For years, labor was a far from pressing concern for retailers and brands. Wages were low, skilled workers were plentiful.

No longer. Now, retailers and brands are being hit with a triple whammy of rising wages, increasing volume of work and decreasing labor availability—all of which are eating into the bottom line.

In 2014, average hourly labor rates increased $0.64 compared to a total of $0.30 during the previous 11 years. Then, in 2015, minimum wages across the country increased an average of $0.67 an hour, as 17 states increased their minimum wages, according to CBRE. And 11 states have increases slated for 2017. The story is similar for warehouse employees, as illustrated in Exhibit 1.

zoom iconExhibit 1: Warehouse employee wages are ticking back up.Meanwhile, labor availability is contracting due to an aging workforce, low unemployment, a lack of skilled workers and new employment opportunities from on-demand jobs like Uber. Since 2005, the number of workers in these types of on-demand jobs has grown by more than half, according to The Wall Street Journal. So it’s no surprise that distribution and fulfillment center turnover averaged 20% in 2015 compared to 10% in 2010.

Since labor makes up roughly 20% of total supply chain costs, these factors have significant strategic implications. For a fulfillment center (FC) with 500 employees, a $1 per hour wage increase would raise labor costs by roughly $1 million per year.

Not only do these challenges make it difficult to maintain profitability, rising wages can hit retailers where it really hurts: their stock prices.

One has only to think back to the fall of 2015, when Walmart’s shares plunged 10% to a three-year low— the stock’s worst percentage loss since 1988—after the retailer lowered its earnings outlook thanks to wage increases for 1.2 million employees that cost the company $1.5 billion, according to CNN.

Clearly, labor is becoming more of a strategic force for retailers and brands than ever before—driving decisions on everything from DC locations to design, even store fulfillment policies.

Here are three components to consider to help stem the tide of rising wages and labor scarcity.

Take a bigger-picture view of the market to make strategic fulfillment location decisions

The classic order of expanding to new markets and the limited set of variables traditionally used to pick the perfect DC location are being totally upended by the new labor market reality.

While it’s still important to consider factors like proximity to highways, affordability of the land and the current local unemployment rate, retailers now need to look at long-term employment forecasts and local market conditions—is Amazon building an FC up the road? Retailers are now having to enter markets that have other existing warehouses.

It’s also becoming increasingly important to examine other potential risks in the local labor market that could severely restrict the number of qualified applicants despite a theoretically large labor pool. Consider external factors such as the high school graduation rate and local immigration trends as well as internal factors like the risk of unionization or the age of your workforce. Some retailers are also turning to part-time workers.

Even after considering all of these variables, wage rate increases are inevitable, so plan for them now so your budget isn’t shot later. Make sure to pay according to the skill level required for each position—not only can this help attract the right people to highly skilled jobs, it can also provide lower-earning workers with opportunity for growth in the FC. Retailers are no longer able to use historical rates for many jobs—compensation has skyrocketed for in-demand positions like wave planners. Within the next year, many retailers will have much more disparate wages across their FCs.

Reassess your facility and network needs

Faced with this shifting labor market, some retailers are considering more automation when redesigning their facilities or rethinking where they’re located.

As with any capital investment, it’s all about hitting the right ROI. This inflection point will vary significantly between retailers and depends on a host of factors. To consider just one of many, retailers with high-end products traditionally had to pay workers more to handle them. Now, automation could quickly pay off.

For example, Meijer bought an old DC in Wisconsin and expanded it to 830,000 square feet ahead of its store openings in the area, according to the Wisconsin Economic Development Corporation. Meijer invested roughly $55 million to turn the DC into an automation-driven, 24/7 powerhouse. Incorporating a fully automated operation management system, the new facility can service 70 Meijer Supercenter stores per day—all existing and planned stores within a 300-mile radius—and employs more than 500 people.

When making the case for automation, don’t forget to factor in what labor will cost tomorrow. To put it simply, if you’re currently paying $10 an hour, it might take roughly two years to pay back a $10 million investment in automation. But if that wage shoots up to $18 to $20 an hour, that same investment breaks even in less than a year.

One of the biggest physical assets to consider in the battle against rising wages isn’t the FC, but the store. While fulfilling from FCs is almost always cheaper from a pure cost and margin perspective, stores bring their own benefits, including enabling faster delivery and reducing out-of-stocks. Some retailers will want to push more volume through their stores depending on demand and customer needs. At a minimum, stores should help during the highest-demand times and can bridge the volume gap as more FC capacity is coming online.

Revamp your operations and support culture

In this hypercompetitive labor environment, where turnover rates often range between 30% and 65%, it’s important to pull out all the stops to keep your employees happy. Company culture is still the main driver of employee loyalty and retention. Finding the right culture for your facility will help attract the best talent and keep them engaged.

A great place to start is to create specific, distinct goals for each facility and then to use data to help track them. But just having the data isn’t enough. You need to share this performance with the team continually to help them feel ownership of their hard work.

Great benefits and retention policies don’t hurt either. Leading retailers are experimenting with perks like on-site health clinics and day care, dry cleaning, valet parking, and flexible schedules. For example, Amazon provides health care beginning on the first day of the job and covers 95% of employees’ tuition, according to CBS News.

Keeping these three areas in mind will help retailers stay competitive and ready for impending labor scarcity and wage increases. Gone are the days when labor issues could be relegated to the back burner. The elevation of labor to a strategic priority can be a challenge, but it also creates an opportunity for leading retailers to separate themselves from their competition in yet another way.

1 June 2016