The Future of Labor in Retail | Marshall Fisher and Santiago Gallino

Understanding Retail Labor in the Grocery Industry

Dan Loney: We are at an interesting time in the labor markets. The economy is pretty strong, but technology is playing a larger role in the day-to-day operations. How to manage a staff plays a big part in the success of the firm. A recent report by two Wharton professors looks at the state of retail labor using the grocery industry as the main example.

Pleasure to be joined by Marshall Fisher, who’s a professor of operations, information and decisions here at the Wharton School, and also Santiago Gallino, who’s an associate professor of operations, information and decisions as well as an associate professor of marketing here.

Gentlemen, why the focus in terms of understanding more about the labor market with the grocery area specifically?

Santiago Gallino: I think the interest came because labor — in retail in general, and grocery is no exception — is one of the main expenses that retailers have, together with inventory. I think that over the years, there has been a lot of effort in optimizing inventory and thinking about that. But relative to inventory effort, staffing has been understudied. And that’s where we thought it was an opportunity to help retailers.

Marshall Fisher: The other interesting thing that was happening is growth in dot-com. Grocery had been sort of a laggard. Right? Grocery was a bit slow, until along came this thing called COVID in 2020. Nobody wanted to go into a store anymore, so online surged. Grocery had to get better at that. We wanted to look at how well they were doing. What grade would you give them, Santiago? About a D? They had this wonderful, innovative model, where you place your order online and at no charge to the customer someone goes into the store and picks it for you, which roughly doubled the labor cost and and eliminated all profit they were earning.

Loney: It is interesting when you think about grocery and how technology has changed a lot of the dynamics not only in the checkout area, but also in placing the order. Is the expectation that technology will continue to evolve retail labor in grocery as we move forward, just like we’re expecting more and more technology to come into our lives?

Gallino: Yes, I agree with that. I think what we are going to see as we move forward is many of the technologies that are already available will become good investments. I think that is a driver of what retailers are incorporating over time. Many of the things that are new today here in the U.S. have been in place in Europe, in certain countries, for many years. This is mainly because the ROI of those technology investments have been justified several years ago in countries like Norway or Sweden and now, because of the pressure, are reasonable investments here in the U.S. I think that that has been a driver of incorporating technology on the operational side. Many of the technology we see is new, but others have been around for a while. It’s just waiting to be a good investment to be acquired by the retailers.

Loney: Marshall, if the numbers and the information you’re seeing in the grocery segment with how they’re handling their labor — should we expect it to be the same across all kinds of retail businesses?

Fisher: Yeah, absolutely. As I mentioned before, some segments of retail are ahead in moving to e-commerce. Apparel would be somewhere in the middle. Obviously, books, video, and consumer electronics are ahead of the game in terms of moving online. Grocery’s the laggard. So I think grocery’s learning from other segments, rather than the other way around.

Santiago mentioned technology. It’s worth a minute or two to talk about, what’s the technology? The part that’s easy is having the customer place an order online. What’s hard then, is fulfilling that order. As we mentioned, the thing that was easy for grocery retailers to ramp up when COVID hit was just pick from the store.

There’s been an emergence of automating the picking process. Walmart has done a pretty good job. What they put in place are mega warehouses. Sometimes it’s an enlarged back room of the store, so they can have the same inventory for filling an online order as servicing the store. They’ve automated the picking from the warehouse of a subset of the items, and then whatever doesn’t lend itself to automation, like fresh product, they’ll pick from the store, put that together and ship it out to the customer. That’s sort of the frontier of online grocery, is getting better and better at the picking and fulfillment process.

Opportunities for Growth Online

Loney: Is the expectation that the online part of the grocery will continue to grow? I say that because grocery is one of those unique things for some of us— and I am like this— I still like to go into the grocery store and see my products and pick them myself. There are those people, though, that are already at the point where they feel comfortable just ordering online.

Fisher: And they’re called young people.

Loney: Yes, that’s right.

Fisher: Will it grow? Sure, as a greater and greater percentage of the population grew up with the internet, they feel comfortable doing that.

Gallino: Another challenge it is that when there is a stock out in the order, in other categories, this is less critical than in grocery. Because if you are trying to fill up your basket and milk is missing, you will need to go to the store anyways. If you are buying apparel or some thing, you can wait. That’s not a big deal. You can still do 100% of the transaction online. And I think that that puts, I will argue, an extra pressure for grocery retailers to fully convert customers to the online experience.

Loney: Is e-commerce delivering the ROI that the owners of these grocery chains expect, Santiago?

Gallino: I don’t think so. That is a great question. And every time I try to get an answer from grocery retailers, the answer is very elusive in bringing the idea of long-term profitability, long-term strategic approach. It’s telling me that in the short run, this is a painful process. Some of them are not losing money anymore with the online grocery channel. But it’s clearly, in my opinion, the less attractive channel for them to fulfill an order. I will say that if a grocery retailer can choose, they would much rather like you to go to the store, because that’s a more profitable transaction for them.

Loney: Marshall, with the addition of all of these components of technology, how does that change how the grocery, as a company, thinks about their employees?

Fisher: I’ll answer your question with a comparison of two retailers and two executives at those retailers that have a connection to Wharton. So Costco, Richard Galanti, who retired this year, was CFO. Wharton undergrad. Spent 30 or 40 years in that job of CFO. Described his job as doing whatever the CEO didn’t want to do, including the earnings calls. Marc Lore was in the MBA program. Did the first year, and then somehow found starting companies was where his heart was, and created Jet. Left, sold that to Walmart, headed to Walmart.com.

Two different approaches. Walmart, under Marc — and this gets to your profitability question. When he took over, they were losing about a $1 billion a year in dot-com. One of the things he was most proud of is that loss steadily declined until now they break even or maybe earn a small profit on dot-com. But he was once interviewed with the head of Walmart stores. And they asked him, “How do you two guys relate and get along?” And Marc said, “Oh, it’s very simple. He makes the money and I spend it.” But he is proud, through innovations he put in place, that that loss has come down to break even or small profit. And Walmart’s stock price earnings ratio tripled as they moved to dot-com. Dot-com retailers trade at higher multiple, right? And was it profitable for them? Yeah. You’d have to say so.

Now, Costco trades at 55 times earnings, and they’re the opposite model. Their dot.com penetration rate is minuscule, about 5%. And you think about, why is that? They have not run out of room for growth with the traditional store model. They realized that they have to improve their dot-com game because people want to buy online. And they’re doing that. But up till now, they’ve said, “Thanks very much. We don’t need dot-com.”

The Future of Grocery Stores

Loney: Santiago, what do you expect these changes are going to do to grocery as we move forward?

Gallino: I think that we are going to see a revival of the physical store in grocery. I think that some of the players, as Marshall was explaining, are able to leverage the scale and play a game that incorporates not just the fulfillment of the order but some kind of advertisement revenue that comes from their online efforts. But others, the smaller players, will lean on the physical store and experience. I will argue that old customers and young customers always appreciate a good in store experience. And I think that there are good examples in grocery where the number of stores is growing. Aldi, with a completely new format in the U.S., is growing very, very rapidly. You can call it traditional, boring stores. But when they’re not boring to customers that are willing to make the trip and go to the physical store. So, I will anticipate in the coming years a revival of the physical store.

Fisher: And Trader Joe’s might be an example. They don’t dot-com. If you want to buy from Trader Joe’s, you go to the store. And they seem to work pretty hard at not making it boring.

Loney: Santiago, you mentioned a little bit ago about the difference between stores here in the U.S. and other countries. Part of this research was looking at what grocery is like in other countries. Tell us about that side of the story.

Gallino: Yes, I think it’s interesting to compare that and look outside. The main driver of the experience in different countries, I will argue, is the hourly rate that employees get in the stores. If you go to places like Latin America, the employees in the store are very abundant. Why? Well, because labor is relatively cheap. Customers like to see employees, and the retailer can afford that. So, there is a lot of that kind of first-hand experience interaction with employees in the store.

Europe, on the other end of the spectrum, like I was mentioning before, has incorporated a lot of technology and has pushed the efficiency of the store in terms of labor to an extreme. That drives the experience of the customer, too, in this format. Size, the frequency of the visit. In Europe, most customers will walk to the store to buy. They buy small baskets, and that drives the format of the store. I think that sometimes we need to remember that the driver of the format is a combination of the customer expectation and the labor market conditions.

Fisher: I just want to mention one thing and follow up to what Santiago was talking about. Costco, in some ways, in their labor practice, looks more like a European retailer. They pay their people well. Really well. You go into a Costco store and you’ll see someone who’s been there for 20 years. I think their turnover is like 6% a year. Other grocery formats in the U.S., the turnover is about 60% a year. So we’re talking about store labor. The Costco model is really impressive in all kinds of ways.