When cost cutting backfires.

An article by James Surowiecki in this week’s New Yorker Magazine highlights the problems with excessive cost-cutting by retailers. In the drive to keep labor costs low evidence shows that retailers often hire too few salespeople and pay them too little.

An MIT professor recently published a study of four large discount retailers who are more profitable than their leading competitors, and sell more per employee and per square foot. The big difference? They have higher labor costs, more salespeople, and they spend more on training.

A Wharton study of a retailer with more than 500 stores showed each dollar of added payroll was worth four to twenty-eight dollars in new sales. Surowiecki provides these two telling examples of what happens when sales staff is cut:

  1. “In 2007, Circuit City fired more than three thousand of its most experienced salesmen, replacing them with newer workers whom it could pay less. Its sales dropped, and it was bankrupt within a couple of years.”
  2. “When Bob Nardelli took over Home Depot, in 2000, he reduced the number of salespeople on the floor and turned many full-time jobs into part-time ones. In the process, he turned Home Depot stores into cavernous wastelands, with customers wandering around dejectedly trying to find an aproned employee, only to discover that he had no useful advice to offer.”

Previously, I wrote that only a myopic managment would attempt to increase sales by reducing the number of salespeople available to help customers. Yet we see this insanity repeated even today as sales are beginning to rise.

It will be an expensive lesson.

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3 Responses to When cost cutting backfires.

  1. Jeffrey Park Jones says:

    Clearly, it’s not a “lesson learned” as these people making the decisions continue to crater their firms with narrow-minded, short-sighted, failed practices. They seem to believe that a short term improvement in the bottom line is preferable over the ability to provide a focused customer service.

    I call these sorts of managers “popcorn leaders” because of the following attributes.
    1. A leader is able to adopt a vision that, when shared, inspires others to work toward it along with the leader. These myopic managers, as described above, sit in ivory towers with a stilted opinion that they alone know what to do. They can’t communicate a vision that everyone shares and there’s no sense of ownership toward a common goal across the firm.
    2. These managers haven’t been able to identify the value focus their firms should strive to fulfill. For example, they could focus on customer service and provide the best, or they could focus on innovation and provide the “new” products, or they could focus on operational excellence and just flat do a better job than anyone else.

    Instead of adopting a specific value focus, these managers jump from one focus to another without excelling in any and this ends up resulting in short-term fixes that don’t really solve the basic business problems facing the firms. This results in rampant mediocrity throughout the firm.

    Thus endth my 02 cents.

  2. Shirley Zorn says:

    Art, Right on! Great blog, great info!

    • Art Johnson says:

      Thanks for the comment Shirley. Good to hear from you. I’m going to San Francisco next week. I always think of you when I visit, and the group dinner we had in Sausalito. Hope you are doing well. – Art

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