00:00:00
Yeah. Another
challenge, I think, to your
00:00:03
point, is that when there is a
stock out in the order, in other
00:00:09
categories, this is less
critical than in grocery. Because
00:00:13
if you are trying to fill up
your basket and milk is missing,
00:00:18
you will need to go to the store
anyways. If you're buying a kind
00:00:22
of apparel or something, you
can wait. That's not a big deal.
00:00:27
You can still do 100% of the
transaction online. And I think
00:00:31
that that puts, I will argue, an
extra pressure for grocery
00:00:35
retailers to fully convert customers
to the online experience, right?
00:00:41
- Welcome to <i>The Ripple Effect</i>,
the podcast that takes you on a
00:00:44
journey through the minds of
Wharton faculty. I'm your host,
00:00:47
Dan Loney, and in each episode,
we'll be diving deep into the
00:00:50
inspiration behind the
groundbreaking research that
00:00:53
Wharton professors have
conducted and exploring how
00:00:56
their findings resonate with the
world today.
00:01:00
Well, we are at an interesting time
00:01:01
in the labor markets.
The economy is pretty
00:01:04
strong, but technology is
playing a larger role in the day-
00:01:08
to-day operations. And how to
manage a staff plays a big part
00:01:13
in the success of the firm. A
recent report by two Wharton
00:01:17
professors looks at the state of
retail labor using the
00:01:21
grocery industry as the main
example. Pleasure to be joined
00:01:25
by Marshall Fisher, who's a
Professor of Operations,
00:01:28
Information and Decisions here
at the Wharton School, and also
00:01:32
Santiago Gallino, who's an
Associate Professor of
00:01:35
Operations, Information and
Decisions, as well as an
00:01:38
Associate Professor of Marketing
here at the Wharton School.
00:01:41
Gentlemen, great to talk to you,
and thanks
00:01:43
very much for your time today.
00:01:46
Our pleasure. Thank you,
Dan,
00:01:48
Thank you. I guess let me start,
why the focus in terms of
00:01:52
understanding more about the
labor market,
00:01:55
with the grocery
area specifically?
00:01:58
Yes. I think that the interest
came because labor in retail in
00:02:04
general, and grocery is no
exception, is one of the main
00:02:08
expenses that retailers have,
together with inventory. And
00:02:12
I think that over the years, there
has been a lot of effort in
00:02:15
optimizing inventory and
thinking about that. But I think
00:02:19
relatively to inventory effort,
I think staffing has been
00:02:23
understudied. And that's where
we thought it was an opportunity
00:02:26
to help retailers.
00:02:29
The other interesting thing that
was happening is growth in dot-com.
00:02:34
Which— grocery had been sort of a
laggard, right? Books, number one,
00:02:41
led the charge. Other products
were— product segments— were
00:02:45
seeing increasing dot-com. Grocery
was a bit slow, until along came
00:02:50
this thing called Covid, in 2020.
Nobody wanted to go into a store
00:02:56
anymore, so online surged.
Grocery had to get better at
00:03:02
that. And we wanted to look at
how well they were doing. And I
00:03:07
would say— what grade would you
give them, Santiago? About a D?
00:03:12
[chuckles]
00:03:15
They had this wonderful,
innovative model where you place
00:03:21
your order online and at no
charge to the customer, someone
00:03:25
goes into the store and picks it
for you, which roughly doubled
00:03:29
the labor cost and eliminated
all profit they were earning.
00:03:34
It is interesting, though,
Santiago, when you think about
00:03:37
grocery and how technology has
changed a lot of the dynamics,
00:03:42
not only in the checkout area,
but also in placing the order.
00:03:48
So is the expectation that
technology will continue to
00:03:52
evolve retail labor in grocery
as we move forward, just like
00:03:56
we're expecting more and more
technology to kind of continue
00:04:00
to come into our lives?
00:04:03
Yes. I think I agree with that.
I think that what we are going
00:04:07
to see as we move forward is
many of the technologies that
00:04:12
are already available will
become good investments. And I
00:04:16
think that that is a driver of
what retailers are incorporating
00:04:21
over time. I think that many of
the things that are new today
00:04:26
here in the US have been in
place in Europe, in certain
00:04:31
countries, for many years. And
this is mainly because the ROI of
00:04:36
those technology investments
have been justified several
00:04:40
years ago in countries like
Norway or Sweden and now,
00:04:44
because of the pressure, are
reasonable investments here in
00:04:49
the US. And I think that that
has been a driver of
00:04:52
incorporating technology on the
operational side. I think that
00:04:57
many of the technology we see is
new. But others have been
00:05:01
around for a while. It's just
waiting to be a good investment
00:05:06
to be acquired by the retailers.
00:05:09
Marshall, with your focus here
00:05:13
in this study on grocery, is
there a way to correlate what
00:05:17
you're seeing going on in that
area with what we potentially
00:05:21
will see play out, or maybe are
already, with retail in general
00:05:26
across so many different
segments?
00:05:30
Tell me more about what you
want on that question, Dan.
00:05:34
Well, I mean, if the
numbers and the information
00:05:39
you're seeing in the grocery
segment, with how they're
00:05:42
handling their labor, should we
expect it to be the same across
00:05:47
all kinds of retail businesses?
00:05:50
Yes. Yeah, absolutely.
And as I mentioned
00:05:54
before, some segments of retail
are ahead in moving to e-commerce.
00:06:01
Apparel would be
somewhere in the middle.
00:06:04
Obviously, books, video, and
generally consumer electronics
00:06:10
are ahead of the game in terms
of moving online. Grocery's the
00:06:17
laggard. So I think grocery's
learning from other segments,
00:06:23
rather than the other way
around. Santiago mentioned
00:06:27
technology. It's worth a minute
or two to talk about what's the
00:06:31
technology? The part that's easy
is having the customer place an
00:06:37
order online. Use the internet,
okay? What's hard, then, is
00:06:42
fulfilling that order. And as we
mentioned, the thing that was
00:06:47
easy for retail, grocery
retailers, to ramp up when Covid
00:06:52
hit was just picked from the
store. There's been an emergence
00:06:57
of automating the picking
process. Walmart has done a
00:07:01
pretty good job. And what they
put in place are mega-
00:07:07
warehouses. Sometimes it's a
enlarged back room of the store,
00:07:12
so they can have the same
inventory for filling an online
00:07:17
order as servicing the store.
And they automated the picking
00:07:24
from the warehouse of a subset
of the items. And then whatever
00:07:30
doesn't lend itself to
automation, like fresh, fresh
00:07:35
product, they'll pick from the
store, put that together and
00:07:38
ship it out to the customer. So
that's sort of the frontier
00:07:44
of online grocery, is getting
better and better at the picking
00:07:50
and fulfillment process.
00:07:51
Is the expectation
then, Marshall, that that part
00:07:55
of the grocery component will
continue to grow? And I say that
00:07:58
because grocery is one of those
unique things for some of us.
00:08:02
And I am like this. I still like
to go into the grocery store and
00:08:06
see my products and pick them
myself. There are those people,
00:08:10
though, that are already the
point where they feel
00:08:12
comfortable just ordering
online.
00:08:15
And they're called young people.
00:08:16
Yes, that's right.
- And will
00:08:18
it grow? Sure. As a greater and
greater percentage of the
00:08:22
population were— grew up
with the Internet, they feel
00:08:27
comfortable doing that.
00:08:29
Yeah, no. It's— it's gonna happen
with demographics.
00:08:33
Gonna happen.
00:08:34
Yeah. Another challenge,
I think,
00:08:36
to your point, is that when there
is a stock out in the order in
00:08:43
other categories, this is less
critical than in grocery. Because
00:08:47
if you are trying to fill up
your basket and milk is missing,
00:08:52
you will need to go to the store
anyways. If you are buying a
00:08:56
apparel or something,
you can wait. That's not a big
00:09:01
deal. You can still do 100% of
the transaction online. And I
00:09:05
think that that puts an— I will
argue, an extra pressure for
00:09:09
grocery retailers to fully
convert customers
00:09:12
to the online experience.
00:09:15
Is e-commerce delivering the ROI
that the owners of these grocery
00:09:20
chains expect, Santiago?
00:09:22
I don't think so. I mean, that
is a great question, and
00:09:26
every time I try to get an
answer from grocery retailers,
00:09:31
the answer is very elusive in
bringing the idea of long term
00:09:36
profitability, long term
strategic approach. Which, it's
00:09:42
telling me that in the short
run, this is a painful process.
00:09:46
Some of them are not losing
money anymore with the online
00:09:49
grocery channel. But it's
clearly, in my opinion, the less
00:09:56
attractive channel for them to
fulfill an order. I will say
00:09:59
that if a grocery retailer can
choose, they would much rather
00:10:03
like you to go to the store
because that's a more
00:10:06
profitable transaction for them.
00:10:09
Marshall, with the
addition of all of these
00:10:12
components of technology, how
does that change how the grocery
00:10:17
as a company thinks about their
employees? And obviously, I
00:10:21
guess also has to manage
the numbers that they have even
00:10:26
closer to make sure that they
are covering the busy times in
00:10:30
comparison to the times of the
week that maybe are
00:10:33
slower than others.
00:10:35
So I'll answer your question
with a comparison of two
00:10:39
retailers, and two executives at
those retailers that have a
00:10:43
connection to Wharton. So
Costco, Richard Galanti was— and
00:10:48
he retired this year, early this
year— was CFO. Wharton
00:10:55
undergrad. Spent, gosh, 30 or 40
years in that job of CFO.
00:11:02
Described his job as doing
whatever the CEO didn't want to
00:11:06
do, including the earnings calls.
00:11:10
Marc Lore was in the MBA
program.
00:11:12
Did the first year, and
then somehow found starting
00:11:15
companies was where his heart
was, and created Jet. Left, sold
00:11:20
that to Walmart. So Mark headed
Walmart.com. Two different
00:11:28
approaches. Walmart, under Marc—
and this gets to your
00:11:32
profitability question. When he
took over, they were losing, I
00:11:38
guess, about a billion dollars a
year, dot-com. And he was very— one of
00:11:43
the things he was most proud of
is that steady— that loss
00:11:45
steadily declined until now they
break even, or maybe earn a
00:11:50
small profit on dot-com. But he
was once interviewed with the
00:11:56
head of Walmart stores, and they
asked him, "Well, how do you two
00:12:01
guys relate and get along? And
Marc said, "Oh, it's very simple.
00:12:05
He makes the money and I spend
it." But he is proud, through the
00:12:13
innovations he put in place,
that that loss has come— come
00:12:17
down to break even or small
profit, and Walmart's price—
00:12:24
stock price earnings ratio
tripled. Okay? Tripled, as they
00:12:29
moved to dot-com. Dot-com retailers
traded at a higher multiple,
00:12:34
right? And so that— so, what— was
it profitable for them? Yeah,
00:12:40
you'd have to say so.
Now Costco
00:12:44
trades at 55 times earnings. And
they're the opposite model.
00:12:50
Their dot-com penetration rate is
minuscule, about 5%. And you
00:12:57
think about, why is that? Well,
they're— they have not run out of
00:13:01
room for growth with the
traditional store model. They
00:13:05
realized that they have to
improve their dot-com game because
00:13:10
people want to buy online. And
they're doing that. But up till
00:13:15
now, they've said, "Thanks very
much. We don't need dot-com."
00:13:20
Santiago, what do you expect,
then, these changes are going to do to
00:13:26
grocery as we move forward?
00:13:29
So I think that we are going to
see a revival of the
00:13:35
physical store in grocery. I
think that some of the players,
00:13:40
as Marshall was explaining, are
able to leverage the scale and
00:13:45
play a game that incorporates
not just the fulfillment of the
00:13:48
order but some kind of
advertisement revenue that comes
00:13:52
from their online efforts.
But other— the smaller players
00:13:56
will lean on the physical
store and experience. Like
00:14:00
customers like you, I will
argue that old customers and
00:14:04
young customers always
appreciate a good in-store
00:14:07
experience. And I think that
there are good examples in grocery
00:14:12
where the number of
stores are growing. I mean, if
00:14:15
you think Aldi, with a
completely new format in the US,
00:14:20
is growing very, very rapidly, with— if you can call it, like,
00:14:24
traditional, boring stores. But
they're not boring to customers
00:14:29
that are willing to make the
trip and go to the physical
00:14:31
store. So I will anticipate in
the coming years, if you want, a
00:14:36
revival of the physical store.
00:14:38
And Trader Joe's might be an example.
- Another example, exactly.
00:14:42
They don't do dot-com. They don't—
if you want to buy from Trader
00:14:47
Joe's, you go to the store. And
they seem to work pretty hard at
00:14:50
not making it boring.
00:14:52
Santiago, you mentioned a little
bit ago about the difference
00:14:56
between stores here in the US
and other countries. Part of
00:14:59
this research was looking at
what grocery is like in other
00:15:03
countries. Tell us about that
side of the story.
00:15:06
Yes, I think it's interesting to
compare that and look outside.
00:15:10
And in part, the main driver of
the experience in different
00:15:16
countries, I will argue, is
driven by the hourly rate that
00:15:22
employees get in the stores. So
if you go to places like Latin
00:15:26
America, the employees in the
store are very abundant. Why?
00:15:32
Well, because labor is
relatively cheap, and so
00:15:35
customers like to see employees,
and the retailer can afford
00:15:39
that. And so there is a lot of
that kind of firsthand
00:15:44
experience interaction with
employees in the store. Europe,
00:15:48
on the other end of
the spectrum, like I was
00:15:51
mentioning before, has
incorporated a lot of technology
00:15:55
and has pushed the
efficiency of the store in terms
00:15:58
of labor to the extreme. And I
think that that drives the
00:16:03
experience of the customer too,
in this format. Size, the
00:16:07
frequency of the visit. In
Europe, most customers will walk
00:16:13
to the store to buy— they buy
small baskets, and that drives
00:16:18
the format of the store. So I
think that sometimes we need to
00:16:23
kind of remember that the driver
of the format is a combination
00:16:27
of the customer expectation and
the labor market conditions.
00:16:33
Marshall, what were your
takeaways from doing this
00:16:35
research and your thoughts on
where grocery is headed?
00:16:39
Well, I just want to mention one thing
in follow up to what Santiago
00:16:45
was talking about. Costco, in
some ways, in their labor
00:16:49
practice looks more like a
European retailer. They pay
00:16:53
their people well. Really well.
And you go in a Costco store and
00:16:56
you'll see someone who's been
there for 20 years. I think
00:17:00
their turnover is like 6% a
year. Other grocery formats in
00:17:06
the US, the turnover is about
60% a year. So we're talking
00:17:13
about store labor. The Costco
model is really impressive in
00:17:20
all kinds of ways.
00:17:22
Great to have you both with us
today. Thank you, Marshall. Thank
00:17:24
you, Santiago.
00:17:26
Thank you very
much for having us.
00:17:27
Thank you, Dan.
00:17:28
Thank you. Marshall Fisher,
and also Santiago Gallino of the
00:17:31
Wharton School.
00:17:32
Thank you for
listening to <i>The Ripple Effect</i>.
00:17:35
We hope you found this episode
informative and engaging. Don't
00:17:38
forget to subscribe and leave us
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00:17:41
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