Slashing payroll is not always the answer

Ever notice that Costco and Trader Joe's, two of retail's most successful enterprises, always have plenty of employees on the floor and at the checkout lines? How can they make money with more people, while other chains struggle to stay alive with less? The New Yorker's James Surowiecki points out that reducing the workforce isn't always the best answer:

It's true that, at some point, hiring more people yields diminishing returns. And, of course, if you have a lousy product selection, a bigger payroll won't help much. But there's a strong case to be made that corporate America's fetish for cost-cutting has gone too far. Some of the highest-profile retailers to flop in recent years were companies that made a big deal of slashing payroll costs. In 2007, Circuit City fired more than three thousand of its most experienced salesmen, replacing them with newer workers whom it could pay less. Its sales dropped, and it was bankrupt within a couple of years.

So if more employees lead to bigger profits, who don't more merchants take the hint?

The benefits of keeping payroll costs low are immediate and easy to see, whereas the benefits of hiring more people are long-term and harder to track. On top of this, keeping a large staff runs counter to one of the most important trends in retail: making customers do more of the work. We're all familiar with the phenomenon of outsourcing work to foreign companies. But there's also been a great deal of outsourcing work to customers. Often enough, this is a good thing: the self-service layout of a modern supermarket offers more freedom than an old-fashioned grocery counter, where you have to ask for things. It seems easier to pump your own gas at a gas station than to wait for an attendant, and people are increasingly happy to use a self-service kiosk at an airport instead of standing in line for a check-in agent. But you can only outsource so much work before alienating your customers.