Business

08.22.13

If Cosi Wants to Make a Profit, It Needs to Increase Wages

The CEO of Cosi recently promised investors he would reverse the chain’s money-losing streak by improving customer service. Not a bad idea, argues Daniel Gross, but first he needs to increase wages.

It’s never attractive when the rich and powerful blame the help for their woes. But that’s precisely what Stephen Edwards, chief executive officer of embattled café/sandwich joint Cosi, did last Friday.

On a conference call (listen here) with investors to discuss the company’s disappointing quarterly results, Edwards said the food was fine. “People love our product,” he said. “They love our sandwiches.” But at the top of the call, he noted that the service at company-owned stores (74 are owned by the company and 59 by franchisees) wasn’t up to snuff. “Service is where we are experiencing the greatest shortfall and where will be focusing the majority of our efforts,” he said. “We have a culture that has lost engagement with the process of serving food to people in a hospitable way.” In order to thrive, the company must “make sure we have what we would call Class A hospitality and service in the stores.”

Edwards never mentioned wages and pay, and neither did any of the worried investors who dialed in to the call. But the CEO’s earnest complaint highlights yet another way in which companies’ insistence on paying low wages has a negative impact on their business.

Some background: Cosi is a little like Friends—a 1990s era darling whose popularity carried it well into the aughts and is struggling to stay relevant in the 2010s. In fact, a typical Cosi looks something like Central Perk, the spacious coffee joint where Ross, Rachel, and the gang hung out. It was designed as a sort of third place—like Starbucks, but with good sandwiches. Like many consumer-driven businesses, Cosi peaked in 2008, when it had $135.5 million in sales. But things have gone south, thanks to a pinched consumer, and competition from below (Subway and Quizno’s) and above (Panera). Revenues slipped to $102.1 million in 2011, and to $98 million in 2012. The company has notched annual losses several years in a row. The number of stores has fallen from 159 in 2009 to 124 at the end of July. In the most recent quarter, revenues were off 11 percent from the year before, from about $26.3 to $23.4 million. At restaurants open for more than a year, customer traffic was down 5 percent.

Here’s the sad long-term stock chart.

COSI Chart

COSI data by YCharts

All of which has left Cosi, which fortunately has no debt, facing an existential crisis. “If we maintain this trajectory, we are heading toward yet another year of unprofitability,” said Edwards, who took over as CEO in June. “This cannot stand.”

The company faces some of the same challenges that its peers face. Fewer people are buying high-margin fountain beverages. There are long periods of the day when the store is open when there isn’t much traffic (i.e. between meals.) But the overriding problem is that not enough people come in, not enough people enjoy the service, and, as a result, not enough customers come back. “We get a number of remarks from customers about how much they love our food and products but they’ve just been disappointed time and time again by the service that they’ve received in the store,” Edwards said. “The complaint is someone was rude to me, my salad was incomplete, they left the basil off my TBM.” And so the company is now working on ways to make service better, faster, more friendly and engaged—“Class A,” as Edwards called it.

Now, labor is the single biggest cost at Cosi. And Edwards did acknowledge that some managers may have gone too far in trying to contain labor costs. Some stores are understaffed, and “that causes a poor experience for the customer.” Edwards said he was pushing managers to add more people. “In some cases that means that we had to add additional bodies in our stores,” he told investors. “It was a requirement for us to be able to be open for business.” And when the CEO talks to store managers today, Edwards tells them not to tell him how low their labor costs are. “I want you to quote your transaction counts, and talk to me about hospitality and the quality of the team and your level of engagement.”

That’s great; too few bosses recognize that asking fewer employees to do the work of more employees can be damaging to morale. But Edwards didn’t make the next logical leap. Class A service is provided by satisfied, happy workers. Happy, satisfied workers tend to draw happiness and satisfaction largely from wages.

But Cosi wants its employees to be on-the-ball, quick, engaging, smiling, committed, and accurate—all for wages that aren’t much higher than the minimum required by law. Cosi’s press people didn’t respond to a request for comment and data about their wages. At Glassdoor.com, the employee-review site, workers noted that “barista” jobs at Cosi pay between $8 and $10 an hour.

Glassdoor had some other interesting data, even though a relatively small number of employees (24) had rated the company. Glassdoor is comfortable making generalization about firms based on a sample size of 20 reviews. The comments about Cosi are mixed. One employee: “Benefits are almost non-existent. Very hard to get.” Another: “I was a Barista, and loved the position. My supervisors were wonderful and accommodating (as I was a student and had a set schedule), everyone was friendly.” Of those who filed reviews, 43 percent said they’d recommend working at Cosi to a friend.

All in, employees on Glassdoor.com gave Cosi a rating of 2.6 out of 5, which is pretty meh. “Anywhere from 2.5-3.5 indicates that employees are OK with their jobs,” said Scott Dobroski, community expert at Glassdoor. “Higher than 3.5 means they are satisfied, and lower than 2.5 means they’re dissatisfied.” Dobroski says Glassdoor isn’t just a dispenser of hater-ade—the average company rating of the 250,000 companies is 3.2, and 69 percent of all employees who fill out response say they are satisfied in their jobs.

By Glassdoor’s measure, Cosi is significantly below average in employee satisfaction. That would tend to explain the subpar customer service. “Where we see employee satisfaction high, we see better customer service,” said Dobroski. And what makes for higher levels of employees satisfaction? Lots of factors play into it. “But we have done many surveys, and salary and compensation is the number one factor that job seekers consider,” said Dobroski. “If you’re not being paid fair market value, it’s not that surprising that it may not make you care as much about your job.” When Dobroski ticked off the employee ratings of other sandwich shops and fast-food joints, most were higher than Cosi but in the same range. But there was one outlier. In-N-Out Burger scored 4.1 out of 5.0. Would it surprise you to learn that In-N-Out pays more than its competition?

It’s disappointing, though hardly surprising, that in a 45-minute call, neither company executives nor investors raised the possibility that one of the antidotes for crappy customer service might be paying higher wages. The people who can provide the kind of service that Cosi wants exist in this world. But the company is clearly not attracting them at the wages it is offering.

It’s hard to buy Class A talent with Class C money.