23 Oct CX and Employee Engagement: The Biggest Test in the World
Walmart, long known as the mega-retailer that most successfully wrings every nickel out of the cost of doing business, recently made headlines in a different way. The New York Times ran an article titled “How Did Walmart Get Cleaner Stores and Higher Sales? It Paid Its People More”. Even for the largest private enterprise in the world, investing real money in employees directly led to increased employee engagement, improved customer satisfaction, and increased revenue.
Slashing prices… and morale
Founder Sam Walton built Walmart on low, low prices and maximum supply chain efficiency. Established in 1962, for most of its long history the only way for the company to sustain those low prices has been by being ruthlessly efficient at controlling the supply chain and the cost of doing business. One of the most significant costs, of course, was the cost of labor. Employee pay, especially for the front line workers in the stores, was just one more component of the supply chain to be kept as tiny as possible.
Since it was last reset on July 24, 2009, the federal minimum wage in the United States has been $7.25 per hour. A significant fraction of Walmart’s employees have been hourly employees at or close to the minimum wage. As the minimum wage stayed stagnant in the face of inflation, Walmart reaped the benefits of lower effective labor costs, but at a price: Walmart became the employer of last resort.
Employees who work at an employer of last resort are not loyal or engaged, and customer service suffers. Those employees don’t provide discretionary effort, the effort that you give because you want to rather than because you have to. That lack of discretionary effort leads to poor customer service, both directly (via poor interactions between employees and customers) and indirectly (as the employees allow physical facilities to get dirty and deteriorate.) As customer service suffers, so does customer engagement and eventually revenue and profitability.
A new CEO and a new approach
In 2014, new CEO Doug McMillon took over. While Walmart had enjoyed constant, steady growth throughout the nineties and 2000s, things had been up and down since 2000. Determined to figure out what was going on and to address it, he and his management team dug into the issues that were causing sliding sales. They specifically reached out to customers through formal survey programs, and the customers were clearly unhappy.
By 2015, Walmart was struggling. Sales at stores open for at least a year had fallen for five quarters, and revenue actually dropped for the first time since Walmart went public… in 1970. Customers, fed up with dirty stores and demotivated employees, fled to other retailers like Target and Amazon
That same year, Doug McMillon announced a radical approach to improving sales and profitability. Walmart was going to raise wages! Walmart has the third largest work force in the world, behind only the U.S. Department of Defense and the Chinese army. In 2015, they had more than 1.2 million employees in the United States alone and another 1.1 million overseas. Even a small increase in wages multiplies across that enormous work force (and matching employer taxes). Not only were they going to raise wages, but they were going to build 200 new training centers to offer training to workers, work at clearly defining more paths for advancement, and eliminate certain management roles to push responsibility further down to the front-line workers. They even went so far as to pilot an effort to give employees more control and predictability over their working hours.
The biggest test in the world
Neil Irwin said it best in the New York Times article:
That set in motion the biggest test imaginable of a basic argument that has consumed ivory-tower economists, union-hall organizers and corporate executives for years on end: What if paying workers more, training them better and offering better opportunities for advancement can actually make a company more profitable, rather than less?
A key tenet of customer experience design is that employee engagement is essential to create exceptional customer service, and that exceptional customer service leads to increase customer loyalty, spending, and word-of-mouth marketing. In short, it should drive increased revenue and profitability.
But Walmart’s different. It’s literally the largest private enterprise in the world. If it were a country, it would rank 23rd in GDP right behind Sweden and ahead of Poland. Perhaps most importantly, it is an efficiency-based business, not a luxury brand. It’s easy to see how the Ritz-Carlton or Nordstrom benefits from intense customer service, but Walmart? As Irwin says, it’s the biggest test imaginable, a fantastic experiment examining one of the absolute core tenets of customer experience design.
The results so far
Nineteen months in, customer survey results have improved consistently since the launch of the changes. The sales slump has reversed, with an increase in sales of 1.6%. While that may seem small, the retail industry as a whole saw a dip of 0.4% in sales. At Walmart’s magnitude that’s literally billions of dollars in improvement.
On the other hand, Walmart’s profitability is down, largely because of increased labor costs and other investments.
The experiment is not perfect. Critics like the labor group Our Walmart complain that the measures are minimal and designed for PR spin rather than meaningful impact. Others suggest that many new employees don’t see the improved wages until they’ve been on the job for many months. In short, it takes time to change the culture of a company with millions of employees, even if you’re willing to inject significant cash.
So, has the experiment proven the tenet that increased employee engagement drives higher revenues and profits. No, not yet.
Walmart’s CEO seems committed to this new approach, and with the competitive landscape he faces he certainly needs to try new things. It will be fascinating to watch and see if Walmart’s revenue continues to climb and profitability rebounds, or if this is just another salvo in a customer experience arms race. Either way, the customers win.