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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 StoresDaniel H. Simona,*, Miguel I. Go mezb, Edward W. McLaughlinc and Dick R. Wittinkd

aDepartment of Applied Economics and Management, Cornell University, Ithaca, NY, USAbDepartment of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, Urbana, IL, USAcRobert G. Tobin Professor of Marketing, Department of Applied Economics and Management, Cornell University,

Ithaca, NY, USAdGeorge Rogers Clark Professor of Management and Marketing, Yale School of Management, Yale University, New

Haven, CT, USA

Using store-level panel data for a major supermarket company, we investigate the linkagesbetween employee attitudes, customer satisfaction, and sales performance, while controllingfor observed and unobserved differences across stores. We find that employee attitudespositively affect customer satisfaction with service but do not affect customer satisfaction withquality or value. Additionally, we find that customer satisfaction with service positively affectssales performance. Our results suggest that employee attitudes affect sales performancethrough their impact on customer service. Copyright# 2008 John Wiley & Sons, Ltd.

INTRODUCTION

Satisfying customers is critical to a firms success.

Fornell (2001) posits that satisfied 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 offering better products and service at

lower prices. As a result, it is important for firms

to understand what they can do to improve their

provision of customer satisfaction.

We examine how employee attitudes affect

customer satisfaction and how customer satisfac-tion, in turn, affects store sales performance. We

consider three dimensions of customer satisfac-

tion: service, quality, and price. We argue that

employees most directly influence customer satis-

faction with service, and that in a retail setting,

employee attitudes should only influence customer

satisfaction with service. We test this proposition

empirically, and then examine the links between

customer satisfaction and sales.

Consistent with our hypothesis, employee atti-

tudes have a positive effect on customer satisfac-

tion with service, but do not affect other

dimensions of customer satisfaction (price and

quality). Customer satisfaction with service in turn

positively affects sales performance. These results

have important managerial implications, suggest-ing 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

benefits against the costs of implementing and

maintaining these policies.

*Correspondence to: Department of Applied Economics andManagement, Cornell University, 354 Warren Hall, Ithaca, NY14850, USA. E-mail: [email protected]

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This study makes two main contributions to the

literature. First, we more clearly articulate how

employee attitudes can influence customer satis-

faction. Although many studies argue that em-

ployee attitudes affect customer satisfaction, few

studies explain how this occurs. We argue that

employee attitudes affect a firms ability to attract,

motivate, and retain employees. In addition, weexplain why employee attitudes should affect

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 custo-

mer satisfaction. In doing so, we improve our

understanding of how employee attitudes affect

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 mea-

sures. Moreover, using panel data, we address

important methodological issues. Specifically, be-

cause we have data for stores over time, we are able

to estimate within-store models, controlling for

unobserved differences 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 order-

ing helps us to better assess causal relationships.

LITERATURE REVIEW

We posit that employee attitudes affect customer

satisfaction with service, which in turn influences

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 me-

chanisms have rarely been made explicit. In this

section, we review the findings of empirical

research in this area.

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 custo-

mer satisfaction. In a meta-analysis, Harter et al.

(2002) find that overall employee attitudesat the business-unit level are positively correlated

with several business-unit performance measures

including customer satisfaction, productivity,

and profitability. 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 significantly 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) finds that employee perceptions of the

firms service-related practices are positively re-

lated 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 find that employee

attitudes are positively correlated with customer

satisfaction (Schneider et al ., 1998), much

of this research is cross-sectional, making

causal inference difficult (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, findings have

been inconclusive.

Using two years of data from branches

of an automobile finance company, Ryan et al.

(1996) find 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. Employingtwo years of bank branch data, Schneider

et al . (1998) find effects 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

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the other studies, he finds 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 controlfor 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 firm performance and

employee attitudes. For example, stores with more

effective managers may have both highly satisfied

employees and better customer service than stores

with ineffective managers. Ignoring unobserved

characteristics may result in biased parameter

estimates and incorrect managerial inferences.

Second, our work considers the underlying dimen-

sions of customer satisfaction. We posit that

employee attitudes do not affect all aspects of

customer satisfaction equally, because employees

have limited ability to influence some aspects of

customer satisfaction. By controlling for unob-

served 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 serviceprofit

links focusing on causality among the elements of

the chain.

Customer Satisfaction and Performance

Several studies have examined the relationship

between firm-level customer satisfaction and

performance. The results indicate that customer

satisfaction provides a variety of economic benefits

to the firm. For example, customer satisfaction

has been found to increase revenues (Rust et al.,

1995; Go mez et al., 2004), make demand more

inelastic (Anderson, 1996), and reduce the costs

for attracting new customers and dealingwith poor quality, defects and complaints (Ander-

son et al., 1997). Reflecting these benefits, custo-

mer satisfaction has been found to improve

the long-term financial performance of firms

(Mittal et al., 2005), increase firm profitability

(Capon et al., 1990; Aaker and Jacobson, 1994;

Anderson et al., 1994), and enhance firms market

value (Aaker and Jacobson, 1994; Ittner and

Larcker, 1998).

HYPOTHESES

While many studies have linked employee attitudes

with customer satisfaction and firm performance,

few have clearly explained the causal linkages

through which employee attitudes affect customer

satisfaction and/or firm performance (Simon and

DeVaro, 2006). In this section, we more preciselyarticulate these linkages. We posit that employee

attitudes can affect customer satisfaction, specifi-

cally customer satisfaction with service, through

their effect on employee effort and employee

quality, and directly through customer experience.

Research in management and economics offers

two different explanations for why employee

attitudes may affect employee effort. Management

researchers draw on socialpsychological argu-

ments, 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 effort (Mac-

Duffie, 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, efficiency wage theory

suggests that firms 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 affect employee

quality by influencing a firms ability to attract and

retain good employees. Positive employee attitudes

can improve a firms ability to attract new

employees because current employees can vouch

for the quality of the work environment. When

supported by effective personnel selection proce-

dures, these positive employee attitudes can enable

the firm to attract high-quality employees. More-

over, more satisfied employees are less likely to

quit (Trevor, 2001). Additionally, as employeesgain experience with the firm they become more

proficient 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 influence on employee effort and

quality, positive employee attitudes may be

observable by customers and may enhance

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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 affect customer

satisfaction through their influence on employee

effort and employee quality, and by directly

enhancing customers experience.

However, employee attitudes may not beequally relevant to all aspects of customer

satisfaction. Employees have a direct effect on

the level of service provided because the behavior

of the employee plays an important role in

determining customer perceptions of service qual-

ity (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 firms

(suppliers). Moreover, product quality is more

likely to be influenced 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 influence customer satisfaction

with service. However, we expect them to have

little, if any, influence on customer perceptions of

quality or price. As a result, we only hypothesize

an effect from employee attitudes to customer

satisfaction with service.

H1:

Employee attitudes have a positive effect on

customer satisfaction with service.

Next, we hypothesize a link from customer

satisfaction with service to a firms sales. Highly

satisfied customers should have a higher probability

of repurchase and higher purchase amounts than

less satisfied customers. Moreover, highly satisfied

customers may provide word of mouth advertis-

ing, as they inform others of their satisfaction with

the firms products and/or services. Drawing on

prior research and on the link between customer

satisfaction and repurchase behavior, we hypothe-

size that customer satisfaction positively affectssales performance. Additionally, there are reasons

why customer service may be especially important

in retailing. Namely, in many cases retailers offer

identical products. In this case, customer service

may become a differentiating factor as customers

choose where to shop.

H2:

Customer satisfaction with service has a positive

effect on sales performance.

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 character-istics 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 rat-

ings. By using data from one chain, we ensure

consistency in the data, particularly in the

customer satisfaction and employee attitude mea-

sures.

Employee attitudes ratings are taken from the

Associate Satisfaction Survey, an annual survey

of hourly employees. An independent human

resource firm conducts the survey for each store

during one week each year. All hourly employees

are requested (but not required) to fill 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 an-

nually for each stores trading area via random

phone interviews, conducted by an independent

market research firm, during a one-week period

annually.1 Each trading area is defined 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 five grocery stores with

which they are familiar. Respondents rate each

store on a 1 (poor)5 (excellent) scale on 15 itemsregarding 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 firms

store. However, on average, respondents rate three

stores. The blind nature of the survey may

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increase the validity of customer responses, be-

cause 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 em-

ployee attitudes and customer satisfaction. Sec-

ond, 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;tjUl

gi dmt u1im;tj; 1

Sales Performanceimt

b0 b1 Customer Satisfactionim;tj

Control VariablesimtF2

Zi lmt u2imt; 2

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 fixed effects, dmt and

lmt are districtyear fixed effects, and u1im,tj and

u2imt are random error terms.

In both equations, we ensure that the temporal

ordering of the variables is consistent with ourconceptual model. In Equation (1), the employee

attitudes survey is conducted prior to the customer

satisfaction survey (the difference 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

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

differences across stores that are correlated with

both the dependent variable and one or more

independent variables. For example, stores withmore 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 fixed effects, we remove unobserved store-

level differences from the data. Similarly, by

including districtyear fixed effects, 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 specific 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 eigen-

values exceeding 1.

We show the factor loadings for the three-factor

solution in Table 1. These three factors account for81% of the variation in the 19 survey items. We

define 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 influence workplace

decisions and that their contributions are appre-

ciated; and empowerment, referring to the

employees ability to voice their opinions and the



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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 custo-

mer 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

influence workplace decisions, has been employed

by several earlier studies (Haynes et al., 1999; Liao

and Chuang, 2004; Saks, 2006). Finally, empow-

erment represents two items (Treated with respect

and dignity and Easy to voice my opinions) that

may affect employee behavior and, in turn,

customer satisfaction.

The reliability alphas (0.96, 0.92, and 0.94 for

customer orientation, engagement, and empower-

ment, respectively) indicate that the employee

survey appropriately measures these dimensions

of employee attitudes. We believe that thesemeasures 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

example, to measure overall employee attitude for

store j, we first 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 rota-

tion, to identify the customer satisfaction dimen-

sions.3 We show the factor loadings for the three-

factor solution in Table 2. These three factors

account for 71% of the variation in the 14 survey

items. We define 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 itemsadvertised 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

Table 1. Employee Attitude Factors and Survey Items

Employee attitude factor Survey items Factor loadings

Customer orientation reliability alpha=0.92 Encouraged to go out of way to satisfy customers 0.86I completely understand expectations 0.86Encouraged to treat customers as number one 0.83Well trained for my current position 0.65

Engagement reliability alpha=0.96 Accomplishments are appreciated 0.83Often told what I am doing right 0.82Customer service recommendations will be acted upon 0.82Encouraged to care about the community 0.79Have the authority to resolve customer problems 0.74My job is recognized as important to the overall operation 0.74Have resources to deliver excellent customer service 0.69Consistently thanked for my efforts 0.69Help with questions about job responsibilities is available 0.64Service goals are clearly communicated 0.64Encouraged to work with associates to find better ways 0.58Encouraged to look for better ways to do my job 0.58

Empowerment reliability alpha=0.94 Treated with respect and dignity 0.87Easy to voice my opinions 0.86

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retailing (Go mez et al ., 2004). The reliability

alphas indicate that the survey measures the threedimensions 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 first calculate customer is

satisfaction with service by taking the average of

customer is ratings for each of the five service-

related 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 continu-ing through the following March.

Ultimately, managers need to know how em-

ployee and customer satisfaction relate to profit-

ability. However, profits are subject to the

vagueries of accounting protocols, which allow

firms to manipulate reporting of costs. Moreover,

store sales is widely recognized within the retail

sector as a critical indicator of performance

(Go mez et al., 2004).

Control variables. In all models, we control for

several employee-related variables, including thenumber 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 local-

area characteristics including the local unemploy-

ment rate, a Herfindahl-like measure of competi-

tion, 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, andnearly 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

Table 2. Customer Satisfaction Components and Survey Items

Customer satisfaction factor Survey items Factor loadings

Customer service reliability alpha=0.86 Fast check-out service 0.82Extremely helpful employees 0.74Always has the items advertised in their circular in stock 0.66Excellent service in the deli 0.60

Strict sanitation standards 0.55

Quality reliability alpha=0.91 High quality in-store bakery 0.82Excellent quality fresh fruits and vegetables 0.74High-quality seafood 0.74High-quality deli meats and salads 0.66High-quality fresh meat 0.62Fresh, high-quality dairy products 0.51Carries all the grocery items, brands, and sizes 0.50

Prices reliability alpha=0.80 Overall, has low everyday prices 0.90Has great sales in its store circular 0.82



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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 effect on customer satisfaction with

service. Model 1 includes the global measure

of employee attitudes, while Models 24 each

include one of the more specific measures of

employee attitudes: customer orientation, employee

engagement, and employee involvement. In

each case, employee attitudes have a positive andstatistically significant effect on customer satisfac-

tion with service. Ceteris paribus, a one-point

increase in employee attitudes produces an esti-

mated 0.121 point increase in customer satisfac-

tion 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

attitudes positively affect customer satisfaction

with service.

Although the above results provide strong

evidence that employee attitudes affect customer

satisfaction with service, an alternative explana-

tion is that the customer satisfaction measures are

closely correlated, and therefore (some of) the

positive effect 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, weassess the effect of employee attitudes on customer

satisfaction with service, while controlling for

customer satisfaction with quality and price. The

results in the first column of Table 5 reveal that

when we hold constant customer satisfaction with

quality and prices, the effect of employee attitudes

falls by a little more than one-third (from 0.121 to

0.078), but remains statistically significant. More-

over, the results in the last two columns of Table 5

Table 3. Summary Statistics

Variable N Mean Std. dev.

Sales performance ($thousands) 328 34 432 8 617

Employee attitude variablesOverall employee attitudes 248 4.05 0.24

Customer orientation 248 4.40 0.17Employee empowerment 248 3.91 0.27Employee engagement 248 4.10 0.27

Customer satisfaction variablesCustomer satisfaction with service 328 3.91 0.14Customer satisfaction with quality 322 4.02 0.13Customer satisfaction with prices 328 3.71 0.19Rival customer satisfaction with service 328 3.81 0.15Rival customer satisfaction with quality 315 3.84 0.16Rival customer satisfaction with prices 328 3.72 0.16

Control variablesEmployees 328 148.53 39.15Percent full time 328 0.26 0.08Turnover rate 328 0.62 0.25

Tenurea

328 2.35 0.36Children 328 0.83 0.19Age (16 scale)b 328 4.04 0.33Income (16 scale)c 328 4.24 0.47Unemployment rate 328 3.97 1.31Herfindahl Index 328 0.25 0.05Remodel 328 0.09 0.29

a15 scale: less than one year, 13 years; 35 years; 510 years; more than 10 years.b16 scale: less than 25; 2534; 3544; 4554; 5564; 65 or older.c16 scale: less than $25 000; $25000$34999; $35 000$49 999; $50000$74 999; $75000$99999; $100 000 or more.

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show that controlling for the effect of customer

satisfaction with service, employee attitudes do notaffect customer satisfaction with quality or price.

These results provide strong additional evidence

that employee attitudes affect customer satisfac-

tion with service, but do not affect customer

satisfaction with quality or price.

Having shown that employee attitudes impact

customer service, we now assess whether or not

this relationship affects the firm financially. Hy-

pothesis 2 (H2) posits a positive relationship

between customer satisfaction with service and

store sales. To test this hypothesis, we regress storesales on customer satisfaction with service. The

results in Table 6 show that customer satisfaction

with service has a positive and statistically

significant effect on store sales. The coefficient 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,

Table 4. Employee Attitudes and Customer Satisfaction with Service

Customersatisfactionwith service




Lagged overall employee attitudes 0.121(0.041)

Lagged employee customer orientation 0.116(0.058)

Lagged employee engagement 0.104(0.037)

Lagged employee empowerment 0.083(0.035)

Ln(employees) 0.020 0.008 0.032 0.004(0.138) (0.140) (0.137) (0.136)

Ln(turnover) 0.005 0.000 0.006 0.004(0.035) (0.035) (0.036) (0.036)

Percent full time 0.084 0.074 0.088 0.089(0.165) (0.166) (0.165) (0.166)

Employed less than one year 0.045 0.011 0.052 0.055(0.249) (0.252) (0.247) (0.246)

Employed 13 years 0.094 0.034 0.101 0.097(0.243) (0.246) (0.241) (0.242)

Employed 35 years 0.045 0.009 0.051 0.039(0.249) (0.254) (0.247) (0.251)

Employed 510 years 0.161 0.102 0.169 0.141(0.318) (0.315) (0.316) (0.315)

Unemployment rate 0.276 0.288 0.270 0.266(0.102) (0.103) (0.104) (0.106)

Unemployment rate squared 0.015 0.016 0.015 0.016(0.008) (0.008) (0.008) (0.008)

Herfindahl 0.477 0.460 0.476 0.430(0.166) (0.169) (0.165) (0.165)

Remodel 0.029 0.025 0.031 0.028(0.023) (0.023) (0.024) (0.023)

Children 0.035 0.031 0.033 0.028(0.049) (0.049) (0.049) (0.049)

Age 0.072 0.079 0.071 0.068(0.038) (0.038) (0.038) (0.037)

Income 0.028 0.039 0.027 0.030(0.038) (0.038) (0.038) (0.038)

Constant 2.353 2.175 2.528 2.435(0.863) (0.870) (0.856) (0.875)

Observations 248 248 248 248Number of store 94 94 94 94R2 0.44 0.43 0.44 0.43

Robust standard errors in parentheses, clustered by store. Store and districtyear fixed effect are included in all models. Significantat 10%; significant at 5%; significant at 1%.



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the coefficient on customer satisfaction with

service of rivals is negative and statisticallysignificant. 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

coefficient on overall employee attitudes in Model

1 of Table 4 (0.121) times the coefficient oncustomer 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

Table 5. Overall Employee Attitudes and All Dimensions of Customer Satisfaction


Customersatisfactionwith quality

Customersatisfactionwith prices

Customer satisfaction with service 0.407 0.417(0.117) (0.107)

Customer satisfaction with quality 0.299 0.251(0.093) (0.102)

Customer satisfaction with prices 0.354 0.291(0.082) (0.109)

Lagged overall employee attitudes 0.078 0.023 0.021(0.037) (0.047) (0.048)

Ln(employees) 0.067 0.012 0.104(0.108) (0.139) (0.137)

Ln(turnover) 0.039 0.020 0.094(0.031) (0.050) (0.042)

Percent full time 0.064 0.248 0.010(0.126) (0.201) (0.122)

Employed less than one year 0.023 0.092 0.163(0.213) (0.261) (0.219)

Employed 13 years 0.082 0.027 0.306(0.220) (0.293) (0.234)

Employed 35 years 0.124 0.218 0.536(0.216) (0.287) (0.208)

Employed 510 years 0.117 0.013 0.007(0.254) (0.307) (0.274)

Unemployment rate 0.239 0.143 0.015(0.065) (0.081) (0.078)

Unemployment rate squared 0.016 0.022 0.006(0.006) (0.008) (0.007)

Herfindahl 0.158 0.214 0.078(0.163) (0.168) (0.192)

Remodel 0.001 0.028 0.013(0.021) (0.029) (0.020)

Children 0.005 0.001 0.031(0.045) (0.046) (0.055)

Age 0.016 0.088 0.030(0.035) (0.048) (0.036)

Income 0.014 0.010 0.001(0.029) (0.031) (0.031)

Constant 0.706 1.125 0.818(0.676) (0.997) (0.713)

Observations (stores) 242 (94) 242 (94) 242 (94)R2 0.65 0.55 0.68

Robust standard errors in parentheses, clustered by store. Store and districtyear fixed effects are included in all models.Significantat 10%; significant at 5%; significant at 1%.

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from sales to either employee attitudes or customer

satisfaction.

A key issue in research on the relationship

between employee attitudes and firm performance

is the direction of causality. To consider the

possibility of reverse causality, we assess the effectof 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 effect of employee attitudes

remains positive and statistically significant. In-

deed 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

this possibility, we re-estimate the sales models,

controlling for lagged sales. Once again, the results

hardly change at all when controlling for feedback

effects. The results in Table 8 indicate that the

effect of customer satisfaction with service is

positive and statistically significant, even holding

last years sales constant. These results provide no

evidence of reverse causality in either of ourmodels. In doing so, they provide additional

support for our hypotheses.

Finally, as noted above, the customer

satisfaction measures are highly correlated. There-

fore, the positive effect 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 significance of the effect of

customer satisfaction with service is reduced, the

magnitude of the effect remains nearly unchanged.

This suggests that despite the strong correlation

among the three variables, the positive effect of

customer satisfaction with service is not a spurious

correlation.

DISCUSSION

In this paper, we examine the linkages between

employee attitudes, customer satisfaction, and

sales performance. Theoretically, we first clearly

articulate how employee attitudes affect customer

satisfaction through their effect on employee

quality and effort. In doing so, we consider three

dimensions of customer satisfaction: service, qual-

ity, and price. Next, we argue that employeeattitudes should effect customer satisfaction with

service, but should have little, if any, effect on

customer satisfaction with either quality or price.

Empirically, we separately assess the impact of

employee attitudes on each of these three dimen-

sions of customer satisfaction. In doing so, we

improve our understanding of how employee

attitudes impact customer satisfaction and firm

performance.

Table 6. Customer Satisfaction with Service andSales

Logarithm of sales

Customer satisfaction with service 0.074(0.041)

Rival customer satisfaction with service 0.128

(0.046)

Ln(employees) 0.270(0.050)

Ln(turnover) 0.015(0.021)

Percent full time 0.068(0.052)

Employed less than one year 0.012(0.086)

Employed 13 years 0.005(0.088)



Unemployment rate 0.014

(0.039)Unemployment rate squared 0.004

(0.003)Herfindahl 0.012

(0.112)Remodel 0.007

(0.011)Children 0.040

(0.027)Age 0.037

(0.019)

Income 0.006(0.016)

Constant 16.337(0.343)

Observations (stores) 328 (94)R2 0.41

Robust standard errors in parentheses, clustered by store. Storeand districtyear fixed effects are included in all mod-els.Significant at 10%; significant at 1%.



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Consistent with our theoretical arguments, ourresults indicate that employee attitudes have a

positive effect on customer satisfaction with

service. However, employee attitudes do not affect

customer satisfaction with quality or value. More-

over, by using panel data techniques and a rich set

of control variables, we are able to rule out

confounds that may bias the estimated relation-

ships between employee attitudes, customer satis-

faction, and sales performance. For example, by

using store and districtyear fixed effects, wecontrol 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 effect of employee attitudes on

customer satisfaction. Our results suggest that

employee attitudes may affect customer satisfac-

tion by increasing employee effort and by enhan-

Table 7. Employee Attitudes and Customer Satisfaction with Service: Controlling for Lagged CustomerSatisfaction with Service





Lagged customer satisfaction with service 0.300 0.313 0.300 0.330

(0.091)

(0.091)

(0.092)

(0.090)

Lagged overall employee attitudes 0.116(0.039)

Lagged employee customer orientation 0.102(0.057)

Lagged employee engagement 0.101(0.034)

Lagged employee empowerment 0.089(0.031)

Ln(employees) 0.035 0.002 0.049 0.025(0.149) (0.152) (0.147) (0.148)

Ln(turnover) 0.022 0.029 0.021 0.024(0.035) (0.034) (0.036) (0.035)

Percent full time 0.173 0.156 0.177 0.173(0.171) (0.172) (0.171) (0.171)

Employed less than one year 0.103 0.136 0.095 0.102

(0.246) (0.251) (0.243) (0.243)Employed 13 years 0.023 0.079 0.013 0.021

(0.247) (0.250) (0.245) (0.246)Employed 35 years 0.016 0.071 0.009 0.014

(0.240) (0.245) (0.237) (0.242)Employed 510 years 0.016 0.050 0.028 0.001

(0.295) (0.291) (0.293) (0.292)Unemployment rate 0.213 0.221 0.207 0.198

(0.096) (0.097) (0.097) (0.099)

Unemployment rate squared 0.012 0.013 0.012 0.012(0.007) (0.007) (0.007) (0.007)

Herfindahl 0.478 0.440 0.483 0.434(0.158) (0.161) (0.159) (0.156)

Remodel 0.018 0.015 0.019 0.019(0.022) (0.022) (0.023) (0.022)

Children 0.039 0.030 0.039 0.031(0.050) (0.050) (0.050) (0.050)

Age 0.051 0.057 0.050 0.045(0.040) (0.041) (0.040) (0.039)

Income 0.008 0.001 0.009 0.008(0.035) (0.035) (0.036) (0.035)

Constant 4.119 3.974 4.318 4.380(1.129) (1.149) (1.102) (1.122)

Observations 237 (93) 237 (93) 237 (93) 237 (93)R2 0.50 0.49 0.50 0.50

Robust standard errors in parentheses, clustered by store. Store and districtyear fixed effects are included in all models.Significantat 10%; significant at 5%; significant at 1%.

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cing customers experience. Finally, we examine

lagged dependent variable models to exclude

reverse causality or feedback effects as an alter-

native explanation. Our results indicate that

employee attitudes positively affect customer

satisfaction with service, even after controlling

for lagged customer service. Taken together, these

results help us to better understand how employee

attitudes affect customer satisfaction.

Lastly, we assess whether the impact of employ-

ee attitudes on customer satisfaction is financially

meaningful. Our results indicate that customer

satisfaction with service affects store sales. Each

one-point increase in customer satisfaction withservice 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

find that through its effect on customer satisfac-

tion, 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 benefits 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 firms

benefit from improving employee attitudes or

enhancing the satisfaction of their customers.

Nonetheless, managers need to understand both

the magnitude of the benefits of employee attitudes

and customer satisfaction, as well as the mechan-

isms through which they affect sales. An important

extension of this study would be to link employee

attitudes and customer satisfaction with measures

of store profitability, 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 under-lie differences 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 influence

employee attitudes, and unions may moderate the

relationship between employee attitudes and be-

havior. It would be useful to examine whether the

Table 8. Customer Satisfaction with Service andSales: Controlling for Lagged Sales

Logarithmof sales

Logarithmof sales

Lagged Ln(Sales) 0.247 0.321(0.079) (0.075)

Customer satisfaction with service 0.091 0.095(0.039) (0.064)

Customer satisfaction with quality } 0.002(0.049)

Customer satisfaction with prices } 0.032(0.047)

Rival satisfaction with service 0.090 0.076(0.054) (0.072)

Rival satisfaction with quality } 0.093(0.090)

Rival satisfaction with prices } 0.021(0.089)

Ln(employees) 0.128 0.079(0.049) (0.045)

Ln(turnover) 0.010 0.015(0.019) (0.020)

Percent full time 0.034 0.015(0.055) (0.054)

Employed less than one year 0.011 0.040(0.101) (0.104)

Employed 13 years 0.008 0.060(0.096) (0.095)

Employed 35 years 0.008 0.024(0.083) (0.081)

Employed 510 years 0.116 0.128(0.131) (0.138)

Unemployment rate 0.000 0.018(0.038) (0.042)

Unemployment rate squared 0.004 0.006(0.003) (0.003)

Herfindahl 0.052 0.004(0.088) (0.077)

Remodel 0.006 0.001(0.011) (0.010)

Children 0.013 0.048(0.031) (0.024)

Age 0.043 0.042(0.021) (0.024)

Income 0.018 0.033(0.016) (0.013)

Constant 12.396 11.268(1.539) (1.530)

Observations 240 (93) 234 (93)R2 0.46 0.48

Robust standard errors in parentheses, clustered by store. Storeand districtyear fixed effects are included in all mod-els.Significant at 10%; significant at 5%; significant at1%.



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relationship between employee attitudes and cus-

tomer satisfaction is different in non-union firms.

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 affects 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,

affects a focal stores customer satisfaction ratings.

CONCLUSIONS

Our study provides valuable insights into the

linkages between employee attitudes, customer

satisfaction, and sales performance. The results

provide strong evidence that employee attitudesaffect customer satisfaction. In particular, as

employee attitudes improve, customer satisfaction

with service levels increase. Moreover, this im-

provement in customer satisfaction impacts rev-

enue as well, as increasing customer satisfaction

with service, drives higher sales. Our results

suggest that firms benefit from making employees

happier. Therefore, HRM programs should be

viewed as investments in delivering better custo-

mer service rather than simply as costs to

minimize.

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

find 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.

11. Often told what I am doing right.

12. Consistently thanked for my efforts.

13. Accomplishments are appreciated.

14. My job is recognized as important to the

overall operation.

15. I completely understand expectations.

16. Help with payroll and personnel questions is

available.17. Help with questions about job responsibil-

ities is available.

18. Have resources to deliver excellent customer

service.

19. Service goals are clearly communicated.

APPENDIX B: ELEMENTS OF THE

CUSTOMER SATISFACTION SURVEY

1. Having strict sanitation standards.

2. Carrying all the grocery items, brands, andsizes 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.

NOTES

1. In 2002, the supermarket chain converted thecustomer satisfaction data collection on a daily basis.Interviewers conducted roughly one survey per dayper store until they had surveyed about 200respondents per store.

2. The specific values of j and k vary modestlyby district and year, reflecting minor changes in thetiming of the surveys. The one exception is that in2002, because of the change in data collectionprocedures described earlier, we use the current valueof employee attitudes, but only use the customer

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satisfaction data for customer surveys conductedafter the associate satisfaction survey.

3. We exclude item 13, actively supporting the localcommunity, because it does not correspond to any ofthe three dimensions of customer satisfaction. In-cluding it does not alter our results.

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