RSR Research: Death to Payroll as Percent of Sales
Commentary by Nikki Baird, Managing Partner
Through a special arrangement,
presented here for discussion is a summary of an article from Retail Paradox,
Retail Systems Research’s weekly analysis on emerging issues facing retailers.
labor budgets based on payroll as a percent of sales is bad and should be reconsidered.
One of RedPrairie’s innovative customers (who shall remain nameless) presented
their pilot at RedShift and their move away from the rationale and they made
a believer out of me.
The first issue with payroll as a percent of sales is that
of a self-fulfilling prophecy. Have you ever been in an airport early in the
morning to find a coffee stand that is staffed by one poor employee, hounded
by mobs of angry people anxious to buy coffee before getting on a plane? In
this case, sales have been ‘okay’ at the stand in the morning hour, but not
because of demand – it’s because the employee simply can’t serve any more customers!
How much greater would sales be during that morning rush if there were two
employees? Or three? That retailer may never know.
Now the reverse issue is a store firing on all thrusters,
but using labor it didn’t need. The example given during the session was selling
one $1 million item vs. selling one million $1 items. Which requires more labor?
what should you use instead? This retailer, together with a partner, developed
a method for budgeting labor based on minutes per traffic, or MPT. It’s dependent
in part on measuring foot traffic and subsequently, conversion. Measurement of
these two metrics can be controversial but it shouldn’t stop you – it’s the trend
that’s important, not the absolute numbers. Once you know how many customers,
and how often you convert per labor minute investment, you can figure out the
optimal number of minutes per traffic that should be invested in order to convert
I have a strong feeling that this number is going to differ significantly
depending on the retailer and the category of goods sold. But the analysis
is pretty straightforward. Just look at your stores’ history of traffic, sales,
and labor hours. Plot minutes per traffic (how long an employee spends on average
with a shopper, based on labor hours divided by traffic) against conversion
rate and you get a good idea of which stores are good at making sales – good
investors of payroll – and which ones are not. You can also see a trend line
that will let you know what you should be expecting in terms of optimal minutes
per traffic to get optimal conversion.
So, as consumer spending returns, I know there are a lot of
retailers out there that suspect they are under-investing in labor and that
it might be hurting sales. Try this. Your payroll as a percent
of sales may increase in the short term, but the visibility and control that
you will have over stores’ effective use of their labor will pay you back in
Discussion Question: What do you see as the pros and cons of basing labor
budgets on traffic counts rather than sales?