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How Walmart and McDonald's can raise wages and still boost profits

Every year as stampede-like crowds storm Walmart (WMT) to score doorbuster deals on Black Friday (or Thanksgiving Day), and this year as fast-food workers have protested low wages in cities across the country, conventional wisdom would seem to defend the status quo for retailers. It goes something like this: shareholders demand growing profits, consumers demand low prices, and to deliver on both, companies have to pay employees seemingly as little as possible.

Related: Walmart's donkey meat recall shows challenge of global expansion     

But a new book from MIT Sloan School of Management professor Zeynep Ton has found a strategy working for companies that includes offering good jobs, while at the same time keeping costs to customers low and boosting profits. The strategy, according to the book, involves both investing in employees through higher wages and more training. But it also involves four counterintuitive operations choices that transform the company's investment in workers into high performance.

"It's not about just paying people more," Ton explains to The Daily Ticker. "It's a combination of operations and investment in people."

Ton has found the "good jobs strategy" at work at four low-cost retailers she studied: Costco (COST), Trader Joe's, Spanish supermarket chain Mercadona, and convenience store QuikTrip. She details the findings in The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits.

Related: U.S. jobs market: Hope springs eternal. Actual jobs? Not so much

In the video interview above, she tells us about it.

Ton found all of the companies she studied made some specific operational choices. For example, all of these companies offer less to their customers. Ton's neighborhood supermarket may offer 110 different types to jams, but a local Trader Joe's offers 13.

"Fewer products increases the productivity of employees, lowers costs, and puts employees at center of success," she says.

In addition to offering less, these companies cross-train employees to do multiple tasks so they're always busy, and they operate with slack so employees can actually have time to help customers.

Related: How Raising the Minimum Wage Would Benefit McDonald’s and Walmart

The evidence that it pays off, according to Ton, is that all of these retailers outperform their competitors in a wide range of metrics. Their sales per sqare foot is higher than competitors, their inventory turnover is better, and their labor productivity is much higher.

"Even if you look at profitability alone, one of my favorite examples is QuikTrip," Ton says. "It's per store performance compared to competitors is 89% higher than the top 25% in their industry."

Ton says there is evidence this strategy works beyond the retail sector, naming Southwest Airlines (LUV), footwear company Zappos and UPS (UPS) as other companies that follow the "good jobs strategy."

So the obvious question becomes, why aren't more companies embracing this strategy if it's so superior? Check out the video above to find out.

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