Higher pay for associates can get better retail results, says MIT researcher

Costco (NASDAQ:COST), Trader Joe's and Tulsa-based convenience-store chain QuikTrip are thriving by paying associates far more than the industry average, according to an MIT business-school study. The key to their success: Start by viewing associates as assets to be maximized instead of costs to be minimized, according to Sophie Quinton in The Atlantic.

The study, by MIT Sloan School of Management associate professor Zeynep Ton, focused on low-price retailers like Costco and QuikTrip, and the standard retail theory that when times get tough, the easiest place to cut is staff wages and hours. That turns out to be a problem. At most chains -- such as Home Depot (NYSE:HD) a decade ago -- cutting payrolls (mostly in the form of associates) generates quick results on the balance sheet, but it also quickly reduces customer satisfaction, which translates into same-store sales growth that drops or even goes negative.

At QuikTrip, in contrast, entry-level employees start at $40,000 plus benefits -- roughly twice the $20,230 a year that an average American cashier makes -- and get two full weeks of training in everything from stocking shelves to cleaning the bathroom. The result: QuikTrip sales per labor hour are two-thirds higher than an average convenience store, and sales per square foot are more than 50 percent higher, Ton found.

Paying employees more to get better results isn't a new idea -- although Ton doesn't point this out, it's how Henry Ford got his pick of assembly-line workers when the Model T was ramping up production a century ago. (By paying much higher wages, Ford could be more selective -- he only hired family men who didn't drink and could follow directions without fail.) It's worth remembering that the Model T was one of the cheapest cars ever made, with much tighter margins than any other model from Ford (NYSE:F) or its competitors. It eventually was selling more cars than all other American models combined.

In retail, the usual assumption is that costs dictate how much a store can pay, and low margins require rock-bottom wages. According to Ton, it actually works out that rock-bottom wages generate rock-bottom results. The biggest challenge in flipping that idea is that it's easy for Wall Street to see (and cheer) cost cutting. Investors tend to forget that's what sets off a later slide. And because turning a retailer around from low-cost to high-value associates won't happen instantly, and there can be a rough patch before customer satisfaction and sales improve -- a patch that can require gritted teeth from both executives and investors.

For more:

- see the Atlantic story

- see the Harvard Business Review article (subscription required)

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