Our Summary: Cost-cutting on staff in retail operations reduces long-term performance. Companies that suffered consequences include Home Depot and Circuit City. On the other hand, companies like Uniqlo and QuikTrip, which invest into training, are more profitable per employee. The cause is misaligned incentives for managers who benefit from short-term cost-cutting even when it’s at the expense of future performance.
THE MORE THE MERRIER
Over the past decade, the Japanese fashion chain Uniqlo has become among the most successful retailers in the world. Its success is due in large part to the fact that it has found a way to sell basic stuff that is not only affordable but also stylish and durable. And there’s something else that makes Uniqlo distinctive: it hires a lot of people, and spends a lot of time training them. When the company opened its flagship Fifth Avenue store, last fall, it hired six hundred and fifty people, and pledged to have four hundred people working there at any one time. This is not the way most retailers do business. The general dogma in recent decades has been that, in order to compete on price, you need to keep labor costs down—hiring as few workers as you can get away with and paying them as little as possible. Although leanness is generally a good thing in business, too much cost-cutting turns out to be a bad strategy, not only for workers and customers but also for businesses themselves.
A recent Harvard Business Review study by Zeynep Ton, an M.I.T. professor, looked at four low-price retailers: Costco, Trader Joe’s, the convenience-store chain QuikTrip, and a Spanish supermarket chain called Mercadona. These companies have much higher labor costs than their competitors. They pay their employees more; they have more full-time workers and more salespeople on the floor; and they invest more in training them. (At QuikTrip, even part-time employees get forty hours of training.) Not surprisingly, these stores are better places to work. What’s more surprising is that they are more profitable than most of their competitors and have more sales per employee and per square foot.