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Could the tip culture change?

Could the tip culture change?


Source: NRN

Jonathan Maze

Oct 28, 2015


Has the time finally come for American restaurants to abolish the tip?


Restaurateurs and their customers have been asking this question on and off for at least a century. But it has become a bigger debate more recently, amid growing labor pressure in the industry, inequitable pay among employees, weakening traffic and mounting complaints from diners.


Industry watchers may well have their first true big test case on the U.S. tipping culture. In October, Danny Meyer’s Union Square Hospitality Group announced plans to eliminate tipping and raise wages for all workers at its 13 New York City restaurants, paying for it with higher prices.


In 10 years, if tipping is abolished, that might stand as the beginning of the end for the practice in the United States. It might also prove that tipping is too ingrained in U.S. culture to truly end.


“It’s a seminal moment,” said Fred LeFranc, founding partner at the restaurant consulting firm Results Thru Strategy, based in Charlotte, N.C.


“He’s changing the model,” said Gary Levy, partner and hospitality industry practice leader at the accounting and tax advisory firm CohnReznick, based in New York City. “Tipping historically is a transaction between the customer and the server. It’s at the customer’s discretion. Danny is saying that now we’re making it a transaction between him and the customer. We’re going to charge more, and pay our staff a salary.”


Operators and executives at casual-dining restaurants are paying close attention to the Union Square experiment. Some restaurateurs Nation’s Restaurant News spoke with were mixed in their views on whether tip culture would or should end in the U.S. – uncertain whether removing tipping would improve the restaurant experience.


But some operators simply don’t like the prospect of eliminating that gratuity, which to them serves as a commission that encourages waitstaff to provide quality service.


“I love the idea that it’s competitive,” said Paul Mangiamele, CEO of 75-unit Bennigan’s Franchising Co., based in Dallas. “The servers will have to compete and deliver the experience one guest at a time, one server at a time. If anyone has bothered to talk to those servers, they take great pride in that.”


Tipping started in 17th-century Europe, crossed the Atlantic during the 1800s and became commonplace in the U.S. in the 1900s. It became largely mandatory in the 1960s, after Congress agreed that tipped employees could receive lower than minimum wage, now currently $2.13.


And Americans generally tip well. In a 2014 Harris poll, the average respondent reported tipping 18 percent for good service, and 70 percent of respondents said they tip between 15 percent and 20 percent for good service.


Still, tipping routinely comes under fire as a system that is antiquated and unfair. Researchers at Cornell University, for instance, have found that black servers are typically tipped less than white servers.


They have also found that women get bigger tips if they are blond, or if they’re thin. A Harvard University study found that countries where tipping is more common are more likely to have problems with bribery and corruption.


Labor issues could force the issue among restaurant operators. Labor shortages, following years of heavy hiring by the industry, has made it difficult for operators to fill jobs, particularly among cooks and other back-of-house employees. That is putting pressure on those wages.


Rising tip credit wages, or rising minimum wages in states without a tip credit, are also challenging operators’ labor models, as is pressure on the industry broadly to increase wages. Health care demands, too, have put pressure on labor costs.


All of these factors might push the industry toward a more European-style model in which restaurant workers are more highly trained and work for salaries, rather than tips. “Danny is just reading the tea leaves,” LeFranc said.


Restaurateurs have periodically experimented with tip-free locations, too, but typically in one-off locations in high-cost areas like New York and San Francisco.


Sushi Yasuda, a sushi restaurant in New York City, eliminated tipping in 2013 and received nationwide praise for doing so. Yet it’s also a high-end restaurant. Other fine-dining restaurants have done that, too, typically by adding a service charge.


Restaurants with already high prices could have an easier transition away from tipping because customers might not be as sensitive to an 18-percent gratuity charge or a 20-percent increase in prices.


“It works better in fine dining than in moderate dining,” said Ed Doherty, owner of Doherty Enterprises, based in Allendale, N.J.


Doherty Enterprises operates 140 restaurants, including Applebee’s Neighborhood Grill & Bar restaurants Panera Bread locations. “In fine dining, you add 20 to 21 percent onto a person’s bill that’s $300 plus, you just throw another $60 on there. People aren’t as price conscious as they are in other brands.”


LeFranc noted that other types of establishments have been tip-free for years. Country clubs, he said, have long been tip-free. Room service has always had tips included automatically. “It’s just not in your public restaurants,” he said.


In casual dining, the big question is whether consumers would accept those higher charges. That’s a big if for a sector that has struggled with sales and traffic weakness for nearly a decade now.


“If prices are $55 for an entrée,” LeFranc said, “that’s a big increase.”


According to the MillerPulse index survey of operators, casual-dining traffic has risen in only three months over the past three-plus years, declining 1.3 percent on average.


One theory is that tipping contributes to that decline in that it acts as a service charge that makes the bill more expensive and drives away value-focused customers. Customers seeking higher-end meals therefore go to fast-casual restaurants, where there is no tip expectation.


Yet some industry observers believe higher prices would also drive away those value customers, and they fear that the economy isn’t strong enough to support a dramatic increase in base prices. “Who has more disposable income?” Mangiamele said. “The economy is limping along. Indicators are screaming it.”


“Ultimately, the consumer will look at the value of the experience,” he said. “The tip will be a part of it. If they don’t feel they’re getting value for their money with the increased pricing, they’re not coming back.”


Union Square will eliminate tipping from one of its restaurants, The Modern, in late November. It will expand that to its other restaurants in New York over the course of the next year.


In a letter to customers, Meyer said that tipping had stood as a major obstacle in his company’s ability to provide more career opportunities and advancement for his company’s employees. And many of them, notably cooks, reservationists and dishwashers, “aren’t able to share in our guests’ generosity, even though their contributions are just as vital to the outcome of your experience at one of our restaurants.”


Instead of a service charge, the company plans to raise prices to replace the tip and pay higher wages for servers and staff.


It might not be a cheap move, either. Levy noted that Union Square will walk away from a social security tax credit that can be anywhere from 1 percent to 2 percent of sales, “a very big number.”


Many observers said The Modern would be the ideal place for such a move to begin. The restaurant is inside the Museum of Modern Art, where it won’t have much competition. A big risk in raising prices and going tip-free is that customers will see the higher prices and go elsewhere.


“What Danny is doing is great,” LeFranc said. “It offers people a living wage. It takes noise out of the system. But casual dining is in a very different position to take advantage of that or not.”


Kenney Moore, CEO of Hwy 55 Burgers, Shakes & Fries, a 121-unit chain based in Mount Olive, N.C., said he’s been looking at the tip question for months. But he, too, is uncertain whether it would be a good idea for a chain like his to go in that direction.


“I’m a little bit mixed,” he said. “I’m going to wait and see how it falls out. It’s just so different. You put an administrative fee at the bottom of the check, how are guests going to take it?”


Tips represent a form of commission. Waitstaff operates much like salespeople. They’re the frontline workers of a restaurant, and their personality and service level can dictate whether a customer returns.


Some operators worry that if they were to get rid of tipping, their top waitstaff would leave to go work somewhere else because they can make good money by doing their jobs well there.


“I think the server takes pride in providing great service,” Mangiamele said. “When I talk to bartenders and servers, they hate the whole debate. Their check was incidental to the tips they’re supposed to make.


“We solved a problem that never existed. Taking away tip policy and making it so all the servers are the same is contrarian to the nature of service.”


Indeed, any restaurant that were to go tip-free would have to get buy-in from servers first because they’re the ones whose jobs and pay would change. “My advice for anybody trying to do this is to have dialogue with your server staff,” Levy said. “Understand their perspective.”


The tip system is also easier for operators because it minimizes need to evaluate servers and give them raises. Operators do evaluate servers to ensure they’re doing a good job, but the tip, and not an annual raise, provides that incentive. If tip policies go away, restaurants will have to give workers annual raises.


Moore likes the ability tips provide to pay good workers more money. But, he said, “I’d love to give cooks more money, too.”


Doherty, who considers himself mixed on the idea of tipping, said that operators would have to ensure that servers take certain steps to keep business flowing at restaurants.


For instance, he noted that servers would have to be trained to fetch more regular drink refills. Applebee’s diners are more likely to return if they’re satisfied at the number of drink refills they receive. Right now, tips provide an incentive for servers to provide those refills. No tips, and waitstaff would have to be trained for this because that incentive would be gone, according to Doherty.


Operators would also have to be more cognizant of overtime, given that they’d be paying much higher wages to servers and would be responsible for that much more in wages if they work more than 40 hours, Levy noted.


Broadly, operators worry about what would happen if the U.S. restaurant industry evolved into that European model. Some suggest that many operators would not pass along all cost increases to employees, or that they would reduce staff and service.


Mangiamele, for one, suggests that some operators would “abuse” a tip-free system in these ways. “It’s a recipe for disaster doing it that way,” he said.


Still, it’s up to operators themselves to train employees to provide good service regardless of whether tips are involved. “It’s my job as CEO to create a culture,” Moore said. “Taking care of your neighbor. Diminish expectation of a tip. You’re taking care of their needs. Refill a guy’s glass because he’s thirsty, not because you’re trying to make a tip.”


Any evolution away from the tip culture would likely start on the coasts, at high-end restaurants, much like it is now. And then it would spread into other parts of the country while trickling down to casual dining restaurants. Moore also would expect seasonal restaurants to be more likely to adopt a tip-free policy first before non-seasonal concepts.


One way or the other, such an evolution would not be quick. “It’s going to take a long time for the concept to finally go away,” LeFranc said. “People are just so used to tipping. They find it weird when they don’t.”