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Are Retailers really that efficient?


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September 27, 2005

Are Retailers really that efficient?

Michael Mandel

While everyone is nittering and nattering about trade deficits, the real news is happening under their collective noses. Just look at the retailing sector. According to new data from the Bureau of Labor Statistics, there was a spectacular jump in productivity in the retail sector in 2004, as efficiency rose across the board. Just take a look:

In 2004, retailing turned in a productivity performance almost double its medium term average (1987-2004). The biggest winner was grocery stores. Some laggards, not shown on the table, include department stores, which barely beat their historical average.

Significance? Just that higher productivity means that the U.S. can produce more with less, which is the clearest signal of true national wealth.

01:23 PM

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? Recent growth in retail productivity from Newmark's Door

Michael Mandel summarizes the recent growth in retail productivity. It's phenomenal, amazing. [Read More]

Tracked on October 5, 2005 06:01 AM

What is going on in grocery stores? I haven't really noticed much change other than the increase in big box discounters. Perhaps some reduction in union labor? More accurate and timely pricing and quicker inventory turns? More price pressure on producers? More international food shipping? What about groceries could be applied in other areas?

Posted by: Lord at September 27, 2005 03:58 PM

To Lord

Wal-Mart is far more efficient at selling groceries than small grocery stores like the previous number one grocery retailer Kroger. On average when Wal-Mart moves into a town with its groceries, that town's price for groceries drops something like 20%. Wal-Mart recently became the biggest grocery retailer in the world beating Kroger. I won't even go into a Kroger their prices are out of control. As far as union labor is concerned Wal-Mart pays about the same as what its competitors pay??ittle.

Posted by: Joe at September 28, 2005 01:29 PM

to those of us who obsess about deficits (fiscal and trade) and capital flows, better retail productivity here in the US is not quite the news that would lead me to change my mind. I would rather see a surge in investment in the tradables sector. Not that retail productivity is a bad thing, hell -- it might even free up labor for the US tradables sector. But the link between more efficient grocery retailing and the higher exports (or lower imports) needed to bring about the eventual reduction in the us trade and transfers deficit (which almost everyone accepts as necessary, though there is enormous debate about when it will happen)is kind of thin. it doesn't suggest to me that changes in other prices (exchange rate, interest rate) wont be needed to bring the US closer to external balance. of course, right now the market is saying that it is ok to move further from external balance -- see the euro/ $.

Posted by: brad at September 30, 2005 05:21 PM

Brad,

I guess here is where I part company with you. I think improvements in productivity in the nontradeable sector--retailing, health care, government--are as or even more important than the tradeable sector. If you have productivity gains in retailing, say, several good things happen:

1) Higher profitability, which attracts more investment from overseas.

2) Labor is freed up from retailing, which enables other sectors to expand without running into inflation.

3) The retail price of goods is lower, which increases the real income of Americans.

4) Real wealth--which can be thought of as the present value of future output--increases.

Taken all together, you can easily see a situation where an increase in retail productivity could boost the trade deficit, at the same time that it increases real wealth.

Posted by: Mike Mandel at September 30, 2005 05:49 PM

Mike...two questions:

1)By "productivity" I assume (since it's BLS) that it's strictly *labor* productivity being measured, as opposed to a measure of total-factor productivity (ie, including capital productivity)...is this right?

2)How about big-box general merchandise retailers (Target, Wal-Mart?)..if these are included under "department stores" then the overall productivity of the *traditional* department stores must be even more dismal.

I always enjoy your BW articles, BTW.

Posted by: David Foster at October 5, 2005 03:15 PM

Perhaps widespread use of self-checkout lanes is a factor and 2004 was the breakout year. All the major grocery chains have installed them. Surprisingly, Walmart now has one of the worst checkout processes -- very slow and chaotic.

Posted by: Scott at October 5, 2005 05:19 PM

Most of the self-checkout systems I've seen are just awful. They look more like someone's science fair project than a well-engineered commercial product. (And I'm talking about a science fair project that did *not* get the blue ribbon)

Posted by: David Foster at October 6, 2005 10:23 AM

Scott is largely correct. 2004 saw the widespread implementation of self-checkout lanes throughout #1 U.S. grocer Kroger's stores as well as #2 Albertsons.

There have also been changes in how the shelves at grocery stores are stocked (by the product vendors rather than store employees), but this has been ongoing for several years.

Posted by: Ironman at October 6, 2005 10:50 AM

What contains Wal-Mart from behaving like a monopolist?, once the firm remains alone in a market...

Posted by: Ricardo at October 15, 2005 02:56 PM

Wal-mart have their own site?

Posted by: Conan at December 15, 2005 06:22 AM

I'm a little late to this discussion but here goes:

Regarding retail efficiency comparing Wal-Mart and Kroger

I've studied Wal-Mart's store information systems from both user and developer roles. Their systems are not that efficient. Jumbled green screens to change a single thing, archaic reports that make information dashboards look like a godsend, and a system that isn't very intuitive are some of the issues I found with their systems.

Their real productivity comes from their processes combined with technology. Their IT systems process orders automatically based on checkout data (perpetual inventory). Sounds pretty basic but you would be amazed how many billion dollar retailers aren't using this kind of system to it's full potential. It sounds great in theory but to keep store inventory (carrying costs) down Wal-Mart cuts everything to the wire. This results in many out-of-stocks (OOS) especially for events that POS technology cannot forsee (rainy weather and ponchos, for instance). While their systems are certainly class-leading, they are just on the cusp of what could be.....

Their grocery business is largely efficient in a labor sense because there is minimal labor. Try shopping a supercenter on Saturday evening. The shelves are bare and of the 13 aisles of groceries there might be 1 or 2 people stocking. No possible way they can keep goods on the shelves with that kind of manpower. WalMart blasts the goods onto shelves during the midnight shift. Go to the local Kroger and see 5-10 people stocking shelves all day. The extra service is why Kroger must charge more. Even if you save $5 on groceries at WalMart if they are OOS on one necessary item, the costs associated with stopping at a Kroger on the way home likely mitigate the inital savings. Grocery stores are also more likely to use vendors to stock products (bread, milk, chips, sodas). This shifts labor expenses from Wal-Mart to the vendor.

Regarding self-checkouts: The newest machines are very fast if someone is intuitive to use them. I am able to get in and out of stores very quickly and I wish Wal-Mart had more of them. If a user has to stop and read every screen each time (English or Spanish, cash or check, etc) there is ZERO benefit to using the machine.

Posted by: Wes at December 20, 2005 02:39 PM

I'm always skeptical that the numbers (such as productivity percentages) have any relation to reality. Nonetheless...

One of the key ways retailers are increasing their productivity is pointed to directly by the comments regarding self-serve machines. All throughout retail "self serve" is the mantra. This is great for the business, because it cuts *their* costs. Same sales, fewer costs, and wallah!... productivity is up! Way up! Of course, Wall St. is thrilled, everyone sees productivity numbers going through the roof, and we all cheer the resilient American economy.

But the work is still being done by the consumer. The costs have just been shifted from the business to the consumer. Since I don't suspect we have any measures of how "productive" consumer's lives are, or how that "productivity" is impacted by the shift of these costs onto them, we aren't truly gauging the overall wealth (and welfare) of our nation.

Posted by: Brandon at December 30, 2005 10:30 AM

What is the estimate of Wal Mart??s impact on overall productivity of US economy?

Posted by: Matti Honkala at May 4, 2007 08:26 AM


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