MANAGERIAL AND DECISION ECONOMICS Manage. Decis. Econ.

30: 2741 (2009)

Published online 23 October 2008 in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/mde.1433

Employee Attitudes, Customer Satisfaction, and Sales Performance: Assessing the Linkages in US Grocery Stores
Daniel H. Simona,*, Miguel I. Gomezb, Edward W. McLaughlinc and Dick R. Wittinkd
Department of Applied Economics and Management, Cornell University, Ithaca, NY, USA Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, Urbana, IL, USA c Robert G. Tobin Professor of Marketing, Department of Applied Economics and Management, Cornell University, Ithaca, NY, USA d George Rogers Clark Professor of Management and Marketing, Yale School of Management, Yale University, New Haven, CT, USA
b a

Using store-level panel data for a major supermarket company, we investigate the linkages between employee attitudes, customer satisfaction, and sales performance, while controlling for observed and unobserved dierences across stores. We nd that employee attitudes positively aect customer satisfaction with service but do not aect customer satisfaction with quality or value. Additionally, we nd that customer satisfaction with service positively aects sales performance. Our results suggest that employee attitudes aect sales performance through their impact on customer service. Copyright # 2008 John Wiley & Sons, Ltd.

INTRODUCTION Satisfying customers is critical to a rms success. Fornell (2001) posits that satised customers may be the most consequential of all economic assets; indeed, they may be proxies for all other economic assets combined (120). Firms that are unable to satisfy customers can expect to lose market share to rivals oering better products and service at lower prices. As a result, it is important for rms to understand what they can do to improve their provision of customer satisfaction. We examine how employee attitudes aect customer satisfaction and how customer satisfaction, in turn, aects store sales performance. We consider three dimensions of customer satisfac*Correspondence to: Department of Applied Economics and Management, Cornell University, 354 Warren Hall, Ithaca, NY 14850, USA. E-mail: dhs29@cornell.edu

tion: service, quality, and price. We argue that employees most directly inuence customer satisfaction with service, and that in a retail setting, employee attitudes should only inuence customer satisfaction with service. We test this proposition empirically, and then examine the links between customer satisfaction and sales. Consistent with our hypothesis, employee attitudes have a positive eect on customer satisfaction with service, but do not aect other dimensions of customer satisfaction (price and quality). Customer satisfaction with service in turn positively aects sales performance. These results have important managerial implications, suggesting that human resource management (HRM) policies that enhance employee attitudes may be used to improve customer service, which, in turn, yields higher revenues. Managers must weigh these benets against the costs of implementing and maintaining these policies.

Copyright # 2008 John Wiley & Sons, Ltd.

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This study makes two main contributions to the literature. First, we more clearly articulate how employee attitudes can inuence customer satisfaction. Although many studies argue that employee attitudes aect customer satisfaction, few studies explain how this occurs. We argue that employee attitudes aect a rms ability to attract, motivate, and retain employees. In addition, we explain why employee attitudes should aect customer satisfaction with service more than other components of customer satisfaction. Then, we empirically distinguish between three types of customer satisfaction and examine the impact of employee attitudes on each component of customer satisfaction. In doing so, we improve our understanding of how employee attitudes aect customer satisfaction. Second, we construct a unique store-level panel data set, which comprises employee attitude ratings, customer satisfaction ratings, and store sales for a major supermarket chain. By using data from one chain, we ensure consistency in the customer satisfaction and employee attitude measures. Moreover, using panel data, we address important methodological issues. Specically, because we have data for stores over time, we are able to estimate within-store models, controlling for unobserved dierences across stores as well as unobserved variation in local economic conditions. Finally, we exploit the longitudinal nature of our data to construct variables whose temporal ordering helps us to better assess causal relationships.

LITERATURE REVIEW We posit that employee attitudes aect customer satisfaction with service, which in turn inuences store sales. We review the empirical literature addressing these linkages below.

Employee Attitudes and Customer Satisfaction A substantial body of research in management has focused on the relationship between employee attitudes and customer satisfaction, with most studies positing that employee attitudes lead to customer satisfaction. However, the causal mechanisms have rarely been made explicit. In this section, we review the ndings of empirical research in this area. Copyright # 2008 John Wiley & Sons, Ltd.

At the employee level, there has been a general consensus that employee attitudes and performance are positively correlated (Judge et al., 2001). At the organizational level, several studies have examined the linkage between employee attitudes and business-unit-level customer satisfaction. In a meta-analysis, Harter et al. (2002) nd that overall employee attitudes at the business-unit level are positively correlated with several business-unit performance measures including customer satisfaction, productivity, and protability. Similarly, several researchers have explored the impact of organizational climate on organizational performance. Schneider and associates use data from commercial banks to show that employee perceptions of the climate for service are signicantly related to customer perceptions of service quality at the branch level (Schneider et al., 1980, 1998; Schneider and Bowen, 1992). Also using bank data, Johnson (1996) nds that employee perceptions of the rms service-related practices are positively related to customer satisfaction at the branch level. Most recently, Liao and Chuang (2004) show that the service climate in a chain of restaurants is associated with employees assessments of their own service performance. Although most studies nd that employee attitudes are positively correlated with customer satisfaction (Schneider et al., 1998), much of this research is cross-sectional, making causal inference dicult (Ryan et al., 1996; Schneider et al., 1998). In response, several recent studies have used panel data to explore the impact of employee attitudes at time 1 on customer satisfaction at time 2. However, ndings have been inconclusive. Using two years of data from branches of an automobile nance company, Ryan et al. (1996) nd that customer satisfaction in Year 1 is related to employee attitudes in Year 2, while employee attitudes in Year 1 are not related to customer satisfaction in Year 2. Employing two years of bank branch data, Schneider et al. (1998) nd eects in both directions: customer satisfaction in Year 1 is positively related to employee perceptions of service quality in Year 2, and vice versa (employee perceptions of service quality in Year 1 are positively related to customer satisfaction in Year 2). Finally, Koys (2001) examines two years of data for individual locations of a restaurant chain. Unlike Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

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the other studies, he nds that employee attitudes in Year 1 have a positive relationship with customer satisfaction in Year 2, while customer satisfaction in Year 1 is not related to employee attitudes in Year 2. Although these studies exploit the longitudinal nature of the data, our work extends the extant literature in two important ways. First, we control for unobserved store (branch) characteristics. We argue that unmeasured branch characteristics related to managerial quality, store location, market demographics, and other factors may be correlated with measures of rm performance and employee attitudes. For example, stores with more eective managers may have both highly satised employees and better customer service than stores with ineective managers. Ignoring unobserved characteristics may result in biased parameter estimates and incorrect managerial inferences. Second, our work considers the underlying dimensions of customer satisfaction. We posit that employee attitudes do not aect all aspects of customer satisfaction equally, because employees have limited ability to inuence some aspects of customer satisfaction. By controlling for unobserved store characteristics and by considering the underlying dimensions of customer satisfaction, we respond to Kamakura et al.s (2002) call for further empirical research on the serviceprot links focusing on causality among the elements of the chain. Customer Satisfaction and Performance Several studies have examined the relationship between rm-level customer satisfaction and performance. The results indicate that customer satisfaction provides a variety of economic benets to the rm. For example, customer satisfaction has been found to increase revenues (Rust et al., 1995; Gomez et al., 2004), make demand more inelastic (Anderson, 1996), and reduce the costs for attracting new customers and dealing with poor quality, defects and complaints (Anderson et al., 1997). Reecting these benets, customer satisfaction has been found to improve the long-term nancial performance of rms (Mittal et al., 2005), increase rm protability (Capon et al., 1990; Aaker and Jacobson, 1994; Anderson et al., 1994), and enhance rms market value (Aaker and Jacobson, 1994; Ittner and Larcker, 1998). Copyright # 2008 John Wiley & Sons, Ltd.

HYPOTHESES While many studies have linked employee attitudes with customer satisfaction and rm performance, few have clearly explained the causal linkages through which employee attitudes aect customer satisfaction and/or rm performance (Simon and DeVaro, 2006). In this section, we more precisely articulate these linkages. We posit that employee attitudes can aect customer satisfaction, specically customer satisfaction with service, through their eect on employee eort and employee quality, and directly through customer experience. Research in management and economics oers two dierent explanations for why employee attitudes may aect employee eort. Management researchers draw on socialpsychological arguments, arguing that if employees perceive that they are being treated well by their employer, this will induce a sense of commitment to the employer, resulting in the provision of greater eort (MacDue, 1995; Perry-Smith and Blum, 2000), and that if employees feel good about their work, they are likely to work harder (Schneider and Bowen, 1992). In economics, eciency wage theory suggests that rms may pay above market wages as a way to increase employees incentives to work hard in order to protect their high-paying jobs. Similarly, employees enjoying high levels of satisfaction may work harder to keep their jobs than unhappy employees who may feel that there is little cost in losing their job (Huselid, 1995). Employee attitudes can also aect employee quality by inuencing a rms ability to attract and retain good employees. Positive employee attitudes can improve a rms ability to attract new employees because current employees can vouch for the quality of the work environment. When supported by eective personnel selection procedures, these positive employee attitudes can enable the rm to attract high-quality employees. Moreover, more satised employees are less likely to quit (Trevor, 2001). Additionally, as employees gain experience with the rm they become more procient at their jobs. Moreover, employees who have worked together longer should provide better service, because providing good customer service usually requires working cooperatively (Hauser et al., 1994). Beyond their inuence on employee eort and quality, positive employee attitudes may be observable by customers and may enhance Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

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customers buying experience in retail settings, where employees interact directly with customers (George, 1991; Liao and Chuang, 2004). Taken together, employee attitudes may aect customer satisfaction through their inuence on employee eort and employee quality, and by directly enhancing customers experience. However, employee attitudes may not be equally relevant to all aspects of customer satisfaction. Employees have a direct eect on the level of service provided because the behavior of the employee plays an important role in determining customer perceptions of service quality (Liao and Chuang, 2004, 42). In contrast, retail employees have little control over product quality, as these goods are generally produced by other workers, in many cases by other rms (suppliers). Moreover, product quality is more likely to be inuenced by the quality of other inputs, especially the raw materials used to produce the good. Similarly, store employees usually have little control over prices. Therefore, in a retail store, we would expect that employee attitudes would inuence customer satisfaction with service. However, we expect them to have little, if any, inuence on customer perceptions of quality or price. As a result, we only hypothesize an eect from employee attitudes to customer satisfaction with service. H1: Employee attitudes have a positive eect on customer satisfaction with service. Next, we hypothesize a link from customer satisfaction with service to a rms sales. Highly satised customers should have a higher probability of repurchase and higher purchase amounts than less satised customers. Moreover, highly satised customers may provide word of mouth advertising, as they inform others of their satisfaction with the rms products and/or services. Drawing on prior research and on the link between customer satisfaction and repurchase behavior, we hypothesize that customer satisfaction positively aects sales performance. Additionally, there are reasons why customer service may be especially important in retailing. Namely, in many cases retailers oer identical products. In this case, customer service may become a dierentiating factor as customers choose where to shop. H2: Customer satisfaction with service has a positive eect on sales performance. Copyright # 2008 John Wiley & Sons, Ltd.

METHODS Data A key contribution of our study is the construction of a store-level panel data set comprising annual measures of employee attitude ratings, customer satisfaction ratings, store sales, physical characteristics of stores, as well as employee and customer demographic data. The data come from a major supermarket company operating in the Eastern US. They include observations for 94 stores located in two states, spanning the period 1999 2002. Each store provides up to three annual observations of employee attitudes and up to four annual observations of customer satisfaction ratings. By using data from one chain, we ensure consistency in the data, particularly in the customer satisfaction and employee attitude measures. Employee attitudes ratings are taken from the Associate Satisfaction Survey, an annual survey of hourly employees. An independent human resource rm conducts the survey for each store during one week each year. All hourly employees are requested (but not required) to ll out the survey and are paid for time spent responding to the survey. On average, about 90 employees from each store complete the survey, a 60% response rate. Employees rate their satisfaction on a 1 (strongly disagree)5 (strongly agree) scale on 19 items (Appendix A). Customer satisfaction data are collected annually for each stores trading area via random phone interviews, conducted by an independent market research rm, during a one-week period annually.1 Each trading area is dened as the census tract in which a store is located. On average, about 200 households are interviewed in a trading area each year. Respondents provide information for up to ve grocery stores with which they are familiar. Respondents rate each store on a 1 (poor)5 (excellent) scale on 15 items regarding perceptions of attributes related to customer satisfaction and one item measuring overall satisfaction (Appendix B). In the customer satisfaction survey, interviewers do not reveal the name of the grocery store chain for which they are conducting the survey. As a result, not all respondents rate the focal rms store. However, on average, respondents rate three stores. The blind nature of the survey may Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

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increase the validity of customer responses, because customers feel no pressure to provide higher ratings for any particular store. In addition, it allows us to track satisfaction with all stores, including rival stores, in a local area. The survey also includes demographic variables such as a respondents age, household size, income, race, and employment status. Empirical Model Our empirical approach proceeds in two steps. First, we examine the relationship between employee attitudes and customer satisfaction. Second, we examine the relationship between customer satisfaction and store sales performance. To do so, we estimate the following equations: Customer Satisfactionim;tj a0 a1 Employee Attitudesim;tjk Control Variablesim;tj Ul gi dmt u1im;tj ; Sales Performanceimt b0 b1 Customer Satisfactionim;tj Control Variablesimt F2 Zi lmt u2imt ; 2 1

for sales and the measurement of satisfaction).2 This temporal ordering helps us to examine the causal links among employee attitudes, customer satisfaction, and store sales. In both equations, there may be unobserved dierences across stores that are correlated with both the dependent variable and one or more independent variables. For example, stores with more experienced managers may enjoy higher employee attitudes, higher customer satisfaction, and higher sales. Similarly, newer, more upscale stores and stores located in more convenient areas are likely to enjoy both higher levels of customer satisfaction and higher levels of sales. By including store xed eects, we remove unobserved storelevel dierences from the data. Similarly, by including districtyear xed eects, we control for local changes in economic conditions over time that may be correlated with other variables in the model. For example, during prosperous economic times, customers may provide higher customer satisfaction ratings and store sales may increase. Variables Employee attitudes. To create an overall measure, we take the average response to all 19 questions (from the associate satisfaction survey) for all employees in each store. In all cases, higher scores indicate more positive attitudes. This measure covers a broad range of employee attitudes and perceptions, providing a global indicator of employee attitudes in each store. We also examine specic types of employee attitudes. To do so, we conducted a principal components factor analysis, employing a Varimax factor rotation, to reduce the employee attitude measure to a smaller set of factors, each of which is a linear combination of a subset of the attributes. We considered all factors with eigenvalues exceeding 1. We show the factor loadings for the three-factor solution in Table 1. These three factors account for 81% of the variation in the 19 survey items. We dene the three employee attitude factors as follows: customer orientation, referring largely to the overall attitude of the employees toward customers; engagement, relating to the extent to which employees feel they can inuence workplace decisions and that their contributions are appreciated; and empowerment, referring to the employees ability to voice their opinions and the Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

where i, m, and t index stores, districts, and years, respectively, j is the average time between completion of the customer satisfaction survey and the sales performance period (about 6 months prior to 2002, and about 8 months in 2002), k is the time between completion of the associate satisfaction and customer satisfaction surveys (about 12 months prior to 2002, and about 2 months in 2002), Ui is a vector of parameters (i=1,. . .,6), gi and Zi are store xed eects, dmt and lmt are districtyear xed eects, and u1im,tj and u2imt are random error terms. In both equations, we ensure that the temporal ordering of the variables is consistent with our conceptual model. In Equation (1), the employee attitudes survey is conducted prior to the customer satisfaction survey (the dierence in time between the two surveys is captured by k. In Equation (2), our measure of customer satisfaction precedes the sales performance variable by construction, as we measure sales during the one-year period after the customer satisfaction survey is conducted (here j captures the average time between the time period Copyright # 2008 John Wiley & Sons, Ltd.

32 Table 1.

D.H. SIMON ET AL.

Employee Attitude Factors and Survey Items

Survey items Encouraged to go out of way to satisfy customers I completely understand expectations Encouraged to treat customers as number one Well trained for my current position Accomplishments are appreciated Often told what I am doing right Customer service recommendations will be acted upon Encouraged to care about the community Have the authority to resolve customer problems My job is recognized as important to the overall operation Have resources to deliver excellent customer service Consistently thanked for my eorts Help with questions about job responsibilities is available Service goals are clearly communicated Encouraged to work with associates to nd better ways Encouraged to look for better ways to do my job Treated with respect and dignity Easy to voice my opinions Factor loadings 0.86 0.86 0.83 0.65 0.83 0.82 0.82 0.79 0.74 0.74 0.69 0.69 0.64 0.64 0.58 0.58 0.87 0.86

Employee attitude factor Customer orientation reliability alpha=0.92

Engagement reliability alpha=0.96

Empowerment reliability alpha=0.94

extent to which they feel they are treated with respect and dignity. Our three-factor solution is consistent with earlier research on employee attitudes. Our customer orientation measure is similar to measures of customer service climate employed in other studies (Schneider et al., 1980, 1998; Schneider and Bowen, 1992). Employee engagement, which measures the extent to which employees can inuence workplace decisions, has been employed by several earlier studies (Haynes et al., 1999; Liao and Chuang, 2004; Saks, 2006). Finally, empowerment represents two items (Treated with respect and dignity and Easy to voice my opinions) that may aect employee behavior and, in turn, customer satisfaction. The reliability alphas (0.96, 0.92, and 0.94 for customer orientation, engagement, and empowerment, respectively) indicate that the employee survey appropriately measures these dimensions of employee attitudes. We believe that these measures are consistent with scales developed to measure employee attitudes. Moreover, they help us to assess the robustness of our results. To construct each measure of overall employee attitudes and its dimensions (service orientation, engagement, and empowerment) at the store level, we proceed in two steps. First, we calculate each employees score on each dimension, and then we take the store average across its employees. For Copyright # 2008 John Wiley & Sons, Ltd.

example, to measure overall employee attitude for store j, we rst take the average of employee is ratings across all 21 items. We do this for all employees at store j. Second, we calculate store js overall employee attitudes by taking the average rating across store js employees on the measure of overall employee attitudes. Customer satisfaction. Similar to the approach employed to measure employee attitudes, we conducted a principal components factor analysis of 14 items in the customer satisfaction survey (Appendix B), employing a Varimax factor rotation, to identify the customer satisfaction dimensions.3 We show the factor loadings for the threefactor solution in Table 2. These three factors account for 71% of the variation in the 14 survey items. We dene the three customer satisfaction as service, quality, and price. Five items capture service: fast check-out, helpfulness of employees, quality of service in the deli, having items advertised in the circular in stock, and store cleanliness. Seven survey items describe the stores quality in the following areas: bakery, seafood, fruits and vegetables, fresh meats, deli meats and salads, dairy, and availability of brands. Lastly, two items measure customer satisfaction with prices: low everyday prices and great discounts. These factors are consistent with earlier research on drivers of customer satisfaction factors in Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

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Table 2.

Customer Satisfaction Components and Survey Items

Survey items Fast check-out service Extremely helpful employees Always has the items advertised in their circular in stock Excellent service in the deli Strict sanitation standards High quality in-store bakery Excellent quality fresh fruits and vegetables High-quality seafood High-quality deli meats and salads High-quality fresh meat Fresh, high-quality dairy products Carries all the grocery items, brands, and sizes Overall, has low everyday prices Has great sales in its store circular Factor loadings 0.82 0.74 0.66 0.60 0.55 0.82 0.74 0.74 0.66 0.62 0.51 0.50 0.90 0.82

Customer satisfaction factor Customer service reliability alpha=0.86

Quality reliability alpha=0.91

Prices reliability alpha=0.80

retailing (Gomez et al., 2004). The reliability alphas indicate that the survey measures the three dimensions of customer satisfaction in a useful way (0.91, 0.86, and 0.80 for quality, service, and price, respectively). To measure store-level customer satisfaction, we follow a procedure similar to that used for the employee attitude measures. For example, to measure customer satisfaction with service for focal store j, we rst calculate customer is satisfaction with service by taking the average of customer is ratings for each of the ve servicerelated items: extremely helpful employees, fast check-out service, excellent service in the deli, having the items advertised in the circular in stock, and store cleanliness. Next, we calculate the average rating for store j, by taking the average rating across all customers of store j. Sales performance. We measure sales during the one-year period following the month in which the customer satisfaction survey is administered. For example, if the customer satisfaction survey is conducted in March, then we compute sales for the following year, beginning with April, and continuing through the following March. Ultimately, managers need to know how employee and customer satisfaction relate to protability. However, prots are subject to the vagueries of accounting protocols, which allow rms to manipulate reporting of costs. Moreover, store sales is widely recognized within the retail sector as a critical indicator of performance (Gomez et al., 2004). Copyright # 2008 John Wiley & Sons, Ltd.

Control variables. In all models, we control for several employee-related variables, including the number of employees working at the store, the percentage of store employees who are full time, the stores turnover rate, and employees tenure. We also control for customer demographics including age, income, and number of children. In addition, we control for several store and localarea characteristics including the local unemployment rate, a Herndahl-like measure of competition, calculated by summing the squared fraction of customers rating each store in a local area, and a dummy variable indicating whether the store has been remodeled. Finally, in the sales models, we also control for rival stores customer satisfaction.

RESULTS In Table 3 we present summary statistics for the variables included in our analyses. As can be seen there, we have an average of almost three annual observations of employee attitudes per store, and nearly four annual observations of customer satisfaction and sales per store. Although both customers and employees rate their satisfaction on a 15 scale, the range of values at the store level is modest because we average individual responses per store per year. For instance, the mean customer satisfaction with service is 3.87, and the minimum and maximum storeyear averages are 3.5 to 4.3, respectively. Similarly, the values for the Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

34 Table 3.
Variable Sales performance ($thousands) Employee attitude variables Overall employee attitudes Customer orientation Employee empowerment Employee engagement Customer satisfaction variables Customer satisfaction with service Customer satisfaction with quality Customer satisfaction with prices Rival customer satisfaction with service Rival customer satisfaction with quality Rival customer satisfaction with prices Control variables Employees Percent full time Turnover rate Tenurea Children Age (16 scale)b Income (16 scale)c Unemployment rate Herndahl Index Remodel
a b c

D.H. SIMON ET AL.

Summary Statistics
N 328 248 248 248 248 328 322 328 328 315 328 328 328 328 328 328 328 328 328 328 328 Mean 34 432 4.05 4.40 3.91 4.10 3.91 4.02 3.71 3.81 3.84 3.72 148.53 0.26 0.62 2.35 0.83 4.04 4.24 3.97 0.25 0.09 Std. dev. 8 617 0.24 0.17 0.27 0.27 0.14 0.13 0.19 0.15 0.16 0.16 39.15 0.08 0.25 0.36 0.19 0.33 0.47 1.31 0.05 0.29

15 scale: less than one year, 13 years; 35 years; 510 years; more than 10 years. 16 scale: less than 25; 2534; 3544; 4554; 5564; 65 or older. 16 scale: less than $25 000; $25 000$34 999; $35 000$49 999; $50 000$74 999; $75 000$99 999; $100 000 or more.

overall measure of employee attitudes only range from 3.4 to 4.7, with a mean of 4.05. To test Hypothesis 1 (H1), we examine the impact of employee attitudes on each dimension of customer satisfaction. Table 4 reports the results, which show that employee attitudes have a positive eect on customer satisfaction with service. Model 1 includes the global measure of employee attitudes, while Models 24 each include one of the more specic measures of employee attitudes: customer orientation, employee engagement, and employee involvement. In each case, employee attitudes have a positive and statistically signicant eect on customer satisfaction with service. Ceteris paribus, a one-point increase in employee attitudes produces an estimated 0.121 point increase in customer satisfaction with service. Likewise, a one-point increase in any of the three dimensions of employee attitudes results in a 0.0830.116-point increase in customer satisfaction with service. These results provide strong support for H1, indicating that employee Copyright # 2008 John Wiley & Sons, Ltd.

attitudes positively aect customer satisfaction with service. Although the above results provide strong evidence that employee attitudes aect customer satisfaction with service, an alternative explanation is that the customer satisfaction measures are closely correlated, and therefore (some of) the positive eect of employee attitudes on customer satisfaction with service is simply a spurious correlation caused by both variables correlation with other dimensions of customer satisfaction such as quality and price. To consider this alternative explanation, we assess the eect of employee attitudes on customer satisfaction with service, while controlling for customer satisfaction with quality and price. The results in the rst column of Table 5 reveal that when we hold constant customer satisfaction with quality and prices, the eect of employee attitudes falls by a little more than one-third (from 0.121 to 0.078), but remains statistically signicant. Moreover, the results in the last two columns of Table 5 Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

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Table 4.

Employee Attitudes and Customer Satisfaction with Service

Customer satisfaction with service Customer satisfaction with service Customer satisfaction with service Customer satisfaction with service

Lagged overall employee attitudes Lagged employee customer orientation Lagged employee engagement Lagged employee empowerment Ln(employees) Ln(turnover) Percent full time Employed less than one year Employed 13 years Employed 35 years Employed 510 years Unemployment rate Unemployment rate squared Herndahl Remodel Children Age Income Constant Observations Number of store R2

0.121 (0.041) 0.116 (0.058) 0.104 (0.037) 0.020 (0.138) 0.005 (0.035) 0.084 (0.165) 0.045 (0.249) 0.094 (0.243) 0.045 (0.249) 0.161 (0.318) 0.276 (0.102) 0.015 (0.008) 0.477 (0.166) 0.029 (0.023) 0.035 (0.049) 0.072 (0.038) 0.028 (0.038) 2.353 (0.863) 248 94 0.44 0.008 (0.140) 0.000 (0.035) 0.074 (0.166) 0.011 (0.252) 0.034 (0.246) 0.009 (0.254) 0.102 (0.315) 0.288 (0.103) 0.016 (0.008) 0.460 (0.169) 0.025 (0.023) 0.031 (0.049) 0.079 (0.038) 0.039 (0.038) 2.175 (0.870) 248 94 0.43 0.032 (0.137) 0.006 (0.036) 0.088 (0.165) 0.052 (0.247) 0.101 (0.241) 0.051 (0.247) 0.169 (0.316) 0.270 (0.104) 0.015 (0.008) 0.476 (0.165) 0.031 (0.024) 0.033 (0.049) 0.071 (0.038) 0.027 (0.038) 2.528 (0.856) 248 94 0.44 0.083 (0.035) 0.004 (0.136) 0.004 (0.036) 0.089 (0.166) 0.055 (0.246) 0.097 (0.242) 0.039 (0.251) 0.141 (0.315) 0.266 (0.106) 0.016 (0.008) 0.430 (0.165) 0.028 (0.023) 0.028 (0.049) 0.068 (0.037) 0.030 (0.038) 2.435 (0.875) 248 94 0.43

Robust standard errors in parentheses, clustered by store. Store and districtyear xed eect are included in all models.Signicant at 10%; signicant at 5%; signicant at 1%.

show that controlling for the eect of customer satisfaction with service, employee attitudes do not aect customer satisfaction with quality or price. These results provide strong additional evidence that employee attitudes aect customer satisfaction with service, but do not aect customer satisfaction with quality or price. Having shown that employee attitudes impact customer service, we now assess whether or not this relationship aects the rm nancially. Hypothesis 2 (H2) posits a positive relationship Copyright # 2008 John Wiley & Sons, Ltd.

between customer satisfaction with service and store sales. To test this hypothesis, we regress store sales on customer satisfaction with service. The results in Table 6 show that customer satisfaction with service has a positive and statistically signicant eect on store sales. The coecient on customer satisfaction with service indicates that each one-point increase in customer satisfaction with service yields a 7.4% increase in store sales during the following 12-month period. This result provides strong support for H2. At the same time, Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

36 Table 5.

D.H. SIMON ET AL.

Overall Employee Attitudes and All Dimensions of Customer Satisfaction

Customer satisfaction with service Customer satisfaction with quality 0.407 (0.117) 0.299 (0.093) 0.354 (0.082) 0.078 (0.037) 0.067 (0.108) 0.039 (0.031) 0.064 (0.126) 0.023 (0.213) 0.082 (0.220) 0.124 (0.216) 0.117 (0.254) 0.239 (0.065) 0.016 (0.006) 0.158 (0.163) 0.001 (0.021) 0.005 (0.045) 0.016 (0.035) 0.014 (0.029) 0.706 (0.676) 242 (94) 0.65 0.291 (0.109) 0.023 (0.047) 0.012 (0.139) 0.020 (0.050) 0.248 (0.201) 0.092 (0.261) 0.027 (0.293) 0.218 (0.287) 0.013 (0.307) 0.143 (0.081) 0.022 (0.008) 0.214 (0.168) 0.028 (0.029) 0.001 (0.046) 0.088 (0.048) 0.010 (0.031) 1.125 (0.997) 242 (94) 0.55 Customer satisfaction with prices 0.417 (0.107) 0.251 (0.102) 0.021 (0.048) 0.104 (0.137) 0.094 (0.042) 0.010 (0.122) 0.163 (0.219) 0.306 (0.234) 0.536 (0.208) 0.007 (0.274) 0.015 (0.078) 0.006 (0.007) 0.078 (0.192) 0.013 (0.020) 0.031 (0.055) 0.030 (0.036) 0.001 (0.031) 0.818 (0.713) 242 (94) 0.68

Customer satisfaction with service Customer satisfaction with quality Customer satisfaction with prices Lagged overall employee attitudes Ln(employees) Ln(turnover) Percent full time Employed less than one year Employed 13 years Employed 35 years Employed 510 years Unemployment rate Unemployment rate squared Herndahl Remodel Children Age Income Constant Observations (stores) R2

Robust standard errors in parentheses, clustered by store. Store and districtyear xed eects are included in all models.Signicant at 10%; signicant at 5%; signicant at 1%.

the coecient on customer satisfaction with service of rivals is negative and statistically signicant. Together, these results indicate that own as well as rivals customer satisfaction with service impacts store sales. Additional Analysis Using the above results, we can estimate the impact of employee attitudes on store sales performance. For example, by multiplying the Copyright # 2008 John Wiley & Sons, Ltd.

coecient on overall employee attitudes in Model 1 of Table 4 (0.121) times the coecient on customer service in Table 6 (0.074), we show that when overall employee attitude ratings rise by one point, sales increase by about 0.9% during the following year. Given that the mean store in the sample has annual sales of more than $34 million, this suggests that one point of employee attitudes is worth more than $300 000 in sales. However, this assumes that there is no feedback from customer satisfaction to employee attitudes or Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

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Table 6.

Customer Satisfaction with Service and Sales

Logarithm of sales

Customer satisfaction with service Rival customer satisfaction with service Ln(employees) Ln(turnover) Percent full time Employed less than one year Employed 13 years Employed 35 years Employed 510 years Unemployment rate Unemployment rate squared Herndahl Remodel Children Age Income Constant Observations (stores) R2

0.074 (0.041) 0.128 (0.046) 0.270 (0.050) 0.015 (0.021) 0.068 (0.052) 0.012 (0.086) 0.005 (0.088) 0.161 (0.090) 0.119 (0.114) 0.014 (0.039) 0.004 (0.003) 0.012 (0.112) 0.007 (0.011) 0.040 (0.027) 0.037 (0.019) 0.006 (0.016) 16.337 (0.343) 328 (94) 0.41

this possibility, we re-estimate the sales models, controlling for lagged sales. Once again, the results hardly change at all when controlling for feedback eects. The results in Table 8 indicate that the eect of customer satisfaction with service is positive and statistically signicant, even holding last years sales constant. These results provide no evidence of reverse causality in either of our models. In doing so, they provide additional support for our hypotheses. Finally, as noted above, the customer satisfaction measures are highly correlated. Therefore, the positive eect of customer satisfaction with service on sales may simply indicate a spurious correlation, because both variables are correlated with other dimensions of customer satisfaction: quality and value. To consider this possibility, we include the other measures of customer satisfaction (both the stores own customer satisfaction and that of rival stores) along with customer satisfaction with service. The results in the last column of Table 8 indicate that although the statistical signicance of the eect of customer satisfaction with service is reduced, the magnitude of the eect remains nearly unchanged. This suggests that despite the strong correlation among the three variables, the positive eect of customer satisfaction with service is not a spurious correlation.

Robust standard errors in parentheses, clustered by store. Store and districtyear xed eects are included in all models.Signicant at 10%; signicant at 1%.

DISCUSSION In this paper, we examine the linkages between employee attitudes, customer satisfaction, and sales performance. Theoretically, we rst clearly articulate how employee attitudes aect customer satisfaction through their eect on employee quality and eort. In doing so, we consider three dimensions of customer satisfaction: service, quality, and price. Next, we argue that employee attitudes should eect customer satisfaction with service, but should have little, if any, eect on customer satisfaction with either quality or price. Empirically, we separately assess the impact of employee attitudes on each of these three dimensions of customer satisfaction. In doing so, we improve our understanding of how employee attitudes impact customer satisfaction and rm performance. Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

from sales to either employee attitudes or customer satisfaction. A key issue in research on the relationship between employee attitudes and rm performance is the direction of causality. To consider the possibility of reverse causality, we assess the eect of employee attitudes on customer satisfaction with service while controlling for lagged customer service. In all four cases, the results in Table 7 indicate that the eect of employee attitudes remains positive and statistically signicant. Indeed the results hardly change at all from those in Table 4. We next consider whether reverse causality is driving our results in the sales models. To consider Copyright # 2008 John Wiley & Sons, Ltd.

38 Table 7.

D.H. SIMON ET AL.

Employee Attitudes and Customer Satisfaction with Service: Controlling for Lagged Customer Satisfaction with Service
Customer satisfaction with service Customer satisfaction with service 0.313 (0.091) 0.102 (0.057) 0.101 (0.034) 0.035 (0.149) 0.022 (0.035) 0.173 (0.171) 0.103 (0.246) 0.023 (0.247) 0.016 (0.240) 0.016 (0.295) 0.213 (0.096) 0.012 (0.007) 0.478 (0.158) 0.018 (0.022) 0.039 (0.050) 0.051 (0.040) 0.008 (0.035) 4.119 (1.129) 237 (93) 0.50 0.002 (0.152) 0.029 (0.034) 0.156 (0.172) 0.136 (0.251) 0.079 (0.250) 0.071 (0.245) 0.050 (0.291) 0.221 (0.097) 0.013 (0.007) 0.440 (0.161) 0.015 (0.022) 0.030 (0.050) 0.057 (0.041) 0.001 (0.035) 3.974 (1.149) 237 (93) 0.49 0.049 (0.147) 0.021 (0.036) 0.177 (0.171) 0.095 (0.243) 0.013 (0.245) 0.009 (0.237) 0.028 (0.293) 0.207 (0.097) 0.012 (0.007) 0.483 (0.159) 0.019 (0.023) 0.039 (0.050) 0.050 (0.040) 0.009 (0.036) 4.318 (1.102) 237 (93) 0.50 0.089 (0.031) 0.025 (0.148) 0.024 (0.035) 0.173 (0.171) 0.102 (0.243) 0.021 (0.246) 0.014 (0.242) 0.001 (0.292) 0.198 (0.099) 0.012 (0.007) 0.434 (0.156) 0.019 (0.022) 0.031 (0.050) 0.045 (0.039) 0.008 (0.035) 4.380 (1.122) 237 (93) 0.50 Customer satisfaction with service 0.300 (0.092) Customer satisfaction with service 0.330 (0.090)

Lagged customer satisfaction with service Lagged overall employee attitudes Lagged employee customer orientation Lagged employee engagement Lagged employee empowerment Ln(employees) Ln(turnover) Percent full time Employed less than one year Employed 13 years Employed 35 years Employed 510 years Unemployment rate Unemployment rate squared Herndahl Remodel Children Age Income Constant Observations R2

0.300 (0.091) 0.116 (0.039)

Robust standard errors in parentheses, clustered by store. Store and districtyear xed eects are included in all models.Signicant at 10%; signicant at 5%; signicant at 1%.

Consistent with our theoretical arguments, our results indicate that employee attitudes have a positive eect on customer satisfaction with service. However, employee attitudes do not aect customer satisfaction with quality or value. Moreover, by using panel data techniques and a rich set of control variables, we are able to rule out confounds that may bias the estimated relationships between employee attitudes, customer satisfaction, and sales performance. For example, by Copyright # 2008 John Wiley & Sons, Ltd.

using store and districtyear xed eects, we control for unobserved store and managerial characteristics, as well as for variation in local economic conditions. Additionally, by controlling for employee turnover and tenure in our model, we have narrowed the set of possible explanations for the positive eect of employee attitudes on customer satisfaction. Our results suggest that employee attitudes may aect customer satisfaction by increasing employee eort and by enhanManage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

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Table 8.

Customer Satisfaction with Service and Sales: Controlling for Lagged Sales
Logarithm of sales Logarithm of sales 0.321 (0.075) 0.095 (0.064) 0.002 (0.049) 0.032 (0.047) 0.076 (0.072) 0.093 (0.090) 0.021 (0.089) 0.079 (0.045) 0.015 (0.020) 0.015 (0.054) 0.040 (0.104) 0.060 (0.095) 0.024 (0.081) 0.128 (0.138) 0.018 (0.042) 0.006 (0.003) 0.004 (0.077) 0.001 (0.010) 0.048 (0.024) 0.042 (0.024) 0.033 (0.013) 11.268 (1.530) 234 (93) 0.48

Lagged Ln(Sales) Customer satisfaction with service Customer satisfaction with quality Customer satisfaction with prices Rival satisfaction with service Rival satisfaction with quality Rival satisfaction with prices Ln(employees) Ln(turnover) Percent full time Employed less than one year Employed 13 years Employed 35 years Employed 510 years Unemployment rate Unemployment rate squared Herndahl Remodel Children Age Income Constant Observations R2

0.247 (0.079) 0.091 (0.039) } } 0.090 (0.054) } } 0.128 (0.049) 0.010 (0.019) 0.034 (0.055) 0.011 (0.101) 0.008 (0.096) 0.008 (0.083) 0.116 (0.131) 0.000 (0.038) 0.004 (0.003) 0.052 (0.088) 0.006 (0.011) 0.013 (0.031) 0.043 (0.021) 0.018 (0.016) 12.396 (1.539) 240 (93) 0.46

for lagged customer service. Taken together, these results help us to better understand how employee attitudes aect customer satisfaction. Lastly, we assess whether the impact of employee attitudes on customer satisfaction is nancially meaningful. Our results indicate that customer satisfaction with service aects store sales. Each one-point increase in customer satisfaction with service increases store sales during the following 12 months by almost 10%. These results hold even after controlling for lagged store sales. Combining these results with the estimates of the impact of employee attitudes on customer satisfaction, we nd that through its eect on customer satisfaction, a one-point increase in employee attitudes results in a roughly 1.3% increase in store sales. Limitations and Opportunities for Future Research We measure only the possible benets of employee attitudes and customer satisfaction, but not the costs. Identifying positive relationships between employee attitudes, customer satisfaction, and sales does not, by itself, demonstrate that rms benet from improving employee attitudes or enhancing the satisfaction of their customers. Nonetheless, managers need to understand both the magnitude of the benets of employee attitudes and customer satisfaction, as well as the mechanisms through which they aect sales. An important extension of this study would be to link employee attitudes and customer satisfaction with measures of store protability, when valid measures are available, as a way of assessing the net impacts of investments in employee attitudes and customer satisfaction. In addition, our analysis does not help us to understand what factors explain the variation in employee attitudes over time, within stores. Because we do not have data on wages, we cannot determine whether wage variation explains the changes in employee attitudes. In addition, we do not observe the HRM practices that might underlie dierences in employee attitudes across stores. As a result, a useful extension of this paper would be to identify the factors that explain the changes in employee attitudes over time, within stores. An important feature of our data set is that all of the stores are unionized. Unions may inuence employee attitudes, and unions may moderate the relationship between employee attitudes and behavior. It would be useful to examine whether the Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

Robust standard errors in parentheses, clustered by store. Store and districtyear xed eects are included in all models.Signicant at 10%; signicant at 5%; signicant at 1%.

cing customers experience. Finally, we examine lagged dependent variable models to exclude reverse causality or feedback eects as an alternative explanation. Our results indicate that employee attitudes positively aect customer satisfaction with service, even after controlling Copyright # 2008 John Wiley & Sons, Ltd.

40

D.H. SIMON ET AL.

relationship between employee attitudes and customer satisfaction is dierent in non-union rms. Finally, the competitive dimension of customer satisfaction merits further study. Our data allow us to examine a number of questions in this area. One such question, until now little studied, is how competition aects customer satisfaction. Using data on rival stores customer satisfaction ratings, we can examine how rivals customer satisfaction, as well as the number of rival stores in a market, aects a focal stores customer satisfaction ratings.

11. 12. 13. 14. 15. 16. 17. 18. 19.

Often told what I am doing right. Consistently thanked for my eorts. Accomplishments are appreciated. My job is recognized as important to the overall operation. I completely understand expectations. Help with payroll and personnel questions is available. Help with questions about job responsibilities is available. Have resources to deliver excellent customer service. Service goals are clearly communicated.

CONCLUSIONS Our study provides valuable insights into the linkages between employee attitudes, customer satisfaction, and sales performance. The results provide strong evidence that employee attitudes aect customer satisfaction. In particular, as employee attitudes improve, customer satisfaction with service levels increase. Moreover, this improvement in customer satisfaction impacts revenue as well, as increasing customer satisfaction with service, drives higher sales. Our results suggest that rms benet from making employees happier. Therefore, HRM programs should be viewed as investments in delivering better customer service rather than simply as costs to minimize. APPENDIX B: ELEMENTS OF THE CUSTOMER SATISFACTION SURVEY 1. Having strict sanitation standards. 2. Carrying all the grocery items, brands, and sizes you use. 3. Always having fresh, high-quality dairy products. 4. Having excellent quality fresh fruits and vegetables. 5. Having high-quality fresh meat 6. Having high-quality deli meats and salads. 7. Providing excellent service in the deli. 8. Having extremely helpful employees. 9. Having fast check-out service. 10. Overall, having low everyday prices. 11. Having great sales in its weekly store circular. 12. Always having the items advertised in their circular in stock. 13. Actively supporting the local community. 14. Having high-quality seafood. 15. Having a high-quality in-store bakery. 16. Overall satisfaction with the store.

APPENDIX A: ELEMENTS OF THE ASSOCIATE SATISFACTION SURVEY 1. Treated with respect and dignity. 2. Easy to voice my opinions. 3. Encouraged to look for better ways to do job. 4. Encouraged to work with other associates to nd better ways. 5. Encouraged to care about the community. 6. Encouraged to treat customers as number one. 7. Encouraged to go out of way to satisfy customers. 8. Well trained for my current position. 9. Have the authority to resolve customer problems. 10. Customer service recommendations will be acted upon. Copyright # 2008 John Wiley & Sons, Ltd.

NOTES
1. In 2002, the supermarket chain converted the customer satisfaction data collection on a daily basis. Interviewers conducted roughly one survey per day per store until they had surveyed about 200 respondents per store. 2. The specic values of j and k vary modestly by district and year, reecting minor changes in the timing of the surveys. The one exception is that in 2002, because of the change in data collection procedures described earlier, we use the current value of employee attitudes, but only use the customer

Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde

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satisfaction data for customer surveys conducted after the associate satisfaction survey. 3. We exclude item 13, actively supporting the local community, because it does not correspond to any of the three dimensions of customer satisfaction. Including it does not alter our results.

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Manage. Decis. Econ. 30: 2741 (2009) DOI: 10.1002/mde