Bad service, crummy economy go hand-in-hand

 

For decades, U.S. corporations have been told to slim down. Not to abandon corporate jets or cut CEO pay, mind you, but to produce more with fewer employees. The conventional wisdom couldn’t have been clearer: The minimum number of required workers yields the maximum level of profits, all else being equal and the creek don’t rise.

During these decades, however, the United States was also shifting to a service economy — a new reality that didn’t always comport with the doctrine of “lean is good.” The minimum number of required workers — a subjective standard at best — seldom yields the maximum level of customer satisfaction (or anything close to it).

So it was at J.C. Penney, an iconic retailer of America’s past that stumbled as it sought to adapt to the management shibboleths of America’s present. When Apple executive Ron Johnson took over in 2011, he decided there was nothing wrong with Penney that couldn’t be fixed by abandoning many of the chain’s product lines and laying off nearly a quarter of its employees. As The Wall Street Journal has reported, Penney employed at least 150,000 people for almost a decade, but within a year of Johnson’s arrival it had cut its labor force to 116,000. The retailer administered layoffs in wholesale fashion: At the company’s headquarters, employees were summoned to meetings in groups, some of more than 100 workers , where they were all summarily dismissed.

The Johnson plan didn’t work out so well. Revenue at Penney, the Journal documents, was roughly $17.5 billion annually for the three years before Johnson’s arrival. One year into his tenure, however, revenue had plunged to $13 billion; consumer dissatisfaction, not to mention worker dissatisfaction, was high. Earlier this month, Johnson got the ax himself.

Johnson’s is not the only cautionary tale of lean staffing run amok. Wal-Mart has been shrinking its U.S. workforce, according to a recent Bloomberg Businessweek report and company filings, even as it expands. During the past five years, Wal-Mart added 455 stores in the United States — a 13 percent increase — while reducing its U.S. workforce by 1.4 percent, or about 20,000 employees (the U.S. workforce includes the company’s Sam’s Club division). The number of employees per store has been cut from 343 to 301.

Fewer workers have meant fewer products on Wal-Mart’s shelves. Businessweek reports that “pallets of merchandise are piling up in its stockrooms as shelves go unfilled” and overworked employees can’t find the time to restock the products. According to the minutes of a Feb. 1 managers meeting that the magazine obtained, Bill Simon, the company’s U.S. chief executive, acknowledged that Wal-Mart was “getting worse” at stocking shelves. The company has placed or tied for last among department and discount stores in the American Customer Satisfaction Index for several years. Wal-Mart is no J.C. Penney, however: For many shoppers, disgruntled or not, it’s still the only game in town.

One lesson that emerges from the experience of low-end retailers is that putting workers in crummy, low-wage jobs tends to yield crummy service as well. McDonald’s earnings have fallen, The Wall Street Journal reports, and a management webcast to franchise owners acknowledged that customer dissatisfaction is rising in part because “service is broken.”

But are mass retailers compelled to skimp on labor costs by slashing their workforce and paying the minimum wage or close to it? Some of the most successful retailers follow a different path. As MIT management professor Zeynep Ton argued in Harvard Business Review last year, Costco and Trader Joe’s pay their workers far more than many of their competitors, offer their employees opportunities for promotion and enjoy markedly lower worker turnover and far higher sales per employee than their low-road counterparts. Sales per employee at Costco are nearly double that at Sam’s Club.

Problem is, the Wal-Mart model of employment and service not only reflects but also reinforces the declining economic prospects of the majority of Americans. The nation’s largest private-sector employer has used its market power to impose its low-wage model all along its supply chain, leaving millions of Americans with no shopping option other than the kind of discount, and frustrating, experience that Wal-Mart provides. The U.S. economy that Wal-Mart has built — with plenty of help from Wall Street and the government — is in the shape of a downward spiral, and it will take all our ingenuity, and a mass movement for worker power, to free ourselves from that path.

Harold Meyerson is editor-at-large of The American Prospect.

Special to The Washington Post.

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