Retailers Should Invest More in Employees

Doug Rauch, the former president of Trader Joe's, visited my Service Operations class at MIT last week. When he mentioned that Trader Joe's invests in its employees a lot more than its competitors do, he was challenged by one of my students: "Isn't it a bad idea to invest in employees in settings like yours where shopping is transactional and can easily be done online?"

Doug had a strong reaction. "Nowadays you can go through an entire day without a single person acknowledging your existence. But don't forget that we are people who generally like connecting with other people." He went on to explain how profitable it is to invest in employees, even for a supermarket that competes on the basis of low prices, and how most online grocers have not found a way to make money.

My class had already discussed QuikTrip, a convenience store chain with over 500 stores, and Mercadona, Spain's largest supermarket chain. We also talked briefly about Costco, a large and publicly-traded wholesale club. All of these retailers, along with Trader Joe's, invest significantly more in their employees than is typical for their retail peers. They also have high profits, low prices for their industry, excellent operational metrics, and a reputation for great customer service. These retailers deliver great value to their customers, employees, and investors all at the same time. (My article in the January-February 2012 issue of Harvard Business Review, Why "Good Jobs" Are Good for Retailers, analyzes how they manage to do this.)

Even so, I was not surprised that my student was questioning Doug on his company's choice to invest in its employees. Many in the business community still see employees in low-cost retail as interchangeable parts. They can see with their own eyes that most large retailers, such as Wal-Mart, do not invest much in their employees. And it makes sense to them, as it made sense to my student, that low-cost retailers really have only one thing to offer their customers: the quick, cheap sale. That's what the customers are there for and there's no point in offering more.

These people miss two things.

1. Even in low-cost retail, it takes a lot of human effort and judgment to get the right product to the right location at the right time and to make an efficient transaction.

It's the low-paid employee, not the inventory-management software, who notices that a shelf looks messy or that some of the products are in the wrong place. It's the low-paid employee who notices that some of the lettuce has gone bad or that there are still signs up for last week's promotion. It's the low-paid cashier who can tell the difference between serrano peppers and jalapeno peppers during checkout. It's the low-paid employee who notices that there are too many customers waiting in the checkout and offers to open an additional cash register. When retailers don't invest in human capital, operational execution suffers and the company pays with lower sales and lower profits than it could have had.

2. Even in low-cost retail, there is still interaction between customers and employees.

It's the employee who notices a customer standing in the aisle looking lost and offers help. It's the employee who can read from a familiar customer's face that he's had a bad day and could use a friendly smile. It's also the employee who can turn a customer off — maybe permanently — by being rude or even just not very helpful. It's the people who make you want to shop here even though you can easily buy the same stuff there. Yet most low-cost retailers forget about that.

Those are what we could call the business reasons for more investment in employees. But business on the scale of these retail chains is never just business. It's people's lives — the employees' and the customers'.

I care that millions of retail employees are not given decent wages, benefits, work schedules and an opportunity for growth, even though doing so is free for retailers. I care that a lot of human talent is wasted. When I'm shopping with my children, I care what view they are forming of the society they live in. I try to go to places where they will see what people are like at their best, not at their most disengaged. I want them to live in a society in which people acknowledge each other's presence and are kind and respectful to each other, and I think that begins with being brought up to see kindness and respect as normal. What Doug Rauch and others have shown is that what I want for my children is not at all incompatible with what they want for their companies.