Photo: RetailWire
Higher wages can boost retailers’ bottom lines
While wage hikes amid a tight labor market are expected to contribute to higher prices for consumers, a new study finds a favorable tradeoff in higher levels of customer service.
Researchers from Cornell SC Johnson College of Business mined data from more than 97,000 online reviews of restaurants in California’s Santa Clara County where the minimum wage increased versus those where the wage was unchanged. Improvement in perceived service quality was found in those restaurants where the wage rose, including a reduction of negative discussion about the courtesy and friendliness of workers.
One caveat was that minimum wage hikes were found to especially affect consumer experiences at independent restaurants, which can control experiences and quality more than national chains where procedures are standardized.
“The discussion around minimum wage has been all around how prices will go up, and consumers will be worse off,” said Vrinda Kadiyali, a Cornell SC Johnson professor. “But we find, in our research, that consumers are happier with the overall quality.”
The findings fall in line with what economists refer to as the “efficiency-wage” theory that argues that wages increased to above market level can effectively pay for themselves through increased worker motivation and retention. Beyond the benefit of growing sales with improved productivity, lower turnover tends to reduce the costs of recruiting and training new employees.
“There is increasing evidence that efficiency-wage proponents may be right: Higher wages can at times boost the bottom line,” wrote economists Ray Fisman of Boston University and Michael Luca at Harvard Business School in a Wall Street Journal article from earlier this year.
Last week, Walgreens became the latest retailer or food establishment to boost minimum pay to $15 an hour starting in October in the fiercely competitive job market. Walmart announced its third raise for frontline workers over the last twelve months, increasing its U.S. average hourly wage to $16.40.
The wage hikes come as retailers of all stripes have been strategically raising prices to offset rising freight, commodity and wage costs.
- Minimum wage hike boosts customer experience – Cornell
- How Higher Wages Can Increase Profits – The Wall Street Journal
- Walgreens Increases Starting Wage for Hourly Team Members – Walgreens
- Walmart will raise hourly pay for 565,000 workers. – The New York Times
- Understanding the Global Price-Sensitive Consumer – Boston Consulting Group
- Wages Are Going Up — And So Is Inflation. Consumer Prices Have Hit A 13-Year High – NPR
- How the delta variant stole Christmas: Empty shelves, long waits — and yes, higher prices – The Washington Post
- Labor Market Will Play Increasing Role in Economic Outlook but Rising Wages Could Lead to More Inflation – National Retail Federation
Discussion Questions
DISCUSSION QUESTIONS: Do you see the productivity gains resulting from higher wages largely offsetting the related expenses for many retailers? What advice would you have for retailers about managing wages and other inflationary pressures?
Poll
Loading …BrainTrust
Neil Saunders
Managing Director, GlobalData
Christine Russo
Principal, Retail Creative and Consulting Agency
Retailers aren’t just raising minimum wages to $15/hour because of the competition to fill jobs right now. They understand that the expense hit will be offset in the long run by better retention and lower costs of hiring and training. Employers like Walgreens aren’t doing this out of the goodness of their hearts, but because there are certainly studies to back it up.
Often forgotten: Loyal, long-term sales associates are often a store’s best customers, too. If a retailer succeeds in retaining them — and paying a living wage — then their loyalty in return will be demonstrated at the cash register.
If you can attract the top 20 percent of workers by offering higher wages, there are numerous benefits for retailers. Attracting the most productive and friendly workers will translate into increased productivity, retention, and customer satisfaction – all which translate into higher sales and lower training costs. The other benefit to higher wages is keeping your stores at full staff when finding labor is an ongoing challenge.
I believe that higher wages will lead to more secure, happier employees, better quality work, improved store experience and ultimately better business results for the retailer. However productivity gains are not a given – higher wages alone won’t necessarily deliver better results. Retailers need to be careful in how they approach wage increases. Part of the wage inflation is being driven by market forces as majors like Walmart and Target increase wages to secure labor in a tight market heading into the holiday season. But higher wages without increases in productivity will only lead to more pressure on the bottom line.
With the pandemic-driven focus of customer convenience becoming more important every day it behooves retailers to improve the quality of their workforce and more importantly the quality of the tools they provide to that workforce. Although the higher wage scale will improve morale today that effect will wane unless retailers improve the level of information they provide to their workers and the quality of that information.
Fascinating subject. There is logic that suggests that higher wages – especially if projected to be a longer term issue – could lead to more investment in technology and automation.
Retailers who are worried about this really ought to be looking at what investments are needed going forward in order to compensate. We already see this in quick-service restaurants such as McDonald’s who have replaced order takers with touch screens.
I wonder how many retailers are currently hiking wages to acquire and retain better people and how many are doing it because they simply need more warm bodies and need to pay a higher prevailing rate. I suspect that most are acting because of the latter. However there is a lost opportunity here as paying people well, treating them nicely, and training them proactively can make a difference to customer service and, ultimately, to the bottom line.
In retail as in life you get what you pay for. Over the years many retailers moved to a part-time sales associate model. They eliminated, in many cases, the benefits associated with full-time employment and have paid the price. We are at an inflection point with the price of associates doubling or tripling and we are not able to fill these roles. We need to go back to the future and implement full-time sales associates who look upon retail as a career and not a job. Reinstitute commissions and the ensuing relationship and loyalty that this will engender.
Customers know in an instant if a store associate can be helpful. If not, then lack of training (for the associate, that is!) is probably the culprit. You can probably guess what grocery store I’m in if I say I asked where to find an obscure item and the associate immediately stopped what they were doing and took me to the item’s location. That’s one reason people choose to shop there, and that I didn’t have to name the brand. And that’s why the full-time model pays for itself in the long run.
Staff aren’t an expense — they’re an investment. For most retailers, they’ve typically been viewed as just an expense — reduce it, squeeze it, cut it. Now, more and more, retailers are realizing that their staff are one of their best assets/investments. Taking care of that asset through better wages, amazing recognition programs, and proper leadership will always pay dividends. A reduction in staff turnover rates will, on its own, cover most of the cost of a wage increase (note: few actually calculate the true cost of turnover). The ability to attract top talent goes up. And an engaged workforce is always more productive.
We are experiencing inflation because of endless supply chain woes leading to product scarcity, insane increases in transportation costs and the many other challenges associated with the pandemic.
More than a few retailers are offsetting increased labor wage rates with self checkout and a reduction overall in the in-store workforce.
Retailers have been telling us for years in our surveys that a solid employee-customer experience makes for higher revenue and ultimately more profitability. It’s time to walk the walk.
This issue gets politically charged really fast, so I won’t go further than that. A better workforce that’s trained and paid a living wage outperform the opposite.
Costco has been proving the efficiency wage “theory” for decades. It’s great to see others recognizing the long-term business value of store associates as differentiators and that paying more for better talent is a winning strategy.
HI Dave – I agree – and it’s a holistic conversation. I think we all agree that money alone does not make a happy employee.
Thanks, Christine – I agree 100 percent.
I totally agree with my colleagues.
Sadly, many retailers and businesses see labor and wages as an expense to be eliminated. It is not. And the retailers (and companies) that are moving forward with higher wages recognize that labor is an asset and wages are an investment.
It did not occur to me until I read today’s discussion. I have noticed in the last few months that the service and attitude of the staff at my Walgreens has improved tremendously. I thought “what is happening here?” It is an increase in wages!
Walgreens wage increases are not yet in effect and were not yet announced until August 31, 2021. So that would not explain any attitude changes over the past few months. Further, the wage increases are going into effect “in stages” beginning in October 2021 and “expected” (their word, not mine) to be fully implemented by November 2022.
In that case, they just have re-staffed the store with better people.
Awareness around quality of life, livable wage, and DEI have contributed to a cultural reset for frontline workers. We are at a major turning point where corporate profits, stock growth, share buy-back, rising prices, and corporate lobbying is pitted against humanitarian realities. Paying workers as little as possible while touting you put your workers at the forefront of your decision-making is no longer possible because of radical transparency. Companies need to take a deep dive and look at their financial plans and layer new realities over every decision to assess the effect on earnings.
Retailers have treated workers like a commodity for many years, cutting wages in an effort to lower costs. Investing in employees will cost more, yes, but it is an investment. Employees will care more and retailers will be able to attract higher quality help – this will help improve service and reduce turnover.
Trainable employees cost more. If it cost me $20 an hour and I had a great training program, I’d make that back in a heartbeat on better conversions, customer service, and profits. Pay the minimum, give them no training and those people who can work a shift will sell whatever they can personally afford which is typically what is on sale. Which costs you much more.
I have long said that front line workers are not stupid. If you pay them $7/hour, they will only give you $7/hour worth of work, and rightfully so. Retailers have sub-optimized themselves into crappy wages for crappy jobs delivering crappy service. If nothing else, this great experiment we find ourselves in right now with front line wages will show what might be possible if you start opening up those constraints.
Let’s take a lesson from In-and-Out Burger. They are known for paying very good wages. They have high employee retention. They have high customer satisfaction. They also have a good management program and treat their employees with the respect they deserve. That all adds up to a win for both the company and the customer. Consider the higher wage to attract and keep good people. The savings in lower turnover can more than cover the cost of the higher wage. And a better employee is better engaged. Hence, the higher customer satisfaction ratings.
If staff are happier and well paid they are likely to be more motivated and productive. They will certainly be more responsive and polite to their customers. But the main benefit is that they are likely to stay longer and be more loyal to the retailer or restaurant, the result of which is less cost of recruiting, training and management of staff which impacts the bottom line considerably, especially if staff turnover has previously been high which is the old norm in retail and hospitality.
Customer wins, company wins and staff win — what could be better? The long term benefits of higher wages is that these jobs are seen as longer term “professions” rather than transient jobs that people do while they are looking for their career job and that has to be a good thing. It enables retailers to properly train staff in the knowledge that the investment is not wasted and that customer service would continue to improve over time.
Wages will become a battleground as retailers realize that their staff are not only important, as discovered during the pandemic, but also loyal and valued members of their company.
In retail, too often we speak of optimizing things as a clever way to rephrase the words “cost cutting.” The pandemic has taught the industry that cost cutting might not be the right answer in supply chains, and now retailers are learning it’s not the right answer in labor either. Frontline retail workers are an asset, when properly trained and invested in they deliver a better customer experience. We don’t call them frontline for nothing! Customers experience the brand through those store associates. Wages are an investment in that asset. While not the only investment (training, benefits, etc. all play a role) we have seen study after study show that happy employees that are well-trained and earning a proper living wage perform better than the alternative. Retailers who view these wage increases as short-term cost increases are missing the boat and might not survive in the long run. The retailers that see this as one part in a long-term investment in their workforce will reap the benefits in reduced turnover (which does have a positive cost impact!) and better customer experience – which we find always results in higher sales!
There has been a lot of focus lately on the difficulty in finding employees. Often overlooked is the reason the positions are open. Within limits higher wages address both the recruitment and retention issues with a net gain in overall labor costs. When evaluated, the impact of increased wages many companies don’t factor in is the true cost of turnover including the impact it has on customer service. I have said it before but if you want good people you have to treat them good.
I have always found that higher wages produce better quality of performance … for a while. If management is not heavily involved in keeping that environment at a higher level (thus thrilling customers), performance will deteriorate. So, it isn’t money, it’s positive acknowledgements and constant interaction with and by management.
So paying better = better workers: Who’d have guessed? Of course like anything else in business, the idea is subject to diminishing returns (and no amount of money is going to make up for lack of training or direction from management.)
As for the belief that higher wages (inevitably) > higher prices, faint memories from several years of classes that led to a B.A. in Economics tell me there’s another possibility: lower profits (GASP!)
It is a lot more than just higher wages. They need to offer more consistent scheduling, better benefits, etc.
Many employers in my area offering the magic $15/hr still can’t get anyone, especially restaurant/fast food type places. When they offer $15/hr but want you to be available 5 a.m. to 11 p.m., still only work on a part time basis, and put you into a bad work environment (understaffed, etc), it still doesn’t quite pan out.