The Strong American Economy and Employee Churn Rates

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Part
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Employee Churn & Its Effects

Restaurants, whether QSRs or casual dining, experience employee churn rates (aka employee turnover rates) far above the current (and rising) national cross-industry average of 19.3%, with some estimates putting restaurant turnover at 72.5%. This negatively affects the ability to have a consistent level of customer care, increasing errors in service, and the employee-customer bond that is so crucial to repeat business. It is estimated that this costs the average restaurant $150,000 per year, which has resulted in restaurateurs considering finding and retaining employees their "number one challenge."
Below is a deep dive into our findings.

Note that in order to avoid excessive wordiness in our response, we will generally include QSRs (a category that includes restaurants typically thought of as "fast food," like McDonald's, as well as "fast casual" like Chipotle) and casual dining under the blanket terms "restaurants" or "restaurant industry." We will make a distinction between these sectors of the hospitality industry where necessary.

RESTAURANT CHURN COMPARED TO OTHER INDUSTRIES

It's no secret that the US is experiencing an economic boom. There were 263,000 jobs added in April 2019 alone, capping "a record 103 straight months of job gains and signaling the current economic expansion shows little sign of stalling." This incredible growth brought the national unemployment rate to 3.6%, the lowest since 1963, which forced employers to raise the wages of hourly employees an average of 3.2% in 2018, well above the inflation rate. The problems that face restaurants as employees take advantage of a boom US economy and move on to other, better positions are being felt across all industries.

According to the Compdata Annual Turnover Report, total employee turnover across all industries was 19.3% in 2018, up nearly four points from 15.7% in 2014. While they don't have restaurants as their own industry, they count them as part of the hospitality industry, which compares to other industries as follows:

However, the general turnover rate is inconsequential to that faced by restaurants, which saw an incredible 72.5% turnover rate in 2017, up from the National Restaurant Association's 2016 turnover estimate of 61%. By 2019, "limited-service restaurants" reported 132% turnover in their hourly employees and 50% in their managers, up from 118% and 40%, respectively, in 2017.

Turnover rates vary by position, with counter service/cashier roles having the highest churn rate (36%), followed by bussers, dishwashers, and runners (34%), "other" roles like catering (32%), bar staff (25%), and managers (23%). Note that those percentages are based on the entire hospitality industry rather than restaurants specifically, and so should be taken as illustrative.

THE DIRECT COSTS OF EMPLOYEE CHURN

One Gallup poll showed that turnover among Millennials alone cost the US economy an incredible $30.5 billion in one year. This isn't an abstract figure; the Center for American Progress estimates that replacing even a low-paying position (i.e., up to $30,000 per year), like most casual dining jobs, costs 16% of that position's salary to find and train the replacement--and that percentage increases as the pay scale goes up. The average employee in the leisure and hospitality industry works 26.1 hours and earns $425.43 per week or a little over $22,000 per year (assuming they work all 52 weeks). If it costs 16% of their salary to replace them, every employee who leaves costs the restaurant an average of $3,500 (rounded for convenience), as indeed some experts estimate the cost to replace an employee in a QSR.

However, the Center for Hospitality Research puts the cost to restaurants even higher, at $5,864 per employee. This can be broken down as $176 for pre-departure, $1,173 for recruiting, $645 selection, $821 training, and $3049 for productivity loss. This, combined with the high churn rate restaurants face means that the average restaurant faces $150,000 a year in losses to employee turnover--and likely more now than when that number was estimated.

The lost productivity that results from replacing an experienced employee with a novice is reflected in a study by QSR Magazine, which found that the average QSR saw service times increase by eight seconds per customer as the economy continued to improve. While eight seconds may not sound like a lot, when spread over 300 or so customers, it adds up.

THE COST TO THE CUSTOMER EXPERIENCE

It's widely understood throughout the industry that high employee turnover impacts the customer experience negatively in several ways, from causing a loss of quality and consistency in the restaurant's service to the customers themselves noting the churn, a "potential red flag" for them. "Customers love seeing familiar faces, and getting to know your staff allows them to feel connected to your restaurant."
However, statistics are few and far between. So, for example, Intouch Insight provides a formula for measuring employee turnover as an internal KPI, they give no indication either what an "acceptable" rate should be nor how higher turnover connects to the decay of other measurable KPIs. They simply say, "It’s important to define an 'acceptable' level of turnover that works best for your restaurants." Consequently, most insights into this area are anecdotal rather than quantitative.

It is widely-known that excessive employee churn can create an environment in which employees are under-trained, understaffed, short-tenured, not fully trained, and disengaged with their jobs. These service inconsistencies arise out of the need for new employees to be trained, with "the noise and friction around indoctrinating new team members when simultaneously running day-to-day operations compels managers to cut corners so they can get staff out on the floor faster," according to QSR Magazine (and we see no reason to limit that observation to QSRs). Of course, "under trained employees can increase errors and decrease the customer experience." Being understaffed can even limit the restaurant's hours of operation. As a result, restaurants with lower staff turnover see 0.8% more profit than the average, while those with higher employee churn see profits drop by 1.4%.

As one human resources expert explains, unlike, say, an oven, employees are "appreciating assets. The longer we stay with an organization, the more productive we get we learn the systems, we learn the products, and we learn how to work together."

THE RESTAURANT RESPONSE

Shannon Meade, VP of Public Policy and Legal Advocacy at the National Restaurant Association, said in January 2019 that "the number one challenge" facing the restaurant industry today is "hiring and retaining staff." Steve Heeley, CEO of Veggie Grill, agrees. "People can be very selective about where they work. Being an employer of choice is important, and being able to retain team members is also very important."

According to Upserve's Restaurant Insider, the three most important factors to a restaurant's churn rate that it can actually control (unlike, for example, younger employees moving on to other careers) are pay and hours, internal conflicts between staff, and the lack of opportunity for advancement within the company. In many cases, this means trying to raise prices without alienating customers. While the QSR segment has been affected the most, casual dining chains like Buffalo Wild Wings and Chipotle have been forced into price hikes as well, with the latter raising prices by 5% in over 400 locations in 2017, for example. As across the board price hikes tend to be poorly received by customers, many experts advise raising prices only on specific items and offering specials on higher-margin items.
CNBC reports that "sending employees back to school — even to pursue careers in other industries — has become a remedy." Chipotle Mexican Grill, McDonald’s, Taco Bell, Starbucks, and other QSRs have begun to offer tuition benefits to those who stay with them through their college careers. Although this may appear counter-productive, the results have proven otherwise: Starbucks reported that employees are "1.5 times more likely to stay with the brand and are being promoted at 2.5 times the rate of those that are not enrolled" in tuition assistance programs.

But the greatest key to keeping employees is training: Just four hours of onboarding and training of new recruits provides a 13% increase in retention. Likewise, a company that invests 5% of its revenue in training team members to mentor new employees see a 23% increase in their retention rates over those who don't. When Nekter Juice Bar initiated an employee training program which reduced employee churn by 40%, they claimed that the benefits were evident "in overall store performance and customer reviews," but did not release any hard numbers to the public to back up their claim.

CONCLUSION

The biggest factor in the restaurant business' incredibly high turnover rate is one that owners and executives have no control over The majority of their hourly employees are teens and college students who work part-time and/or seasonally while pursuing the education they need for other careers. Thus, while industry insiders are aware of the many problems associated with an inability to retain employees in a QSR and casual dining environment--leading some, like Starbucks, to offer college assistance to those who stay with them for the long haul--the fact is that this is a sector that will always see a far higher turnover rate than other industries, or even other sectors of the hospitality industry. Interestingly, while pay is important, providing excellent training and upward mobility in the company seem to be far bigger factors in determining whether employees will stay with the restaurant.



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