The $50 Billion Bill Retailers Will be Scrambling to Pay

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Retailers everywhere are furiously cutting costs in an attempt to partially offset diminished foot traffic and profits which are largely MIA.

Some of their recent measures include: Sears’ $1.25 billion in cost savings, which it achieved through a variety of steps including liquidating assets and a slate of store closures. Macy’s cut $1.5 billion in expenses since 2015 and this year reduced headcount by 100 resulting in $30 million in savings annually along with monetizing real estate and closing doors. J.C. Penney has closed around 140 stores in an effort to save $200 million and has entered into leaseback deals for locations, including $353 million deal for hits home office. Hudson’s Bay Company has eliminated 2,000 jobs and laid out a transformation plan designed to create an annual savings of $350 million by the end of FY 18.

But try as they might, there is only so much they can cut. And now they have a new threat to their bottom lines: ballooning labor costs.

AlixPartners estimates there’s a perfect storm set to converge on the retail community that will drive labor costs up by $50 billion. In a new report, the consulting firm attributes the surge to low unemployment, increasing minimum wages, workers’ rights laws and a competitive hiring environment.

The staggering sum is derived from estimates that peg total retail sales for 2017 at $5 trillion and the assumption that wages represent 15 percent of sales. From there, the consultancy calculated in a potential 10 percent wage hike—which it turns out is a conservative estimate given that states like Arizona, Main and Colorado have already increased pay by higher percentages.

With higher wages and a smaller applicant pool, Alixpartners said retailers will have to offer incentives, which will also impact the bottom line.

With labor going up, retailers will have to cover the shortfall somehow. Though tempting, hiking prices is pretty much off the table given consumers are already supremely price sensitive.

So if larger sales tickets won’t cover the difference, retailers will have to get smarter about staffing.

The report suggest merchants triage the tasks their employees currently fulfill to provide a better idea where time and money is currently allocated—and where it should be going forward.

“Luckily, we think there’s a way retailers can figure out where to make cuts that won’t hurt profitability,” according to the report. “It starts with making sure they are not wasting precious dollars paying employees to do tasks that don’t boost sales.”

Alixpartners suggests stores put all tasks in one of four buckets: Time Takers, Superior Service, Required Tasks and Core Drivers to help them see which are critical and which need to be eliminated or fulfilled in other—less costly—ways.

The lowest value, lowest skill tasks are the Required Tasks. Think, having employees empty jewelry display cases each night and return all of those goods before the store reopens in the morning. For these ongoing operational duties, Alixpartners suggests organizations automate as many as possible and tightly manage those that can’t be solved through innovation.

Time Takers are also relatively low value tasks that require some skill. And they’re exactly what they sound like: things that are a drain but don’t add to the sales or brand engagement effort. When possible, the report suggests stores simplify these.

Core Drivers are low skill but high value in that they speak to customer experience. In this case, it’s suggested they become standardized. It’s even an area where more resources could be funneled.

Finally, Superior Service duties are considered to be those that generate the most long-term customer value. Think in-store stylists who cultivate a relationship with consumers and help them find merchandise efficiently and effectively. Here, Alixpartners suggests companies boost employee training.

By viewing each task by value and skill level, retailers will have a better understanding of the roles that are essential and those they need to rethink to remain competitive as costs increase.

“Think most retailers are already doing that? Think again,” the report noted. “In our experience, most retailers aren’t getting the most bang for their buck.”

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