Last weekend was joyous in sunny Northern California, but I was a little blue from the wind-down of a spectacular baseball season for both the Oakland A’s and the newly anointed world champ San Francisco Giants. Why worry? There’s always football! Alas, the Niners had the weekend off, but there’s always that train wreck known as the Oakland Raiders… and so I drove down to the grocery store to get some beer and chips before the game.

But to my surprise, the employees at my local Nob Hill (Raley’s) supermarket stood in front of the store with strike signs (thank you for being in the same shopping mall, Bevmo!). I got the story on the car radio: the employees were striking over benefits and weekend pay. Union workers at Raley’s, a 75+ year-old privately held supermarket chain operating over 100 stores in California and Nevada and headquartered in Sacramento, CA, went on strike Sunday after contract negotiations and federal labor mediation had failed.

What got my attention was this: a Raley’s spokesperson said that the company’s position was a response to increased competition from Wal-Mart, Target, and Whole Foods (from San Jose Mercury News: “‘Raley’s needs to cut costs’, spokesman John Segale said. ‚ÄòWe’re facing severe competition.’ Since 2008, when the last contract with the clerks union was adopted, more than 240 non-union stores — like Walmart, Target and Whole Foods — have opened or expanded, he said. “)

Raley’s is privately owned and so we can’t see the company’s income statements, but assuming that it’s a reasonably well-run operation, its expense ratio (the ratio between top line “revenue ” and “operating expenses ” less non-recurring expenses found on a typical profit & loss statement) shouldn’t be TOO much different than the other retailers mentioned. So armed with Yahoo Finances, I came up with these numbers from the most recent annual data:

Safeway: 24.43%

Whole Foods: 29.08%

Target: 23.88%

And…. WMT: 19.08%

It’s a very general rule-of-thumb that labor will make up about half of the expense ratio, with everything else – facilities, utilities, etc. taking up the rest. So of the competition that Raley’s is worried about, it’s an okay assumption that Whole Foods has the highest labor expense while Walmart has the lowest.

Is anyone surprised?

The Fallacy

My past CEO (a lifelong retailer from a multi-generational family of retailers) used to say, “if your strategy is ‚Äòlow price’, it just means you don’t have a strategy “. That was a little self-serving – since there was no way we’d ever be called the low-price leader in our category, but the point was (and is) that there can’t be more than one low price leader. If a company isn’t willing to do what everyday low price leaders like Walmart have done, then it’s not a winning strategy. And on top of that, competing on everyday price with the likes a Walmart is an almost surefire formula to get clobbered. Walmart has accomplished its winning position primarily by hyper-optimizing its supply chain – and then not giving the gains way in too much service labor.

That’s the problem for regional chains like Raley’s. After all, “Cheerios is Cheerios ” no matter where you buy them. In the world of fast moving consumer goods, the reason that a consumer will drive past retailer A to shop at retailer B is because of a perception of a combination of service, selection, and quality – the lower consumers’ perception of those things is, the more important price becomes. Labor impacts all three of those things (especially service). That is why RSR has talked up the issue of refocusing labor expenses on customer-serving functions while optimizing the non-selling functions. The reason Whole Foods continues to perform well even in challenging economic times is because they have figured out how to get their customers to NOT focus on price. One of the ways they accomplish that was with great service on the sales floor.

Customers Are In Control

RSR is conducting a survey now to gauge retailers’ attitudes about workforce management technologies (/research/the-fallacy-of-using-your-expense-ratio-to-lower-prices). Although responses are still coming in, here’s what our first wave of respondents is telling us about market challenges as they relate to labor:

The data bespeaks of the top line (revenue) benefit of better service. If a company can maintain a certain level of labor spend but crank more revenue out of each dollar of labor spend, if creates a competitive edge over against low-service, low-price providers. In other words, getting consumers to focus away from price and more on qualitative value is the way to go (and that by the way, is the best way to lower the ratio of labor to revenue – by getting more revenue out of the labor spend, rather than lowering the labor spend for the existing level of revenue).

The thing about service is that it depends on the goodwill of the employees. It’s another old adage of my former boss that “more money won’t motivate someone to do better, but lack of money will sure de-motivate them “. Anyone who has recently flown on United Airlines has seen that truism in action. Raley’s would be better served by soliciting ideas from its employees about how to generate more revenue per employee. That will move the company more towards a Whole Foods model and away from the dog-eat-dog world of low price leaders.

That’s my opinion. What’s yours? Take the survey, RSR Research Benchmark on Workforce Management (/research/the-fallacy-of-using-your-expense-ratio-to-lower-prices). As always, your individual answers will be kept strictly confidential, and we’ll send you a copy of the completed report.