A typical UK high street retailer operates at a 8% labour cost to sales ratio and generates a 2% EBITDA. Imagine minimum wage inflation of 5% pa for the next 5 years (minimum wage legalisation, post-Brexit London labour shortage) and... oh, that's zero percent profit. One more year, and it's negative.
Do nothing and bury your head in the sand? Actually, those retailers really do exist. But not for long.
What's to be done... Sell more? At a higher gross margin? Well, my retailer friends tell me that's going to be tough. So it's got to be labour costs we think about.
Automatic for the people?
Maybe you’re a fan of early 90s alternative rock band R.E.M. and ‘Automatic for the people’ instinctively strikes a chord with you, if you’ll excuse the pun. Maybe it really should conjure images of what is said to be the best soul food restaurant in the South - Weaver D's Delicious Fine Foods in Clarke County, Georgia to be precise. Athens, Clarke County of course being home to REM. This is the motto and service mark that Mark Weaver has been working to for over a decade, if someone needs something, his answer is ‘automatic’ – of course, it is expected and he will make it happen for you as pleasing customers and making sales are what he does.
Why is there so much noise surrounding automation in retail now?
Automation isn’t a new concept, more than two millennia have passed since the ancient Chinese got tired of physically pounding their grain and employed the power of waterwheels to repeatedly lift trip hammers rather than expend their own or their animals’ energy. Throughout our history, we have found ways to simplify processes and remove human effort from the equation where feasible, to gain efficiencies, increase speed and improve accuracy. Now, especially in retail, new tools and analytics, e.g. video analysis, means that we can have the most efficient deployment of labour, e.g. CrowdVision outputs live data about customer flows, queues and wait times, processing times, occupancy - so allocation of labour can be optimized in real time.
Aren’t great people worth the investment?
As always, it boils down to pounds and pence, dollars and cents, yuan and jiao… Enforced labour costs are again being increased for the lower paid workforce, which accounts for the majority of the headcount in retail and therefore is one of the largest line items on the P&L. It is true, the percentage wage increases do add up to significant absolute amounts. Retail margins are notoriously razor thin and still being sharpened, but shouldn’t the one human touchpoint with your customers be worth investing in? One way retailers are testing robots in stores is to help customers find goods they are searching for – like a robot personal shopping concierge. Home improvement retailer Lowe’s introduced the LoweBot in 2016 at its stores in San Francisco. In the same way, Westfield Valley Fair shopping center in San Jose has a K5 robot that guides people to shops and shows people where coffee shops are. Lowe’s is not the only US retailer trialling robots in store aisles, e.g. Target tested a robot called Tally to track product inventory on shelves (I guess to tally up sales?). What if the robots were actually better than the human helpers? The BestBuy “Chloe” robot lets customers make purchases without the need for an employee - an automated system that retrieves products from shelves in the BestBuy Chelsea New York shop. Not saving labour costs, by shelving merchandise vertically, Chloe creates another 1,000 sqft of shopfloor space, for product experience and engagement, or to range more SKUs.
As an increasing focus is laid upon the customer experience and store sales colleagues are the difference between making the essential sales conversions in store or not. Where part of the trust equation means that consumers are expectant that a brand can provide them information, advice and post sales service. Surely having the right staff is paramount. And yet we have seen, especially here in the UK, the more expensive store colleagues being removed from the equation to reduce costs, leaving behind a thin covering of junior staff to take up the strain, often those with less experience and skill than is required to satisfy customers. So, assuming that people like people (a moot point) maybe investing in staff for customer experience is worthwhile. But automation brings other benefits: warehouse robots allow the use of narrower aisles, and on the shop-floor they help the use of vertical space out of reach for mere human helping hands.
Don’t lose your staff, ensure they are focussed on the right jobs.
Now, I’m not saying that any retail machine I have seen, is the most effective it could be in terms of headcount utilisation, far from it in fact. I know of many retailers across verticals where far less than half of a colleague’s time is spent interacting with customers. And paying for these staff to undertake the most basic of backroom tasks, this is a crazy waste of money. This is where automation has a place. Where routine, mundane, repetitive tasks can be sped up and mistakes virtually eliminated, by using automated and semi-automated machinery, e.g. finding lost inventory, bringing forward inventory from the back of store to the right place on the aisles (even if final stacking and replenishment is human), freeing up the valuable time for staff to interact with customers.
Fewer staff can achieve more when the right technology is available to them, so don’t just think of automation as the deployment of machinery shifting boxes behind the scenes, but the decision logic powering the tablets staff often use in conversation with customers to help them quickly find the best deal together. The software helping store managers focus on their most valuable issues each day, prioritised in a defined order of importance, rather than often hundreds of paper reports churning out of a printer than can never be read, let alone actioned. I have seen too much of this inefficiency first hand, but thankfully we have also worked with clients to see through the fog and focus on what is valuable.
Is automation really the answer or just panacea dressed up in a robot suit?
I believe automation is key for future retail success, ultimately it is a logistics business and becoming more so with online growth and various delivery and collection methods growing at pace. But understanding the areas to automate and the process to successfully deploy is not an easy, cheap, or quick play. For now, I see automated systems and tools working best in partnership with store staff, not as an immediate replacement.
Too often I have witnessed substantial and creeping expenditure attached to the ‘cost saving’ initiative of reducing headcount with technology. For real success, it isn’t about moving costs across departmental balance sheets, but making sure that the significant short term investments can begin to payback rapidly. Considering these investments as purely financial in nature, will always undermine success. For any system to function and change to be accepted, staff upskilling and process support are the nuts and bolts that hold the machine together and deliver the essential regular servicing for smooth running.
You can’t downsize your staff on a Sunday and plug in the machine Monday morning expecting an instantly more profitable result. Such fundamental shifts in business operation will not payback overnight, so a staggered plan to manage cashflow is essential. For some smaller retailers getting this wrong will be enough to force the shutters down for the final time.
Manging your bottom line is and always has been of major focus in retail but it shouldn’t be done at the expense of neglecting the top line. In the past I have worked with a client where cost was such a blinkered focus that on offering options to increase sales I was actually told that ‘sales didn’t matter, the only options they required were ones to reduce costs’. What retailer in their right mind turns down an opportunity to sell more? If not enough money is coming into the business I can guarantee that the costs, regardless how slim will always reach a point where they are too high for economic survival. So, how do you improve the customer experience and get sales over the line when you’re minimising skilled and experienced workforce to save money?
James Walker is a Partner at OC&C Strategy Consultants, and Global Head of Analytics