“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

Wednesday, November 14, 2012

Peet's Coffee & A Living Wage Pt. 3: Why should Peet's be different?

We have established that Peet's is financially able to pay every employee a living wage. It is clear to us that it would ultimately benefit the company's bottom line to invest in its people. But if the retail/service industry in general is slow to recognize the financial benefits of such investment, why should Peet's be any different from Walmart, or McDonald's?

Two words: Peet's' values. CEO Pat O'Dea once said that what makes Peet's great is that we continue to "challenge the status quo through the lens of our values."

What is the status quo for the Peet's workforce? For 80% of us, it is less than a living wage, fluctuating weekly hours, no sick days, no option to work full time, and unpaid promotions.

So how do Peet's values fit with the status quo? Peet's speaks of its mandatory-part-time minimum-wage retail workforce (80% of its total employee base) using these words: most knowledgeable in the industry, valued members, coffee and tea experts, committed to continuous learning and professional growth, the face of our business, ambassadors for the brand, skilled baristas...and the list goes on and on.

Peet's speaks in no uncertain terms of its fundamental business values: sustainability, community, prosperity, health, integrity, social responsibility, etc. At the Peet's website you can read about initiatives to build essential infrastructure in coffee-growing communities, U.S. partners growing mushrooms on recycled Peet's coffee grounds, and the annual holiday charity fundraising drive at retail stores. One quick glance and you will believe, as many of us did before we worked here, that Peet's is the most socially responsible billion dollar corporation around.

Of course we support every positive outgrowth of Peet's values. But Peet's fails to pay a living wage to those who serve daily as the face of the business. There is nothing sustainable, healthy, or socially responsible about denying 80% of your workforce even a modest living as a result of their hard work.

There is evidence that Peet's did once embrace a more sustainable labor model. Long-term employees speak nostalgically of a Peet's much more closely aligned with its values. For example, just ten years ago retail employees received paid sick leave, as evidenced by this illuminating quote directly from the current Peet's payroll manual:
"Peet's provides Retail staff hired on or before January 31, 2003 and all SMs and ASMs sick time to encourage rest and to recuperate when they are ill, without losing pay."
Somehow around January of 2003 Peet's decided that retail staff are no longer in need of rest and recuperation when ill, or perhaps that they are no longer in need of protection from lost pay.

This fall, Peet's transfers to private ownership under German conglomerate Joh. A. Benckiser Group. Will Peet's' management use this significant transition to revisit Peet's' values, reinstate abandoned employee benefits, begin paying a living wage, and set an example as industry leaders?

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

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

Tuesday, November 6, 2012

Peet's Coffee & A Living Wage Pt. 1: Can they afford it?

This begins the five-part series "Peet's Coffee & A Living Wage."

"Can the company afford to pay you a living wage?"

This is a common question among small business owners in particular. Struggling in an economy evolved to favor and protect large corporations, small business owners nevertheless tend to extend much misplaced empathy toward their gigantic competitors. For a small business owner, especially in the first few years of her company's existence, it can be a very real challenge to pay even highly contributing employees a living wage. Independent coffee shop owners, in particular, may see the Peet's Workers Group living wage campaign as an indictment of their own minimum wage pay scale.

It is crucial to differentiate immediately between Peet's Coffee & Tea and the mom-and-pop coffee shop around the corner. We in PWG are intimately acquainted with small business owners, and most of us have worked for or participated in running small businesses ourselves. We know the story. You pay your employees minimum wage, treat them like family, let them eat free meals at the shop, and at the end of the year you're lucky to break even. You employ high school students, college students, people without dependents, people who live with their parents, people whose partners earn a "real" income, people who receive government assistance. People who are otherwise subsidized, so they can manage to scrape by on less than a living wage. You wish you could pay them more, that you could pay yourself more, but you can't. Yet.

When your company is traded at $70/share, has 3700 employees, 200 stores, 175 licensed partners, a booming grocery business, executive officers paid in the millions, and a market cap around $1,000,000,000, you will be able to pay each of your employees a living wage.

When PWG asked our friends further up the corporate ladder the question, "can Peet's afford to pay us a living wage?" they just laughed. A quick glance at the numbers was more than enough to say, of course they can afford it.

The problem with asking "can they?" is that for those of us with limited corporate accounting knowledge, the question precipitates an overly simplistic "bottom line" analysis: figure out the total cost per year of increasing each employee's salary to a living wage. Then take the company's net profit, subtract the added labor cost, and see what's left.

We did this, and yes, the company could give every retail worker in the country a $3/hour raise and still net $8 million a year in pure profit. The equation looked like this: 3000 retail level employees x 1000 hours/year average due to part timers x $3/hour = $9,000,000 subtracted from about $17,000,000 net profit each of the last couple years = $8,000,000 net profit left.

Peet's' stock more than doubled in the last 5 years.
Corporate accountants will tell you that increasing labor spending is not a simple subtraction of money from the bottom line. The answer to "can Peet's?" is, there is no question they can. But in order to do so they must first recognize the dignity of their employees as a clear priority, revisiting their own value of "prosperity." They must then reallocate money within the company to accommodate this prioritization. New store openings may slow. Equity may not accrue at a rate that facilitates stocks doubling in value every five years (see chart). Expansion and shareholder profits, in other words, could potentially be less dramatic than they have been.

At least at first.

Because actually our math is still too simplistic. It is based on the short-sighted business philosophy that labor is an expense, rather than an investment. Which leads us to our second post in this series: What about the bottom line?

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