FRBSF Economic Letter
2004-37; December 17, 2004
Productivity Growth and the Retail Sector
The phenomenal
performance of labor productivity that has marked the U.S. since
the mid-1990s has not only fostered economic growth and real gains
in wages, but it also has kept economists busy trying to understand
its underlying causes. Many studies focus on the broad economy
and find that information technology (IT) has played a major role.
Another way economists try to gain a better understanding of the
causes of productivity growth—and, therefore, to gain insights
into how it may develop in the future—is to focus closely on a
narrower part of the economy for clues.
This Economic Letter focuses
on productivity growth in one area of the economy: the retail trade
industry. Although strong productivity
growth is often associated with high-tech industries (such as semiconductor
manufacturing), the retail sector has enjoyed above average productivity
growth and contributed significantly to the acceleration in productivity
at the national level. In addition, the retail trade industry highlights
the diverse forces involved in the evolution of productivity growth.
Results from recent research (Doms et al. 2004)
indicate that the successful adoption of IT appears to have played
a role in productivity
growth in this industry, allowing firms to do a better job of managing
the vast information on sales, inventories, and shipping. The use
of IT appears to be especially beneficial to large retailers. Another
important component of productivity growth in the retail sector
is competition. The Darwinian concept of "survival of the
fittest" manifests itself through the rise and decline of
establishments and firms, with low-productivity establishments
closing (which raises the average level of productivity in the
industry) and new, more efficient establishments taking their place.
An overview of the retail sector
 The retail trade industry is an important part
of the economy and of our daily lives. It includes such diverse
businesses as department stores, gas stations, supermarkets, plant
nurseries, bars, and car dealers. In 2002, approximately 15 million
people were employed in retail (about 14% of the private workforce),
working in over 1.1 million individual establishments.
Figure 1 shows that productivity growth (as measured
by average percent changes in real output per hour worked) in the
retail trade sector has surpassed that of the nonfarm business
sector. Between 1987 and 1995, the retail sector averaged a 1/2
percentage point lead in productivity growth over the nonfarm business
sector (2.0% versus 1.5%). That lead increased to 1 percentage
point between 1995 and 2002, a period when productivity picked
up sharply in the economy; in the retail sector, annual productivity
growth averaged a phenomenal 3.8%.
Why did productivity growth in
retail increase?
Research has found two interrelated stories that
help explain the above average productivity performance in retail.
The first involves the use of IT and the second argues for the
effects of competition (namely the rise of efficient firms and
the demise of less efficient firms).
Retailers have employed many technologies that
allow them to do a better job of accumulating and managing a tremendous
amount of data on sales, inventories, and shipping. For instance,
scanners that quickly read Universal Product Codes (UPCs) reduce
checkout times and eliminate the need to put price tags on individual
products. UPCs also allow firms to track inventories more closely.
Supply chain management software helps firms make better purchasing
decisions, improves transportation logistics, and increases coordination
with manufacturers. Global positioning systems allow firms to track
the locations of goods that are in transit. Although some of these
technologies first appeared in the 1980s, it wasn't until the 1990s
that they became more fully employed. According to a case study
by the McKinsey Global Institute (2002), these technologies, along
with others, helped boost productivity in four segments of retail
included in the study: general merchandise stores, electronics,
apparel, and building materials/do-it-yourself.
More rigorous statistical analysis examining the
relationships between IT investment and productivity has been plagued
by a lack of data on investment in technology and productivity.
One exception is a study by Doms et al. (2004) that used confidential
data collected by the Census Bureau to examine the empirical relationships
between IT investment and productivity growth for a large sample
of retail firms. They found, not surprisingly, that there is indeed
a positive relationship between IT spending and the level of productivity:
firms that spent more on IT had higher sales per employee than
firms that spent less on IT. They also found that the more firms
invested in IT, the faster their productivity grew between 1992
and 1997, a period in which productivity growth in the retail sector
picked up. However, the results of the study existed only for larger
firms (those with more than 100 employees), not for smaller firms.
This finding could imply that IT, at least in retail, is particularly
useful when trying to coordinate a very large number of products
or a large number of stores. For smaller firms, IT may be useful,
but it may not have been the main impetus for the growth in their
productivity.
Another story that arises from analyses of the
retail industry is the importance of competition and changes in
the establishments and firms in the industry. Foster et al. (2002)
examine data on the universe of retail establishments between 1987
and 1997. The question they basically ask is: to what extent was
rising productivity a "tide that lifts all boats," that
is, productivity increased uniformly across all establishments
and firms, versus a Darwinian story of "survival of the fittest," where
the least efficient firms fail and the most productive take their
place?
The authors find that the Darwinian story does
a much better job of describing developments in the retail industry.
Establishments that exit retail are much less productive than the
average at the beginning of the sample period. In terms of entry,
they find that new establishments that are owned by existing firms
are much more productive than the average establishment. By eliminating
some of the less productive establishments and adding very productive
establishments, the average productivity of the industry rises.
The Darwinian story is likely coupled with the
IT story. One way for new technology to be diffused through the
economy is for all firms to adopt it. Another way is for firms
that know how to use the new technology most wisely to grow at
the cost of firms that are not as technologically savvy. Case studies
show that WalMart was a pioneer in the use of IT in the retail
arena, and that it took time for other firms to learn how to use
IT as effectively. While other firms were trying to catch up to
WalMart's expertise, WalMart gained market share.
What does the future hold?
 Coming up with forecasts for productivity growth
in the retail sector highlights the difficulties of forecasting
productivity growth in the nation, and it also raises some critical
questions. Have we already seen most of the benefits from IT and
the firms that make the best use of IT? Or is there still considerable
room for further improvements? Are there new technologies on the
horizon that will again boost the efficiency of retail establishments,
and, if there are, when will they take hold?
The answers are by no means obvious, but there
are some clues worth considering. In terms of technology, two areas
hold some promise for the retail sector. The first is commerce
conducted over the internet, instead of the more traditional brick
and mortar stores. Statistics from the Department of Commerce show
that e-commerce is growing much faster than overall retail sales.
Consequently, as shown in Figure 2, the share of all retail sales
that are conducted over the internet have generally increased since
late 1999. However, the share of sales conducted over the internet
remain a small portion (less than 2%) of total sales. How long
fast growing sales over the internet will continue is an interesting
question.
Another technology that is receiving a fair amount
of attention is radio frequency identification (RFID). Tags (small
semiconductor chips) emit a signal so that individual products
can be tracked wirelessly, allowing retailers to walk down their
store aisles with a scanner and know precisely what items they
have on the shelves. How quickly this technology will be adopted
and what improvements in efficiency will result remain to be seen.
Finally, the competitiveness in the retail industry
that has contributed to productivity gains in that sector is likely
to continue, as it has for many decades. While it is not clear
how that competition will play out in terms of which establishments
survive and which wither away, it is clear that the competition
will benefit the consumer by keeping prices restrained.
Mark Doms
Senior Economist
References
Doms, Mark, Ronald Jarmin,
and Shawn Klimeck. 2004. "Information
Technology Investment and Firm Performance in U.S. Retail Trade." Economics
of Innovation and New Technology 13(7) pp. 595-613.
Foster, Lucia, John Haltiwanger,
and C.J. Krizan. 2002. "The Link between Aggregate and Micro Productivity Growth:
Evidence from Retail Trade." NBER working paper 9120.
McKinsey Global Institute. 2001. U.S. Productivity
Growth 1995-2000: Understanding the Contribution of Information
Technology Relative to Other Factors. Washington, D.C.: McKinsey
Global Institute (October).
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