Rising Labor Costs Inspire Savvy Retailers to Innovate

New approaches, strategies unlock competitive advantages

March 17, 2017, 04:19 pm

As retail wages continue to rise due to government action and industry competition, some grocers and food retailers are developing ways to keep profit margins intact without passing along costs to customers, according to industry analysis from global management consulting firm L.E.K. Consulting.

Labor costs already take up approximately 14% of grocers' average revenues, according to estimates from the National Grocers Association, and those costs will probably rise further as more states and cities raise their minimum wages. At the same time, stores like Walmart and Costco are boosting their own minimum wages, prompting competitors to do the same, and shaving profit margins even thinner.

The easiest way for a retailer to respond is to try and pass through price increases to the consumer. But the savviest food retailers -- the ones who may win lasting advantage -- are fashioning strategies that maintain margins and keep customer prices in check, say Chris Randall and Rob Wilson, Managing Directors in L.E.K. Consulting's Consumer Products and Retail practice and authors of "Rising Labor Costs -- and What Retailers Can Do About Them."

"The smartest grocers are dealing with higher wages by shifting the labor status quo. That means taming labor costs that already exist, finding opportunities to outsource certain labor-intensive activities, taking labor out of the back office via technology and exploring cutting-edge pricing and merchandising techniques," says Randall.

"Innovative food retailers recognize that turning points are disruptive by definition – but they're also catalysts for breakthroughs," adds Wilson.

Randall and Wilson highlight a number of ways innovative food retailers have grappled with higher wages:

1. Maximize existing labor without sacrificing service. Kroger hopes to save $250 million in annual labor costs with a new customer tracking system that will help match the number of open checkout lanes to the volume of customers in a store at any given time. The new system is also expected to slash average customer wait times.

2. Automate more non-customer-facing activities. French grocery store E.Leclerc uses electronic labeling systems that can change prices across stores simultaneously. This eliminates the labor cost of paper labels, as well as the cost of mislabeling items.

3. Outsource some labor-intensive activities. Grocers can find more opportunities for outside service providers to take on labor-intensive store functions, such as inventory resets, onsite marketing, product management and data collection. Strategic outsourcing has the proven potential to reduce the overall labor cost.

4. Drive sales of high-margin products. Many grocery stores turn to private-label brands to increase profits and balance out rising wages -- and there's more than one way to do so, says Wilson. "Aldi carries just one private label for many of its products, which saves store and warehouse space and allows for lower prices," he says. "Kroger, Costco and Whole Foods, on the other hand, have applied robust and multi-tiered branding and categorization to their private labels."

5. Employ cutting-edge pricing and promotion techniques. Customer loyalty programs and digital coupons are effective ways to increase revenue to offset higher labor expenses. Wegmans' digital coupon initiative -- distributed via email and mobile app -- have inspired recipients to make 23% more trips to the store and spend 50% more per year than the average shopper.

Today's environment of rising labor costs may represent an opportunity as well as a danger for grocers and other retailers, sums Randall. "Retailers can create meaningful competitive advantage if they remain proactive and focused, and if they put labor cost planning and margin management on the strategic agenda today."