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Why the Trader Joe's Model Benefits Workers--And the Bottom-Line Why the Trader Joe's Model Benefits Workers--And the Bottom-Line

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Why the Trader Joe's Model Benefits Workers--And the Bottom-Line

Companies that invest in higher salaries for low-level employees find success in a competitive market.

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(AP Photos/Ric Francis)()

The average American cashier makes $20,230 a year, a salary that in a single-earner household would leave a family of four living under the poverty line. But if he works the cash registers at QuikTrip, it’s an entirely different story. The convenience-store and gas-station chain offers entry-level employees an annual salary of around $40,000, plus benefits. Those high wages didn’t stop QuikTrip from prospering in a hostile economic climate. While other low-cost retailers spent the recession laying off staff and shuttering stores, QuikTrip expanded to its current 645 locations across 11 states.

Many employers believe that one of the best ways to raise their profit margin is to cut labor costs. But companies like QuikTrip, the grocery-store chain Trader Joe’s, and Costco Wholesale are proving that the decision to offer low wages is a choice, not an economic necessity. All three are low-cost retailers, a sector that is traditionally known for relying on part-time, low-paid employees. Yet these companies have all found that the act of valuing workers can pay off in the form of increased sales and productivity.

 

“Retailers start with this philosophy of seeing employees as a cost to be minimized,” says Zeynep Ton of MIT’s Sloan School of Management. That can lead businesses into a vicious cycle. Underinvestment in workers can result in operational problems in stores, which decrease sales. And low sales often lead companies to slash labor costs even further. Middle-income jobs have declined recently as a share of total employment, as many employers have turned full-time jobs into part-time positions with no benefits and unpredictable schedules. 

QuikTrip, Trader Joe’s, and Costco operate on a different model, Ton says. “They start with the mentality of seeing employees as assets to be maximized,” she says. As a result, their stores boast better operational efficiency and customer service, and those result in better sales. QuikTrip sales per labor hour are two-thirds higher than the average convenience-store chain, Ton found, and sales per square foot are over 50 percent higher. 

Entry-level hires at QuikTrip are trained for two full weeks before they start work, and they learn everything from how to order merchandise to how to clean the bathroom. Most store managers are promoted from within, giving employees a reason to do well. "They can see that if you work hard, if you're smart, the opportunity to grow within the company is very, very good," says company spokesman Mike Thornbrugh.

 

The approach seems like common sense. Keeping shelves stocked and helping customers find merchandise are key to maximizing sales, and it takes human judgment and people skills to execute those tasks effectively. To see what happens when workers are devalued, look no further than Borders or Circuit City. Both big-box retailers saw sales plummet after staff cutbacks, and both ultimately went bankrupt.

As global competition increases and cheap, convenient commerce finds a natural home online, the most successful companies may be those that focus on delivering a better customer experience. Ton's research on QuikTrip and other low-cost retailers--now a Harvard Business School case--is applicable across a variety of industries, she says. Toyota's production system, for example, gives all employees--including workers on the assembly lines--a voice in improving products.

But for a publicly traded company under pressure to show quarterly earnings, it's tempting to show quick profits by cutting labor costs. The bad economy has also made workers willing to take lower-paid positions rather than join the ranks of the unemployed. New employer-sponsored health insurance requirements under the Affordable Care Act are only going to give employers an additional incentive to shift workers to a part-time schedule. 

There are also trade-offs to investing in employees. Businesses that spend more on their workers have to cut costs elsewhere. Trader Joe's streamlines operations by offering a limited number of products and very few sale promotions. Costco stocks products on pallets, as a warehouse would. And the QuikTrip model requires investors to have the fortitude to accept possible short-term drops in profits. "You have to take a loss for a little bit," says Maureen Conway, executive director of the Economic Opportunities Program at the Aspen Institute. "You have to pay above market. You have to change how you do business."

 

At the upper echelons of the American workforce, salaries have soared. Companies are accustomed to thinking of their highest-level employees as “talent,” and fighting to hire and reward people who will help grow the company. Now Trader Joe's and QuikTrip are proving that lower-level employees can be assets whose skills improve the bottom-line as well.

Correction: An earlier version of this story incorrectly spelled the first name of MIT Professor Zeynep Ton.

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