Wages As A Cost Factor
( Originally Published 1939 )
Wages and salaries are the largest single cost element in retailing. Fifteen cents out of every dollar spent by the consumer for retail goods in 1935, or more than half the retailers' average mark-up or gross profit, was needed to cover wages and salaries, including the proprietors' imputed compensation.' With the smaller re-tail sales volume in 1933, personnel compensation amounted to nearly 18 per cent of sales.
a. PERSONNEL COSTS IN DIFFERENT KINDS OF BUSINESS
Personnel expenses and their relation to total operating costs vary widely among different lines of trade and types of operation. These variations-in part at least-reflect differences in the kinds of goods sold and in the amount and costs of services supplied by the retailer. Restaurants, for example, had a 29 per cent payroll expense in 1933, as compared with around 15 per cent in grocery and department stores, specialty shops and shoe stores. In stores selling expensive and slow-moving articles like furniture, house-hold appliances and radios, the ratio of payroll costs to net sales is substantially above the average. Automobile dealers are a striking exception to this tendency, however. Their personnel expense is only 11 per cent of their net sales, no doubt reflecting the fact that the automobile manufacturer does a large part of the selling job through his national advertising. The importance of wage and salary costs, as compared with total expenses for different kinds of business and types of operation.
Earnings and Wage Costs
There is no evidence of any consistent relation between average earnings per employee in different kinds of business and total wage costs in the same line of trade. For retail trade as a whole average earnings in 1933 were $986 and the payroll expense ratio was 17.8 per cent of net sales. Annual earnings of restaurant workers were only $669-much less than for any other trade-yet total payroll expenses of 28.7 per cent were higher. Men's clothing stores paid their employees nearly twice as much, but had a personnel expense ratio of only 16.9 per cent. In other kinds of business too-notably shoe stores, grocery and meat stores, and auto-mobile dealers-higher-than-average employee earnings were accompanied by payroll expense ratios which were below the aver-age for retail trade as a whole. Furniture, hardware, household appliance and radio stores also paid their employees better than average wages, but in these trades payroll expense ratios were also above the average. In Table 19 average earnings in various lines of trade are compared with payroll expense and with sales per person engaged.
Also the level of employee earnings in a particular trade seems to have no consistent relation to the average volume of sales per employee or the average sales per dollar of personnel cost. With average earnings of $1,041 in the motor vehicle trade, for example, the sales volume per employee of $9,229 was higher than for any other kind of business. Jewelry store employees, on the other hand, had average earnings of $1,376, with average sales of only $5,043, while employees in household appliance stores, with aver-age sales of $4,707, earned an average of $1,057. Personnel costs in the jewelry trade amounted to 28.2 per cent of net sales and in household appliance stores, to 24.7 per cent, as compared with only 11.3 per cent in the retail automobile business.
b. INDEPENDENTS COMPARED WITH CHAINS
When personnel costs, average earnings and sales volumes are compared by types of operation striking differences appear. Personnel costs vary from as low as 10 per cent of net sales in commissaries to as high as 29.7 per cent in house-to-house selling. Average sales in commissaries were $11,532 and in direct selling $4,325. These disparities are not surprising. Selling goods from house to house obviously requires vastly more time, ingenuity and sales effort than filling orders in a company store. Mail-order houses also had a low payroll expense ratio, partly because of economical operation, but also because the annual earnings of $873 were much below the average. Average sales per employee were twice as large as in direct selling and far above the average for retail trade as a whole, but considerably below the volume in company stores.
Comparisons of independent retailers with chain stores are of special interest because these types together do over 95 per cent of all retail business. Chain stores as a whole had a much lower personnel cost than independents-12.7 per cent of net sales as compared with 19.4 per cent for independents (with imputed proprietors' compensation included) . Nor was this advantage gained by paying lower wages than the independents. Average earnings of chain store employees in 1933 were $132 more than the average reported by independents. But the chain store employees sold $9,161 worth of goods, while the average for independent stores was only $5,162.
Comparisons between chains and independents for various kinds of business, as shown in Table 20, tell the same story. With the exception of the household appliance trade and motor vehicle dealers, personnel costs are a smaller proportion of net sales for chains than for independents. In some trades-such as grocery, shoe, radio, department, jewelry, and drugstores-the chains have a conspicuous advantage. When payroll cost is compared with total expense rather than net sales, the chains also are in a stronger position than the independents in most lines of trade.
Chain Store Wages Higher
The lower average personnel expense ratios of chain stores were generally accompanied by average employee earnings considerably above those of the independents. Chain stores paid higher wages in fourteen of the eighteen lines of trade shown in the table. In the case of filling stations, food stores, and motor vehicle dealers the average chain store employee had an advantage in annual earnings of about $300 or more. Chain department stores, jewelry, and women's specialty stores paid slightly lower wages than independents in the same fields.
The chains made a much poorer showing than the independents, however, in the household appliance trade. Their employees earned only $900 as compared with $1,136 for independents. Personnel costs and total expenses were considerably higher, and sales volume much less, than for independent dealers.
A comparison of Census data for a single week in October 19358 confirms the fact that chains pay higher wages to selling employees on the average than other types of retail operation. In only three of the twenty-three kinds of business for which comparable figures are available did chain store selling employees earn less than the general average for retail trade. Chains were far below the average in the retail milk and dairy products trade, but paid much higher wages in combination grocery and meat stores, in filling stations, men's clothing stores, jewelry stores and in the fuel and ice trade. For the entire group, chain store wages averaged $23.65-exactly $4, or nearly 20 per cent, more than the average wage of all employees included in the sample. These comparisons are shown in Table P of the Appendix.
It is abundantly clear from Table 20 that the lower total wage cost of the chain stores and the higher earnings of their employees are related. They both grow out of the fact that the average sales volume per employee is much larger in chain stores than in independent stores. The average for all kinds of business was $9,161 for chains and $5,162 for independents.
It does not follow that because the average chain employee accounts for a greater volume of sales than the average independent employee, he is necessarily a more efficient salesman. The payment of higher wages may enable an employer to hire more efficient employees; but modern distribution, like modern production, does not depend primarily upon the individual efficiency of those en-gaged in it. The typical chain store, it must be remembered, is larger than the average independent store, and this fact in itself may be chiefly responsible for the larger average sales of chain employees. For this and other reasons, comparisons based on Census figures of average sales per employee in chain and independent stores furnish no conclusive evidence either as to the relative efficiency of the employees or of the management in the two types of stores. Final conclusions on this widely debated question can-not be drawn from existing data on operating costs.
The rate cif stock turnover is only one factor by which the efficiency of a retail business may be judged. Other things being equal, profits will be greater and expenses lower as turnover increases. But other things are rarely equal. Turnover must therefore be viewed in its relation to other factors influencing operating expense, such as the size of store and the size of city in which it operates and the average sales per employee. The cost and effectiveness of advertising and rent and credit control also have an important bearing on costs. Getting rapid stock-turn by excessive expenditures for advertising or high-cost locations may dissipate what would otherwise be an advantage. Likewise, reducing gross mar-gins in order to gain turnover may increase sales-and sacrifice profits.
Rapid stock turnover as a factor in successful retail store operation is probably overemphasized. As a matter of fact, it seems to depend largely on the size of business, which in turn is of course influenced to some extent by the rate of stock-turn itself. In general the larger the store the greater the number of times its stock is turned over during the year.
In three lines of trade for which data are at hand-hardware and department stores and food chains-there seems to be no direct and consistent relation between stock turnover and total expense ratios. Hardware stores show a steady increase in the annual rate of stock: turnover in each successive size-class. Expense ratios and gross margins tend to decrease with increasing size, but these changes are not marked. Department stores show the same tendency toward rapid turnover as the stores grow larger, but in this case expenses also show a decided rise. Food chain organizations show no very consistent relation between stock turnover and total expense when the various size-classes are compared. Profits-the difference between expense and gross margin-do appear to have some relation to stock-turn, however. Detailed figures are given in Table 21.
Profit margins in each of the three trades were larger in the size-class with the highest rate of turnover than in the groups with low turnover. Here again, however, it is difficult to disentangle the various influences at work and to distinguish cause from effect. The large organizations are the more profitable ones; usually they are also the ones with the highest rate of turnover. The extent to which high profit ratios can be attributed to size of organization, or to turnover, or stock turnover to size, is impossible to say.
In the department store business, however, faster turnover de-creases mark-downs, which are an important expense item for many kinds of goods. The amount of mark-downs is closely related to the length of time merchandise is allowed to remain in stock, for when goods age in stockrooms they spoil or go out of style.
Chain Stores Have Higher Turnover
In most lines of trade chain stores, with their larger size and better locations, have a higher rate of stock turnover and lower operating costs than the independents. This is clear from Figure 15, which is based on Census figures for 1935. It should be observed that the "sales-stock" ratio shown in the chart is arrived at by dividing total sales at retail value by the total stock on hand at the end of the year at cost. Really adequate figures on turnover would be computed from the total cost of goods sold and average stocks on hand during the year, but the Census does not furnish data on the cost of goods, and reports inventory for only one date. The figures furnish a rough indication, however, of the stock-turn in different kinds of business.
The marked differences in the sales-stock ratios of various lines of trade are due largely to differences in the kinds of goods sold. Filling stations, for example, sell only a few grades of a standardized product, which explains their turnover of 26.8, more than six times the rate for shoe stores. Groceries and combination grocery and meat stores also had sales-stock ratios considerably above the general average of 7.7 for retail business as a whole.
The sales-stock ratio for chain stores as a group was 9.8 as compared with 7.2 for all others (largely made up of independents). Only in the case of department stores was the turnover rate for chains less than for independents. But in spite of their slower turnover the expense ratio of chain department stores was less than that of independents. Chain store expenses were lower than those of independents in most lines of trade; but in variety stores and filling stations their expense ratios were higher, in spite of a more rapid rate of turnover. Here again there is no convincing evidence that high turnover is the only or primary reason for a low expense ratio.
If chain stores and independents were identical in all respects except their management-in average size of store, in the kinds of goods carried, in the nature of services rendered, and in the size of city in which they operate-comparisons of sales volume per employee and of average earnings would justify valid and significant conclusions. Actually, however, it is known that chain stores on the average are larger than independents, which helps to ex-plain the fact that their average sales per employee are greater. Moreover, a larger proportion of chain stores than of independents are located in the larger cities, where retail sales and turnover are greater than in the smaller communities and where wages are necessarily higher. Chain stores have better locations, too, than independents, which involves higher rents but also contributes to a larger sales volume. As a rule chain stores render fewer services and carry a more limited variety of merchandise than do many of the independents. All of these factors-as well as the superior organization and management of the chains-contribute to their more favorable showing when they are compared as a group with independent stores.
6. EXPENSES IN FOUR LINES OF TRADE
Because of the importance of food distribution and the variety of competing types of stores in the field an examination of avail-able data on operating expenses from other sources than the Census may be useful. The three such sources called upon in general confirm and supplement the picture presented by the Census.
a. FOOD STORES
Among combination grocery and meat stores-the most important type of food outlet-total operating expenses ranged from 12 to 19 per cent of sales in 1934 and 1935, depending upon the type of store and the services rendered. According to the 1935 Census the average operating expense of such stores, including chains and all other types, was 18.4 per cent of net sales. Dun & Bradstreet's Retail Survey for the same year reports a figure of 16.7 per cent, the discrepancy being attributable to the fact that the average size of store in this latter sample was larger than in the Census.
The most interesting comparisons in this field are between the conventional independent operator, the chain store, and the super-market. Competition between these groups has been one of the leading legislative issues of the last few years.
Costs and Services
According to the Census, the general average expense of stores other than chains (including the smaller independents and super-markets) in 1935 was 19 per cent, including the compensation imputed to proprietors. A study published by The Progressive Grocer shows that the average expense of twenty-five selected representative independent stores offering services-either charge account service, delivery service, or both-was 16.7 per cent in 1934. But the operating costs of twenty-three selected independent cash stores was 14.4 per cent of net sales. In discussing the service element this report points out:
It is practically impossible to determine the exact cost of rendering particular services such as credit or delivery, even when the operating expenses of a large number of stores are studied. Such factors as store location, size of town, the variety of merchandise handled and the class of trade, each bring variables into the expense picture. It is impossible to find a given number of independent stores operating under identical conditions, the only variable being the character of the service. Even when individual stores operate under similar conditions, there is still one factor that varies greatly from store to store and that is the individual merchant's capacity and his personality.
But one fact does stand out as a result of studying hundreds of operating statements: Service when properly and efficiently rendered in a limited and well-defined trading area-whether credit service, delivery service or both -does not add as much to the operating expense as many merchants think it does. To be sure, many service stores have a comparatively high operating expense but frequently it is the result of poor management, of scattering their energy over too much territory, and the high expense is not due entirely to the additional service rendered.
Insofar as one can generalize, it appears that credit service when properly rendered need not add more than 2 per cent to the operating expense, and likewise, delivery service . . . need not add more than 2 per cent, making a total of 4 per cent.
Wide variations in the expenses of individual stores were noted in this study. In the case of the twenty-five service stores ranging in size from about $20,000 up to $93,000 in annual volume, total expenses ran from a minimum of less than 13 per cent up to 20 per cent, with little relation to the size of the store. The cash stores showed even wider fluctuations in expense ratios. They ran from a minimum of less than 10 per cent for four individual stores up to over 20 per cent in several instances. The thirteen self-service stores in this group had the lowest expenses.
This study also analyzes the expenses of twenty-five departments of super-markets selling grocery and delicatessen lines, all of them located in Los Angeles. As these departments were operated on the basis of a completely independent set of books they can be considered as separate stores. Six of them were of the self-service type. They did a strictly cash-and-carry business, averaged nearly $150,-000 in annual sales, and were located in the center of the best residential communities. These stores had average expenses of 12 per cent.
A second group of super-market grocery departments offered both counter-service and self-service but very little delivery service. Selling only for cash and averaging about $60,000 annual volume, their average expenses were 13.8 per cent. A third group of seven stores of about the same average size doing about 80 per cent of their business on a credit and delivery basis showed aver-age expenses of 18.3 per cent.
In addition a detailed analysis of one super-market selling groceries, meats, vegetables and delicatessen lines, with total sales of $540,000 in 1934, showed total expenses of 11.7 per cent. Practically all of the business of this market, which was located some distance from the downtown section, was on a cash-and-carry basis. This store is more or less typical of the successful, medium-sized, low-expense market.
Chain Store Costs versus Other Stores
A study made in 1934 by the Harvard Bureau of Business Re-search gives a good basis for comparing chain and independent store costs in this field." Total chain costs given in this study include not only the expenses incurred in operating the retail stores, but also overhead costs of maintaining central offices and a good deal of the cost of the wholesale function. Overhead expenses, including administrative and general costs (advertising, most of the taxes, etc.) and warehousing and transportation, accounted for about 30 per cent of all food chain costs in 1934. The remaining 70 per cent were the costs of actual retail store operation.
The total figure for combination food store chain costs given in the Harvard study was 21.4 per cent of sales. If warehouse and other costs are deducted to give a fair basis of comparison with other retail stores, we get a figure for the chains of 15.1 per cent. This is a little less than the costs of independents which give credit and delivery service (16.7 per cent), but a little more than the cash-and-carry independents (14.4 per cent). The cash-and-carry super-markets were both below the chains in costs (12 and 13.8 per cent as against 15.1) ; but those that did most of their business on a credit and delivery basis were above (18.3 per cent).
The 1935 Census reported chain combination store expense at 17.5 per cent of sales. This figure includes a small amount of central office expenses, which the Harvard figures indicate must have been somewhat more than 2 per cent.