By Matt Vannini & Lauren Boatwright
The discussion of the evolution of tipping has snowballed into a polarizing topic. Restaurateur Danny Meyer fired the proverbial revolutionary shot in 2015 when he announced that he would be eliminating tipping at his establishments and significantly raising prices instead.
Each side wields strong opinions regarding the transition into a tip-less culture. This seemingly European ideal would have a significant impact on the overall guest experience in U.S. restaurants. The dynamic would change the relationship between guests and their server; back of house (BOH) wages and the quest for parity in paychecks along with support staff tipping would almost certainly take center stage. The big question remains: will the general public catch on or cut out?
If you’re thinking about eliminating tipping at your brewpub, where do you begin? In a culture so ingrained in tipping for service, how do you explain to your guests that a 20 percent service cost has now been baked in to your menu pricing, while convincing them that the service standard remains unchanged? How do you motivate your team when service charges are pooled? What significance does this have for your hiring strategies? How will independent operators compete against large chains on employee wages?
It’s important to note that every brewpub and restaurant is different, and will therefore be affected differently by this growing trend. Change is inevitable; now it’s all about doing your due diligence to make educated decisions that work for you, your guests, and your bottom line.
Strategies for Eliminating Tipping
Two different tactics are generally used to absorb the cost of eliminating tipping: menu price increases and surcharges. Frankly, we don’t love menu price increases. That’s not to say they don’t work, but consider the following drawbacks to this strategy:
- Sales Exemptions: Many brewpubs are involved in percentage-based lease agreements where their rent is tied directly to their sales. Say you increase your sales by 20 percent after the surge in menu prices to cover the cost of tips. Now you’re tasked with trying to explain to your landlord that your gross sales increase shouldn’t translate into an increased percentage in rent.
- Price Value Perception: Guests will feel sticker shock when they see that the price for a seemingly cheaper valued item has gone up by 20 percent. Bluntly speaking, there is a limited amount that people are willing to pay for any given item—why would they pay 20 percent more for the same item they can get around the corner for less?
- Price Elasticity: By simply increasing your menu prices, you lose all leverage regarding price elasticity. Despite fluctuating commodity prices, you surrender your ability to make adjustments to preserve a contributing margin on an item. Even worse, you’re no longer able to put price increases on high contributing margin items—a HUGE ding to your bottom line. On the flip side, adding a surcharge provides flexibility regarding the capacity to change that number over time as your business demands evolve. It also provides complete transparency with your guests—if a surcharge is executed properly, you have the opportunity to educate about why the surcharge exists and where the money is being distributed.
Below are four strategies to consider when removing the tip and adding a surcharge. The goal is to ensure that your guests, your team, and your profits don’t suffer.
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Wage Increase Method
Using additional funds from the surcharge, increase wages for your entire FOH and BOH team members. Provide them with wages that are close to the total they were making before since they’re now going to lose their tips.
Split Distribution Method
This is very similar to the wage increase method, except here you augment the hourly wage with splits on additional funds from the surcharge based on a percentage—comparable to a tip pool.
With this method, you would supplement the hourly wage for your FOH via split distribution. For your BOH, you would provide a straight wage increase.
FOH Tip – BOH Wage Increase Method
Here you add a smaller surcharge that covers the increase for BOH wages and allows the guest to leave a tip for the FOH. *Note: Approach this strategy with cautious optimism as it’s yet to be seen whether the service staff receives a smaller tip as a result of the partial surcharge.
To test each strategy above, you’ll need to determine exactly how much to raise wages, or exactly what percent of additional funds should be distributed to each team member. Historical data is paramount for these determinations and you should have a year’s worth of data on hand from the following areas:
- Sales Information: This can be pulled right off your income statement.
- Labor Information: This needs to be split between the FOH and BOH by job code, and should show both average wages and total hours worked. To calculate average wages by job code, simply take the total hourly wage plus the total tips and divide them by the total number of hours worked.
- P&L Information: This is extremely important because whenever you’re making a decision for your operation, you’ll want to see exactly how it impacts key areas of your financial statement.
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The first step with any of these strategies is to define your surcharge rate to recognize how much extra cash you’ll have to distribute among your team members within each strategy. Then, using your historical data, you can crunch the numbers and analyze exactly what will work best for your team. The end goal is to increase wages, distribute the surcharge, or use the hybrid method in a manner so that your change in EBITDA is as close to zero as possible!
There’s much to consider when it comes to eliminating tipping. While the industry will perhaps adapt, the subject will require careful consideration of the impact on your guests, your team, and the bottom line.
Matt Vannini is partner and strategic development, and Lauren Boatwright is marketing director at Restaurant Solutions Inc. (RSI), a national restaurant accounting and management services company providing restaurateurs with solutions to not only survive in the competitive restaurant industry, but thrive.