Making Payroll Pay
The simple act of asking, "How can I invest my payroll?" rather than, "How can I manage my payroll expense?" fundamentally turns retail labor planning on its head -- to the benefit of increased conversion, DPT, sales and margin.
The critical change in thinking is to view store labor as an investment rather than an expense. This investment can generate returns that far exceed typical retail investment thresholds and should therefore be a top priority for any retailer.
For most retailers, the largest controllable expense after merchandise is payroll. All retailers must leverage payroll to improve operating margin, but also need to deploy labor strategically to drive conversion and sales. Too often, retailers make across-the-board adjustments to labor under the mistaken belief that pro rata change is the best approach.
Fixed vs. Variable Labor
There is a better alternative. And it's based in an understanding of the difference between "fixed" and "variable" store labor. "Fixed labor" is the labor required to run a store. Think of this as the absolute minimum payroll required to open, close and staff (at minimum) all stores. All store labor above this amount is "variable labor" and should be thought of as an investment, rather than an expense.
Once isolated, it is possible to calculate the return on this "variable labor" investment. This is what we call Return on Invested Labor (ROIL). We have seen ROIL optimization lead to sales increases of 2-10% at a return on investment that far exceeds any other typically available.
The accompanying graph shows a group of stores for a sample retailer where this merchant can invest up to $8M in payroll at an ROIL of 250% or greater to generate $60M in incremental sales. The graph also shows what should come intuitively, which is that the return diminishes at a certain point, i.e., you can't grow profitable sales indefinitely without sacrificing return on investment.
Overcoming ROIL Challenges
The analytical challenge to support ROIL is significant, but manageable. It starts with detailed, historical data, which is then analyzed for the impact-potential at every store. This data allows retailers to pinpoint exactly where to invest for maximum benefit, how much to invest, and what outcome to expect.
Once a retailer indentifies which stores are in most need of additional payroll, store teams need to define and roll-out a test, measure the results and prove that investing in payroll in the right stores leads to profitable, otherwise unattainable sales growth. In other words, ROIL helps answer, once and for all, the key question retailers ask about store payroll: How do I know how much payroll to spend, and what return should I expect?
Russ Spieler is a Director at AlixPartners, a global firm of senior business and consulting professionals, that specializes in improving corporate financial and operational performance. To learn more about AlixPartners, visit: www.alixpartners.com