Minimum Wage Laws Force Retail Transformation

The looming prospect of higher minimum wage laws in the United States, whether federal or state-by-state, is forcing retailers to consider what they can do to weather the storm and stay alive. Already concerned with squeezed profit margins — thanks to higher costs associated with online delivery, processing orders and managing a massive increase in product returns — higher minimum wages could tip the balance between profit and loss.

Increasing the minimum wage is a hot political potato in the U.S. The Obama administration supports a proposal currently stuck in Congress that would raise the federal minimum wage to $12 an hour by 2020.

The federal minimum wage has gone more than six years without an increase from $7.25 an hour. The opposing Republican Party is mostly against raising the minimum wage at all, although presidential candidate Donald Trump has flip-flopped on the issue and is currently pro raising it. Ted Cruz voted against it last year.

Democratic candidates are mostly for raising the rate. Senator Bernie Sanders introduced a bill for a $15 minimum wage last year; and Senator Hilary Clinton says there's no evidence to suggest that raising the wage will kill jobs.

Rather than wait for an agreement, some states and cities have taken their own measures. For example, Oregon will increase the minimum wage in the state incrementally over six years to different levels in different regions. In its largest city, Portland, the $14.75 per hour wage concerns small retailers in particular.

San Francisco, Los Angeles and Seattle have all approved a $15 minimum wage for all employees in the three cities. New York is proposing raising rates to $15.00, but opponents say it will cost the state 65,000 jobs. A proposal to raise California's minimum wage to $15 by 2021 is on the upcoming November ballot.

The news is grim: layoffs, increased prices, store closures. According to commercial real estate consultancy CBRE Group, a $1 increase in average wages amounts to a $1 million rise in total annual labor spend for a 500-employee facility. Surely something can be done to minimize the impact of higher minimum wages, but what?

Retailers, especially those that place a high value on customer service and use this to differentiate themselves, will have to increase overall labor productivity in order to attain maximum value from the increase in costs.

Increasing productivity to the extent that gains cancel out losses due to higher wages won't be easy. Retailers will also need technology to leverage process efficiencies by increasing automation and driving greater staff productivity.

Technology is a crucial part of the answer, and now is the time. Opportunities that exist include process and task automation, process streamlining, staff orchestration and monitoring, and proactive reporting. Each of these represents significant opportunity to improve productivity and at the same time increase overall customer service.

Retailers now have a unique opportunity to look at things holistically across the business. Since the impact of productivity benefits every area, there's a clear incentive to look at productivity as a whole rather than focusing in on specific areas.

By increasing productivity and efficiency, total costs can be kept down without resorting to price increases or store closures, while increasing overall customer service. And the storm over the minimum wage will move harmlessly out to sea.

Oliver Guy is global industry director, retail, at Software AG, a digital business platform provider.