Franchising Insight Domino's Slices Turnover By Focusing on Leaders

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Turnover is a chronic and costly headache for fast-food businesses, which rely on an army of low-paid workers. One company is willing to try all sorts of tactics to retain hourly employees. That is, except paying them significantly more.

When Rob Cecere became regional manager for eight Domino's Pizza stores in New Jersey four years ago, his boss gave him a mission: slow down turnover.

Store managers in the region were leaving every three to six months. Without a steady boss, workers there who answered phones, made pizzas and delivered orders had a turnover rate as high as 300% a year.

Turnover is a chronic and costly headache for fast-food businesses, which rely on an army of low-paid workers. A harsh boss, a mean colleague, or a boring day can cause workers who earn around the minimum wage--which is $5.15 an hour nationally but slightly higher in some states--to quit for similar pay elsewhere. Average turnover for most large and midsize companies is about 10% to 15%. But at fast-food chains, rates as high as 200% a year for hourly workers aren't unusual.

Some companies are tackling the problem with a higher starting wage. Starbucks Corp. says it pays hourly store workers more than minimum wage, although the rate varies in different markets. The company says its turnover rate for such workers is 80% to 90%. Starbucks says it also focuses on friendly workplaces and good managers, but higher wages make a difference. "If we did all these other things, but we paid minimum wages, I bet our turnover would be higher," says Dave Pace, Starbucks executive vice president for partner resources.

Domino's has a different view. The company is willing to try all sorts of tactics to retain hourly employees--except paying them significantly more. "If we had increased everybody's pay 20%, could we have moved the needle a little bit to buy a little loyalty? Maybe, but that's not a long-term solution," says Domino's Chief Executive Officer David A. Brandon.

He says that while pay is a factor, "you can't overcome a bad culture by paying people a few bucks more." He believes the way to attack turnover is by focusing on store managers--hiring more selectively, coaching them on how to create better workplaces, and motivating them with the promise of stock options and promotions.

High turnover hurts the bottom line. It costs money to recruit, hire and train people, and undercuts service when inexperienced employees don't work as efficiently. It costs Domino's about $2,500 each time an hourly store worker leaves and about $20,000 each time a store manager quits, the company estimates.

Domino's turnover crusade started in 1999 when Mr. Brandon was named CEO. His first day at Domino's, he asked about the company's turnover rate. He was told it was 158%. "Honest to God, I almost fainted," he says.

After doing some math, he realized Domino's was recruiting, hiring and training 180,000 people a year at the time, including those at franchise stores.

Mr. Brandon vowed to change things. He re-named the human-resources department "PeopleFirst."

Mr. Brandon commissioned research that showed the most important factor in a store's success wasn't neighborhood demographics, packaging or marketing, but the quality of its store manager. "When that position is turning over at a high rate, the ripple effect of that is enormous," he says.

His strategy seems to be working. By last year, the company's overall turnover had declined to 107%.

Domino's has about 15,000 employees; another 135,000 work at its franchisees. Many are part-timers -- students or workers with other jobs who need extra income and a flexible schedule.

Store managers oversee people in three entry positions: assistant managers (who earn about $8 to $10 an hour); those who answer phones (and earn an average of $6.15 an hour); and drivers, most of whom make minimum wage. Drivers, who provide their own cars and gas, also get tips and an 82-cent reimbursement for each trip they make.

All the employees make the food, including managers and drivers.

Workers spend their first 30 days training, learning everything from how to hand-stretch dough (tossing it in the air isn't allowed because the company says that leads to overly thin middles) to how many pepperonis to put on a large pie (at least 48). To earn a pin designating them a "qualified pizza maker" they must be able to make a pizza in under a minute.

Hoping to pick better managers, Domino's implemented a new test. Those seeking promotion to that job have to take a 30-minute online evaluation of their financial skills and management style. Do they understand terms such as "break even" and "cash flow?" How would they manage a poorly performing employee? Candidates then receive training on their weak points.

To help managers keep track of their best and worst performers, Domino's rolled out a new in-store computer system. The screens, which everyone in the store can see, constantly update statistics such as the average order size for each employee and how long it's taking to get a pizza out the door.

Better financial incentives helped, too. Mr. Brandon introduced a program that grants stock options to about 15% of store managers, based on criteria such as sales growth and customer service. This is in addition to profit-linked bonuses that Domino's already had, which traditionally average about 30% of managers' compensation. Today store managers' base salaries start at about $32,000.

Domino's went public in July 2004 at $14 a share. For the nine months ended Sept. 5, its net income rose 99% to $35 million, on revenue of $968 million. Its stock rose 23 cents to $17.25 as of 4 p.m. yesterday in New York Stock Exchange composite trading.

Domino's also stresses to store managers that most of its franchise owners came up through the ranks. The company has about 7,603 stores world-wide, with about 10% company-owned. Franchisees must train their workers to meet the same food-making standards and use the same training materials.

When Mr. Cecere was promoted to regional manager for eight Domino's stores in New Jersey in 2001, he says his boss told him: "Once you get some stability in the management ranks here, these stores will do much better."

Pep Talk

Mr. Cecere, a 14-year Domino's veteran who started as a driver after high school and continued working at the company through college, knew improvements were needed. His stores were averaging $8,500 each in sales a week, about $3,000 less than the chain's current average. He gathered his managers together and gave a pep talk. "How do we get to $15,000? How do we get to $20,000? Where do you start from?" he recalls saying. "It's got to start with people. We've got to hire people and keep people."

He wants people like George Escobar. In August, Mr. Cecere promoted Mr. Escobar to manager of a Domino's in affluent Ramsey, N.J., where it's hard to recruit. Local teens shun low-paying jobs because their parents pay more in allowance, Mr. Escobar says, and he quickly realized he couldn't afford to lose current employees.

To give the store a friendlier feeling, Mr. Escobar says he bought boxes of tea bags and put them on a small folding table in the back with hot water and sugar. He discovered that his assistant manager brightened up when talking about his pets. So Mr. Escobar bought a pet fish for the store.

Seeking a way to discipline employees without alienating them, he bought a pair of dopey-looking, oversized black-framed glasses. They're called the "mistake glasses" and workers have to wear them when they make errors. The joke is that if you couldn't see what an obvious mistake you were making, you need glasses. "You want to make it like a fun environment but at the same time, you get your point across," Mr. Escobar says. He says no one has ever refused to wear the glasses.

On a recent busy Friday night, Mr. Escobar was training a new driver and was short two phone-answerers. Just as the dinner rush began, a new, 38-year-old driver flubbed: He forgot a pizza. Another driver had to take it out. "I'm going to let you go this time, but next time, you've got to wear the glasses," Mr. Escobar told the man, in a friendly, firm tone. The new driver nodded.

Later that night, the driver mistakenly took a thin crust pizza with garlic and green peppers that was part of another driver's order. The other driver, frantically searching for his pizza, guessed the culprit. "This new guy!," the other driver growled. Mr. Escobar sprinted to the back of the store, hoping to catch him before he left the parking lot. He did. "Yeah, the new guy grabbed it," he said, running back into the store, pizza in tow.

This time he was firmer with the employee: "You've got to double-check," he said. Mr. Escobar says he didn't want to chastise him in front of his co-workers, but would talk with him later. In the meantime, Mr. Escobar personally double-checked each order before delivery.

"Sometimes you just want to throw up your hands and say, 'I just can't train anymore,' " Mr. Escobar said after the rush subsided. "That's why you've got to maintain your people."

Dileep Kumar Kalludi, a Domino's manager in Edison, N.J., picked up a tip sheet at one of the company's management meetings, which he later tacked on his office wall. "Management is communicating, communicating, communicating," it says.

Mr. Kalludi put that into practice with new hire Brian Giraldo, a 16-year-old high-school junior who's trying to save $1,000 to help buy a car. Soon after he started in December, Mr. Giraldo misrecorded an order as a pepperoni pizza instead of mushroom. When the customer came in to pick up his order, he discovered the mistake. "He was mad," Mr. Giraldo says. "I still remember his face." Mr. Kalludi had to make the man a new pizza, free of charge.

'He Was Cool'

Afraid he'd be in trouble afterward, Mr. Giraldo was surprised by Mr. Kalludi's calm tone. He told Mr. Giraldo to take time to get orders right. "He just said to learn from my mistakes," Mr. Giraldo said. "He was cool about it."

During the next few weeks, Mr. Giraldo continued to make errors. One night, he stuck a Buffalo Chicken Kickers label on a box meant for Cheesy Bread. "Brian, this is a mistake," said Mr. Kalludi, checking his trainee's work.

Mr. Kalludi estimates it takes about 80 hours of work before a new order-taker is as reliable as an experienced one. "If he makes a mistake, it costs me money, it hurts my bonus," he says. Store managers get a quarterly bonus based on how much they improve store earnings.

Mr. Cecere, 31, coaches his managers constantly. His stores, he says, are now averaging sales of about $20,000 each week, up from $8,500 four years ago. Often he gives common-sense advice: treat people respectfully, be polite and patient. He hammers home that it's not the pay that makes employees stick around, it's their relationship with their manager. "They can go to McDonald's and make that, they can go to Pizza Hut," he says. "You've got to make sure they are happy to come to work for you."

He worries one of his newest managers, Nelson Rivas in Hackensack, N.J., lashes out too easily. "He's ready to fire people over the smallest little thing," Mr. Cecere says. "He doesn't understand that people aren't going to be perfect."

A few months ago, Mr. Rivas tussled with one of his drivers. The driver called in to say he'd be late because he needed to get his brakes fixed. Mr. Rivas was furious. The driver had been off for the previous two days and should have fixed his brakes then, Mr. Rivas figured. He called Mr. Cecere and told him he was ready to fire the driver.

But Mr. Cecere wanted a different resolution. That afternoon, on a previously planned visit to the store, he took the driver aside and listened to his side of the story. He explained in a calm voice why Mr. Rivas was upset, and how coming in late hurt the store. The driver said he understood. Mr. Rivas backed off. His boss has been "teaching me to be listen to the whole thing before jumping to conclusions," Mr. Rivas says.

Mr. Rivas was more patient a few weeks later when phone-answerer Joan Valdez, 27, had to take a couple of weeks off right after she started at Domino's. Ms. Valdez, who lives in Hackensack with her husband, who works as a barber, and two sons, had to leave to care for her mother. When she returned to work in January, she had forgotten some of the basics, such as how to label food boxes correctly.

Ms. Valdez, who quit school at 17 when she gave birth to her first child, has worked at Red Lobster and for a beauty-supply store. During baseball season, she works in concessions at Yankee Stadium. She wants to save enough money to go back to school and dreams of becoming a doctor. Her sister is tutoring her in math while she saves money. "I'm just trying to hold onto" the Domino's job "until I find something better," she says.

Mr. Cecere's goal is to get hourly workers to stay for at least three months. Once they do, they typically stay for about a year or two--and he doesn't expect them to stay much longer. "A driver's job is not a permanent job for anybody," he says. "Eventually, all drivers are going to leave."

Copyright © 2005 Dow Jones & Company, Inc. All Rights Reserved

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