Turnover Is the New Enemy at One of America's Oldest Restaurant Chains

    If CEO Peter Dunn could see how crowded this restaurant is--well after the lunch rush and on such a dreary day--he’d be thrilled. When Dunn took over as president of Steak n Shake 18 months ago, he began reshaping the company. The goal was to turn around the company and, ultimately, fuel an expansion. Earnings had slipped in 2001 and management turnover stood at 50 percent. By the first quarter of 2003, crew turnover topped 200 percent.

Payoff of reducing turnover
    Last year, as Dunn implemented his plan to better support employees, the crew turnover rate began to fall. In turn, guest satisfaction improved, as measured by Mystery Shops. During the first quarter of 2003, crew turnover reached 213 percent, and guest satisfaction measured 81.2 percent. By the third quarter, crew turnover had dropped to 192 percent, while guest satisfaction increased to 86 percent.

    If Steak n Shake can reduce crew turnover, it stands to reason that guest satisfaction will continue to improve, as will profits. The company’s turnover rate is markedly higher than that of other restaurants in the fast-casual segment. The People Report 2003 Survey of Unit Level Employment Practices showed that the average turnover rate in the fast-casual segment is 129 percent. During the last quarter of 2003, Steak n Shake’s crew turnover rate went down to 188 percent, but it’s still 59 percentage points higher than the industry average. The company has told investors that it can save $2 million to $4 million per year if it can only convince more frontline workers to stick around.

    So far, the company has made nominal attempts to make the workplace more appealing to employees, such as offering a self-funded dental and vision program to associates and increasing training for frontline employees. Still, the company has yet to address one of the major issues in the restaurant business: understaffing.

Satisfied Employees + Happier Guests = Bigger Profits
    Dunn’s plan to revamp Steak n Shake centers on an idea he calls the Virtuous Cycle--better known as the service-profit chain. The service-profit chain "establishes relationships between profitability, customer loyalty, and employee satisfaction, loyalty and productivity," according to a 1994 Harvard Business Review article. This concept is based on the idea that loyal customers are the result of customer satisfaction, which comes from the value that loyal, contented employees provide. The writers of that article estimated that the lifetime revenue from a loyal pizza eater could amount to $8,000. A Steak n Shake customer could spend as much as $25,000 over a lifetime at the restaurant, according to Vic Yeandel, vice president of marketing and investor relations.

    The idea of creating a customer-focused environment is actually a return to the company’s roots. When Steak n Shake founder Gus Belt started the restaurant in 1934 in Normal, Illinois, he paid particular attention to customer service. He’d wait until rush hour and roll in a barrel of steaks--including round steak, sirloin steak and T-bones--and then grind them into burgers right in front of guests sitting at the counter. Belt also put the milkshake machines in the front window, so passersby would want to stop for a frosty shake. The friendly service kept customers returning, and before long, Belt started to expand.

    Today, the burgers at Steak n Shake are still ground from various types of steak and the food is still served on china in a diner-like atmosphere. Steak n Shake occupies a niche: a full-service environment with food that people are accustomed to eating in fast-food restaurants. "If the service is bad, all you’ve got is an expensive burger," says Yeandel.

Involving managers in decisions
    Steak n Shake says that holding down management turnover can provide a savings of $1 million to $2 million per year. The company couldn’t say how much turnover has to be lowered to achieve that savings. Nearly a year after Steak n Shake began to pay attention to employee satisfaction and invested in training and development, the company is making progress in retaining managers. Management turnover now stands at about 30 percent. "Steak n Shake’s focus on labor, staffing and training has helped its bottom line and will continue to do so," says Amy Greene Vinson, vice president of equity research at Avondale Partners LLC.

    Holding down turnover and grooming manager/management talent also enables the company to open more new units, says Vinson. This, she says, is the key to the growth of Steak n Shake and probably one of its biggest challenges for the foreseeable future.

    Steak n Shake’s Yeandel says management turnover is decreasing because the company has started to include managers in making decisions on how to increase revenue and efficiency. For the first time ever, Steak n Shake has given its store managers books with all sorts of statistics about the individual restaurant, such as which products produce the most revenue and profit. The information also includes turnover rates, customer-satisfaction data and drive-thru efficiency. The company has asked each store manager to come up with a plan for his or her store and to share it with frontline employees. Instead of having store goals set for them, managers now help to make those goals and feel more invested in them, says Yeandel.

"Benefits do matter"
    The challenge for 2004--one the company openly acknowledges--is to reduce frontline turnover. To that end, the Indianapolis-based company began a self-funded dental and vision plan for associates this year, which can help workers reduce dental and vision expenses by 50 percent. Quick-serve restaurants that offer dental insurance to employees have a lower turnover rate (about 176 percent) than those that don’t (195 percent), according to Dr. Joseph "Mick" Michael La Lopa, who has studied how turnover rates are affected in Indiana restaurants when benefits are provided to part-timers.

    "Benefits do matter," says Teresa Siriani, president of People Report, a consulting firm that specializes in workforce-management metrics, trends and best practices for the food-service industry. The company’s 2003 survey of hourly turnover found that restaurants that offer dental, health care and 401(k)s have on average a turnover of 104 percent, compared with 128 percent for those companies that don’t offer such benefits. Siriani also recommends that companies survey frontline workers, which Steak n Shake is beginning to do. The company won’t release details about that survey. The annual report, however, describes steps that frontline workers can take to provide anonymous, candid feedback to store management.

    Steak n Shake already offers its frontline employees medical and life insurance; supplemental and dependent life insurance; short-term disability insurance; vacation pay; meal allowances; a 401(k)/profit-sharing plan; and a referral bonus program. Life insurance is the cheapest benefit and produces the greatest reduction in turnover, says La Lopa, an associate professor at Purdue University. Restaurants that offer life insurance have a turnover rate of about 156 percent, versus 196 percent for those that don’t offer it. "People who go to work and have kids want to know that there will be some money for their kids or spouse to deal with the loss financially," he says.

"Part of a whole"
    A comprehensive orientation for new hourly workers can also help reduce turnover significantly. Siriani says companies that spend an average of one to two hours on employee orientation have 120 percent turnover; companies that spend two to four hours on orientation lower turnover to 105 percent; and those that spend four or more hours on orientation enjoy an even lower turnover of 86 percent.

    Steak n Shake might also be able to increase its return to shareholders if it can improve something called the employee "line of sight," or the ability of employees to make connections between their job and the company’s business goals. "To what extent does somebody understand that the work they’re doing is part of a bigger whole?" asks Scott Cohen, national practice leader of talent management at Watson Wyatt.

    "Organizations that have a much greater line of sight actually show four times the total return to investors," Cohen says. Steak n Shake can assess its employee line of sight by determining if employees understand the company’s business goals and the steps necessary to actually achieve those goals. The way to assess this is through surveys, following up with focus groups if necessary. About a decade ago, Sears Roebuck went so far as to develop a board game that helped teach employees about its business, says Cohen. A more modern way of generating this kind of communication is through intranet chat rooms where employees can ask questions about the business and give senior leaders a snapshot of working conditions in restaurants.

The elephant in the room
    Studies show that stores with satisfied employees outperform those with unsatisfied employees, and turn larger profits. At Taco Bell, the stores in the top 20 percent for employee retention were 55 percent more profitable than those in the bottom 20 percent, wrote James Heskett, Earl Sasser and Leonard Schlesinger in a 1997 book titled The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction and Value.

    But what is it that workers really want from employers? "It’s simple--it’s really to deliver on the promise," says Purdue’s La Lopa. "Companies like Steak n Shake promise incoming managers that they’ll grow with the company, their salary will increase, they’ll have days off, they’ll have the support and resources they need--that’s the promise," he says. "The minute they sign on the dotted line, they become victimized by churn and burn--the opposite of what they’re promised."

    In fact, the staffing numbers at Steak n Shake show that although the number of restaurants is increasing, staffing isn’t increasing at the same rate. SEC filings reveal that in 2002, the company operated 404 restaurants, with a total of 20,000 employees--an average of 49.5 employees per unit. In 2003, the number of restaurants jumped to 413, but the total number of employees stayed steady at 20,000, giving an average of 48.4 workers per unit, the lowest number of workers per unit since 1997.

    "By not hiring enough workers, companies shoot themselves in the foot three ways," says David Lee, president of HumanNature@Work. First, overworked, stressed-out employees give lousy service. Second, employees see understaffing as senior management not caring about them. Third, employees want to feel proud of their employer, and when management doesn’t staff adequately yet touts the importance of great customer service, employees lose respect for their employer.

    La Lopa agrees that when the staff is overworked, the burnout rate becomes high. "All employees at every shift have to work twice as hard to provide high-quality service," he says. "This happens every single day in restaurants throughout the U.S.--it’s a tragedy." As it happens, our server at the Pittsburgh restaurant is extremely friendly and even takes a minute to talk to my daughter about her toy pony. Still, she seems overloaded with guests.

    The company won’t say whether it plans to increase hiring of associates. Steak n Shake’s annual report says the company continues to improve its labor-scheduling system to better deploy its employees when the restaurants are crowded.

    In the end, La Lopa says, all these retention efforts could actually lower food costs. "Restaurants give away so many meals every day because they’re understaffed--it’s service recovery. A trained staff isn’t making mistakes, ‘comping’ meals or redoing orders." The companies that understand this principle--such as Applebee’s, Outback Steakhouse and The Cheesecake Factory--and keep promises to employees enjoy a higher profit, he says.

Vital signs improving
    The company’s overall financial picture appears to be improving, partly because of a slightly more stable workforce. In 2003, Steak n Shake opened 13 new restaurants, bringing its total stores to 413. This year, the company expects to open 15 to 18 new restaurants. For every 10 successful new stores that Steak n Shake builds, the company adds $2 million to $3 million in profit.

    Although the company has had to close some underperforming restaurants, same-store sales--a particular barometer of health in the fast-food industry--are on the way up. The company hit a low in the first quarter of 2003, with same-store sales dropping to -4 percent. By the fourth quarter of last year, however, same-store sales had increased by 12 percent. That crowded Pittsburgh restaurant reflects a nationwide trend.