How Mercadona Fixes Retail's 'Last 10 Yards' Problem

Imagine a retail chain that offers customers not only the lowest prices but also personalized customer service. Employees receive above-average wages and 20 times more training than the average American retailer.

Sounds like a recipe for retail suicide, especially in industries with razor-thin margins. Yet in the new case study "Mercadona," HBS assistant professor Zeynep Ton and research assistant Simon Harrow describe a Spanish supermarket chain that has done all this while achieving steady profits and double-digit growth for more than a decade.

I have been studying retail in-store logistics," says Ton, "looking at what goes wrong in those 'last 10 yards' of the supply chain—from the store's loading dock to the customer's hands—and how to improve it. In the course of my research, I have learned a lot about how poor operational decisions create unnecessary complications that lead to quality problems and lower labor productivity and, in general, make life hard for retail employees."

Ton is interested in demonstrating how operations can be designed and managed in ways that improve in-store logistics and profitability while making life much better for workers.

Mercadona offers the lowest prices in Spain, and its operational performance exceeds that of comparable Spanish and foreign chains. In 2008, Mercadona's sales per square foot was 60 percent higher than that of France's giant Carrefour, and more than twice that of an average U.S. supermarket. Sales per employee were 18 percent higher than that of other Spanish supermarkets that disclosed financial information that year and more than 50 percent higher than U.S. supermarkets. By all measures, its inventory productivity is much higher than that of its competitors.

What accounts for the difference? "It's not one thing," Ton insists. "It's many things all working together. Mercadona does a great job of making manufacturing principles work in a retail setting. It's something like the Toyota Production System, with a relentless focus on process and product improvement."

Employee investment is critical
For Mercadona, investment in employees is part and parcel of process and product improvement. In 2008, the chain invested four weeks of training time and €5,000 for each new store employee. "In the United States," Ton points out, "the norm is only seven hours, and the difference shows."

For example, Mercadona cross-trains employees so their productivity is not tied to store traffic. Cleaners can work the cash registers during busy periods, and cashiers can shelve products during downtime. Departmental specialists can assist customers during busy periods and order merchandise and arrange their sections during slack hours.

The results? Customers receive better service. Employees have more predictable schedules, one reason why turnover is a mere 3.8 percent. And Mercadona has a great bottom line.

Ton emphasizes the importance of scheduling and stability. Workers learn about their schedules one month in advance and don't have to work different shifts from one day to the next. Over 85 percent of Mercadona's store employees are full-timers, and they have fixed salaries with a variable bonus.

"Stable hours and stable salaries make a world of difference to lower-wage retail employees," she says. "In the United States, even full-time employees often do not know when they will work and for how long in a given week. But offering stability isn't just a favor to the workers—something that can be taken away if things get rough. It's part of what's making the company profitable. Too often, retail managers keep their employees dangling and switch their schedules around on short notice because they feel they have to be free to match the labor supply with variable store traffic. What Mercadona shows is that all this torture isn't necessary. You can offer employees stability and still run a very successful supermarket chain."

The specialist knows
The Mercadona case, which Ton has taught in the MBA course Coordinating and Managing Supply Chains, highlights the chain's "specialists"—an unusual example of how operations, customer service, employee relations, and profitability are all maximized together.

"It's a lot like the kind of service Home Depot used to be famous for," says Ton. "In any Mercadona store, you can walk up to the department specialist and ask, 'What kind of meat should I buy to make stew?' or 'What's the best toothpaste for me to buy for my family?' She knows everything about the products they carry. And you're not taking her away from her job—that is her job."

This kind of customer service is directly tied to the way Mercadona handles its operations—specifically, the size of its product assortment. Compared to U.S. supermarkets, Mercadona offers 43 percent fewer products per square foot of retail space. Mercadona believes it has a responsibility to select the highest-quality, most affordable products to "prescribe" to customers, an approach that may sound paternalistic but, in fact, is much appreciated by Mercadona's customers.

"This concept of 'prescription' is more subtle than it sounds," says Ton, "because, in fact, it involves information passing through the system in all directions."

To accomplish that, Mercadona invests in field employees called "prescription instructors" who constantly visit stores in their area. Ton recalls one prescription instructor telling her how she would sit in a cafe near one of her stores to hear what customers were saying about Mercadona's products and service. Information regularly moves up the chain from customers through employees to management and back down the chain through employees to customers. Information also moves out to Mercadona's family of house-brand suppliers, resulting in improvements to a product, to the supply chain, or to employee productivity in the stores.

"They don't make big improvements very often. They look for small, daily ways to improve efficiency and quality," Ton explains, citing a brand of hand cream as one example. Mercadona convinced the supplier to change the jar's lid from convex to flat. This made it possible for store employees to stack the jars more easily and for Mercadona to lower the price by 15 cents. A specialist could explain the new look to any customer who wondered if the product itself had changed.

"It's very interesting how Mercadona does more for its customers by doing less," Ton observes. "The smaller assortment allows Mercadona to offer better customer service, and as one employee pointed out to me, 'Who really needs calcium-enriched tomato sauce?' "
Never on Sunday

In another telling detail, all Mercadona stores are closed on Sunday. On this point, the case quotes the chain's human resources coordinator, Marcos Barberán: "Our employees have a family life. Plus, people only have so much money to spend on groceries. So if we were opened seven days a week, we wouldn't necessarily sell any more, and we would have to increase prices to cover our expenses."

The Mercadona case inevitably raises the question: Can this company's methods work anywhere else? Can we really get the old Home Depot service at Wal-Mart prices?

"For years, I have been preaching that retailers need to invest more in their store processes and in store labor to improve operations," says Ton. "Many retailers tend to overlook store processes and treat store labor as an expense to be minimized."

Mercadona always takes store operations into account when making supply-chain decisions, Ton continues, and pays particular attention to the design and management of store processes. It also treats labor as an asset to be maximized.

"It's a beautiful instance of how well-designed processes and well-treated people can be a natural fit rather than some kind of painful tradeoff."

Not for the shortsighted
Ton acknowledges that the model could be difficult to implement for companies focused more on meeting Wall Street's quarterly expectations than on long-term profitability.

"I'm sure there are periods when Mercadona's payroll is higher than it's supposed to be," she says. "That's the cost of stability for them. But they don't worry too much about that blip in their profit margins because they believe that stability overall will be good for the company."

Mercadona's focus on long-term profitability is clear in how the company makes decisions. "Mercadona does not even consider short-term profit maximization. The company always considers the impact of a decision on the customer, the employee, the supplier, and society before it thinks about the impact on profits."

Adopting Mercadona's approach also requires a leader with a strong backbone. Ton notes that Jim Sinegal, CEO of Costco, another retailer with good labor practices, had been criticized by analysts who complained he treated the company's employees better than its shareholders.

Retailers may also make the mistake of focusing on just one aspect of Mercadona's model, such as product assortment or employee stability.

"Everything fits together," says Ton. "The continuous-improvement mentality is pervasive, from the raw materials supplier to the store worker. Every decision is made thinking about the entire supply chain—the components work together and reinforce one another. Too often, I find that retailers make decisions regarding product variety, promotion, and packaging with no regard for what goes on in the stores."

There's often a big mismatch between the complexity of the retail environment that we create and the people who work there, she says. A typical American supermarket has more than 46,000 SKUs. "I'm not so sure that huge number helps either the store or the customers all that much, but I can tell you a hundred ways it drives the employees crazy."

Ton remains hopeful that examples such as Mercadona's will have a positive influence on retail operations and on the lives of millions of lower-wage workers.

"As soon as I found out about Mercadona, I wanted to write this case to show that offering low prices and making good profits are not in conflict with investing in your employees and your processes," she says. "Retail employees are on the losing end of the income-inequality gap. This case offers a great example of how to close that a bit."