Executive summary (download full report here)
The retail landscape is experiencing unprecedented change in the face of disruptive forces, one of the most recent and powerful being the rapid rise of automation in the sector. The World Economic Forum predicts that 30-50% of retail jobs are at risk once known automation technologies are fully incorporated. This would result in the loss of about 6 million retail jobs and represents a greater percentage reduction than the manufacturing industry experienced. Using Osborne and Frey study1 with the Bureau of Labor Statistics, the analysis suggests that more than 7.5 million jobs are at high risk of computerization. A large proportion of the human capital represented by the retail workforce is therefore at risk of becoming “stranded workers.”
As of 2002, retail employment exceeded total manufacturing employment, and now sits at about 16 million workers (Figure 1). Total manufacturing employment, which peaked in 1979 at approximately 19 million workers, has fallen to 12 million workers. The repercussions of manufacturing’s decline, which was driven by automation and globalization, have been felt at the local and national levels. For example, certain areas of the US that were once manufacturing hubs have experienced rising poverty, declining populations, and erosion of political trust.
Figure 1: Employment in manufacturing and retail trade
Source: US FRED, Cornerstone Capital Group
The impact of significant reductions in retail workers may mirror the impact of manufacturing job losses. Retail sales at brick-and-mortar stores, as well as margins on those sales, are increasingly constrained as consumers shift to online shopping. At the same time, many parts of the country are experiencing upward structural wage pressure as concerns about income inequality are gaining political traction. Major retailers, including Macy’s, J.C. Penney, Kohl’s and Wal-Mart, have collectively closed hundreds of stores over the last few years in attempts to stem losses from unprofitable stores. These headwinds are pushing retailers to rethink the traditional retail business model.
|Technology has the potential to automate part of the sales process and render a range of jobs redundant|
Retailers are investing in technology to build out their omnichannel platforms. In some cases, technology is complementing labor by providing a better customer experience. Indeed, this report argues that companies which use technology to support their workers are likely to benefit from long-term productivity gains. However, technology also has the potential to automate part of the sales process and render a range of jobs redundant. Taken together, store closures and automation technology have the potential to accelerate job losses in retail, an industry that employs approximately 10% of the total US labor force.
An in-depth examination of retail automation was undertaken to enable investors to consider investment risks and opportunities by exploring how retail is addressing profit pressure and how employees are considered in the context of a broader shift in strategy. This report:
- Identifies the structural factors catalyzing change in the retail industry;
- Examines the current and potential automation initiatives across 30 retail companies, chosen based on market capitalization and comparability;
- Provides analysis on the characteristics of current retail workers, including gender and location, and assesses stakeholder groups that may be impacted by changes to retail labor;
- Leverages these insights, using Cornerstone’s BRAVE MatrixTM as well as novel metrics (given the retail sector’s limited disclosure) to analyze how these companies are positioned to manage automation and labor through the industry’s transition; and
- Provides a set of questions for investors to include in their engagement with retailers.
Which factors are driving automation in retail?
Given that automation has been a central driving force for economic development for decades, it is important to understand why its application in the retail sector threatens to radically and rapidly reshape the retail labor force. The research identifies two key factors driving the automation conversation.
First, e-commerce has grown significantly over the last five years and now accounts for more than 8% of total US retail sales. Amazon has been a dominant force in e-commerce for years, and the company accounted for 43% of all online sales in 2016. While the consumer benefits from lower prices and greater price transparency, Amazon’s success is pressuring retailer profit margins as they fight to maintain market share and keep prices low to remain competitive.
|Retail workers are disproportionately represented among recipients of public assistance|
Second, a growing focus on income inequality and regulatory-driven minimum wage changes are a source of increasing wage pressure. Retail employs about 10% of the US labor force, and research finds that retail workers are disproportionately represented among recipients of public assistance. Retailers have been increasing wages recently due to a tighter labor market, but retail faces a structural issue of increasing pressure for minimum wage hikes at the local and state level.
Taken together, retailers are facing structural price and cost issues that impact profitability and create meaningful long-term uncertainty. These headwinds will likely increase the industry’s propensity to automate, which would have significant impacts on existing labor. Companies are likely to respond through two consumer strategies:
- Convenience – focus on removing the ‘friction’ of the purchase process within the retail store to increase sales volume and decrease labor costs through technology.
- Experience – focus on enhancing consumers’ interaction with the store and its employees to increase pricing power.
While companies may pursue a mix of these two strategies, understanding which is the primary strategy will enable investors to understand how technology and labor are likely to be used, and how the overall labor profile of the company might change.
How is automation being adopted in retail?
The technology initiatives of 30 retail companies were assessed, and ten in-store technologies that will impact the retail industry were identified. The assessment provides an indication of the extent to which each technology is being deployed. These initiatives are focused on improving customer satisfaction, operational efficiency, or a combination thereof.
|Research indicates companies are adopting mobile devices, self-checkout, digital kiosks, proximity beacons, and workforce and task management solutions|
The review of company reports indicates that retail companies are implementing technologies such as mobile devices, self-checkout, digital kiosks, proximity beacons, and workforce and task management solutions.
What are the broader stakeholder implications?
An assessment of the gender composition of retail workers shows that the largest group, retail salespeople, has equal numbers of men and women. However, cashiers, the next largest group of retail workers, are predominantly women (73%). Cashiers are considered one of the most easily automatable jobs in the economy. Based on this analysis, large-scale automation of retail labor could disproportionately affect women, as noted previously in Cornerstone Capital Group’s September 2016 report, Women in an Automated World.
From a geographical standpoint, it appears that several major retail companies have store footprints that are concentrated in less densely populated metropolitan areas. For example, a UCLA study shows that Wal-Mart possesses an average market share of 25% in metropolitan areas with populations of fewer than 500,000 residents. This market share, if indicative of employment share (even if not directly proportionate), suggests significant potential impacts for local communities should Wal-Mart pursue an aggressive labor automation strategy.
How are companies managing labor issues associated with automation?
The retail sector provides little disclosure on labor issues. None of the 30 companies reviewed in this report provides key labor data such as employee turnover, labor costs as a percentage of SG&A, or employee satisfaction. Therefore, a series of proxy metrics were developed to evaluate the universe of companies:
- Public disclosure of automation initiatives;
- Changing labor profile associated with an experience or convenience strategy;
- Minimum wage and poverty level exposure;
- Labor investment; and
- Public perception of employee practices, social policies, and prior reputation.
|No companies provide key labor data such as employee turnover, labor costs as a percentage of SG&A, or employee satisfaction|
Based on the assessment, key takeaways include:
- No retailers appear to be pursuing a clear convenience strategy. Approximately 35% of the assessed retailers are positioning towards an experience strategy. The remaining 65% do not appear to have a clear strategy, at least as determinable by public disclosures.
- On average, retail companies are moderately exposed to state minimum wage increases, although Sprouts is significantly more exposed than others. Only Costco, Nordstrom, Whole Foods, and Tiffany & Co. pay their cashiers and associates a wage at or above the poverty level for a family of four as calculated by the US Department of Health and Human Services.
- Amazon, Best Buy, Lowe’s, Staples, Target, and Wal-Mart stand out as investing in their labor through programs such as tuition reimbursement and technical and programming training, which is consistent with their strong employee ratings.
- Dollar General and Wal-Mart receive the most negative scores on social policies and public reputation from the data sources utilized, while Costco scores most favorably. Data sources include Mission Measurement and Sustainalytics.
The analysis indicates that automation is set to alter the retail industry’s labor profile. If companies migrate towards a high-touch, experience-based strategy, then it is possible workers will receive improved training and higher wages, and there will be fewer layoffs. If companies adopt a heavily convenience-oriented strategy, more tasks will be automated and less labor required. To date, companies’ discussions around implementing technology suggest that technology is aimed at complementing labor. However, should structural price and cost issues persist, technology may be viewed as a potential substitute for labor.
|A mix of experience and convenience strategies could still result in material lay-offs in the retail sector|
The most likely outcome is a mix of experience and convenience strategies, though this could still result in material layoffs in the retail sector. Because retail represents approximately 10% of the total US labor force, any systematic deployment of automation is likely to reduce the number of retail jobs by a figure in the millions.
Download full report here.
 Calculated from retail trade employment, given by the Bureau of Labor Statistics Current Employment Statistics Survey
 Business Relationship Analytics for Value Enhancement.
 EPI analysis of Current Population Survey Annual Social and Economic Supplement microdata, pooled years 2012-2014
Michael Shavel is a Global Thematic Research Analyst at Cornerstone Capital Group. Prior to joining the firm, Michael was a Research Analyst on the Global Growth and Thematic team at Alliance Bernstein. He holds a B.S. in Finance from Rutgers University and is a CFA Charterholder.
Sebastian Vanderzeil is a Global Thematic Research Analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.
Emma Currier is a Research Associate at Cornerstone Capital Group. Emma graduated with a Bachelors of Arts degree in Economics from Brown University in May 2016. While at school, she worked with the Socially Responsible Investing Fund and as a teaching assistant for the Public Health and Economics departments. She spent her sophomore summer researching differences between American and Indian educational styles in Arunachal Pradesh, India, and completed a summer investment bank analyst position with Citi in the Media & Telecom group in 2015.