To Tip or Not to Tip? A Foodservice Consultant Weighs in on Labor Cost

By Juan Martinez, PhD, PE, FCSI and Principal at Profitality®

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It seems a lot of operators are stuck on how to make this whole no-tipping thing work without emptying their pockets, and are trying to find alternate ways—like upping menu prices—to balance it out a bit. But how can this model be sustainable and scalable, and at what price?

Well, if the current undertow that is in the marketplace ends up coming to fruition in the restaurant segment, this question will no longer be in existence and we can go on to worry about the next one.

I am going to refrain from the economic side of this dilemma, since I am sure many others more worthy are already pondering and writing about this, along with the reality that I am just not an economist; but then again, a comment along the way may be appropriate.

Since there are so many underlying pieces, philosophies, theories, and models that come along with this primary issue, I would submit to you that it would be difficult to truly land on what will happen if and when automatic tipping becomes a reality. Keep in mind that as you try to analyze the situation in a static way, there are other regulations that are being considered by different levels of government that could change the deck that you are looking at, altering the end result. This past week I read an article on tip pooling that restricts who can benefit from the tip pool.

These sorts of actions should make us all wonder: What is the next legislation that will spring out, like if we need more government intervention?

My biggest concern is around the unintended consequences if automatic tipping becomes a reality. One initial position I would like to offer from a personal human behavior perspective is that I feel that tipping is a free economy right that we all have and would love to continue to exercise, but perhaps a “who cares?” response may be offered by many who feel this way.

Who can win from this?

The obvious initial answer may be the government, since they will get more taxes from the wages of employees that may not be reporting all the tips, along with the sales taxes that come from the increase in the prices that restaurants will likely have to apply, in order to compensate for the cost, since they will have to pay more per hour for servers that are currently paid under a “tip-based” system. 

Concepts that can deliver their food offering without the inherent piece of tipping for service can also benefit. Years ago, this category was mostly filled by quick-serve restaurants. Nowadays, in addition to the fast-casual category that has blossomed, or any other sub name that has also shown up in the marketplace for this type of restaurant (e.g. quick casual, etc.), many other concepts have sprung into offering viable replacements to restaurant meals, including C-stores, who have significantly upped their ante in this area, along with groceries, many of who have done the same. They are certainly going hard after the “share of stomach” in the market.

Who can lose from this?

Let me start by saying that the guest is likely to be the first one.

I feel that there is a direct link between effort of service with the expectation of more reward and higher pay via tip.

Think about it. Will you personally work harder if you know you will benefit more from your effort? Why do athletic teams practice so hard? To win the game! Otherwise, we may just want to coast a bit, since it may not make a difference.

A key question in this quandary and big issue is, how does the guest feel? My wife and I consider ourselves good tippers, but since this issue is forcing our hand, we don’t like it. Perhaps this will influence my next visit and I will begin to frequent other places where automatic tipping is not required.  

Keep in mind that many concepts in the fast-casual theatre of operation, as well as in the quick-serve category, are already upping their game in the food quality they offer and even in the service mode they give guests. Many have gone to table service after you order and pay. So they are executing two of the three main aspects of a full-service restaurant (e.g. better quality of food and part of the table service), without having to worry about tipping. They are very likely going to win as automatic tipping will come to reality.

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What can concepts do to minimize the impact?

If full-service concepts that have servers who get tips could execute automatic tipping without having to rely on tips and without having to increase the prices they charge guests, there would be no harm done and most of the positions I made before would be gone. But the reality is they cannot, so it becomes a harsh issue that needs to be dealt with.

Although most foodservice concepts have a detailed breakdown of their food cost to the cent, many of them do not really understand their true labor cost. I don’t mean to say that they don’t know the number for labor in their P&L since this is a figure they see at the end of any accounting cycle they keep their eyes on (e.g. by shift, daily, weekly, monthly, etc.), but rather that they do not really understand what makes this number up. Or, better yet, they don’t understand what should make this number in order to drive a healthy level of overall hospitality to their guests and profits to their bottom-line. Notice that I used the word hospitality to describe what restaurants offer. In this word, I include service times, service (friendliness) levels, and product quality, among other aspects that make up hospitality.

Most concepts do not even have the information that would enable them to truly understand their labor cost. This information should include a granular and detailed enough breakdown of the labor to be able to know the work content to do all the labor activities required to run the concept, including all prep, guest service, cleaning, receiving and storing, and how these times impact each of the products they sell. How else could you accurately define the labor impact to the profitability of the concept, if you cannot attach the labor to each of the items that you sell? 

Basically, as a starting point to conquer the Battle of the Tip included in the price of the item, concepts should get a detailed, item-based accounting for the labor, just like they do for food cost. Armed with this information, they can then figure out how to re-engineer the products they offer to minimize the labor cost, so that the impact of the automatic tipping gets reduced.

What good can come out of this?

One good aspect of all the labor cost increase currents that are facing the restaurant industry is that it will force operators to become more efficient and lean. The application of the principles of industrial engineering in foodservice can help concepts do just this. The truth is that concepts should be in continuous improvement mode to stay relevant and competitive in the marketplace. Not taking this approach can quickly make them irrelevant, impacting profit and brand growth.

A strong recommendation I would offer restaurants is to take action on how to better manage their labor line, since many forces are already driving labor costs up and more are likely coming. Between automatic tipping, minimum wage increase that would make the no tipping wage even higher, health care legislation, and other movements, there will definitely be changes in the landscape of the restaurant business — perhaps even of our economy, since these changes will certainly have an intended or unintended impact on the number of employees restaurants can afford to staff.