Topics: Retailing, Cost, Supply and demand Pages: 16 (5375 words) Published: January 3, 2013

Understaffing in Retail Stores: Drivers and Consequences
Vidya Mani
Smeal College of Business, Pennsylvania State University, State College, PA 16802

Saravanan Kesavan
Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, NC 27599

Jayashankar M. Swaminathan
Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, NC 27599

September 22, 2011

In this paper we study the drivers and consequences of understaffing in retail stores by examining the longitudinal data on traffic flow, sales and store managers’ labor planning decisions of 41 stores in a large retail chain. Assuming store managers are profit-maximizing agents, we use a structural estimation technique to estimate the contribution of labor to sales and impute the cost of labor for each store in our sample. We find significant heterogeneities in the contribution of labor to sales as well as imputed cost of labor across these stores. Using the estimated parameters, we establish the presence of systematic understaffing during peak hours. In addition, we explore the effects of forecast errors and lack of scheduling flexibility on the inability of store managers to staff optimally. Finally, we run counterfactual experiments to quantify the impact of understaffing on this retailer’s profitability. Key words: understaffing in retail, imputed cost of labor, store performance, structural estimation

Introduction In the battle to win retail customers, the importance of labor planning cannot be overemphasized. Having adequate store labor is critical as it impacts sales directly by affecting the level of sales assistance provided to shoppers, and indirectly, through execution of store operational activities such as stocking shelves, tagging merchandise, and maintaining the overall store ambience (Fisher and Raman, 2010). Store labor affects store profitability not only through its impact on sales but also on expenses. Labor related expenses account for a significant portion of a store’s operating expense (Ton, 2009). Hence, retailers have to walk a fine line between balancing the costs and benefits of store labor in order to maximize their profits. They try to achieve this balance by investing in technologies such as traffic counters and work force management tools to aid store managers in labor planning, conducting training programs for their store managers, and providing incentives for the store managers to have the right amount of labor in the stores. However, it is unclear to what extent retailers are successful in their efforts. Anecdotal evidence suggests that about 33% of the customers entering a store leave without buying because they were unable to find a salesperson to help them 1 . Such statistics highlighting lost sales opportunities due to understaffing can be vexing for retailers as they spend a substantial amount of their budget on marketing activities to draw customers to their stores. While substantial agreement exists that understaffing would result in lower store performance, the extent of understaffing in retail stores has not been studied rigorously. This issue is important for several reasons. First, studies have shown that understaffing could lead to poor service quality that can result in lower customer satisfaction (Oliva and Sterman 2001). Dissatisfied customers may switch to competitors resulting in a loss of lifetime value for those customers (Heskett et al. 1994). In addition, such customers may express their dissatisfaction in many forums, including social networking websites such as Facebook and Twitter, causing retailers to worry about the word-of-mouth effect (Park et al. 2010). Second, understaffing has been found to be negatively associated with store associate satisfaction (Loveman 1998). Decline in employee satisfaction has been found to be linked to decline in store’s financial performance (Maxham et...
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