The Retail Death Spiral

THE RETAIL DEATH SPIRAL

An article from the Retail Industry Series by Bernie Wolford

Pilots call it the death spiral. The plane goes into a spin. The nose drifts toward the ground. The
wings lose their aerodynamic lift. All initial, knee-jerk reactions to correct the attitude of the
plane and restore lift actually contribute to the continued uncontrolled descent–the death spiral.

A similar phenomenon frequently occurs in retailing. It may be found in both large and small
companies. It can be devastating. For many, during post-mortem review, their very failure as a
retailer can actually be traced to this early-stage business cancer.

Here’s a typical autopsy: Softening sales, or projections for same, start the process. Typically
the starting point for budgeting labor dollars is expressed as a simple percentage of sales. If,
for example, labor cost is budgeted at 7.0% of sales and our sales are forecast to be one
hundred thousand dollars, simple math provides a labor budget of seven thousand dollars. If our
average hourly labor rate is fourteen dollars per hour, our store (or department) manager will
schedule 500 labor hours for the week.

A softening sales trend, let’s say a forecast of eighty thousand dollars per week produces a
mathematic labor budget of five thousand, six hundred dollars. At our fourteen dollars per hour
average labor rate, the resulting weekly labor hours are 400. To maintain our labor budget the
store (or department) in our example must reduce weekly labor hours by 100.

The manager reduces staffing, and (perhaps), due to less customer service and/or lapses in
moving fresh merchandise to the floor, etc., the prophecy is fulfilled–the store (or department)
achieves considerably less sales. Customers, perceptive to reduced levels of staffing and
deteriorating stock maintenance, begin to “vote with their feet” and shop elsewhere–leading to a
lowering of sales projections, further reduction to staffing, reduced customer service. The cycle
in now is place–the retail death spiral.

To make the point, our story transpires within a short time period. In the real world the changes
are much more subtle, occurring over a longer time period, but, unmistakably, with the same
result. Why? Because the problems with many retail labor staffing models are systemic.

The first indictment is brought against “dollar-based” staffing models. If we are totally wedded to
planning labor staffing exclusively by using a percentage of sales, we have launched the labor
ship in this unfortunate direction. If we are predicting a softening of sales, blindly adjusting labor
costs as a percentage of sales, we will reduce labor. Yes, I know my next point is radical: What
if we did not reduce staffing? Would the sales reduction still have occurred?–a question, not an
answer, by the way.

So, what can be done to avoid this problem? First is the recognition that “activities” produce a
need for labor hours, not a mathematical equation. The correct number of hours for any store,
any department, and any given period of time may or may not be the same number as those
hours determined from the traditional “labor as a percentage of sales” calculation. A gradual
evolution away from the labor percentage approach into an activity-driven approach is the first
step in breaking the cyclical nature of the retail death spiral.

Now, what if the activity-based approach actually produces more hours for a department? First,
this is good news to learn. Think about it: it means we are currently understaffed. Things we
need to do are not getting accomplished. Short cuts are being taken. Must we add hours and
increase labor costs? Not necessarily. When this occurs, it is time to closely examine how the
activities are being performed: Can “best practices” reduce the time it requires to perform
certain tasks? Can we transfer certain activities to other departments (perhaps to one for which
activity-based staffing analysis showed over-staffing?)

Once the transition from dollar-based staffing to activity-based staffing begins, management
receives a fresh look at the relationship between labor hours and those activities the hours are
intended to support. Decision-making improves immediately. Improvement programs can be
directed to the department of greatest need. Confidence improves that sufficient labor hours are
being invested to achieve desired goals. Conversely, we can identify costly over-spending on
labor hours.

The Retail Death Spiral can be avoided.

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