Retail and the "New Normal"

Retail has always been a tough business. In the current economy, it's as tough as it's ever been. Gallup analysis suggests that there's a "new normal" for consumer spending -- a fundamental shift in the way people spend and save. Even in an improving economy, we may discover that many consumers have permanently altered their shopping habits. Securing a share of a consumer's wallet may not get easier any time soon.

What does this mean for retailers? What is the secret to thriving in such a competitive environment?

For more than 40 years, Gallup has partnered with many of the world's top retailers. We have studied their brands, their customers, and their employees. Throughout the course of our work, one finding holds true: Stores that have a strong manager outperform other stores. The impact store managers have can't be overstated. They set the tone for the entire store and dramatically influence key performance metrics.

This won't surprise many retailers. What is surprising, however, is how frequently retailers fail to use this knowledge to their advantage. Too often, retailers pay lip service to the importance of store managers without creating the structure that's required to increase the impact of this crucial position.

Getting the most out of store managers

So how does a retailer create that necessary structure? Gallup has found that retailers can increase their store managers' performance by taking five key steps:

1. Define the store manager's role. Clearly identify the store manager's responsibilities and priorities.

2. Find the right talent. Match the store manager role with people who have the right talent to perform the role at excellence.

3. Unleash your best. Assign your best store managers to your best stores.

4. Maximize strengths. Invest in developing your store managers' strengths.

5. Optimize local performance. Provide your store managers with a system for managing the engagement of the associates in their stores.

Improvements in one area will support and enhance improvements in others, and progress on any one of these steps can make a difference. But addressing all the steps leads to the most dramatic progress. Let's look more closely at these five steps.

Step 1: Define the store manager's role

Store managers typically have an overwhelming range of responsibilities. They are under tremendous pressure to increase sales, minimize payroll, engage customers, control inventory, monitor shrinkage, forecast growth, hire and train employees -- the list goes on and on.

Managers who are pulled in so many different directions will find it difficult to be effective if they aren't masters at prioritizing their time. Retailers can help their managers by determining which responsibilities they want them to focus on, then clearly defining the role to reflect those priorities.

One head of store operations at a leading retailer faced this challenge during his first week on the job. As part of his introductory tour, he asked store managers what prevented them from working with customers. The store managers said they were so busy filling out reports and complying with procedures that very little time remained for customers. The new head of store operations didn't like the sound of that. So he told the store managers to stop completing any reports that didn't help grow the business, and only start completing them again if someone complained. It seems that most of the reports weren't missed, and the store managers gained an extra two hours each day to work with customers.

Removing the organizational barriers that block managers from increasing performance is crucial to success. But it's not easy to set these priorities; it requires difficult trade-offs. The best approach is to study how top-performing store managers allocate their time. This means retailers must be able to rank their store managers according to a defined set of performance criteria. That ranking can then be used to investigate the differences between the top performers and the lower performers and to draw lessons from those differences.

Once a retailer knows how it wants store managers to allocate their time, the next step is to incorporate those priorities into the formal job description and communicate the new expectations throughout the organization.

Step 2: Find the right talent

Something interesting happens when retailers define the role they want their store managers to play. They often discover that some of their current store managers aren't capable of being effective in that role.

The missing element is talent. Do your store managers have talent profiles that position them to excel in their role? In other words, do they have the recurring patterns of thought, feeling, and behavior that make them a match for the demands of the store manager position?

When reviewing the talents of their store managers, most retailers will find some whose talents are a poor fit to the role and who may need to be replaced. Selecting those replacements must be done with care to ensure that the new store managers have the right talent profile to succeed.

Gallup uses a scientific approach to this selection process. First, we identify the top performers in the role (this step may have already been completed during the definition of the store manager's role). Next, the top performers are compared and contrasted to a group of lower performing store managers. Gallup's research team looks for areas in which the top performers consistently think and behave differently than the lower performers. Those key areas become the basis of a selection instrument that can screen for candidates who match the talent profiles of the top-performing store managers.

This process works. Gallup finds that candidates with high scores on our selection instruments are much more likely to perform at a high level in the role. Over time, the instrument becomes even more accurate. We refine it by conducting validation studies that track the performance of high-scoring candidates to ensure that the right talent profiles are being selected.

Step 3: Unleash your best

Almost every retailer has "good" stores and "bad" stores. Good stores have few problems, are in prime locations, and make the most money. Bad stores experience one crisis after another, are in difficult locations, and struggle to make a profit. Dealing with bad stores is a constant challenge. One of the most common ways to deal with a bad store is to assign it to one of the company's best store managers, trusting the manager to turn things around. That makes sense, right?

Wrong. This is the exact opposite of what retailers should be doing. Instead, retailers should assign their best store managers to their best stores. The reason is simple: You get more bang for your buck. The impact a top-performing store manager can have on a good store far exceeds the impact he or she can have on a bad store.

In our work with a major electronics retailer, Gallup learned that strong store managers who engage employees and customers significantly improve their sales and profits whether they are in a good location or a bad one. However, great store managers can make dramatic improvements in stores that are already doing well; they usually make only modest improvements in stores that are mired in problems. In fact, we discovered that a larger chunk of missing growth was in locations that were deemed good. The bad ones already knew they had to turn over every possible rock to find growth opportunities. Gallup's extensive studies of employee performance have revealed this pattern repeatedly.

Step 4: Maximize strengths

For retailers to succeed, it's vital to have the right talents in the right roles. But it's just as important to invest in developing that talent. Most retailers provide their store managers with some kind of skills and competency training, but they stop there. That type of training, while necessary, isn't enough to drive real growth. Retailers that also identify and develop their store managers' strengths can significantly enhance their performance.

While a talent is a natural way of thinking, feeling, or behaving, developing a strength -- the ability to consistently perform an activity at a near-perfect level -- takes practice and hard work. But the effort yields a big payoff. Gallup's research has proven that helping employees leverage their strengths provides a range of benefits that far outweigh the investment.

Our studies show that a strengths-development program can increase a company's profitability, improve employee productivity, increase employee retention, and enhance customer engagement. (See "How Ann Taylor Invests in Talent" in the "See Also" area on this page.)

Step 5: Optimize local performance

A retailer that has taken the first four steps has now defined the store manager role, staffed the position with the right people, deployed them effectively, and invested in developing their strengths. This has created a formidable workforce that lacks just one thing: a structured system for measuring and managing employee and customer engagement.

Gallup's study of engagement is grounded in the emerging science of behavioral economics, led by notable scientists such as Princeton psychologist Daniel Kahneman, who won the Nobel Prize in economics. In contrast to traditional economic approaches, which assume that people are rational decision makers, behavioral economists theorize that rational considerations play a significantly smaller role than emotional factors in framing human decisions and behaviors. Behavioral economists theorize that only 30% of human decisions and behaviors are driven by rational considerations, meaning that more than two-thirds of the decisions that employees and customers make are based on emotional factors.

When someone is engaged, a meaningful connection has been established. Engaged employees are involved in and enthusiastic about their work and about contributing to their company's purpose and outcomes. Engaged customers are tied to a company by a meaningful bond that is both rational and emotional. (See "Feedback for Real" and "The Constant Customer" in the "See Also" area on this page.)

The connection between engagement and key business outcomes is measurable and powerful. Gallup research has found that in comparison to workgroups with disengaged employees, engaged workgroups are 18% more productive, 16% more profitable, 12% better at engaging customers, 37% less prone to absenteeism, and 27% less likely to be a source of inventory shrinkage.

Our studies have revealed similar connections between customer engagement and financial performance: Customers who are fully engaged represent an average 23% premium in terms of share of wallet, profitability, revenue, and relationship growth over the average customer. In stark contrast, actively disengaged customers represent a 13% discount in those same measures.

And optimizing both employee and customer engagement delivers significantly stronger financial performance than focusing on either in isolation. Workgroups that simultaneously optimize both elements significantly outperform workgroups that optimize just employee engagement or just customer engagement -- or that fail to optimize either element -- on measures of financial and operational success.

Implementing a system that enables store managers to optimize both employee and customer engagement provides them with the final piece of the puzzle they need to drive superior store performance. It gives managers the data they need to understand the engagement levels of their employees and their customers and provides them with a structured process for improving those engagement levels. Companies that have optimized their performance-management systems have outperformed their competitors by 26% in gross margin and 85% in sales growth. Their customers spend more, return more often, and stay longer.

Let's look at an example of how optimization works in the real world -- and how it can help retailers achieve organic growth -- in good and bad economic times. For the past two years, Gallup has worked with a large multisite, multiformat retailer on optimizing its customer and employee engagement. This retailer operates more than 400 stores in North America.

While this retailer was carrying out these efforts, same-store sales (year over year) for the chain as a whole declined by 1.3%, and profit declined by more than 3%. But in the highest performing stores -- those that were optimized -- sales and profit actually grew by approximately 1% and 0.4%, respectively. In contrast, in the poorest performing stores, sales and profit declined by roughly two times the company average. (See "A Powerful Alternative to Cutting Costs" in the "See Also" area on this page.)

Bucking the tide

The five steps outlined here -- based on decades of Gallup research and analysis -- represent the best strategy retailers can use to drive organic growth. Retailers that are seeking the single biggest leverage point in their company need look no further than their store managers. Taking effective action in any of the areas is a step in the right direction, but maximizing the performance of store managers by addressing all five of these areas will generate the biggest gains.

The old saying that "a rising tide lifts all boats" is only partially true. Even in a down economy, some retailers buck the tide and rise higher than the rest. The arrival of a "new normal" in consumer spending will make the market more competitive. To survive in a world where consumers are spending less and saving more, retailers need every edge they can get.