking crates, shelving shampoo, making a burrito, or arranging flowers. That’s not to say that automation wouldn’t help in some ways. Wouldn’t it be cool if robots could round up the carts from the parking lot or if everything had an RFID tag and customers didn’t need every item to be scanned at the checkout?
So far, the technology we hear most about in retail is self-checkout. But self-checkout by itself does not automate the checkout process, it just outsources the task to customers. That doesn’t work so well when there are many items to scan or when things suddenly get complicated — say, when the customer realizes she got the wrong item or when she wants to use two coupons for the same product. Self-checkout can also increase customer theft.
Consequently, investors should ask: What technologies are you planning to use to increase labor productivity without undermining service or increasing costs elsewhere?
Simplify processes. There are many ways to simplify processes in low-wage service settings. Perhaps the most significant is to reduce product variety within a category and cut back on promotions. My local, low-cost supermarket has over 250 types of soup, over 50 types of milk, and over 50 types of shredded cheese. As research has shown, customers are less likely to buy anything when there is too much choice and they are less satisfied with what they do choose. Such variety also boosts costs and decreases labor productivity. With so many products in a limited space, shelving takes more time and not all units fit on the selling floor. So employees have to put the extras in the backrooms and bring them out when the units on the selling floor are sold — an error-prone process that often leads to stockouts. And of course, employees spend a lot of time moving products around and changing prices and locations of products due to promotions.
Given this reality, investors should ask: Do you want to pay people $15 per hour for all this non-value-added work? What are you doing to simplify so your people can work more efficiently?
Improve work design. Many low-wage employees could work more productively — if the company would let them. Standardizing routine processes and providing enough equipment, training, and time would help employees do their work properly. Cross-training allows employees to do useful work even when there are no customers. Empowering employees to make simple decisions for customers would reduce the time spent on small issues and deliver faster service.
With this in mind, investors should ask: How are you changing work design to improve productivity?
How are you using your workforce to cut costs and increase sales?
Another way for higher wages to pay off is if the employees themselves help reduce costs. One of the truths that makes the Toyota Production System so successful is that those closest to the work are in the best position to improve it. They have the most detailed knowledge and the strongest motivation. If a company can create an improvement system with mechanisms to hear employees’ ideas (the easy part) and to act on them (the hard part), costs will go down.
Employees can also increase sales. They know things about their local customers that no centralized system can know. They know what the customers are asking for that the store or restaurant doesn’t have.
Of course, all this requires enough time to do the daily work and engage in improvement. Many low-wage employers think that increasing labor productivity means doing as much as possible with as few people as possible all working as quickly as possible. But key aspects of great service can’t be speeded up. An IT system may find an answer quickly, but it can’t listen to the customer’s problem more quickly or with any empathy. Nor can thinking about improvement and experimenting with countermeasures be speeded up.
For these reasons, investors should ask: What are you doing to gather ideas from your people and to act on them? How are you leveraging employee knowledge to improve service and sales? How are you making sure your people have enough time to do their tasks well, give great service, and contribute to continuous improvement — all of which will pay back their wage increases?
What is your plan for transitioning to high performance?
If a company’s answers to any of the questions above is some variation of “we’ll find a way,” it has a problem and investors should worry. None of the changes I have mentioned are that easy. They require a shift from seeing employees primarily as a cost to be minimized to the generator of profits and returns. If a company’s leaders view employees this way, they will realize that it makes sense to invest more in them.
Higher investment, of course, doesn’t just mean higher wages and more training. It also means setting high expectations and doing everything you can to help people meet them. As I learned from my own research, that’s when you find convenience store clerks and grocery store cashiers who love providing great service and love their companies for helping them do it.
Right now, most companies are used to operating in the realm of mediocrity — from recruiting to training to job design to performance management. I have visited many retail chain stores since I started my research in the late 1990s. It is not unusual to find stockouts, messy (or worse) backrooms, new employees who still haven’t been trained, not-so-new employees who can’t answer basic questions, and managers who know about problems that are losing the company money but feel no urgency to solve them. Lack of care and respect for employees means that employees lose concern for their work.
Getting from there to excellence will take years. So these companies better get started. Investors can do them a favor by prodding them for serious answers. What exactly is the plan to move to excellence? What are some useful measures of whether progress is being made?
The minimum-wage hike will deeply affect low-wage employers. The companies that muster the most competence and motivation (that means leadership) in moving towards excellence will win. The others will either have to make less money or else increase their prices and lose out to their competitors.