BALANCING THE LABOR EQUATION

Liz Parks

Supermarket operators need to find the right balance between service and cost-cutting as they turn more and more to part-time workers to run their stores, according to industry observers.

Some observers worry that some chains, driven by competitive pressures and double-digit increases in benefit costs, may be trying too hard to increase the number of part-time workers, running the risk that they could potentially lose one of their strongest competitive weapons: knowledgeable employees who can turn shoppers into loyal customers.

Although full- to part-time ratios vary widely within the supermarket industry, there has been a trend in the last few years for chains, particularly chains under competitive pressure from supercenters and other low-price retailers, to increase the number of part-time workers, while lowering pay rates and the number of hours that would qualify part-timers for health insurance, sick time, vacation pay and other benefits.

Since turnover rates for part-timers far exceed turnover rates for full-timers, that trend, sources said, could potentially drive industry turnover rates up to a dangerous level as workers bypass supermarkets for better-paying and more stable jobs elsewhere. According to Food Marketing Institute, Washington, turnover rates are close to 75% for part-timers and average just over 16% for full-timers.

"The trend to part-time workers swings back and forth, and it's based on economic pressure, but the competitive nature of the business today really puts a squeeze on," said Ernie Monschein, senior director, education and human resources for FMI.

"Most companies are trying to balance the economic need to keep labor and employee benefit cost percentages under control with the operational need to provide a steady, stable, motivated workforce. But if you are in a situation where you have to compete strongly on price and your margins are getting squeezed, it makes the choices you have to make even more difficult.

"On the other hand, if you are a company that views your workforce as a way to differentiate yourself from competitors, there is often more of a focus on keeping a larger contingent of full-timers on board. With a lower-turnover workforce, you don't have a constant training curve for new hires and you more often have people with a greater stake in your company."

Many supermarket retailers declined to talk on the record about their hiring policies, citing the sensitive nature of the topic, but those who did speak off the record expressed considerable sympathy, as well as concern, for chains operating in very competitive markets, often describing those chains as caught between a rock and a hard place.

Gary Rhodes, a spokes-man for Kroger, could not be reached for comment, but has said in the past that Kroger, one of the country's leading national food chains, was making "progress" toward its goal of labor-cost competitiveness.

Rhodes recently told SN that Kroger's most recent labor contract agreements have included a variety of measures designed to bring its labor costs "more in line with the competition."

Those measures included what Rhodes described as "modest cost sharing by our associates for health care benefits and caps on cost increases in health care plans.

"We continue to be committed to achieving a cost structure that enables us to grow our business and create more good jobs, while providing our associates with competitive wages and benefits. Our goal at the bargaining table is always the same: to balance our associates' need for competitive wages and benefits with the company's need to remain competitive and grow our business."

Many supermarket companies, not just large primarily unionized chains like Kroger, Safeway and Albertsons, are faced with the need to contain costs, one source said. "Labor is one of the largest controllable expenses that supermarkets have," the source added. "So there is pressure on wage rates, pressure on employee benefit costs.

"Companies are trying to deal with those pressures and still maintain a strong core workforce with a good core of solid full-timers, but it isn't easy. And the pendulum can swing too far. Some chains are not measuring the hidden costs of recruitment, training and the lost selling opportunities that companies may experience without a stable workforce."

"The cost of high turnover is sometimes intangible," Monschein said. "It can be difficult to measure, but the indirect costs of a more transient workforce, such as longer-than-average learning curves, higher shrink and lower levels of customer service, can adversely affect your business, your sales and your customers."

Sources, including Monschein, point out that the need for a stable workforce varies based on the marketing philosophy of individual chains, but the danger is that in trying to lower labor costs, some traditional supermarket retailers might cut the very thing that differentiates their stores from low-price competitors like Wal-Mart Stores, Bentonville, Ark.

"My personal opinion is that some of the unionized chains may have driven their starting wages and benefits down so low that they are going to have trouble getting quality of labor," said Marc Levinson, an economist with New York-based JP Morgan.

Levinson noted that some contract employees around the country now start at $7.50 an hour.

"It used to be," he said, "that workers would start at a lower wage and work their way up to a higher wage fairly quickly, so working in a supermarket was a pretty desirable job.

"Now you have a situation where workers are starting at a fairly low hourly wage on a part-time job and it will take a longer time to work their way up, and their benefits are not terrific, so the part-time jobs may be less attractive to people."

"There is a trend in large chains for hiring more part-time people," said Duane Naccarato, a senior partner with Bentonville, Ark.-based Diversified Retail Solutions, a retail consulting firm. "It allows so much more flexibility to bring more people in when you need them."

"But," added Naccarato, "people ought to be looking at the dynamics of their stores, looking at shrink, the competition factor, how hard it may be to find qualified people. If a store is in an area where it is very difficult to find people, then it is better off staying with a stabilized workforce and a higher percentage of full-timers."

"Supermarket retailers need to quantify what the true cost of turnover is," said Paul Anderson, president of Chicago-based Scheduling Dynamics, a retail consulting company specializing in store operations and labor scheduling. "They need to look at the training curve and compare that to fringe benefits. They need to understand how the two match."

Many supermarkets need high numbers of part-timers to fulfill flexible scheduling requirements, and, as many food retail operators point out, it is almost impossible to write a grocery schedule to cover the front end of the store in eight-hour shifts. So supermarket operators write shorter shifts. They simply don't have enough bodies if they try to write a schedule using all full-timers.

"Our competitors who are unionized really have to keep close tabs to make sure they follow the terms of their contracts when it comes to scheduling and that their contract terms stay where they are suppose to be," said Mike Gantt, senior vice president of human resources for the 154 -unit Bashas' supermarket chain based in Chandler, Ariz. "In most contracts, full-time employees must be scheduled for five eight-hour days a week.

"That's one of the reasons that unionized chains want to minimize the number of full-timers because if they have to give those shifts and they don't have enough sales volume to cover the costs of those shifts, they are really restricted, so they need more part-timers and more flexibility. If they have to have too many full-timers, all working full shifts, that's an artificial restriction that can affect their productivity. Nonunionized chains like ours don't have those restrictions."

Although the need for flexibility and the desire to control health care costs are understandable, legitimate issues, "flexibility doesn't mean disposability of the workers, and cost containment still has to result in affordable benefits for workers," said Greg Denier, a spokesman for the United Food and Commercial Workers union.

"Unfortunately, these days, too many employers are looking at the Wal-Mart model of low wage, low service and high turnover," he said. "But traditional supermarkets have a base of customers who expect full service. So we think it is short-sighted on the part of employers to push for more part-time workers, a higher-turnover workforce, a lower-wage workforce because that doesn't provide the relationship between the employee and the customer that keeps people coming back.

"Those relationships are what keeps the business for full-service supermarkets together. If supermarkets go toward a low-wage, low-service, high-turnover model like a Wal-Mart, then people might as well go to Wal-Mart. We have to differentiate our product, and the product differentiator in the full-service supermarket industry is the full service," Denier said.

It is not clear yet whether the shift toward using more part-timers will ultimately level off. Some sources said it may simply cause the food retailing industry to finally split into two well-defined camps, something like fast-food outlets vs. sit-down restaurants.

"I don't see any industrywide resolution," said Jon Hauptman, vice president of Willard Bishop Consulting in Chicago, Ill. "I think we're going to see a split. We're going to see some efficiency-oriented retailers try to shift their labor mix more toward part time, but I also think we will see other supermarket retailers continue to attempt to differentiate with a strong full-time staff and not participate in that same level of shift to part-timers."

Some clues to the future may lie in the success that many regional retailers are currently having by investing in a stable workforce.

Wegmans, Bashas', Ukrop's, Costco and Whole Foods are some of the chains that market their employees, and the high levels of customer service they provide, as a competitive point of differentiation. And their workforce ratios, which, in some cases, have shifted close to a 60% to 40% ratio of full- to part-time workers, are not negatively impacting the bottom line.

"With the 800-pound gorilla overshadowing everybody, we have to look for ways to do better than we're doing now," Bashas' Gantt said. "We have to look for ways to differentiate, to offer what Wal-Mart cannot offer. But we do need flexibility in scheduling. Labor is our biggest expense, and labor is a controllable expense."

Bashas', which like many traditional supermarkets today, has a variety of specialty departments, including floral, pharmacies, child care centers, and, in their upscale format, A.J.'s, even sushi bars, prides itself on its high degree of customer service.

"Our customers will get excellent service, whether they are being helped by a full-time person or a part-time person," Gantt said. "Those with longer tenure can be viewed as having more product knowledge -- and, yes, they get to know their customers better."

"I have seen many retailers increase their requirements for part-time employees to lock into benefits," Hauptman said. "Many supermarket retailers now require part-timers to work more hours than they had to work in the past before they can qualify for full or partial benefits."

But, said Hauptman, "many supermarkets are also using peripheral departments to differentiate from the alternative formats, such as the super stores, the limited-assortment stores, even the dollar stores, that are selling more and more food. A key component of perishable offerings is service. There is really no substitute for knowledgeable, savvy team members staffing those peripheral departments. So this is an area where you see less of a shift to part-timers."

Other sources stressed that the supermarket industry needs to maintain a balance, however precarious that balance may sometimes need to be.

"Healthy retailers that have a strong niche can often withstand some of the pressures being placed on the bottom line by low-price competitors," FMI's Monschein said.

"They realize that just as a strong perishable offering or very convenient locations are key elements to the customer, so is a well-trained, knowledgeable workforce that understands their product and can talk to their customers about it. That's worth something because it's a point of differentiation."

"The bottom line," said Naccarato, "is how well can each store best serve the needs of its customer, and if retailers keep that focus, then they'll reach the right blend over time. Whoever does the best job satisfying customers wins the battle."

Staffing a Top Concern of Supermarket Executives

Top Industry Issues 2004/2005

Issue: Ranked On A Scale Of 1 To 10

Credit card debt: 6.9

Energy costs: 6.5

Staffing/retention: 6.2

Technology investments: 5.5

Consumer privacy concerns: 3.0

Source: FMI Speaks 2005

Trends in the Median Average Turnover Rate

2004; 2003; 2002; 2001; 2000

Part-time employees: 74.6%; 59.7%; 58.0%; 84.0%; 80.8%

All store employees: 53.7%; 41.8%; 47.4%; 62.0%; 63.0%

Full-time employees: 16.1%; 14.3%; 13.3%; 24.0%; 19.7%

Source: FMI Speaks 2005