Why managing turnover and rising costs is critical to restaurants

It is well understood that employee turnover is a massive issue in the restaurant industry. By some accounts, staff turnover rates range anywhere from 70% and has even skyrocketed to 140% annually. What may be less understood is what that turnover is actually costing you. A more complete financial analysis helps enable you to make smarter business decisions as to where and how to direct limited financial and human capital.

Most restaurant operators underestimate the total cost of turnover, which goes beyond the cost of recruiting, and even beyond the time and expense to get a new employee trained and fully productive. The more insidious, and often unmeasured, turnover costs include employee disengagement, an impact on the customer experience and company culture, and the loss of institutional knowledge. While these costs are sometimes difficult to quantify, they are critical to at least estimate as they guide downstream decisions on how to improve.

Bottom line: Labor is one of the largest numbers on your P&L, and you can’t manage what you can’t see. In addition to gaining insight into the total cost of employee turnover, working to reduce your turnover rate is also important.

One may find that investing in higher pay and incentives to retain top talent is not as much of a cash flow strain as one might think.

To reduce the cost of turnover and foster retention, restaurant operators need to invest in compensation packages that will retain valuable talent. Employees today are interested in far more than just a paycheck. People who believe their employer genuinely cares about their personal development are more engaged and productive. According to a 2022 Gallup poll: “Employees who feel their employer cares about their wellbeing are 69% less likely to actively search for a job”.

The hospitality industry has traditionally lagged behind other industries in terms of pay structure, incentives, and employee benefits. Neglecting these areas is no longer an option and astraight salary package is no longer the norm. Medical benefits, 401(k) plans, PTO, and other “fringe” benefits are now table stakes. Larger employers are offering profit interests, phantom stock plans, and formalized bonus plans to compete with corporate America for top talent. Employers of all sizes are helping their employees maintain their physical and mental health through perks such as gym memberships, mindfulness apps, and therapy sessions.

Keep in mind that not all employees value the same things. While some employees may be purely financially motivated, others may care more about flexibility, mental health, work environment, social involvement, or a host of other things that comprise your company’s culture. How to best understand these preferences? Ask them! Periodic employee surveys, modern “suggestion boxes”, and just staying engaged with your employees will help you understand which benefits your employees see as valuable, and which ones are not.

Another opportunity for reducing your operating costs is heavily dependent on understanding your core competencies and where you could use additional expertise and support in running your business.

For example, is bookkeeping a core competency of your restaurant business? What about maintaining your technology? Chances are, probably not. Outsourced bookkeeping has long been a common business practice and, in recent years, interim (or fractional) executives (e.g. CIOs, COOs, CFOs) have become more prevalent in the industry. Utilizing these methods can help you further streamline your cost structure, and even improve overall service levels.

Outsourcing the entire finance business function, for example, to a professional Managed Services and Outsourcing (MSO) provider, will allow you to trim your operating expenses while increasing your bench strength. MSOs provide a tailored level of support to meet each business’s custom needs – whether that’s a full-service outsourced team, an interim CFO, or project-based solution. Working through an MSO gives your business more sophisticated resources and capabilities – both with talent and technology – than you might be able to afford internally. Likewise, fractional executives – hiring a person on a contract, part-time basis – can give you needed experience without the hefty price tag of a fulltime employee with benefits.

The use of MSOs and fractional executives can provide value from a strategic perspective as well. When your management team is stretched thin, these methods can usually efficiently scale up to support and drive business goals, again, usually at a lower cost and higher overall service levels.

If it’s not a core competency, consider outsourcing to someone to whom it is. Good outsourcing partners and fractional executives will help you both reduce cost and improve service levels.

In order to effectively address all rising costs, restaurants need to work smarter by investing in technology and leveraging the information available in their operating environment. The positive impact operational data analysis can have on your business cannot be understated. Traditionally, restaurant operators have leveraged monthly P&L statements and historical data to judge current-state performance; but today operators can optimize performance with real-time visibility into their business’s actual, or actual vs. forecasted, performance. Adopting and maturing financial planning and analysis capabilities within your restaurant business will allow you to proactively control costs and generate revenue in the moment versus the traditional, reactive approach of taking action weeks later while reviewing your P&L.

Connected platforms, such as the CohnReznick Restaurant Planning & Forecasting App, not only provides real-time visibility into your business’ performance via real-time data but it also empowers operators to effectively plan for the future using accurate and timely information. Real-time visibility helps enable operators to respond in the moment and quickly mitigate operational and financial risks. For example, what if the cost of a key ingredient from one of your main suppliers that touches many of your menu offerings dramatically increases? Are you prepared to address menu price adjustments in the moment and understand the impact your decision may have on operational performance, or are you applying a standard price increase and hoping for the best?

The CohnReznick Restaurant Planning & Forecasting App can also help by allowing you to identify operational trends, remediate risk, and forecast performance impacts. For example, maybe you have identified that delivery revenue has been down at a specific location compared to your other operations. Can you quickly and easily forecast the impact it would have if the trend were to continue? Or the effect a labor model adjustment could have on that location and determine the effect on profitability? Connected platforms provide real-time visibility into operational performance and allow operators to forecast theoretical "what if?” scenarios across their portfolio, per location, by region, or even by concept.

Today restaurant operators need to work smarter, and that means leveraging all available information in your operating environment. Solicit feedback from your staff and get creative with your incentive plans. The positive impact real-time operational data analysis can have on your business, combined with a true understanding of all costs, and the opportunity to outsource where possible, can have a profound impact on your bottom line.

Don’t try to do all of this alone. Leverage your professional networks and seek help from third-party consultants and digital tools to give your business a competitive edge.

Jeff Wissink, Principal, Industry Advisory Leader, Technology+

312.508.5810

Stephanie O’Rourk, CPA, Partner, Tax

404.250.4079

Stephen Mancini, Director, Technology+

646.762.3410