A Closer Look at Retail & Labor in Inflationary Times

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As the former owner and CEO of Murray’s Cheese and a veteran supermarket executive, I feel compelled to weigh in on the current economy with some insights from the past. Having experienced the best and worst of times, I am only mildly optimistic about the future.

That said, the headlines grow increasingly dim: inflation, recession, global stagflation, even “greedflation.” On the one hand, job openings are near record highs at 11.4 million in April alone. On the other hand, 6.5 million jobs were added in the last year. Record numbers of workers are voluntarily leaving their jobs, often without another offer. Yet wages are up and that’s part of what’s stoking inflation.

The Economist predicts, “The next downturn ought to be mild. But even a mild recession must be followed by an upturn for the economy to return to full health. And with a fiscal policy on the sidelines and monetary policy badly hobbled, the chances are that America would face a painfully slow recovery. After two years of focusing on high inflation, low growth may move back to center-stage as the economy’s principal problem.”

Sometimes inflation is an excuse to raise prices. Anticipating that prices would rise allows us to raise prices on existing inventory, purchased at a previously lower cost. Today, we read about inventory overstock, following dwindling demand after the surge of consumer purchasing during the Covid lockdown. Just look at Target’s current dilemma.

Added to inflation, the current headlines admittedly make it hard to stay upbeat: war, an endless pandemic, climate change, supply chain disruptions, governmental dysfunction, and schoolchildren being massacred. That uncertainty makes even the best-laid plans of the very best managers scramble, constantly dodging the next metaphorical bullet, bobbing, and weaving, hoping they are resilient enough to adapt and prosper — or at least survive and able to come back from the latest crisis to fight another day. One could argue we need a real hero we can believe in to lead the way.

Punch List for Retailers

What’s going on here? What’s a retailer to do? Let’s take a closer look at the major issues that are going to continue to challenge retail over the short term.

Creeping Inflation

With wages rising six percent each year, that alone makes inflation difficult to control. In my experience, the wage-price spiral means that workers come to expect inflation with a corresponding loss of buying power, and so they demand even higher wages. Or they organize new unions in companies where none have gained a foothold before. In either case, workers need wages higher than inflation to live, and so far, they are still far behind the inflation curve. In my opinion, to tame inflation without a recession, policymakers must find a way to cool the labor market without causing huge layoffs.

Looming Layoffs

Anticipating the effects of inflation, layoffs are already happening in some sectors. In tech, where earnings of many companies are off (as well as their stock prices), layoffs are the order of the day. Amazon, still a retailer in my book, reports its warehouses are overstaffed to the tune of $2 billion a year, or nine percent of its operating profit. Netflix and PayPal are also cutting jobs. Are these indications of a broader trend in other industries? Reports are mixed. While some companies reduce payrolls, others desperately seek replacement workers they can’t find.

Retention

Retaining workers will become more important as time goes on. With fewer immigrants combined with the growing demand for cheap labor, retention will become critical. As the grandson of immigrants, and employer of many, I think immigrants are great for America. In times of labor shortages, especially during inflation, they are more necessary than ever. Hardworking, and willing to do the jobs many Americans seem to avoid now, they provide the labor business needs and are fiercely loyal to companies and America. Retail and food service need workers like this.

Companies need to shift their mindsets to recognize workers as individuals, not cogs in a wheel. Workers demand flexibility (especially for working mothers). Employees need a reason to believe in the company. Retention strategies need a systemic approach, empathetic to the human condition. Faceless corporations are experiencing their just rewards with customer and employee pushback. When worker loyalty is expected but rarely reciprocated, the wave of resignations and public indictment on social media should come as no surprise. Closing stores to avoid paying a local pandemic bonus, as one large chain has done, sends the wrong signal. Cutting hours so a worker can’t earn enough to pay the bills undermines humane compassion. Treating employees as an expense rather than as a resource is shortsighted, rather like blaming the victim in an accident or a crime.

Cost Cutting

Two opposing forces are at work here. To maintain profits, businesses must cut costs. Labor is usually the largest expense, and that’s the first to get cut. That was the case during my career. But companies are so desperate for people to work, a low-pay environment in a high worker-demand environment is like being stuck between a rock and a hard place. Employees today have some serious leverage over their employers with better opportunities elsewhere. That’s a logical formula for increasing pay, not cutting it. And let’s face it, many executives who are deemed essential are often rewarded far beyond their actual performance. We are duped by the myth of the superstar CEO, at least until things go south and the next star is brought in to save the day.

The Pay Divide

Many sectors are still having real trouble finding people to work and retain, especially the service businesses, in particular food service (restaurants). The job opening rate of seven percent relative to the workforce available is at an all-time high. So how do retailers retain workers in a high-stress, low-pay environment, where there are better, more fulfilling opportunities elsewhere? How do retailers keep workers that are fed up with their routines, managers, and pay scales?

A major source of worker discontent is the discrepancy in pay between executives and workers. In fact, it gets more complicated. Workers’ pay has increased along with inflation. But as The New York Times recently reported: “The median pay for companies that tend to pay low wages last year was up 17 percent, to $24,000, a rate double the rate of inflation.” The report examined pay at companies including Lowe’s, Target, Best Buy, and Amazon. “Still, rising wages did not outpace those corporations’ chief executive pay gains, which rose 31 percent, to an average of $10.6 million.” At Best Buy, median pay fell two percent, while the CEO received a 30 percent pay increase. Is it any wonder frontline workers are demanding more? How many Boards of Directors meetings are confronted by members who stand up and say, “Enough is enough!” I would say, not enough.

I have no problem with high salaries for CEOs and top management, despite their spotty record. Americans have traditionally looked kindly at the kind of success and reward that comes with reaching the top of one’s field. The problem is at the other end: a livable wage. That means a decent full-time wage for those who need full-time work to support themselves and their families. Higher wages are good for the economy, good for retention, and good for morale. They are essential in a 70 percent demand economy like ours. In my experience, it’s better to keep well-paid associates and utilize layoffs in tough times like these. And it’s better than reducing many employees to part-time work, with changing schedules that don’t allow them to plan their lives or live on these meager part-time wages. The $7.25 minimum wage says it all: The value our government puts on hourly wages is a disgrace in the world’s richest country.

Collateral Damage

To get a firmer grip on how the retail sector is faring in this disruptive marketplace, it’s wise to separate it into at least two categories: large and small. There are huge companies that dominate their markets, and smaller retailers struggling just to survive. The haves and the have-nots are becoming increasingly clear.

In Manhattan, where I live, there are approximately 220,000 businesses; 98 percent have fewer than 100 employees and 89 percent have fewer than 20. These long-tail entrepreneurs are the real heroes of capitalism and keep the economy humming along. Whether large or small, many were helped by the bailouts and many more were not. In any case, retail has taken a huge hit.

We are operating in the wake of the Covid years: empty storefronts, a great number of vacancies, and “For Rent” signs on too many windows to count. And almost all these vacancies are retail. The Paris-based American writer Madeleine Silverberg wrote in The New York Review (May 2022): “I had recently been home in New York and was shocked by what I saw. In the West Village, I walked through streets of empty storefronts, decimated by the pandemic and a lack of government coordination. I returned to Paris with the feeling of relief: finally, I was in a city where it seemed that someone was in charge.” It has been a long time since New Yorkers have felt comfortably secure that anyone is in charge. Our optimistic new mayor is already experiencing difficulties.

Back to the Future

As a young district manager in the supermarket business back in the 70s, practically all I ever heard was, “Cut the payroll.” Far less attention was paid to increasing sales, and that was usually done by cutting margins on fast-moving items, putting even more pressure on the bottom line. It was difficult to raise margins by increasing prices, as the competition was fierce. It was also an era of double and triple coupons, an expensive means of maintaining sales, especially in an inflationary environment.

Sometimes inflation is an excuse to raise prices. Anticipating that prices would rise allows us to raise prices on existing inventory, purchased at a previously lower cost. Today, we read about inventory overstock, following dwindling demand after the surge of consumer purchasing during the Covid lockdown. Just look at Target’s current dilemma. Overstock in anticipation of supply chain disruption now seems to indicate the end (at least for now) of strict just-in-time inventory management. Better to have enough parts on hand than hold up production due to geopolitical events.

Retailers typically phase in markdowns to move out goods (often the wrong items in the wrong quantities), which means lower margins. At the same time, they markup goods in their stores and warehouses bought at a lower cost. It’s an old retail trick, increasing the retail price (and gross profit) of items bought at a lower cost because of anticipated inflation to help maintain the bottom line. The prevailing rationale (and I lived it) is if sales and margins rise, not through increased turnover but simply by raising prices in an inflationary environment and at the same time labor is cut, then perhaps a decent net profit is possible after all.

The Seeds of Discontent

Today the Fed wishes for a soft landing; slower wage growth; fewer job opportunities; and workers with less leverage over wages and hours. But bias and control are with the company, at least in today’s economy. A victory for the inflation fighters, bringing inflation under control without a recession, may not feel like a victory to the workers. The corporate bias is that workers are fungible, it’s the companies that need protecting. After all, the company produces growth, jobs, and the engine that drives the whole thing. They are the geese that lay the golden eggs. But who gets the eggs? We all know the answer and it’s who doesn’t get them that feeds the seeds of discontent.

Rise and Fall

Perhaps the profit-driven model is simply the “stay in business” model. By that, I mean that workers may not necessarily suffer if the company continues to stay in business producing enough profit to sustain itself without the ruthless pursuit of cost-cutting. Or perhaps I am being naïve. Yet not long ago the greatest market value was a company known best for its home appliances, and its superstar CEO lauded as the greatest ever, until they later crashed and practically flamed out from the very moves, he was celebrated for.

In my own specialty food retail field, the great local merchants in my neighborhood — Balducci’s and Dean & DeLuca — were purchased by the private equity boys, who presumably bought them to increase their short-term value. But there was no long-term proposition for the retailers and instead, they went out of business. The workers suffer, but the financial wizards keep getting richer. The model is flawed; something more than short-term financial wizardry is needed to properly nurture and grow a profitable business.

To Infinity and Beyond

I have wondered how to maintain an upbeat attitude amid all this bad news. When I read The Times review “For All Mankind,” a show I’d binged about astronauts in an alt-universe, I had my answer. Its third season was described as “…precision-ratcheted tension and white-knuckle flight maneuvers. But its secret fuel source is that blue-sky hopefulness. History, as this show imagines it, is nothing but a series of small steps – until you look back and see that they’ve added up to one giant leap.”

It’s time for us to take some small, smart incremental steps, and maybe our children will be able to look back and see that we created something wonderful. I’d like to think that instead of being incapacitated by the current inflationary mess, we meet it head-on, make those steps forward and anticipate the future, not catch up to it.

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