By Eric Rosenbaum
If you think it sounds like a mathematical impossibility for a company to lose more than 100% of its workers every year, you’ve never worked in the fast-food industry. At fast-food restaurants, losing 100% of employees — and then losing still more of the employees hired to replace those workers — is a common, and worsening, labor problem.
The case of Panera Bread shows just how deep the employee turnover issue is for restaurant companies. Panera loses close to 100% of workers every year, and by fast-food industry standards that’s considered good.
“In the restaurant industry, turnover is 130%, turning over more than a full workforce every year,” said Panera bread CFO Michael Bufano at CNBC’s @Work Human Capital + Finance conference in July. “We are a little under 100%, but still a huge number.”
The official Bureau of Labor Statistics turnover rate for the restaurant sector was 81.9% for the 2015–2017 period, but industry estimates are much higher, reaching 150%, and the problem has gotten worse in recent years. “It’s definitely been going up,” said Rosemary Batt, chair of HR Studies and International & Comparative Labor at the Cornell School of Industrial Labor Relations.
Batt said decades of fast-food industry efforts to standardize and “routinize” jobs — take the skill out of them — has been intended to create turnover-proof jobs. “If you lose someone, it is not a real cost, because they are so easily replaceable. ... The industry has thrived on this HR model of turnover-proof jobs for many years, because they could get away with it,” she said, through a slack labor market or absorbing the cost of high turnover. But that model is being stretched.
“Now turnover is absolutely excessive, and some chains are beginning to put numbers on the cost of turnover. I know some chains that are focused on it,” Batt said. “Because turnover is getting so serious and because chains have the ability to do the HR analytics, they can begin to cost out turnover and say, ‘This is not a cost we have taken seriously, because historically we were counting on high turnover model as acceptable.’”
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The cost of turnover
How much does turnover cost? According to Batt, the rule of thumb in estimating the expense can be broken down into a few simple parts: the time it takes a manager to hire a worker, the time it takes to train a worker, and the time it takes for them to become proficient on a job — in fast food, that is measured in one to two months, and during that period of time, half of the pay should be considered a loss. And there are less tangible costs: organizational disruption and team disruption.
“If people get beyond 90 days, turnover really drops, and so that’s why we make investments in technology and training in those first 90 days. It has a huge return,” the Panera CFO said at the CNBC event in Chicago. “Turnover and recruiting costs you money and is felt in the guest experience.”
Robin B. DiPietro, director of the International Institute for Foodservice Research and Education at the University of South Carolina’s School of Hotel, Restaurant and Tourism Management, says that six years ago, when she was in touch with Burger King, the average cost of turnover was about $600 per employee.
Cornell’s Batt said a survey of restaurants she helped conduct in 2013 put the cost of fast-food turnover at $1,600 per worker, and that was at a time when turnover was significantly lower.
The turnover cost estimates have kept going up.
The cost per employee now is estimated by the National Restaurant Association at $2,000 per employee. Those figures will vary by restaurant type as fast-food employees are still less expensive to turn over than those in upscale dining. Restaurant research firm TDn2K calculated replacement costs at $2,100 to $2,800. But all operators feel the pinch of the deepening turnover crisis, especially with a higher minimum wage, and higher recurring business costs.
“This is an industry issue across the board, and it’s getting worse with the labor market tighter,” said David Portalatin, NPD Group vice president and food industry advisor. “Restaurants will increasingly look to technology to solve the problem. Both technology to train and automate.”
The rise of the automated order
As far back as 2003, McDonald’s tested kiosks to place orders.
Much has changed in the industry since then, but some basic economics remain unchanged: Restaurants are pressured by rising costs and the ability to pass that on to consumers. The average cost of a restaurant meal increased 2.4% in the last 12 months, according to NPD data, more than the rate of inflation and cost of a grocery basket, and the rising cost puts pressure on restaurant operators. “The economics dictate you can only pay so much and today’s labor market makes it even harder to staff restaurants.”
Making customer interactions “frictionless” and automating repetitive tasks in the kitchen would theoretically allow restaurants to be more efficient with labor.
“In China they’re way ahead of us in automation in the back of the house and front of house,” Portalatin said, referring to the food industry terms for kitchen and customer-facing positions.
Portalatin said there has been a dramatic increase in digital ordering, especially consumers placing orders from mobile phones. Total customer traffic has been flat over the past year, but there has been “a monumental shift” to digital ordering, and NPD Group expects digital orders to increase 23% a year over the next half-decade. Restaurants have an economic incentive to make sure this shift continues to accelerate. Average ticket size from a digital order is higher than a traditional order, which NPD Group attributes, at least in part, to the ability of an app or kiosk to upsell customers and “suggestively sell” based on data collected through digital order histories.
Panera just announced deals with Uber Eats, DoorDash and GrubHub for mobile order delivery. On Wednesday, McDonald’s announced the expansion of a deal with DoorDash to reach a total of 10,000 restaurants, which comes at a time when it estimates 2019 delivery revenue will reach $4 billion. McDonald’s has a total of over 14,000 U.S. locations.
“Turnover is the biggest problem in the industry,” said Jordan Boesch, founder and CEO of 7Shifts, who grew up working in Quiznos locations run by his father. The self-described “quick-service kid” started 7Shifts to provide on-demand staffing andrestaurant shift scheduling to restaurants. A survey of workers using its system found that more than half wanted to grow their careers outside the food industry. Only 25% were looking for a promotion in the restaurant space, and that was heavily tilted to cooks.
Some experts believe the rise of the gig economy is hurting restaurants’ ability to recruit and retain staff, saying it is harder for any worker to justify punching a clock at a fast food restaurant offering little to no benefits.
But Batt says the gig economy, while a fascinating and growing trend, represents half of 1% of the labor force and is not a primary reason for the fast-food sector’s struggle. In fact, 7Shifts is one of many start-ups rushing into the restaurant space as a way to solve staffing woes through on-demand worker networks.
Panera is betting that better training can help. “All training had been in back of kitchen; now it is all on iPhones, and I can see it going to goggles — employees see it right in front of them, training them in a fun and interactive way,” Panera CFO Bufano said.
Panera declined to offer any additional details on its plans to reduce employee turnover beyond what its CFO said at the CNBC event. A spokesman said there was reticence to “share details on more of the secret sauce and statistical success.”
The job no one really wants
Experts who have studied the restaurant business for decades and work with national chains are divided over the extent to which fast-food jobs can be made better. Some do not believe there is no formula combining pay, benefits, training and culture that can save the human worker in this sector.
Abraham Pizam, chair in tourism management and the founding dean of Rosen College of Hospitality Management at the University of Central Florida, says his position is not popular among academic peers, but he is convinced the fast-food industry is on a path to be the first to fully automate.
No one who thinks of a job as temporary is motivated.
-Abraham Pizam, FOUNDING DEAN OF ROSEN COLLEGE OF HOSPITALITY MANAGEMENT AT THE UNIVERSITY OF CENTRAL FLORIDA
Low wages, lack of career paths and an overwhelming belief among the working public that fast-food jobs should only ever be temporary all contribute to the worsening turnover issues. “You talk to an employee here in the U.S. and it is nothing to be proud of,” he said. “It’s a job until I graduate or until I’m back on my feet,” he said. “No one who thinks of a job as temporary is motivated.”
There are no other job segments in the U.S. that have higher turnover than the fast-food and fast-casual segments of the restaurant industry, according to DiPietro at the University of South Carolina’s School of Hotel, Restaurant and Tourism Management. “Not even retail.”
She said that’s due to the reputation of the restaurant industry. Many people consider these lower jobs than retail due to hours, job responsibilities and uniforms that typically have to be worn. “Even though the pay may be equal, the perception of restaurants is lower than in retail.”
It’s a devil’s bargain for the companies to accept the status quo in turnover, Pizam said, with lower wages justified by their limited ability to pass along price increases to consumers, but in turn, restaurant operators paying the price through the expense of training and retraining of personnel multiple times a year.
“Sooner or later these jobs will disappear. There is no reason a robot can’t serve,” Pizam said. “In the future, whether 20, 30 or 50 years, only the very top of the restaurant industry will have human beings. Prepared or not, we will see it.”
Pizam is not making a short-term bet on full automation. Public acceptance of a humanless food-service experience will take time, as will the redesign of an entire industry so that minimal human contact is a cost-saver — the initial capital expenditures to overhaul operations, not even including the costs of the robots, will be large.
“The counterargument made is that people like to be served by people and there is no substitute to that. You can’t flatter a robot. But for the fast-food industry, there is no human contact that is personal at this point, anyway.”
“CEOs of these companies understand where we are going. The ultimate solution is robotics. In the long-run it’s menial work and they will admit they can’t satisfy employees and it costs too much in terms of the turnover cycle. Once trained, a robot, if done right — that is years of high productivity. But if they admit that, then it is like saying we failed and no one wants to say that.”
“I don’t think training can be a game-changer,” Boesch of 7Shifts said. “The bigger determining factor for someone to stay with you is if they see a future there.”
Boesch said the big food chains are overly confident: They think they are better at training than they actually are, and as a result, they recruit and hire the wrong people. Citing Jim Sullivan, a well-known restaurant consultant, Boesch said hiring is 90% of the equation and training only 10%. “There is no way to develop the wrong person.”
For the customer-facing positions that are most at risk, Boesch said the best chance of retaining staff is by doing more than just offering competitive wages and hiring people who have personalities that are conducive to service. These personality types want to be engaged and work as part of teams, and they want shift hours that suit their lives outside of work. “The No. 1 thing is interest in the people. ... Pay is important, but would you go across the street to get 50 cents more if it’s a toxic culture?”
“I think it is going to happen for quick service first for sure, full automation,” Boesch said. “To me it is not a matter of if, it is when. These QSRs [quick-service restaurants] are almost going to become like 7-Eleven, a giant vending machine. I don’t know when, but for QSR I feel like it is not astronomically far, but it is not close, either,” he said, with the biggest uncertainty not being the pace of innovation but whether automated systems can meet food safety and regulation requirements. “With the introduction of more ordering kiosks, it feels like the writing is on the wall a little bit,” Boesch said.
Reasons for robot skepticism
Cornell labor expert Batt is skeptical of the robot argument. “I totally disagree with the future being 100% robot. It will take decades to get to a place where kiosks will have such a major effect.”
Batt said that the fast-food industry, which faces steep price competition, is handicapped by the inability to raise wages much, as well as its limited career advancement opportunities. It also has little history of offering competitive benefits. Only 14% of all fast-food restaurants offer sick leave, and only 16% offer paid time off.
An increase in wages mandated by a higher federal minimum wage could lead restaurants to invest more in training, a trend already playing out in many states. “When companies are faced with that kind of hard increase in cost, they have to look for ways to retain workers more in order to justify the wage increase, how to get more effort or better quality, service, and productivity, and that leads them to invest more in training.”
She said the labor problems can be solved by methods other than robots, such as chains putting more effort into hiring better managers and treating workers with more respect. That requires companies being willing to give workers more hours and more predictable scheduling. “That is not very costly for HR to invest in. It just takes managers to be frankly more competent and pay more attention to the issue. ... Maybe they won’t optimize labor costs to the extent they want to, but it will pay off in lower turnover and more satisfies workers and better operations. That should not be hard problem to fix.”
Another potential solution used in other countries is the development of relationships with higher-end companies in the same sector, or what she referred to as a “cross-establishment career ladder.”
“That way workers do have an incentive to stay and shows qualifications that can move them up. ... If McDonald’s would get a worker to stay for year that would be a huge improvement, ” Batt said.
McDonald’s said no executive was available to comment, but a company spokeswoman pointed to several initiatives it has undertaken to confront staffing issues, including a workplace preparedness study, youth employment program, and educational assistance opportunities for employees.
A major decline in teenagers and college students working in the U.S. and in fast food specifically are factors. Recent data from the Federal Reserve Bank of St. Louis shows that in 1950, the labor force participation rate for 16- to 19-year-olds was 52.5%. It reached a high of 58.9% in 1978, dropped to 52% in 2000 and hovered at 34% between 2010 and 2018. The median age of the restaurant worker between 2005 and 2017 was 29, meaning that one-half of all workers in the sector were older than that, with many families raising children on restaurant incomes and benefits. During this same period, teen employment in restaurants plummeted to 17.8%.
The first US robot restaurant already shuttered
The first, fully automated restaurant in the U.S. already exists — or at least, it did.
Eatsa, a quinoa-bowl automat chain that started in San Francisco in 2015 and expanded to New York, shuttered its locations and has since transitioned to a new business model and been renamed Brightloom. The restaurant tech company focuses on helping other restaurants improve operations through use of technology.
Adam Brotman, a former Starbucks executive who in April took over the CEO reins at Brightloom, said although the automated restaurant run preceded his tenure, it was not a failure — some press accounts pegged it as one.
Brotman said the reasoning for the business pivot was a recognition by the company and its backers that all of the money being invested in order management and menu-management technology, and digitization of the customer experience — both out of store and in-store — would lead to a better return on investment as a technology company rather than restaurant operator.
Brotman said that for the first time next year, orders placed off-premise may equal in-store orders. “It’s an amazing stat. Half of the restaurant food consumed.”
McDonalds’ largest acquisition in 20 years was made in March when it acquired Dynamic Yield, which creates personalization and decision logic technology, to help with digital drive-through order optimization. The fast-food giant also is spending $1 billion this year to upgrade 2,000 locations with kiosks and other technology.
But Brotman said the increasing use of technology does not lead him to conclude that restaurant best practice will be “all one or the other.”
“Kiosks are great to break up the line and help drive larger sales. They upsell better and they allow you to deploy labor to optimal throughout. Really what we are seeing is a combination of front-of-the-house automation with traditional human customer experience at the point-of-sales or handoff lane, counter. That combination is ideal for quite a while.”
In order to keep the Big Mac price below $10, they will need to add technology to the restaurants and decrease the number of employees in order to ensure that they can continue to open each day.
-Robin DiPietro, DIRECTOR OF THE INTERNATIONAL INSTITUTE FOR FOODSERVICE RESEARCH AND EDUCATION AT THE UNIVERSITY OF SOUTH CAROLINA
Batt said the Paneras of the food sector can lead the way.
“Many, even in the fast-food arena are looking for ways to upscale a little, as in the Paneras of the world, and that segment of QSR does have more wiggle room, looking to compete more on quality and service, and it pays for them to be looking into better HR practices. If the industry starts there and they set a model, then we will see others follow suit.”
Danny Meyer of Union Hospitality Group has been experimenting with many ways to retain employees at restaurants he owned, which include Shake Shack, from a four-day workweek to a hiring model for customer service positions that focuses on personality assessments.
At Panera all executives complete a short tour of duty working a frontline job in a restaurant location. “Everyone who sits on corporate side works in cafe for a few weeks. I was a terrible barista but good salad maker,” Bufano said.
University of South Carolina restaurant sector expert DiPietro, who worked in fast food for 20 years and started her professional career making drinks before moving up to restaurant manager and district manager, said technology has been talked about in fast food since she entered the field in 1980. “They said that robots were going to take our jobs even then; they did not.”
“In order to keep the Big Mac price below $10, they will need to add technology to the restaurants, and decrease the number of employees in order to ensure that they can continue to open each day. Drink stations that are automated, ordering kiosks (similar to airports), automated fryers and broilers will help, but they cannot take the people fully out of the restaurant.”
Labor academics like Batt and DiPietro say for restaurants to fully address the turnover issues, they need to focus on people, plus robots.
“Look at the hours of the restaurant. Do we need to have 24-hour McDonald’s? If we do, can we have robots run the night shift? Turning the industry around may be as simple as having more restaurants providing tuition reimbursement for employees, employee-designed uniforms, pay differential for nights and weekends, robots doing the menial, non-guest contact tasks,” Batt said.
Brightloom’s Brotman, who comes from the Howard Schultz school of employee management, said Starbucks may be an outlier in offering healthcare, stock options and free online college education to employees, but it should also be an inspiration.
“I don’t think there is a single answer on how everyone should do it. Automation can help with the issue, but I talk about digital tools to allow people to spend their time connecting with customers rather than doing menial tasks. People you have doing the job they want to do, which is ultimately the best use of time. ... I don’t think the restaurant business is thinking about it as ‘we just need to replace people with technology.’”
It might also help if more respect for the fast food worker came from the dining public, according to the most-vehement prognosticators of the inevitable rise of the robot in the kitchen and at the counter. “I’ve been in thousands of fast food restaurants but never seen someone say to a manager, ‘I want to report that this worker was fantastic.’ Especially the counter,” Pizam said.