For the majority of retailers, loss is an inevitable part of doing business. What form this loss takes and, critically, how much it costs the business varies enormously depending upon the type of retailer and the quality of their operations. In addition, the customer experience is often heavily dependent upon the way in which retail employees behave and deliver an organization’s culture and ethos. They are usually the most visible and defining representation of the business.
In turn, the extent to which retail employees feel valued, rewarded, and are offered meaningful opportunities by the business that employs them is a key component in delivering customer service. Unhappy, demotivated, and disengaged associates are probably much less inclined to deliver great customer service than those who find their work to be enjoyable, rewarding, and fulfilling. In other words, the degree of retail employee engagement can affect customer satisfaction.
Recent research by the ECR Europe Shrinkage and On-shelf Availability Group sought to examine these issues to assess whether and to what extent they are linked. In particular, the research was interested in understanding the way in which retail employees viewed their work-life experience and how this might impact levels of loss experienced by their businesses. Is it the case that levels of loss are higher when levels of staff engagement are low and vice versa? Based upon the first detailed analysis of both a range of store-based indicators of loss and levels of retail employee engagement across three major European retailers, this research provides a unique insight into the complex interrelationship between retail losses and employee engagement.
The Role of People in Retailing
From restocking shelves to serving customers and selling products, employees play an active and essential role in the daily functioning of a retail organization. Despite this, they are often portrayed as a drain on business profitability, either through the direct costs of wages and associated employee benefits or as generators of loss, through malicious and non-malicious behavior. Although little work has been done to date to understand the link between overall employee engagement and the generation of retail losses, much more is known about their potential impact on retail sales and customer satisfaction.
While previous research has generated a mixed picture on the relationship between retail employee engagement and improved business profitability, some research has shown that the relationship is generally positive and beneficial to the business. The important role managers can play in affecting levels of employee engagement have also been highlighted–in particular, the way in which levels of trust, store culture, and atmosphere can affect levels of employee stress and anxiety. Similarly, it has been found that managers over-prioritizing productivity and sales can also have a deleterious impact on levels of employee engagement, which in turn can negatively impact the customer experience. Furthermore, it has been found that dissatisfied employees are more likely to steal from an organization, whereas satisfied employees are more likely to exhibit pro-social behavior.
Understanding the Impact of Retail Employee Engagement on Retail Losses
Based on questionnaires from more than 200,000 associates in three large European retailers with a combined turnover of over €35 billion (~ $37.4 billion) and 1,570 stores, the ECR study was able to consider the relationship between eighteen common engagement factors, which measured staff attitudes towards how they perceived their contributions to the business, the environment within which they worked, the way in which they were managed, and more broadly the organisation which employed them, with four indicators of retail loss: shrinkage, waste, cash loss, and lost sales driven by out of stocks.
The main results can be summarized as follows:
- The four loss indicators (a combination of shrinkage, waste, cash loss, and lost sales through out-of-stocks) for the participating companies amounted to 3.12 percent of retail turnover.
- If representative of European grocers, this equates to losses of over €25 billion (~ $26.7 billion) a year for the grocery channel.
- Waste accounted for the largest proportion of loss at 53 percent, followed by losses caused by out-of-stocks (OOS) (25 percent) and then shrinkage (22 percent), with cash losses generating the least amount of losses (1 percent).
- A significant number of employee engagement factors were found to be linked with the four loss indicators—fifteen of the eighteen factors were associated with loss.
- When the four loss indicators were combined, six key retail employee engagement factors were found to be correlated, with regression analysis suggesting that they accounted for 21 percent of the variance in loss (ranked in order below):
- Staff feel appreciated and valued.
- Managers communicate effectively with staff about performance and objectives.
- Staff believe there are good opportunities for development.
- Manager/company is good at keeping staff informed about what is going on in the company.
- Staff are happy to recommend the company.
- Company provides a safe and tolerant working environment.
- If the participating retailers were able to improve the levels of staff engagement on these six key engagement factors in the bottom quartile of stores to the levels found in the rest of their businesses, the following savings could be made:
- 9.8 percent reduction in waste
- 19.6 percent reduction in lost profits through out-of-stocks
- 12.5 percent reduction in shrinkage
- 9.5 percent reduction in cash loss
- If these savings were aggregated out to cover the entire European grocery sector, the savings could be in the region of €380 million (~ $406 million) a year.
Loss Prevention and Retail Employee Engagement
The ECR study provides a fascinating insight into the role retail employee engagement might play on the levels of loss experienced by retailers. While the majority of previous research has focussed upon the potential impact retail employees might play in increasing business profitability through boosting sales, principally through better customer service models, what this study does is look at the potential role employees might play in reducing one of the biggest drags on retail profitability—the losses they incur as they go about delivering their complex and ever-more demanding retail value chains.
This data suggests that there is enormous potential for changes in levels of retail employee engagement to impact losses, which can be translated into improvements in profitability, possibly by as much as 20 percent in poorly performing stores. Of the eighteen engagement factors used by this research, all but three were found to play some role in explaining variance in the loss indicators used. Of these, some factors were found to have greater explanatory power than others, with the role of management and how staff perceived their contribution to the business being particularly important.
There is a general trend within the world of loss prevention to characterize the control of the problem of loss as one best done through the application of a range of technologies—electronic article surveillance (EAS) tags, closed circuit cameras (CCTV), safer cases, radio frequency identification (RFID) technologies, and so on—in other words, the application of science to solve the challenges of retail loss. In some ways, this is understandable, particularly when the definition for loss is mainly premised upon causes that are malicious in nature, such as external theft, which is one of the more difficult loss problems to tackle. But there is also a danger that loss prevention departments can become over-reliant on technology to prevent loss and forget the value of one of the retail organization’s biggest assets and expenses: its employees. This could take the form of not only more informed training for those with management responsibilities but also the training provided to all staff operating throughout the organization.
Pivotal Role of Managers
The important role of managers, especially the store manager, is a recurring theme in this research. It was the category of engagement that had the greatest number of correlates with the four loss indicators. It is clear from this research, and indeed from other ECR studies, how important the store manager is in generating profit and controlling losses. They are the lightning rod through which the organization’s culture, ethos, priorities, and demands flow through to the fabric of the store, the behavior of the staff, and the way in which the customer consumes. They channel information, training, new developments, and decisions from the broader organization to store teams and make critical decisions on how products will be displayed and protected. This research has shown that store managers can play an important role in generating higher levels of retail employee engagement, which in turn can produce lower levels of inventory loss.
Putting People First
Many of the factors identified in this research are as much about personal behavior and management style as they are about changing organizational structures, processes, and procedures. It is perhaps one of the most profound elements of this research—the potential for significant savings through delivering a working environment where employees feel valued, encouraged, well informed, and proud to be a part of the organization. It does not require new technologies. It simply needs the business to recognize that its people not only are its greatest asset in terms of selling more, but also can play a powerful role in helping the business to lose less–potentially a lot less!
EDITOR’S NOTE: To get a free copy of the full report, please email Professor Adrian Beck at bna (at) le (dot) ac (dot) uk.
This article was excerpted from “People Power: The Value of Engaging Staff to Manage Retail Losses,” which was originally published in LP Magazine EU in 2016. This article was updated January 31, 2017.