“Challenge the status quo through the lens of our values. This is our rallying cry.” --Pat O’Dea, Peet’s Coffee & Tea CEO, 2011 Annual Report

Saturday, November 10, 2012

Peet's Coffee & A Living Wage Pt. 2: What about the bottom line?

Now that we've established that Peet's can pay a living wage, we ask, why would Peet's want to?

Let's set ethics and values aside and explore the most obvious incentive: profit.

What if Peet's, in many other ways an industry leader, is merely following the dictates of a dead-end, unsustainable model of labor management already being cast aside by savvier companies?

We believe that it is. In the last decade, Peet's has bought more and more into the "labor as an expense" business model. Relegating labor to an expense to be minimized is the short-sighted approach of a management team blatantly ignoring the crucial variable of human decision-making at all levels of a company. Peet's is not alone in this; it has fallen prey to the same fallacy as much of the American retail sector.

M.I.T. Professor Zeynep Ton explains in the Harvard Business Review:
Even in low-cost retail, it takes a lot of human effort and judgment to get the right product to the right location at the right time and to make an efficient transaction. It's the low-paid employee, not the inventory-management software, who notices that a shelf looks messy or that some of the products are in the wrong place. It's the low-paid employee who notices that some of the lettuce has gone bad or that there are still signs up for last week's promotion. It's the low-paid cashier who can tell the difference between serrano peppers and jalapeno peppers during checkout. It's the low-paid employee who notices that there are too many customers waiting in the checkout and offers to open an additional cash register. 
When retailers don't invest in human capital, operational execution suffers and the company pays with lower sales and lower profits than it could have had.
'Why "Good Jobs" Are Good For Retailers.' Harvard Business Review

Professor Ton's extensive research in the field of operations management includes an in-depth study of four highly successful retailers (including Costco and Trader Joe's), all of whom budget labor as a significantly higher percentage of operating costs than do their less successful competitors. Ton shows in great detail how labor-as-investment is good business practice.  

Read Zeynep Ton's fascinating study in the Harvard Business Review. You will have to sign in (free) to read the full article, but it's well worth it.

To those of us who work in the retail and service sector, this is no surprise. Depressed wages and utter lack of performance incentives create high employee turnover, as frustrated employees move laterally to jobs that pay just slightly more, or even just offer any change of pace. High turnover rates cost the company in training hours, as well as expensive errors, unnecessary waste, and missed sales due to inexperienced workers. Long-term, high-performing employees find themselves on an understaffed sales floor training new employees while simultaneously performing all their normal job functions. All of the above exacerbates stress levels and compromises customer service. Morale weakens, turnover increases, and what Zeynep Ton calls "Retailing's Vicious Cycle" ensues (see graphic above). And it's terrible for business.

Which begs this question from James Surowiecki, in his New Yorker article "The More the Merrier":
If investing in employees yields such big dividends, why don’t more retailers do it? Partly, it’s a matter of incentives: store managers are typically evaluated on their payroll costs. Moreover, 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.
Essentially, there is no profit-based excuse for under-investing in your people. But publicly-traded corporate America is evaluated by its shareholders four times a year, and management from top to bottom is incentivized to boost quarterly profits at all costs, even at the expense of long-term gains. Short-term, easily quantifiable advances are too tempting, so short-sighted managerial decisions abound. Genuinely motivating and empowering every employee in the company to contribute the best they have? Absolutely common sense, but also such an integrated part of success that it's difficult to isolate and measure, except through an extensive independent research study like the one mentioned above.

Peet's knows better than to follow Retailing's Vicious Cycle. Its management team needs only to revisit its own definition of the value of "Prosperity" to realize that Peet's already believes in a living wage:

We believe in the principle of abundance; as we grow, we create exciting careers for our people, thriving local communities, and healthy, fulfilling lives for our global partners.
-Peet's Coffee & Tea

Which introduces our next post: "Why should Peet's be any different than any other retailer?" 

Peet's Coffee & A Living Wage 5-part series:
1. Can they afford it?

2. What about the bottom line?
3. Why should Peet's be different than any other retailer?
4. Whatever happened to the dignity of work?
5. Living wage Q&A


  1. nice post. managers are under extreme pressure to keep labor hours/costs low. is it any coincidence that most peet's stores are not making there budget these days? in my own peet's store there are often so few staff scheduled that people walk in and out again without waiting in a long line to be served.

  2. The trend definitely seems to be this: expect the same tasks to be accomplished with less people working less hours. Actually, that might be a misstatement; it's more that we're expected to accomplish MORE tasks with less people working less hours. The corporate retail model is such a joke. I think suits are accustomed to viewing apron-wearers as some kind of software that gains capabilities with every new release, as if somehow we can just magically be more and do more than we used to. Also, the new German owners have some pretty awful ties: www.raptorsarethesolution.com

  3. Sure, I go to Peet's because of the excellent coffee. But do I also go because of the fondness for the employees that I have developed over the years? Yes, definitely. Actually, I may go to Peet's more to see them than for the coffee.