New Retail Metric Comes Up (More Than) A Little Short

A new metric is being floated for judging likely retail success or failure: employees per thousand square feet. The very reasonable idea is that more associates means better customer service and sales productivity, according to Jacob Roche, who proposed the metric at The Motley Fool.

Roche compared the number of company employees per thousand square feet of retail space (EPKSF) for Costco (NASDAQ:COST), Walmart (NYSE:WMT), Safeway (NASDAQ:COST) and Whole Foods (NASDAQ:WFM) in 2007 and 2012, and noticed that for the first two, EPKSF edged up, while the others declined. "Costco and Whole Foods have both dramatically increased sales, while Safeway and Walmart have lagged significantly," Roche added.

It's an interesting idea, and it might even be useful if retail were a mature, sleepy backwater of a business. But it's not. Retail in 2012 is dramatically different from 2007, and some of the biggest changes to be wrought by omnichannel and in-store technology have yet to hit their stride.

What happens when every associate carries an iPod that serves as a handheld point-of-sale device? The mix of associates (in-aisle versus cashiers) shifts. The ability to gain incremental sales and avoid abandoned shopping carts goes up dramatically. How about when all merchandise is tagged with RFID devices, so the same number of associates can do a much better job of keeping shelves stocked, especially in categories such as apparel that can have many sizes and colors for each item? The result is fewer customers who walk away because the item they want can't be found.

That's what technology should be doing in retail: allowing stores to increase sales without increasing the number of employees in the same space.

Or what about more radical revamps, such as OfficeMax's (NYSE:OMX) recent experiment with stores that are much smaller than its usual big boxes, but still devote a smaller percentage of space to merchandise, with the goal being to focus on high-margin business services? That makes the EPKSF metric completely useless in comparing OfficeMax 2012 with OfficeMax 2007.

Another problem that shows up in Roche's tiny sample: Even though Costco (which typically scores high in customer satisfaction surveys) has increased its EPKSF numbers since 2007, it's still short of Walmart and Safeway and far below Whole Foods. A metric that doesn't make it possible to compare retailers isn't very useful to investors (which is Motley Fool's audience) and it's even less useful to retailers themselves.

There's some truth at the core of this idea: It's certainly possible to run retail too lean, as Walmart has recently demonstrated. But as a metric? A lot of short talks with customers will probably do retail execs more good than this little bit of long division.

For more:

-See this Motley Fool post

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