If You Bake In The Tip In Your Restaurant — Will It Eat Away Profits?

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This month we’ve hopped on the proverbial bandwagon and joined in the debate of transitioning our well-known American Tip Culture to embrace the more European model of complete tip removal; otherwise known as Hospitality Included.  We’ve discussed the positive and negative impacts that this transition can have on both your guests and your team members, but we’re forgetting a major piece of the puzzle here and our triangle of balance feels indeed, quite unbalanced.  In today’s blog post we’re going to balance out that triangle and put a magnifying glass to the P/L to take a look at how Hospitality Included is changing the Hospitality Industry… and in what ways it may affect your bottom line.

Having Minimum Wage Increases spike across the country and continuously rising commodities, restaurant operators are having to find new means in which to maintain healthy profits or worse-off, survive at all.  Now if we start to introduce the eliminating of tipping into the picture, businesses that already function on dwindling margins will need to find ways to jump this hurdle too.  That is unless you have the ability to make it work in your favor, à la Danny Meyer.

The current labor pool is already scarce and with the foundation of Hospitality Included there’s a blanketing fear that it may only get worse as a larger wage disparity will occur from restaurant to restaurant. To clarify, this disparity no longer resembles FOH and BOH employees since everyone will receive an equal and fair wage in Danny Meyer’s ideal.  Instead, this disparity speaks directly to the fact that competitive wages will be ubiquitous for all team members.  While some restaurant groups may be able to make this picture work, others won’t have the ability to even compete for the quality applicants since their starting hourly wage will be less than a concept around the corner.

Imagine two different restaurants: For simplicity purposes, we’ll call them Restaurant A and Restaurant B. Let’s say A takes in 10 million annually, while B rakes in a cool 50 million.  What’s the only thing seemingly similar at these two different places?  Their Job Codes – those won’t change.  Now, you have the same Job Codes, but Restaurant B can afford to pay their team more because they simply have more dough to put towards their labor costs.  You’re applying for a server job – which restaurant do you apply for?

The smaller fish now becomes a training ground for less experienced individuals that will work for less money than those with stronger resumes.  Unfortunately, this could potentially make an already frustrating situation of maintaining a full staff even more discouraging.

Additionally, within Hospitality Included, menu pricing or surcharges will increase to cover the baked in tipping, but the question is, how much do you increase?  Recipe costing will be critical to determine what your modified sales prices will be.  Initially, you may think that a 15-20% increase in sales will cover everything; however, there are some intangibles that you may have forgotten.  Consider states that allow a reduced minimum wage for employees—this now vanishes, meaning the guest won’t be able to help offset your labor expense because they no longer have the opportunity to leave a gratuity, thus supplementing the hourly wage to reach the state minimum.  For example, in Colorado, the Tipped Employee Minimum Wage is $5.21 but the State Minimum Wage is $8.23.  As long as all tipped employees (paid by the restaurant at $5.21/hour) receive enough tip income to meet the State Minimum ($8.23/hour) the restaurant does not have to pay the difference of $3.02 as an hourly wage… tips make up that difference.  As well, for Year-End Tax Returns and K-1’s, there will be no FICA Credit to help offset an owner’s personal income tax liability.

Next, there is the scenario of percentage rent.  Often times, in commercial lease agreements, there is an expectation that when your gross sales surpass a specific mark, you begin to pay additional rent via an extra percentage for every additional dollar in sales.  Since the increase in sales is essentially an artificial inflation due to the increased wages that you are paying, you can only hope that your landlord will negotiate with you.  Some may, most probably won’t.

So when kicking around the idea of eliminating tipping, you have a lot to consider.  While some good may come out of it, for example, a unified team front all working towards the betterment of the restaurant’s bottom line, there will certainly require more effort of owners and operators to make it work.