The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits

by Zeynep Ton

In service industries, succeeding at the expense of employees and at the expense of customers often go together. If employees can’t do their work properly, they can’t provide good customer service. That’s why our experiences with restaurants, airlines, hotels, hospitals, call centers, and retail stores are often disappointing, frustrating, and needlessly time-consuming.

There are companies in business today that have made a different choice, which I call the good jobs strategy. These companies provide jobs with decent pay, decent benefits, and stable work schedules. But more than that, these companies design jobs so that their employees can perform well and find meaning and dignity in their work. These companies—despite spending much more on labor than their competitors do in order to have a well-paid, well-trained, well-motivated workforce—enjoy great success. Some are even spending all that extra money on labor while competing to offer the lowest prices—and they pull it off with excellent profits and growth.

If you want to offer good jobs and low prices at the same time, operational excellence is not optional, it is mandatory.

You might think most retail employees are high school or college kids who are not fully supporting themselves or families. In fact, most people who work in retail are like Janet. This is their livelihood. This is how they support their families. In 2011, the median age of U.S. retail workers was thirty-eight, only slightly lower than the median age of all U.S. workers, which was forty-two. Only 23 percent of retail workers were between the ages of sixteen and twenty-four. Women make up slightly more than half the retail workforce;8 many of them are the sole or primary source of income for their families. And, according to the Bureau of Labor Statistics, nearly 30 percent of part-timers would rather work full-time; they just can’t find the work.

But they are wrong. The assumed trade-off between low prices and good jobs is a fallacy. There is, in fact, a good jobs strategy, even in low-cost retail, that combines high investment in employees with a set of operational decisions that deliver value to employees, customers, and investors.

Remember that, after seven years and several promotions, Janet was still making only about $22,000 a year. After seven years with QuikTrip, Patty was making almost triple that. And when I interviewed her in October 2010, she was making more than $70,000 a year. Patty also has affordable healthcare, enjoys a stable schedule, and finds dignity and satisfaction in her work. “I’ve always loved people,” she said, “and that’s what this company is in business for. Helping people and giving them great service.” Patty’s job allows her to have a fulfilling life. “You were asking what makes me excited about going to work every day,” she said. “It’s knowing that you’re going to be able to attend your kids’ activities at school. You’re going to be able to take care of your kids, and knowing that the company that you work for is growing each day. And you don’t have to worry about, Am I going to get laid off tomorrow? or, Where’s the next meal coming from? There is no other company that will pay you your regular wage, a customer service bonus, a profit bonus, and even an attendance bonus. You go to work, you do your job, you’re excited, and you know everything’s pretty much taken care of. QuikTrip has never let me down.”

QuikTrip has appeared on Fortune magazine’s list of the top one hundred companies to work for for eleven straight years. Think about that—a convenience store chain that sells gasoline and merchandise at lower prices than other convenience stores is consistently voted one of the best places to work. It’s not just the employees who love QuikTrip. Customers love it, too.

Other companies in retail and beyond—including Southwest Airlines, UPS, Toyota, Zappos, the Wegmans supermarket chain, and Shouldice Hospital in Canada—do the same.

but our main focus will be on four retailers that exemplify the good jobs strategy: Costco, a wholesale-club chain with more than 580 stores and $76 billion in sales; Mercadona, the largest supermarket chain in Spain, with more than 1,400 stores and €19 billion in sales; QuikTrip, with more than 600 convenience stores and over $8 billion in sales; and Trader Joe’s, an American supermarket chain with more than 340 stores and $8 billion in sales. Throughout the book, I will refer to these four as “model retailers.”

Excuse #1: Public companies can’t do it. When companies invest in wages, benefits, training, or staffing levels, the costs of those investments are direct, short term, and easy to measure, while the benefits are indirect, long term, and hard to measure.

Excuse #2: You have to be born this way. “We don’t operate this way and it’s impossible to change.” People think a model company has to be “born this way.” Only an enlightened founder can create one of these businesses. But one of the model retailers, Mercadona, was not born that way at all. It drastically changed its strategy in response to competition. It started investing in employees and restructured its operations, believing it would be much more likely to succeed by offering good jobs.

Excuse #3: Big companies can’t do this. “We are too big and we can’t put employees at the center of our success because we just can’t find enough hardworking people. Investment in people is not ‘scalable.’ ”

Excuse #4: Those model companies must have idiosyncratic qualities that we don’t have. People think that the companies implementing a good jobs strategy must have idiosyncratic qualities. They say, “Costco is a wholesale club. Its customers pay to be members, so their business model is different than, say, Walmart’s and they can afford to pay their employees more.” But Sam’s Club, a division of Walmart, is a wholesale club too, yet it isn’t a model retailer.

The first ingredient of the good jobs strategy—the ingredient that most companies don’t realize will make so many good things possible—is remarkably unglamorous by most people’s standards.

Model retailers do this by making four operational choices, which are not the typical ones in their industries, but which allow them to deliver value to employees, customers, and investors all at the same time: Offer less. Whereas most retailers try to offer their customers a wide range of products, promotions, and hours, model retailers offer fewer products and no promotions. Some are open fewer hours than their competitors are, and some do not even accept most major credit cards. Offering less reduces their costs significantly, yet it can increase customer satisfaction. Standardize and empower. Whereas most retailers take decision rights away from store employees and have them execute plans made higher up, model retailers combine standardization with empowerment. This combination allows them to be highly efficient and, at the same time, adaptive to customers’ needs. Cross-train. Whereas most retailers manage variability in customer traffic by changing the number of employees and hence creating unpredictable work schedules, model retailers cross-train their employees. Instead of constantly changing the quantity of employees, they change what employees do depending on customer traffic. Cross-training ensures that employees are continually busy and that customers always get good service. Operate with slack. Whereas most retailers try to cut costs by understaffing their stores, model retailers err on the side of overstaffing their stores—they deliberately build slack into th...

Model retailers invest heavily in their employees. They view their workforce as a valuable asset to be enhanced, not as a big, scary expense to be kept under tight control. In these companies, the employees are seen as the key to the company’s success—not only in word but in deed.

THE RISE AND subsequent stumble of Home Depot, once one of the great success stories in retail, is a case study in the importance of investment in people, both for customer service and for financial performance. But it is also a case study in the importance of good design in operations.

Great performance, whether in customer service or the quality of manufacturing, requires operational excellence. Operational excellence requires a great operational design and great people to carry it out. Neither can make up for the lack of the other.

THE BEST-KNOWN SPANISH retailer in the world must be the fast-fashion retailer Zara. Even if you are not a typical Zara customer—young, price-conscious, and up-to-date with the latest in fashion—you have most likely heard of them. Zara’s business model and the responsive supply chain that supports it have been the topic of business school case studies all over the world. While most fashion retailers take months to make new products, Zara’s supply chain is so fast that it can design and deliver new products to its stores in a few days. Zara’s speed, along with its ability to collect information on what’s selling and what’s popular, helps the company produce products that its customers want, when they want them. For example, when Madonna was on tour in Spain, teenage girls turned up at her final show wearing the very outfit she had worn for her first show—purchased from Zara, of course.1

Zara’s human resource director told me that when it came to human resource management and store operations, the model company she looked to was Mercadona. Unless you have been to Spain, I’ll bet you have never heard of Mercadona. I hadn’t either, so I had to ask the HR director what Mercadona was. Her answer took me by surprise: It’s a supermarket chain. Really? Super-cool Zara models itself after a supermarket chain? I set out to explore.

If the retailers that trade in good jobs for lower prices and operate in a vicious cycle are in a “mismanaged chaos,” Mercadona stores are quite the opposite. They are highly disciplined in the way they are organized, in how store processes are defined, and in the high expectations to which employees are held. There is discipline in the way trucks deliver products to the stores, the way maintenance personnel do maintenance work, the way cleaners clean the stores, and the way managers manage the stores. For example, I asked each store manager what his or her typical day was like. They all gave me the same answer. They begin each day by going around the store and saying hello to all their employees. This gives them a chance to gauge people’s feelings. Then they check the computer for the previous day’s financial performance. Then they visit each section of the store and have a talk with the section specialist about the previous day’s sales, what had to be thrown away, what was out of stock, and the specialist’s objectives for the new day. And so on. Contrary to appearances, Mercadona employees are not robots performing mindless tasks. As we will see in chapters 6 and 8, Mercadona’s discipline is implemented in a way that frees and empowers employees. Processes are efficient enough that store employees can carry out all their standardized work and still have time to find out what’s on their customers’ minds and to initiate improvements—even chainwide improvements. Putting the...

Roig made a strategic switch from high-low pricing with promotions to “always low prices,” and he promoted a culture of continuous improvement by implementing what was internally called the Total Quality Model (TQM). For him, the key to continuous improvement was staying true to nine principles: Everyone is reliable. This means that the company can rely on people to perform a task. If they can’t perform it, the company will examine what circumstances impede them and what it can do to overcome those obstacles. Anything that does not provide value to customers is not done. The company will constantly look for opportunities to reduce waste in its products and processes. Every company is an assembly line. The assembly line at Mercadona goes all the way from raw materials for the products sold at the stores to the checkout. Mercadona will do whatever it takes to make the entire assembly line work better. Have a scientific mind. Mercadona’s process improvement and product improvement involve generating hypotheses, conducting experiments, collecting data, reviewing the results, and then implementing change. Do it right the first time—zero defects. Mercadona does not define acceptable defect rates. As we saw with the stew-vegetable rollout, the company expects 100 percent execution 100 percent of the time. Everything can be improved. Mercadona encourages each product and process to be continuously improved. The company has to prescribe. Mercadona does not view itself as a retailer...

An equally important change was that Mercadona constantly communicated with employees and started letting its employees know how much it appreciated them. The company officially made its employees number two on its list of priorities, right after the customers, but conspicuously before the investors.

Mercadona pays higher salaries than its competitors do. In 2012, the salary for a new full-time employee was €14,693, almost double the minimum wage in Spain.3 That salary would increase by 11 percent during the first four years, so a full-time employee who had been there for four years would make €20,094. After the fourth year, the salary increased in line with inflation.

In addition to salary, all Mercadona employees, from the cleaner to the CEO, received an annual bonus if their individual and local goals were met and if the company met its overall targets. The bonus was two months’ salary for employees who had been with Mercadona four or more years and one month’s salary for those who had been there less than four years. In a typical year when company targets were met, about 95 percent of the employees qualified for the bonus because they had met their individual and local goals. If the company targets were not met, no one—neither the cleaner nor the CEO—would receive any bonus.4

In 2012, all 74,000 employees at Mercadona had permanent contracts. Approximately 85 percent of Mercadona’s store employees work full-time. Unlike the full-time employees at other low-cost retailers—who can actually get as few as thirty hours a week and whose schedules change all the time—full-time employees at Mercadona are salaried employees with stable schedules. They typically work 6.6 hours a day for six days a week. There are four main schedules: 7:00 a.m.–2:00 p.m., 8:00 a.m.–3:00 p.m., 2:00 p.m.–9:00 p.m., and 3:00 p.m.–10:00 p.m. Store employees alternate each week between a morning shift and an afternoon shift and know their schedules one month in advance. Employees also receive thirty days of vacation a year, maternity leave, and day care benefits.

Mercadona’s employees are so satisfied that once they start working at the company, they seldom leave. When Marcos told me that Mercadona’s employee turnover was 3.4 percent, I didn’t believe him. I thought perhaps he was using a different definition of employee turnover. But he was indeed measuring turnover just as others do—the number of employees who left divided by the average number of employees during that year. Still skeptical about such a low number, I asked all the people I talked to in the seven stores I visited how long they had been working there. I heard ten years, fifteen years, twenty years, twenty-five years.

Like Mercadona, the other three model retailers—Costco, QuikTrip, and Trader Joe’s—view employees as precious assets and invest in them. They all deliver low prices and good service to their customers. And they all perform better than their competitors financially. Hence these four retailers have found a sustainable way to deliver superior value to employees, customers, and investors all at the same time.

The four model retailers pay their employees substantially more and offer more benefits than their competitors do.6 For example, Costco’s average pay for hourly workers is $20.89 an hour7 and it offers benefits to all employees who work more than twenty hours a week.* A 2006 study shows that the pay at Costco is over 40% higher than the pay at its largest competitor, Sam’s Club (owned by Walmart).8 Trader Joe’s employees typically start as part-time “crew members” at around $10 to $12 per hour, but they are given raises every six months if they pass their reviews. Full-time employees can make $40,000 a year, depending on the location at which they work; assistant managers, called “mates,” make substantially more. Store managers, who are called “captains,” make around $100,000. All Trader Joe’s employees receive a 10 percent discount, and, given what the store sells, that employee discount gets used a lot. In addition, all employees—including part-timers who work more than seventeen hours a week9—get benefits. Employees also receive a Christmas bonus.10 At QuikTrip, an entry-level assistant manager makes close to $40,000 per year, first and second assistant managers make around $50,000, and store managers make between $60,000 and $80,000. While part-time clerks start considerably lower—around $8 an hour—they are offered a customer service bonus after their first six months, which is typically 10 percent of their annual wage. The average salary for part-time employees is aro...

And indeed, employees at these companies do tend to stay for a long time. QuikTrip’s 13 percent turnover rate among full-time employees is substantially lower than the 59 percent rate in the top quartile of the convenience store industry. At Trader Joe’s, turnover among full-time employees is less than 10 percent. Turnover for employees who stay at Costco for more than a year is 5.5 percent. And we saw before that turnover at Mercadona is less than 4 percent.

Glassdoor asks people a very revealing question: Would you “recommend this employer to a friend?” (A similar question is the basis for a commonly used measure of customer loyalty.) In August 2012, Costco scored 82 percent on this question, QuikTrip 83 percent, and Trader Joe’s 84 percent. In comparison, Walmart scored 47 percent, Target 62 percent, Home Depot 58 percent, and Staples 46 percent.12

QuikTrip also ranks among the top in customer service according to mystery shopper visits conducted by CSP magazine, which covers the convenience store industry. When it comes to speed of checkout, cleanliness, and merchandising, QuikTrip consistently scores over 90 percent and often near 100 percent.16 QuikTrip’s fast checkout is a sight to behold. One thing that makes it so fast is that any employee can use any cash register at any time without making the customer wait. If you regularly shop at a supermarket, you know it’s no fun waiting for the cashiers to do a changeover. The other thing that makes QuikTrip so fast is that employees have been trained to ring up three customers per minute. How do they do this? For many high-turnover items, such as soda, the cashier doesn’t have to bother scanning the item. One more thing: QuikTrip employees can calculate your change in their heads. So if your coffee costs 89 cents, the employee at the register can see you and have the 11 cents ready before you can even pull that dollar bill out of your pocket. (That’s a perfect example of great customer service that has nothing to do with personal interaction. It’s a piece of operational excellence that makes your visit there go the way you want it to—quickly.)

They work harder and they work better. You get lower employee turnover, so you have people with more experience making fewer mistakes. In addition, there are financial benefits to operating with low turnover. You limit disruptions and training costs. But as we saw at Home Depot, investment in people isn’t enough. Home Depot had a loyal and committed workforce, but it still ran into trouble because it lacked operational discipline.

COSTCO WON’T DO a lot of things for its customers. It won’t provide shopping bags. It won’t put signs on the aisles that tell customers where products are located. It won’t even try to offer a pleasant shopping environment—its stores have bare cement floors, industrial lighting, and bulky products stocked on top of each other. When it comes to the products themselves, Costco won’t offer many choices. Want to buy diapers? You have only two options, Huggies and Kirkland (Costco’s private label). Costco won’t advertise to get customers into its stores. And it won’t offer extended shopping hours.

Model retailers offer their customers less than their competitors do. As the Costco example shows, there are many ways to offer less. But in this chapter, I’ll focus on two of them—offering fewer products and limiting sales promotions. These choices allow model retailers to pursue the good jobs strategy by substantially lowering their costs, increasing employees’ productivity, and making employees the center of the company’s success.

HIGH-QUALITY BURGERS AT LOW PRICES On a recent visit to California, my family and I treated ourselves to an extraordinary version of the most ordinary of American meals. We went to a burger chain and had hamburgers made from beef that had never been frozen and contained no additives, fillers, or preservatives. The lettuce was crisp and hand-leafed. The onions were hand-cut. The bun was freshly baked and lightly toasted. The fries were made from whole potatoes, sliced fresh right there and fried in trans-fat-free vegetable oil. My five-year-old, who is already a foodie—his favorite food is oysters!—ate his burger with gusto. Now I understood why In-N-Out, a chain of 281 stores, has such a cultlike following. I also understood why it consistently earns one of the highest customer satisfaction scores of any fast-food chain.9 I know—even my five-year-old knows—that hamburgers and fries are not good for us. But were these ever good! The hamburgers were just $1.90, quite a bit cheaper than Big Macs at McDonald’s or Whoppers at Burger King, which aren’t made with such fresh ingredients or so much hand labor. Great quality, low prices, and yes, In-N-Out offers better jobs than other fast-food chains.10 As of the end of 2012, the company was privately owned, so there is not much data on its financial performance, but outsiders consider the company to be extremely successful. The company has had steady sales and profitability growth, and analysts estimate its profit margins to be ar...

Several studies have shown that when offered too many choices, especially when the differences among the choices are small, people end up being so confused that some decide not to buy anything at all.

cycle. Model retailers offer fewer products than their competitors do. While an average supermarket carries close to forty thousand products, Mercadona carries eight thousand and Trader Joe’s carries around four thousand. Costco carries around four thousand products while its biggest competitor, Sam’s Club, carries more than five thousand, and another competitor, BJ’s, carries around seven thousand. In all the categories it offers, QuikTrip stocks only high-volume products. Model retailers also do not continually change prices to stimulate demand. They offer everyday low prices.

Trader Joe’s may have a small assortment of products compared with other supermarkets, but the products that do make it to the shelves are often loved by its customers. Doug Rauch, the former president of Trader Joe’s, told my students that it is not uncommon for the company to receive notes from loyal customers raving about Trader Joe’s products.

The skit shows how customers benefit from fewer choices. The obvious benefit is low prices, which is one of the reasons why people shop at Trader Joe’s. The bread-and-butter pickles, which were the most expensive kind at Trader Joe’s, were only $3.49. Because Trader Joe’s sells just three kinds, it can leverage economies of scale in purchasing and can reduce all the complexity costs I mentioned earlier. In addition, limited variety leads to high inventory productivity, which means lower costs for Trader Joe’s and ultimately lower prices for customers. Trader Joe’s inventory turnover is extremely high compared with that of its competitors. While the average inventory turnover in the food retail industry is around eleven times, at Trader Joe’s it is around thirty-eight times. That means that an average product stays on the shelf for a little more than a month at a typical supermarket and only about ten days at a Trader Joe’s store. In New York City stores, Trader Joe’s turns its inventory fifty-two times a year, so an average product stays on the shelf for only a week.17

There is yet another benefit that doesn’t come out in this skit. Because Trader Joe’s customers know that they will always get low prices, they don’t have to stuff their pantries with sale items they won’t actually use for weeks. Trader Joe’s customers save themselves from clutter, and their more rational and predictable shopping patterns save the company’s supply chain by reducing the bullwhip effect.

Southwest Airlines is another great example. For decades, Southwest built a reputation for offering low fares to its customers, good jobs to its employees, and great returns to its investors. In 2002, Money magazine identified Southwest as the American company that has given the greatest return to shareholders over a thirty-year period, and that success has continued. In 2012, the company had its fortieth consecutive year of profitability—extremely impressive in a cyclical industry. Southwest definitely offers less than its competitors: no seat assignments, no meals, no baggage transfer to other airlines, no first class, no upgrades. As Colleen Barrett, the former president of Southwest, said, “Southwest doesn’t purport to be all things to all people, and we’re very upfront about it. We tell our customers why we don’t do this, that, and the other—why we don’t have assigned seating, for example. And then we just kill them with kindness and caring and attention.”20 Offering less has not meant low customer satisfaction for Southwest. In fact, Southwest is the only airline to have won the “triple crown” of airline service—the highest level of customer satisfaction, the best on-time arrival record, and the lowest level of lost baggage—and it did so multiple years in a row. In 2011, as it had in previous years, Southwest earned the leading customer satisfaction score, according to the U.S. Department of Transportation, with 0.32 complaints per 100,000 passengers. The airline had...

Though this approach to operations is efficient and provides consistency, you might think that the employees must hate it. Don’t they feel humiliated that they have to follow instructions so precisely and aren’t trusted to use their judgment? Don’t they feel that what they do doesn’t matter because anyone else would have to do exactly the same thing? Whatever happened to empowerment?

Ah, but QuikTrip is big on empowerment. Store employees make a lot of decisions ranging from how much inventory their store should carry each day to how to handle customer complaints or problems. They even have a say in how products and processes should change over time. You might wonder, though, if this is really a good idea. Can QuikTrip maintain consistency this way? Is this much autonomy scalable? Can the company really rely on tens of thousands of people to make the right decisions? Won’t they game the system? In fact, this blend of standardization and empowerment works very well. Despite all the standardization and monitoring, QuikTrip employees feel they are treated with respect and dignity.

How many times have you requested something you thought was completely reasonable from a frontline employee, only to be told, “I’m sorry, this is against our policy” or “Let me ask my manager.” My husband and I were celebrating Valentine’s Day at a fancy restaurant. I had been drinking a glass of wine chosen to go well with my lamb, but toward the end of the meal, my glass was almost empty. All I needed was one more sip of wine to enjoy the end of my meal, so I asked our waiter if he could give me just a little splash. No—they sell wine only by the full glass. He would have to ask his manager if he could give me a bit more. By the time he came back with his manager’s okay, it was too late—the meal was over. Next time we want a special night out, we’ll go somewhere else. Restaurants generally make a hefty 75 percent margin on wine. One little splash more would have cost the restaurant close to nothing, especially in comparison with what we were already spending on our meal.

Zappos is famous for its outstanding customer service. Nowhere is the emphasis on customer service more apparent than when a customer calls the customer service number. Zappos employees are not given a script and they don’t need one. They know quite well what they are expected to do: deliver a “wow” experience to each customer.

Empowerment especially works in service industries because customers bring a lot of variability in this context. It is almost impossible to anticipate precisely what every customer will want, how each will behave, and what will make each one happy, and to create a script or rule book to achieve that. That means that a combination of judgment and caring may often be more effective than rules and protocols.

Empowered employees can also provide better service because they themselves are more satisfied. As my colleagues who study motivation have shown so clearly, autonomy is great for motivation. Which is just what you would expect.

Employees were to use a simple framework: “Member, Organization, Employee,” or simply “MOE.” Here’s how the CEO explained it to the employees: “Not sure what’s right in a particular situation? Run it through MOE—in priority order—remembering that the member always comes first and trumps the other two. In other words, if a solution is right for the employee or the organization but does not position the member for future success, we will not proceed.” He also said, “No employee will ever get in trouble for doing what is right for the member.… There is only one operating policy or guideline you ever need. Trust your feelings… Do not consider the system capability, policy, or procedure…” Think about the magnitude of this change. Tellers and call center employees were now being empowered to make decisions on product pricing, general services, and even loan structuring. The management of the firm’s operations changed significantly as a result. At its call centers, for example, employees used to be driven by efficiency. They were encouraged to finish calls as quickly as possible to meet the target average wait time of 1.41 minutes. But with the MOE framework, efficiency could no longer be the sole or even the primary objective—not if what was efficient for the bank was less than satisfactory for the member. Members had to come first. So the call center employees started spending more time with their callers, really listening to their problems and suggesting solutions. Over time, ...

Ever heard the Nordstrom tire story? A customer walks into a Nordstrom store in Alaska to return snow tires. If you’re familiar with Nordstrom, a high-end department store chain, you’re probably puzzled: Does Nordstrom even sell tires? No, it doesn’t. The customer brought the snow tires there because he had bought them from the store that had been in that location before Nordstrom took the spot. In any case, according to legend, the Nordstrom store manager decided the customer had made an honest mistake and took the tires back anyway. It’s a lovely story, but can you afford to have your employees taking back products you don’t even sell?