00:00:00
Yeah. Another
challenge, I think, to your 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 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 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 that that puts, I will argue, an
extra pressure for grocery
00:00:35
retailers to fully convert customers
to the online experience, right? - 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, Dan Loney, and in each episode,
we'll be diving deep into the
00:00:50
inspiration behind the
groundbreaking research that Wharton professors have
conducted and exploring how
00:00:56
their findings resonate with the
world today. Well, we are at an interesting time
00:01:01
in the labor markets.
The economy is pretty 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 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 grocery industry as the main
example. Pleasure to be joined
00:01:25
by Marshall Fisher, who's a
Professor of Operations, Information and Decisions here
at the Wharton School, and also
00:01:32
Santiago Gallino, who's an
Associate Professor of Operations, Information and
Decisions, as well as an
00:01:38
Associate Professor of Marketing
here at the Wharton School. Gentlemen, great to talk to you,
and thanks
00:01:43
very much for your time today. Our pleasure. Thank you,
Dan, Thank you. I guess let me start,
why the focus in terms of
00:01:52
understanding more about the
labor market, with the grocery
area specifically? 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 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 optimizing inventory and
thinking about that. But I think
00:02:19
relatively to inventory effort,
I think staffing has been understudied. And that's where
we thought it was an opportunity
00:02:26
to help retailers. 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, led the charge. Other products
were— product segments— were
00:02:45
seeing increasing dot-com. Grocery
was a bit slow, until along came 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 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? [chuckles] They had this wonderful,
innovative model where you place
00:03:21
your order online and at no
charge to the customer, someone 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. It is interesting, though,
Santiago, when you think about
00:03:37
grocery and how technology has
changed a lot of the dynamics, not only in the checkout area,
but also in placing the order.
00:03:48
So is the expectation that
technology will continue to 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 to come into our lives?
00:04:03
Yes. I think I agree with that.
I think that what we are going to see as we move forward is
many of the technologies that
00:04:12
are already available will
become good investments. And I 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 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 those technology investments
have been justified several
00:04:40
years ago in countries like
Norway or Sweden and now, because of the pressure, are
reasonable investments here in
00:04:49
the US. And I think that that
has been a driver of incorporating technology on the
operational side. I think that
00:04:57
many of the technology we see is
new. But others have been around for a while. It's just
waiting to be a good investment
00:05:06
to be acquired by the retailers. Marshall, with your focus here 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 will see play out, or maybe are
already, with retail in general
00:05:26
across so many different
segments? Tell me more about what you
want on that question, Dan.
00:05:34
Well, I mean, if the
numbers and the information 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 all kinds of retail businesses?
00:05:50
Yes. Yeah, absolutely.
And as I mentioned before, some segments of retail
are ahead in moving to e-commerce.
00:06:01
Apparel would be
somewhere in the middle. Obviously, books, video, and
generally consumer electronics
00:06:10
are ahead of the game in terms
of moving online. Grocery's the laggard. So I think grocery's
learning from other segments,
00:06:23
rather than the other way
around. Santiago mentioned 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 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 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 of automating the picking
process. Walmart has done a
00:07:01
pretty good job. And what they
put in place are mega- 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 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 doesn't lend itself to
automation, like fresh, fresh
00:07:35
product, they'll pick from the
store, put that together and 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 and fulfillment process.
00:07:51
Is the expectation
then, Marshall, that that part 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. 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, though, that are already the
point where they feel
00:08:12
comfortable just ordering
online. And they're called young people. Yes, that's right.
- And will
00:08:18
it grow? Sure. As a greater and
greater percentage of the population were— grew up
with the Internet, they feel
00:08:27
comfortable doing that. Yeah, no. It's— it's gonna happen
with demographics.
00:08:33
Gonna happen. Yeah. Another challenge,
I think, 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 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 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 think that that puts an— I will
argue, an extra pressure for
00:09:09
grocery retailers to fully
convert customers to the online experience. Is e-commerce delivering the ROI
that the owners of these grocery
00:09:20
chains expect, Santiago? 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, the answer is very elusive in
bringing the idea of long term
00:09:36
profitability, long term
strategic approach. Which, it's 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 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 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 profitable transaction for them.
00:10:09
Marshall, with the
addition of all of these components of technology, how
does that change how the grocery
00:10:17
as a company thinks about their
employees? And obviously, I 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 comparison to the times of the
week that maybe are
00:10:33
slower than others. So I'll answer your question
with a comparison of two retailers, and two executives at
those retailers that have a
00:10:43
connection to Wharton. So
Costco, Richard Galanti was— and 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. Described his job as doing
whatever the CEO didn't want to
00:11:06
do, including the earnings calls. Marc Lore was in the MBA
program. Did the first year, and
then somehow found starting
00:11:15
companies was where his heart
was, and created Jet. Left, sold that to Walmart. So Mark headed
Walmart.com. Two different
00:11:28
approaches. Walmart, under Marc—
and this gets to your 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 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 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 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 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— stock price earnings ratio
tripled. Okay? Tripled, as they
00:12:29
moved to dot-com. Dot-com retailers
traded at a higher multiple, right? And so that— so, what— was
it profitable for them? Yeah,
00:12:40
you'd have to say so.
Now Costco 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 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 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 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 grocery as we move forward?
00:13:29
So I think that we are going to
see a revival of the 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 play a game that incorporates
not just the fulfillment of the
00:13:48
order but some kind of
advertisement revenue that comes from their online efforts.
But other— the smaller players
00:13:56
will lean on the physical
store and experience. Like customers like you, I will
argue that old customers and
00:14:04
young customers always
appreciate a good in-store experience. And I think that
there are good examples in grocery
00:14:12
where the number of
stores are growing. I mean, if 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, 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 store. So I will anticipate in
the coming years, if you want, a
00:14:36
revival of the physical store. 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 Joe's, you go to the store. And
they seem to work pretty hard at
00:14:50
not making it boring. Santiago, you mentioned a little
bit ago about the difference
00:14:56
between stores here in the US
and other countries. Part of this research was looking at
what grocery is like in other
00:15:03
countries. Tell us about that
side of the story. 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 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 America, the employees in the
store are very abundant. Why?
00:15:32
Well, because labor is
relatively cheap, and so 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 experience interaction with
employees in the store. Europe,
00:15:48
on the other end of
the spectrum, like I was mentioning before, has
incorporated a lot of technology
00:15:55
and has pushed the
efficiency of the store in terms 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 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 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 of the customer expectation and
the labor market conditions.
00:16:33
Marshall, what were your
takeaways from doing this 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 was talking about. Costco, in
some ways, in their labor
00:16:49
practice looks more like a
European retailer. They pay 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 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 about store labor. The Costco
model is really impressive in
00:17:20
all kinds of ways. Great to have you both with us
today. Thank you, Marshall. Thank
00:17:24
you, Santiago. Thank you very
much for having us. Thank you, Dan. Thank you. Marshall Fisher,
and also Santiago Gallino of the
00:17:31
Wharton School. Thank you for
listening to <i>The Ripple Effect</i>.
00:17:35
We hope you found this episode
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00:17:41
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