No Tipping? Now What?

The no tipping movement seems to be gaining momentum. We’re hearing multiple stories about restaurant groups (Danny Meyers’ Union Square Hospitality Group) and individual restaurants pledging to move away from tipping.   There are a number of good reasons:

• The ability to distribute wages more equitably – particularly to pay kitchen staff more and to improve retention
• To improve consistency of service
• To mitigate some of the operational challenges arising from tipping (see past posts and an upcoming discussion document).

They’re all good reasons.   Making the decision to change is the easy part. Getting it done will be more of a challenge.  Careful consideration needs to be given to implementation.

There are two common approaches being discussed.   The first involves adding a service charge to all cheques. It simply automates the process of tipping and moves it to the control of the restaurant management. The second involves adding a percentage to the price of all food items. Both have strengths and weaknesses.

Service Charge

A service charge may be somewhat easier for customers to understand. They are used to paying a percentage in tips and this simply formalizes it. It also takes away the pressure on the customer of deciding how much to tip. It does, however, put pressure on the restauranteur to decide how much the service charge should be. This is not an insignificant challenge. What level is acceptable to customers? Often restaurants chose a level close to the current tipping average. The problem is that this may not provide enough money to achieve all of the goals of removing tipping. Not only does paying the kitchen more out of a fixed pot of money mean that you have less for the servers but there are costs associated with internalizing tips. Increased wages to the kitchen and servers (tips weren’t controlled by the restaurant) mean increased payroll costs for the restaurant too. If the change is not universal, dramatic decreases to the server wages may make it difficult to keep servers. Putting the service charge at a higher level may create resistance.   There may also be new tension due to differences in pay. That exists today but it’s outside of the control of the restaurant because of tips. If it is all internal this may create not only tension but resentment of management. It is a delicate balance.

Raising Prices

This option involves increasing menu prices. It is simple and makes service and food all inclusive. This is the approach that Danny Meyers is suggesting. It has the benefit of being simple. It may cause customer resentment when comparing prices between restaurants. It may cause a loss of customers if price is important in the comparison. Pricing strategy is important and breaking it up may make it more palatable. The type of restaurant you are and how popular (i.e. price sensitive versus loyal) your customers are will influence which approach works best.

This approach has the same challenges with total increase as service charge does. What to pay the different staff. How much to increase prices. This approach has the additional challenge of deciding whether to increase all prices by the same amount or to be more selective in which prices to increase by which amount. It may make more sense to increase some items by higher amounts. Restaurants need to think about total revenue. If the number of desserts and appetizers (as an example) ordered goes down because of the price increase then there may not be as much more revenue as anticipated (even without a decrease in customer numbers) and then you can’t pay more or meet your other objectives.

What else can you do?

There are variations on the theme that are possible. One chef chose to get rid of servers and have cooks deliver food.  Eater article on Dominique Crenn

She got rid of tips and only has to pay one type of worker. She’s also significantly changed the nature of the service experience. Others have done the same thing (or slight modifications) with and without tipping.

There may also be innovative alternatives we haven’t considered yet at all. Perhaps we have a fixed price for a base menu and then “upgrades” at different price points for enhancements. This might be a more accurate reflection of the value created in the experience and help to insure a minimum margin for occupying that seat for a given amount of time.

It will be interesting to see where we end up. There will likely be a variety of approaches depending on strategic priorities and specific characteristics of the restaurant. What is true, though, is that careful consideration is necessary or things could go badly off the rails. Deciding to change is the easy part – where you end up is the hard part.