What Good Are Low Prices If the Shelves Are Empty --Walmart Faces the Cost of Cost-Cutting: Empty Shelves

Abstract

Walmarts U.S. Chief Executive Officer Bill Simon stated that Walmart was getting worse at stocking shelves, and its self-inflicted wounds were Walmarts biggest risk because they correlated positively with slowing sales growth. The vicious cycle of understaffing has led to operational problems at Walmart.

Today Walmart has an average of 301 employees per store compared to 343 employees per store, with the averages based on total U.S. employee and store count, including Sams Club and headquarters staff. Adding five full-time employees to Walmarts U.S. supercenters and discount stores, for example, would cost the retailer about $448 million a year, assuming those workers earned the federal minimum wage and industry standards for health benefits. Such changes would add about a half-percentage point to Walmarts selling, general, and administrative expenses.

From an operations management perspective, a thinly spread workforce has other consequences: longer checkout lines, less help throughout the store, and disorganization.

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Margaret Hancock long considered her local Walmart superstore her one-stop shopping destination. But during recent visits, the retired accountant from Newark, Del., says she failed to find more than a dozen items, including certain types of face cream, cold medicine, mouthwash, bandages, and hangers. Walmarts loss was a gain for Kohls (KSSLinks to an external site.), Safeway (SWYLinks to an external site.), Target (TGTLinks to an external site.), and Walgreens (WAGLinks to an external site.)the chains Hancock visited for the unavailable items. If its not on the shelf, I cant buy it, she explains. You hate to see a company self-destruct, but there are other places to go.

Wal-Mart Stores (WMTLinks to an external site.) has been cutting staff since the recessionand pallets of merchandise are piling up in its stockrooms as shelves go unfilled. In the past five years the worlds largest retailer added 455 U.S. Walmart stores, a 13 percent increase, according to company filings in late January. In the same period its total U.S. workforce, which includes employees at its Sams Club warehouse stores, dropped by about 20,000, or 1.4percent.

A thinly spread workforce has other consequences: longer checkout lines, less help throughout the store, and disorganization. Last month, Walmart placed last among department and discount stores in the American Customer Satisfaction Index, the sixth year in a row the company has either tied or taken the last spot. The dwindling level of customer service comes as Walmart has touted its in-store experience to lure financially strained shoppers and to counter the threat from online rivals such as Amazon.com (AMZNLinks to an external site.).

The retailer says reports of stocking problems are overblown. Our in-stock levels are up significantly in the last few years, so the premise of this story, which is based on the comments of a handful of people, is inaccurate and not representative of what is happening in our stores across the country, Brooke Buchanan, a Walmart spokeswoman, said in an e-mailed statement. Two-thirds of Americans shop in our stores each month because they know they can find the products they are looking for at low prices.

At a Feb. 1 gathering of Walmart managers, U.S. Chief Executive Officer Bill Simon said Walmart was getting worse at stocking shelves, according to minutes of the meeting obtained by Bloomberg News. Simon said self-inflicted wounds were Walmarts biggest risk and that an executive vice president had been appointed to fix the restocking problem, according to the minutes.

The stocking challenge coincides with slowing sales growth. Same-store sales in the U.S. for the 13 weeks ending April 26 will be little changed, Simon said during a Feb. 21 earnings call for investors. When times were good and people were still shopping, the lack of excellence was OK, says Zeynep Ton, a retail researcher and associate professor of operations management at the MIT Sloan School of Management. Their view has been that they have the lowest prices so customers keep coming anyway. Ton says Walmart shoppers are mad about the way they were treated or how much time they wasted looking for items that arent there.

Retailers consider laborusually their largest controllable expenseas an easy target for cost-cutting. Thats what happened at Home Depot (HDLinks to an external site.) before, when it tried to trim expenses and boost profits by cutting staff and relying more on part-time workers. Eventually customer service and satisfaction deteriorated, and sales growth at established stores fell. When you tell retailers they have to invest in people, the typical response is, Its just too expensive, Ton says.

Adding five full-time employees to Walmarts U.S. supercenters and discount stores, for example, would cost the retailer about $448 million a year, assuming those workers earned the federal minimum wage and industry standards for health benefits, according to an analysis by Poonam Goyal, a Bloomberg Industries senior analyst. That would add about a half-percentage point to Walmarts selling, general, and administrative expenses, which were about $88.9 billion last year.

At the Kenosha (Wis.) Walmart where Mary Pat Tifft has worked for nearly a quarter-century, merchandise ready for the sales floor remains on pallets and in steel bins lining the floor of the back rooman area so full that no passable aisles remain, she says. Theres no manpower in the store to get the merchandise moving, says Tifft, who oversees grocery deliveries and is a member of OUR Walmart, a union-backed group seeking to improve working conditions at the chain. Customers come in, they cant find what theyre looking for, and theyre leaving.

At the Walmart store in Erie, Pa., 26-year-old meat and dairy stocker Anthony Falletta faces a similar predicament. The merchandise is in the store; it just cant make the jump from the shelf in the back to the one in the front. Theres not the people to do it.

Walmart is entangled in what Ton calls the vicious cycle of understaffing. Too few workers leads to operational problems. Those problems lead to poor store sales, which lead to lower labor budgets. The decision to hire more workers requires a wake-up call at a higher level, Ton says.

Rochelle Jackson, who works at the jewelry counter at a Walmart store in Springfield, Mo., says a supervisor recently told her the number of hours available to schedule employees is linked to sales performance: The worse the sales number, the fewer hours available. I asked, Why cant we have enough hours to make the store work? recalls Jackson, who has worked at two Walmart stores. They said, Its orders from home office.

Staff shortages at cash registers during peak hours require Jackson and her co-workers on the sales floor to help check shoppers out while we are trying to restock the shelves, help customers, and do other assigned projects, she says. That leaves a service vacuum across the stores departments. Customers come back to shoes for help to find something in grocery because they cant find someone in grocery, Jackson says.

Tim White, an attorney, recalled trying to buy wall paint at the Walmart near his home in Santee, Calif.: You wait 20, 25 minutes for someone to help you, then the person was not trained on mixing paint. It was like, you have to help them help you. White says that while long checkout lines irritated him, the No.1 reason we gave up on Walmart was its prolonged, horrible, maddening inability to keep items in stock. The White familys visits to Walmartwhich had been a several times a week occurrence several years agobecame less and less frequent until they stopped in the past year. The eight-member clan now shops at Target and Costco Wholesale (COSTLinks to an external site.). Things might be a little bit more expensive, he says, but not so much so that it would keep me away.

The bottom line: Some employees say staff reductions have hurt Walmarts ability to keep shelves stocked at its more than 4,600 U.S. stores.

Discussion Questions

1. Discuss the vicious cycle of understaffing that has led to operational problems at Walmart in the retail industry.
2. From an operations management perspective, retailers consider labor (usually their largest controllable expense) as an easy target for cost-cutting. Discuss the effectiveness (or lack thereof) of this operations strategy.
3. Walmarts U.S. Chief Executive Officer Bill Simon stated that Walmart was getting worse at stocking shelves, and its self-inflicted wounds were Walmarts biggest risk. What would you suggest and why if you were appointed to fix the restocking problem?
4. Some employees say staff reductions have hurt Walmarts ability to keep shelves stocked at its more than 4,600 U.S. stores. How should the operations management strategy be aligned with the strategic management strategy?