Out of Stock? It Might Be Your Employee Payroll -- Not Your Supply Chain -- That's to Blame
Attention, shoppers: Did you find everything you were looking for? Retail customers who answer "yes" to this question might very well represent the Holy Grail to retail operators who want to increase their sales with only a modest increase in costs or, in some cases, increase sales by merely reallocating staff within a store at no extra cost.
Impossible? Not according to a new study on retail store execution by Wharton operations and information management professors Marshall L. Fisher and Serguei Netessine, and Wharton doctoral student Jayanth Krishnan. Using proprietary data collected over 17 months from a large retail operation with more than 500 stores, the Wharton experts determined that sales and customer satisfaction are not merely driven by a customer's ability to find products on the shelf. Instead, "customer perceived in-stock" -- a metric the Wharton experts use to describe the number of customers who answer "yes" to that all-important "Did you find everything?" question -- is driven not only by actual in-stock but by how well the customer rates employee knowledge about the store and the products they are looking to purchase.
In short, customers get lower satisfaction from their shopping experience when stores have too few employees and, more importantly, when stores lack employees who are knowledgeable about what's in the store. After analyzing the results of the study, the researchers suggest that a "modest reallocation of the payroll budget among stores" in this particular chain could yield a 2-3% increase in sales with no increase in cost -- a clear signal that adequate, knowledgeable staff help drive customer satisfaction and retail execution success.
But what surprised Fisher, Netessine and Krishnan the most was the potential financial return if the unnamed retailer were to make even a modest investment in hiring more staff. According to the study, "increasing associate payroll by $1 at a given store is associated with a sales lift of anywhere from $4 to $28, depending on the current level of payroll relative to store sales. The implication of this finding on retail performance is quite dramatic."
"We were amazed to find how this retailer could increase sales by changing its staffing resources through adding more employees or simply reallocating existing staff," says Netessine. "In some stores, the sales leap would be $28 to $1 in employee costs, and that was really striking. We were blown away. It never occurred to most of the retailers that by moving employees around the stores, you could increase sales."
Fisher agrees. When the researchers analyzed the impact of increasing staff, increasing inventory and providing more training to employees, "The biggest surprise was the enormous measurable impact from increasing staffing," Fisher says. "And that's the one that's the easiest to act on."
The "Weak Link"
The study's findings could have a significant impact on how retailers view supply chain issues. As Netessine points out, most of the traditional retail supply chain concerns focus on planning and getting the product to the store. "You forecast demand and plan just-in-time deliveries to the store, but our paper points out that this is really not enough," he says. "Execution within the store is the key element. That's how the product gets to the customer. People will hopefully start thinking about execution issues and how to address them, and spend more time thinking about in-store processes. This is the weak link in the supply chain."
When it comes to customer satisfaction, says Fisher, "the new finding here is that it is often not enough to have [a product] in the store for many retailers. In many cases, a customer needs [the help of] a store associate to decide what product to buy."
As Netessine explains, "In a supply chain analysis, consumers' perception of availability is when there is inventory availability; if you have it in the store, they will think it is in the store." But as the study found, "employee knowledge about product brand and prices was the biggest driver of consumer perception of availability. Consumers think that it is not available to buy if there is no associate to explain the product, if there is no assistance when they need it. When we asked, 'Was there anything on your trip to the store that you couldn't find?' and then tried to get to the bottom of it, the biggest driver was employee knowledge and assistance. The actual presence of the product is actually the second driver."
The study, which is titled, "Retail Store Execution: An Empirical Study," is part of two long-term projects by Fisher, Netessine and Krishnan that examine store operating policies and out-of-stock issues in four major but unidentified retail operations to determine what drives retail success. Granted, before starting the "Retail Store Execution" study, the Wharton experts knew that customer satisfaction was a dominant driver in successful retail sales transactions. But they didn't know what elements of an individual store's operating policies drove customer satisfaction and directly resulted in successful purchases for any and all traffic that walked into the door.
According to the results of the study, "Each day a given customer (traffic) arrives at a store representing potential demand. A fraction of this potential demand converts to actual sales depending on how well the store executes. Potential demand may fail to convert to actual sales if the store fails on any of four key execution elements: 1) the product the customer wants to buy isn't in the store because of a stock-out; 2) the customer needs help and can't find a store associate; 3) they (the customers) find an associate but the associate is not helpful; or 4) the checkout line is too long.
"Interestingly, for many years, retailers have been administering surveys to their customers to measure both their overall level of satisfaction and their opinion of various details of their store experience," the study continues. "Many of the detailed questions relate to store execution. For example, 'Did you find what you were looking for?' is a commonly asked question directly related to missing inventory...it is thus natural to consider using this data to better understand issues related to store execution, including what factors influence the quality of execution and what is the impact of execution on output variables of interest to the retailer, such as sales and overall customer satisfaction."
Though the authors declined to identify the study's retail chain or its particular retail sector, they noted that they tracked data monthly for 17 months at individual stores. Key sets of data were obtained: 1) financial store performance data, including sales, number of transactions and units sold; 2) operational data, such as payroll, employee turnover and in-stock levels; and 3) the results of ongoing customer satisfaction surveys that use a variety of questions to measure customers' overall satisfaction with a store visit as well as their perception of various aspects of their experience that may have influenced their overall satisfaction.
A New Variable: Payroll
For the customer satisfaction data set, questions about the customer experience were designed to help determine the benefits of having enough staff, knowledgeable staff and a hassle-free check out. In order to collect the data, the retail chain conducted automated customer surveys over the telephone. When customers paid their bill at the checkout, they were randomly chosen to answer a satisfaction survey and given an invitation to call a toll-free number to answer a series of questions (most had "yes-no" responses) using the numeric pad on the telephone. Some examples:
- During your visit, did anything get in your way that was put or left in the aisles?
- Did you need assistance, but were unable to find it?
- Was your checkout quick and efficient?
- Did you see any product which you were interested in purchasing that was too high for you to reach?
- Did you look for anything that turned out to be out-of-stock or not carried by the store?
- Did you have any difficulty finding the price of an item?
- How knowledgeable are employees about what they sell? About everyday prices?
- Based on your visit to our company that day, will you come back?
- Do you feel you got your money's worth on this visit?
- Taking everything into account, how would you rate your visit to the store that day? (scale of 1 to 10)
Using formulas and adjusting for, among other things, seasonality, trends within individual stores and store heterogeneity, the study found that customer perceived in-stock is primarily driven by actual in-stock and customer rating of employee knowledge; overall customer satisfaction is primarily driven by customer perceived in-stock as well as payroll level (number of employees), customer rating of employee knowledge and check-out efficiency; and sales are primarily driven by actual in-stock, overall satisfaction and payroll level. In short, the study notes that it is "reassuring to see that satisfied customers do buy more," and "knowledgeable employees are instrumental in facilitating product availability."
While previous reports have indicated that customer satisfaction and inventory availability positively affect sales, the researchers write that viewing associate payroll as an important driver of sales "is new. We argue that store associates are instrumental in fulfilling both factory and service functions within the store. The reason is that store associates perform a variety of factory tasks, which include moving inventory from back room to the shelf, conducting inventory audits, guarding against theft, updating price stickers, checking adherence to store layout guidelines, etc. Moreover, store associates perform sales office tasks which involve all facets of customer-employee contact, such as explaining the location of the products within the store, helping customers to make brand decisions and manage their shopping baskets, and so forth."
According to Netessine, adding employees obviously means there are more people to deliver more products to the store shelves. "Inventory availability is a big driver of sales," he says. But the study shows that adding employees increases the chance that customers who need help can "find someone who is knowledgeable about product location, pricing, brand comparison. What affects customer satisfaction with the store? The biggest driver was knowledge of employees."
Netessine admits that it was difficult to determine issues of quantity of staff versus quality when it came to store employees. For instance, how much would sales be expected to increase if retailers simply provided more training to existing employees? Would an increase in employee knowledge correlate with increased sales? "We couldn't really estimate the impact of that," says Netessine, allowing that future studies may review this issue.
The study also found that while understaffed stores increased sales by adding staff and that even adequately staffed stores increased sales by reallocating employees to key sales areas, there is a diminishing return to adding or tweaking the staff. "If the current staffing level is low, the gain from adding people is very large; if you are doing a very poor job, you get a huge gain," says Fisher. "But like everything in life, there is a diminishing return in sales versus level of payroll. It tapers off."
The authors readily acknowledge some limitations to their study. Though the researchers would have preferred to use profit at the store level as a measure of financial performance, this particular retailer tracked profit only at the chain level. Also, the authors note that their study did not capture data on the number of customers who did not visit the store because they were dissatisfied, or the number of customers who did visit the store but left without buying. These customers did not have an opportunity to respond to the satisfaction survey -- the opportunity was presented only to those in the check-out line -- and their absence might introduce additional biases. According to the authors, the study does not claim to be a "universal model that captures everything important in all stores for all retailers, but rather a parsimonious model that, given what we saw in our data analysis, appears to fit store operations of the retailer we studied."
One potential universal retail truth, however, was reflected in the report's findings: "If customers find what they came for and make a purchase successfully, they leave the store satisfied and are likely to return. Otherwise, they will abandon this retailer for a competitor with some probability. Thus, in this model, sales during the current visit increase satisfaction, which in turn leads to future visits and sales."
The primary contribution of their study, the authors note, "is a methodology to help a retailer identify action steps that can increase sales, customer satisfaction and store execution. Although we designed this methodology to fit the specific data set (retail chain) that was available to us, we believe that it can be adapted to match the needs of other retailers."