As the Christmas rush approaches, retail store managers hold their breath in the hopes that their Christmas sales will bring their year-end numbers up to profitability and meeting quotas. They have hired seasonal staff to help with the madness, not thinking twice about the extra expense incurred. The only priority at the top of mind is having enough staff to restock shelves and cashiers at the checkout.
After all, the tradition of Black Friday is historically the day that retailers “get into the black” on their balance sheets and all sales after that day increase their profit margin. Through the course of the year, there were undoubtedly many factors that contributed to a smaller profit margin, such as employee attrition, shrinkage, logistics, and the economic climate, to name a few. Some factors can be mitigated, others are an unwelcome surprise. Retail store managers are expert jugglers, but they are only human.
The Harvard Business Review released a study in 2006 of Costco’s low turnover rate that revealed why it is one of the most successful retail giants, year after year. Harvard found that the foundation of their great success lies in low employee turnover rates of less than 10% for first-year employees. Compared with an industry average of 65%, Costco is undoubtedly a unicorn among its retail peers. Many point to their 2006 higher-than-average full-time wage of $17/hr compared with $10.11/hr at their direct competitor Walmart-owned Sam’s Club. You don’t need a degree to know that offering a 72% higher hourly wage than your direct competitor will certainly attract and help retain top talent. Add to that health-insurance benefits for 82% of its employees, while less than half of Walmart’s employees are getting the same. Should we even mention retirement contributions?
The Long-Term Test Drive
Unsustainable, you might think. An economic experiment destined to fail. Well, fast forward a decade to 2016 and look at how things have changed for Costco. They haven’t. In 2016, CNN Money took a close look at Costco’s wages and found that Costco still tops the list of well-paid retail employees clocking in at about $22.50/hr for a fulltime wage. Their starting minimum wage for new entry-level workers is $13/hr, while Walmart offers $10/hr. This all translates into a low turnover rate that has held strong ever since Harvard started examining Costco’s success.
But what does this all mean for a Costco store manager’s profit margins? Simple, a higher margin than most competitors. Forbes found that Costco offers the smallest markups on their products at 15% or less, compared with 25% for supermarkets and 50% for department stores (who pay low wages and are now headed towards extinction). How does that translate into higher profit margins? By spending less on hiring and recruiting.
Attention: Retail CFOs
Let’s run the numbers. The average cost of replacing an employee across all industries sits at about 150 – 250% of the employee’s annual salary. Harvard used conservative numbers and estimated a replacement cost of a retail employee at 60% of their annual salary, making a Costco employee cost $21, 216 compared with only $12, 617 for a Walmart employee. It looks like Walmart wins here, but when you consider Walmart’s turnover rate is more than double Costco’s this makes Costco’s total annual cost of turnover at $244 million while Walmart is $612 million.
Let’s boil it down further. Each employee you hire is an important decision that represents revenue gained or lost. The most impactful point made in the Harvard Business Review study is the amount of revenue Costco made per employee compared to Walmart. Costco earned $43 billion in 2005 compared with $37 billion for Walmart’s Sam’s Club and with 38% less hiring. That translates to “$21,805 in U.S. operating profit per hourly employee, compared with $11,615 at Sam’s Club”. Read that again. Costco generated almost twice the revenue per employee than its closest competitor. Perhaps you can’t offer the high wages that Costco does, but you can still hire better and build a team that sticks together.
If you’re reading this, you are looking for new ideas on improving your profit margin and you know that you need a strong team in your store to make that happen. And you need that team to stick together. We can’t all be Costco, but how do you compete with high retail wages that corporate head office just won’t approve? Well, you can start with engaging your best employees with incentives and rewards knowing that you will experience some turnover, as per normal. However, when it comes time to hire new blood, hire with the expectation that your new hires will complement your existing team and fortify your store.
Don’t have the time to hire the best? It’s easy to get overwhelmed by the Christmas rush and to cut corners in verifying past employment, reference checks, and interviews. However, stop to consider how your recruiting strategy might be stuck in “insane mode” where you run the same job posting on the same job site with the same process, hoping for a bit of luck in finding a great employee. And when you’re ready to take the step towards hiring better employees, contact us at Mindfield.
We are an innovative Recruitment Outsourcing Solutions (ROS) provider that has taken recruiting services to a new level. Specializing in hourly employees, Mindfield provides a complete recruiting life-cycle service that offers a team of professional and experienced recruiters that can provide you with a roadmap to hiring better employees. Let us put time back into your schedule by crafting and posting your job description, vetting your applicants’ work experience, and providing phone interviews so that all you need to do is meet your best candidates and make a decision. And this time next year, look at how many fewer employees you needed to hire and smile when you look at that profit margin.
Mindfield is a Recruitment Outsourcing solutions provider that partners with companies to create powerful hourly workforces. Our solutions combine a recruitment team, simple to use technology and a data-driven hiring strategy that promises to improve the quality of your hourly workforce. This approach focuses on tying business outcomes such as sales performance, tenure, and engagement to the selection, hiring and measurement of quality candidates.