#143. Every week on the podcast we’ll challenge a recently-announced business strategy to understand the upside and downside of the brand’s approach. We discuss Shake Shack and Taco Bell’s approach to employee retention and whether or not these new initiatives will make a difference.

Check out the full transcript below. 

Richie: [00:00:00] Welcome to the eighth episode of Espresso, a podcast from Loose Threads where we challenge a recently-announced business strategy to understand the upside and downside of the brand’s approach.

Richie: [00:00:09] I’m Richie Siegel, the founder of Loose Threads, which analyzes and advises next-generation consumer companies, and FaceLift by Loose Threads, a retail incubator and accelerator for leading brands and retailers. For our latest analysis and insights, check out our free weekly newsletter at LooseThreads.com.

Richie: [00:00:24] Joining me for our discussion this week is Rebekah Kondrat, a partner at FaceLift by Loose Threads, and Caroline Tibbetts, who leads our research at Loose Threads. This week, we analyze Shake Shack and Taco Bell’s approach to employee retention. The burger company is offering some store managers four-day workweeks, while the taco company is paying some store managers $100,000 a year. In an economy with such low unemployment, employee retention is essential, but will these moves make a difference or have unintended consequences? Here’s what we thought.

Rebekah: [00:00:54] I think this is kind of an—not a new problem in retail, in particular, in these kind of like, high-pressure customer service environments, where they’re very fast-paced, like a Shake Shack, or even a Taco Bell, or any of those environments, it’s really difficult to retain workers. But, at the management level, you definitely want to reduce the attrition as much as possible because those jobs, they’re not easy to find people to replace them. They require a measure of strategic thinking, which, when you’re kind of on the front lines as just a team member, everything is laid out for you, especially on like, a food line in the restaurant instance. You know, you really don’t need a high level of that. So you want to retain the managers.

Richie: [00:01:42] That is a misconception, right? Like, I feel like a lot of people think all retail people are transient, beer money people. But store managers are like, real full-time people.

Rebekah: [00:01:53] Yes. And I think the bigger driver of whether or not a store manager stays with the company has more to do with the values of that company and how they’re treated as a strategic member of the leadership team than it does with whether or not they wanted to be a store manager from the time they were three [years old]…because they probably didn’t. I fell into a retail career, didn’t intend to stay as long as I did, ended up really loving it, and stayed because of the environments that I was put in, less because of the products that I was selling.

Caroline: [00:02:31] So, does Shake Shack really need to compete with a McDonald’s or Taco Bell?

Rebekah: [00:02:37] Shake Shack is an interesting one, because I don’t think that they’re competing with a Taco Bell necessarily, but they probably are competing with like, a Sweetgreen—or Dig Inn, to kind of keep it in the food service world. The thing about the privately-held companies is that they oftentimes do have more benefits for front line managers because no one’s looking at your balance sheet, necessarily, or they don’t report publicly how much they’re spending on labor versus how much they’re making in top line and all of that.

Caroline: [00:03:08] So that’s why I equate Shake Shack to Taco Bell—I don’t think it’s an actual comparison. However, if they’re paying managers at Taco Bell a six-figure salary, would that attract me to join Taco Bell?

Rebekah: [00:03:21] Right. So to like, give some context, Taco Bell recently announced that in some of its stores—probably in these kind of more urban markets that are higher volume—they’re going to pilot paying store managers $100,000 dollars a year. In-N-Out Burger has announced that it pays some managers up to, I believe, it’s $160,000 a year, which is not a small number for a single-unit store manager in any industry, let alone food service, which has notoriously low margins.

Rebekah: [00:03:51] So, to the question of, “Will this work as a retention tool?” I think the greater driver of whether or not someone stays at a place is ultimately if they believe in the mission, vision and values of that company. I mean, yes, you have to be able to fulfill your basic needs. You have to be able to pay your rent, you have to be able to buy groceries, so you can’t dip below that number in terms of salary. But then, once you get to a certain point where you can do those things, what matters much more is the actual values and the treatment, and whether or not you’re able to be a strategic partner as those businesses grow.

Richie: [00:04:32] I guess, what are they solving for? And then, why do you think they turn to these solutions?

Caroline: [00:04:38] I equate the four day workweek to the values piece, because then it tells me that you—they want me to spend more time with my family or friends than working.

Richie: [00:04:46] Interesting. So you would equate that more than Taco Bell just paying a hundred grand.

Caroline: [00:04:50] Exactly.

Richie: [00:04:51] Interesting.

Caroline: [00:04:51] That’s throwing money at it, to me.

Rebekah: [00:04:53] Yeah, I actually agree with that. And I’d imagine what they’re doing with the four-day workweek is they’re doing four ten-hour days. So you’re not actually working less than 40 hours and getting paid the same, because they are not the first company to institute a four-day workweek. I mean, retailers have been doing it for a very long time. And sometimes it’s touted as a benefit to the employee, but sometimes it’s just easier from a business standpoint, because you know that you have enough coverage to stay open and close the store with the same key holder. So, where labor laws allow, some of them do a four-day workweek.

Rebekah: [00:05:24] For Shake Shack, specifically, assuming that it has a stronger value set than a Taco Bell…I actually think that it does play into Shake Shack’s kind of mission/vision values, and it’s another thing to further that for their store managers. Whereas throwing a $100,000 dollar salary, will that actually work as a retention tool? If Taco Bell is not treating its workers as part of solving a larger problem, then probably not.

Richie: [00:05:53] It also could totally attract the wrong people, too, right? I mean, think of all the people applying to those jobs now because they just saw six figures.

Rebekah: [00:06:01] Yes. And that kind of goes into their vetting process. And in order to find the right candidates, you do have to have that strong value set.

Richie: [00:06:11] My initial thought or immediate question is: what happens when unemployment goes up and the economy goes down? It seems Shake Shack’s approach is a lot more sustainable through economic cycles, versus Taco Bell’s could be hugely problematic if they start paying, what is, what? Fifty to 100 percent over market for these roles, at least? And if the economy starts to go elsewhere, does that become a problem? Although…I guess they could argue that when the economy goes down, does fast food do better? I am sure it does.

Rebekah: [00:06:41] Oh, I’d imagine it does.

Richie: [00:06:42] Yeah.

Rebekah: [00:06:43] But the other thing that is probably happening in the situations like a Taco Bell is, the store managers know that they are now pressured to pay for themselves. Because they are also bonused off of the profitability and performance of their stores and their own salaries play into that. So they just have to sell that much more. And, depending on what tools they’re given and what type of a leader they are, that could actually make the environment for the employees much, much worse. It could potentially make it better, but it’s not likely. You know, they’ll be feeling much more pressure.

Richie: [00:07:18] It’s also one-sided, right? The manager’s getting the benefit that his team is not. Versus, with Shake Shack, your entire team is benefiting from this policy.

Caroline: [00:07:25] [At] Shake Shack, I think it’s, as of now, it’s just the managers.

Richie: [00:07:28] Really?

Caroline: [00:07:29] One-third of the managers is what the article said. And that was actually my next question…

Richie: [00:07:32] That seems like a mistake.

Caroline: [00:07:33] Yeah, right. It seems like the staff will be jealous.

Rebekah: [00:07:37] Well, this fast-food workforce is kind of unique in that not everyone is salaried. So you can’t think of it like, everybody’s working 40 hours, but some people get to work four days and some people get to work five. A lot of the people who are on staff below the management level, even at like, some sort of leadership role, are going to be part-time because they’re normally students, or they have another job, or they’re an artist or an actor and this is what they do on the side for a steady income.

Rebekah: [00:08:08] And so, it does make a lot of sense to have it be just for the managers. It would be better if they would open it up to all full-time employees. But the other thing that this does is it gives opportunity because you have the leader, the point leader out of the store for three days, you can actually develop a second leader because now they have three full days where they can actually lead the business instead of always overlapping with that manager. So there is an—I don’t know the details of what Shake Shack is doing with those extra three days, and if they’re asking their assistants or managers to step up, but there isn’t a development component that can actually—I’m sure they’re scaling, opening more restaurants. It could actually help them.

Richie: [00:08:50] What’s your general perspective on wage [versus] non-wage benefits? If they’re trying to solve for retention, is it better to just pay them more, or is it better to make their life better? Which could be solved by paying them more, but also not necessarily.

Rebekah: [00:09:07] Yeah, I mean, I think it kind of goes back to that, like, hierarchy of needs. As long as you have the income that you need to eat and live indoors and a little extra to have some fun, right? ‘Cause you can’t just be living paycheck to paycheck, nobody wants that, but often, a lot of times, these workers are. I actually think it’s better to have some sort of, call it a cause, call it a mission, call it something else that’s outside of just money.

Richie: [00:09:37] The other part of context I’ll just add, though, right is like, this comes in the middle of a wave to raise the minimum wage as well. So there’s already, I would say, real cost pressure on the bottom line of these businesses just from the general staff. The Taco Bell thing is even more interesting, then. All their costs are rising. Food costs are going up, labor costs are going up significantly. And so, their approach is to raise labor costs more.

Rebekah: [00:10:01] Right. But they’re thinking—’cause I totally understand why this is happening—is that “If we pay our store managers $100,000, they’ll be happier, they’ll treat their employees better, they’ll be happier, they’ll treat the customers better, and they’ll sell more.” In practice, that may or may not be true. This $100,000 price tag may actually stress the managers out more because now their profitability is down and now their bonuses are lower, or it may just come out as a wash. Great. You have a $100,000 salary, but your bonus is lower. Your take-home pay is the same. So the whole like, top-line salary increase—

Richie: [00:10:39] It’s trickle-down economics for labor.

Rebekah: [00:10:41] Right! Yeah. Its trickle-down economics for labor is exactly the right term. You know, but what if instead Taco Bell did something like, if you stay with the company for three or more years, then you get [an] all expenses paid vacation up to a certain amount reasonable, of course. Or you get to go on some sort of like, benevolence trip. There are several companies that do this that will send you to Guatemala to help in areas that need support and will pay for it. Those things, I think, go much, much farther than we’ll pay you 30%, 50%, whatever it is, more.

Richie: [00:11:22] It’s also interesting, I guess, to create those benefits in a parallel path through the mission of the company. So, for example, you could think of Shake Shack doing things with the farms and the other places that their food comes from, versus just, all-expenses trip to Disneyland or whatever.

Rebekah: [00:11:38] Yes. And the other thing I think that would work well is an actual investment in their career advancement, wherever that is. That some people may want to stay in front line retail or sales or something like that, but some people may want to learn about marketing or learn about different areas like finance, something like that. So I think that another reward lever for retention could be, “We’ll let you sit with this team for three months. You get to work alongside them.” And, of course, that takes someone out of the business and you have to account for that, but it’s worth far more than paying them $40,000 more or whatever.

Richie: [00:12:19] Well, it makes me think of [how] Starbucks has paid for schooling and education for a really long time. Amazon’s doing a ton of worker-retraining right now as they automate more of their warehouses. That idea of like, “pay it forward,” or “invest in yourself and pay it forward,” I agree, is a lot more powerful, helpful, useful than just cash.

Caroline: [00:12:37] So is Starbucks the only—well, you mentioned Amazon, but more of like a food retailer—doing this?

Richie: [00:12:43] Weren’t they one of the first public companies, if not the first, to give benefits to all employees? Stock options? I mean, the benefits package was vastly greater than anything else I think the public markets had ever seen for that type of establishment.

Rebekah: [00:12:57] Yes, they were the one of the first, if not the first, to give part-time workers health care, which was huge.

Rebekah: [00:13:03] Right.

Richie: [00:13:03] And that comes from the fact that Howard grew up, and his dad got laid off, and they could not afford health care and he didn’t want anyone to have to go through that. When you talk about like, mission and values, like, that is the definition of values-driven. So, I think from the get-go, Starbucks is a values-driven company. And, you know, they’ve hit some bumps along the way, so, not to say that they’ve been perfect, but that’s why they’ve been able to retain—at least in the people that I know that work there—they’ve been able to retain workers for a very, very long time.

Richie: [00:13:38] I mean, it makes me think again of Apple, in terms of the Geniuses and so forth. And I think it’s known that those are not the highest-paying retail jobs at all.

Rebekah: [00:13:44] The interesting thing about the Geniuses, though, is that originally they were flown to Cupertino to train, now they’ve opened training hubs around the country. And so, now it’s not always going to that quote-unquote “mothership,” which was fun in and of itself for them. But, that’s right. They’re not the highest paid jobs in the store when arguably they are the most skilled.

Richie: [00:14:05] There is an asymmetry of the retail and service jobs that pay the most are usually not necessarily the best.

Rebekah: [00:14:11] Right. Like, in the luxury apparel sector, you’ll have hourly sales associates that make more than the managers because of the commission.

Richie: [00:14:18] Right.

Rebekah: [00:14:18] But the managers would stick around for longer.

Richie: [00:14:21] Right. And Apple pays no commission. And you’re selling thousands and thousands of dollars for the stuff, but people still work there and, I think, do well and enjoy the jobs and so forth. And so, commission’s also a great example of how just maximizing the economic potential does not necessarily lead to anything good. ‘Cause there are plenty [of] people that work on commission that are miserable and/or earn less than those that maybe have higher base [salaries]. But—so even to your point before, the Taco Bell story, we don’t really have the full picture of, “Well, what’s the whole package?” We just know they made headlines for bumping the base up on those.

Rebekah: [00:14:54] And I think, too, what can happen with these commission-driven environments is people can start to feel stuck. So it’s like the opposite of helping them advance in their careers, is because, “Now I’m making this money. How could I ever possibly leave?” We used to use the term “golden handcuffs.” You got the golden handcuffs—you feel like you’re so stuck, but you’re miserable. What if a company actually helped you become who you want to become?

Richie: [00:15:23] Thanks for listening to Espresso, a Loose Threads Podcast. You can read full transcripts of the podcast and join the newsletter at LooseThreads.com. Feel free to leave a review on iTunes, we always appreciate it, and thanks to George Drake, Jr. for editing this episode. We’ll be back with more.