Tag Archives: danny meyer

THE HOSPITALITY QUOTIENT – WE CAN CHANGE THE WORLD, AT NO COST!

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 THE HOSPITALITY QUOTIENT – WE CAN CHANGE THE WORLD, AT NO COST!

“Culture” is an overworked term in the restaurant/hospitality business.  Every operator strives to create an exemplary corporate culture. Hard as it is to define, Danny Meyer  and Howard Schultz have demonstrated how far a great culture can take you. It is not the coffee, good as it is, that has allowed Starbucks to build 20,000 profitable stores worldwide. My daily visit to Starbucks is my morning social life. “Hi Roger, your usual venti soy latte’, no foam?”, or ”did you get a haircut?”, or “haven’t seen you in a little while, been away?”

My wife and daughter think I’m getting a little (or a lot) eccentric. Often, after a service person responds with a “no problem” after I thank them,  I take a minute (if they seem friendly) to suggest that something like “my pleasure” is a lot more hospitable or what I might call charming.  Of course it’s not a problem, because  it’s their job, after all. I feel like I’m doing them a favor, mentoring them if you like, and it costs me nothing. I say it with a smile, tell them I am only taking the time because they seem like they care. Almost all the time they seem to appreciate it, and usually respond, on my next visit, with “my pleasure” and a smile. I tell my wife and daughter that they can call me a little crazy, if they like.

Which leads me to my visit this morning to Starbucks. The expeditor at the pickup counter, who Starbucks now has in place to sort out the digital/pickup orders from the in-store ordering, handed me my drink, and I thanked him. He said “my pleasure”. I complimented on that response, and he said that it was natural for him because he also works at Chick Fil A.

I’ve never met or spoken to the management of Chick Fil A but I have visited their stores and the experience is always a good one. Last I read they were doing $5M a copy in a six day week. That compares pretty well to McDonald’s, good as they are these days, doing 40% less than that over seven days. Maybe there really is something about a great corporate culture, taking the time to build something as simple as a warm salutation into the training process.

LET’S CHANGE THE WORLD TOGETHER !  There’s nothing obnoxious about “no problem”. However, we would be doing our employees, many of whom are just beginning their working lives, a great long term service if we suggest a variety of more personal, hospitable, even charming responses. “My Pleasure”, “Always Nice to See You”, “You’re Very Welcome”, “Any Time”, “Come See US Again”, or down south “Y’all Come See Us Again, Y’Hear?” are just a few suggestions.

There’s a reason that the customer experience at Chick Fil A and Starbucks is a cut above almost all of the competition, and the sales follow. The above does not happen by accident.

Roger Lipton

DANNY MEYER’s SPAC COMES PUBLIC – (HUGS) RAISES $250M – THE OUTLOOK!

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DANNY MEYER’s SPAC COMES PUBLIC – (HUGS) RAISES $250M – THE OUTLOOK!

THE EVENT

Danny Meyer and Co. raised $250M yesterday. Now the hunt begins to find a high quality company that can be bought without overpaying by too much. The time allowed to complete the transaction is twenty four months, though that could be extended by way of a shareholder vote.

Something like $100 billion has been raised by way of SPACs (Special Purpose Acquisition Companies) in the last twelve months, which can be leveraged four or five times. If half of that is still in the hunt, that would mean that $250 Billion is looking for a home. Foreshadowing our conclusion:  it will be hard to find a bargain.

THE COMPANY

Each Unit of USHG AcquisitIon Corp. (HUGS/U), sold to the public at $10.00, consists of a share of Class A common stock plus one third of a five year warrant to purchase a share of class A common at $11.50. The $11.50/sh warrants are exercisable on the later of 30 days after the business combination or 12 months from the IPO. The Sponsor of HUGS  is an affiliate of Union Square Hospitality Group, LLC, (USHG, the same letters, different order).

We need not detail the credentials of Chairman of the Board, Danny Meyer, literally a legend within the hospitality industry.

In addition to Randy Garutti, well known to investors as CEO of Shake Shack, Directors probably less well known to restaurant industry investors, are: CEO, Adam Sokoloff; CFO, Tiffany Daniele; J. Kristofer Galashan;  Lisa Tatum; Mark Leavitt; Walter Robb; Heidi Messer; and Robert Steele.

Daniele, Galashan, Tatum, Leavitt and Robb have long been affiliated with USHG. Sokoloff and Steel are highly qualified in terms of their background within investment banking and private equity circles. Messer has been a prominent, successful  entrepreneur and investor in the digital economy since the commercialization of the internet.

There is also an Advisory Council, consisting of Clarence Otis, Jr., Avisheh Avini, Patti Simpson, Kelly MacPherson, Richard Coraine, Darryl “Chip” Wade, Jonathan Sokoloff and Peter Mavrovitis, all of whom are affiliated with USHG.

Meyer has clearly done his best to include many of his key associates  from Union Square Hospitality Group, no doubt in his desire  to bring his associates along for  “the ride”.

The stated acquisition strategy, in the same mold as USHG and publicly held Shake Shack,  is “to identify and acquire a company with a people-first culture”. HUGS is not, however, limiting their search to the restaurant industry.

THE FINANCIAL STRUCTURE

There were 6,934,500 Class B shares outstanding before the offering ,bought by the Sponsor for $24,120 (That’s twenty four thousand, one hundred twenty dollars.).  The Sponsor contributed 115,0000 shares  to Share Our Strength, a nonprofit working to end childhood hunger. Following the planned Business Combination, an additional  253,000 shares of class B common may be issued to advisors, presumably largely from the group mentioned above. The Founders’ B shares will elect Board members prior to the Business Combination, then be converted to A shares.

The Sponsor agreed to lend up to $300,000 to HUGS, to cover organizational expenses, to be repaid from the proceeds of the offering. The sponsor has agreed to purchase 1,333,333 warrants similar to those publicly held, for $2M, or $1.50/wt.

The Founder’s shares can be sold at the earliest of (A) one year after the Business Combination and (B) subsequent to the business combination, if the closing price of the public shares is at or above $12.00/sh for 20 trading days commencing 150 days after the business combination.

THE RISK AND THE REWARD, FOR THE SPONSOR, FOR THE PUBLIC

The Sponsor is risking about $24,000 to buy the Founder’s shares, plus loaning $300,000 for organizational expenses if the SPAC doesn’t become publicly held. Worst case, the Sponsor loses $324,000. When the deal comes public, another $2M is spent to purchase $1.33M warrants, so the Founder is then out of pocket by $2,024,000.

The public shareholders of HUGS have the right to redeem, for approximately $10/share,  prior to the Business Combination if they disapprove of the outlook from that point forward. This is typical of SPAC offerings and a major source of comfort to the SPAC buyers, along with the warrants (costing nothing) they can keep if they  bought the Units at the IPO. If time runs out to find  a Business Combination or if the majority of all the shares (37.5% of those publicly held) disapprove of the deal, the SPAC would be liquidated and the full $2,024,000 provided by the Sponsor would be lost.

The Founder’s shares, not liquid for a while, at the $10/share offering price of the unit before the public has won or lost anything,  are worth $69 million, almost 35 times the total invested.

However, it may not be easy to sell a lot of shares very soon.  There are lots of reasons that HUGS might not do so well for a couple of years after the Business Combination.  The Sponsor can sleep pretty well, though, because there is a big cushion. It only requires about  $0.30/share for the Founders to get back their $2.024M. On the upside, if the HUGS common should trade north of $12, to perhaps $15/sh., six months after the Business Combination, for whatever combination of reasons (strong market, exciting story, etc.etc.) the value of the liquid shares at that point, would be worth over $100M.

So….if management has any reasonable success, the return to the sponsors would be very large. If the stock only trades at $5 (so the IPO purchasers have lost half their investment) the Sponsors own over $30M worth of stock, fifteen times their money. At $15/share, the public makes a 50% return (plus the value of their warrants) and the Sponsor makes over  fifty times its investment..

And that’s why smart  entrepreneurs who can find an underwriter, are sponsoring SPACs. That’s also why there is going to be very active M&A activity, a great deal of it at inflated prices.

CONCLUSION

HUGS is going to find a very attractive opportunity, an open ended growth situation,  including a great “culture”. HUGS’ management will follow Warren Buffet’s approach in terms of paying a full price for a high quality property.  Meyer and Co. will have  outbid other purchasers in this overfunded environment, but the investment community will give HUGS’ management every benefit of the doubt. Investors will have a reasonable  chance to make an acceptable return over the long term and the Sponsor will make a fortune.

Roger Lipton

DANNY MEYER REVERSES WELL INTENDED NO TIPPING POLICY – NOW FOR THE UNINTENDED CONSEQUENCES!

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DANNY MEYER’S RESTAURANTS WILL END NO-TIPPING POLICY

The article just below is from yesterday’s New York Times. We don’t get them all right, but we did this time, for the right reasons, almost five years ago and again two years ago. Those articles are provided just below.

Most important to all of us now is what Meyer’s move signifies going forward.

The restaurant industry obviously remains in a  huge state of flux. so nobody knows how quickly some form of normality returns. The pandemic has brought forward and magnified a great number of economic, social, and political trends that are taking place worldwide. As one obvious example, America has been over-stored for years, too many restaurants and retailers chasing the same consumer dollar. Not so much anymore.

The most important Unintended Consequence, or perhaps Expose’ of a latent trend, especially when economists are completely convinced that inflation is not a problem, is that menu prices are going to be higher. Even prior to the pandemic, Profit Margins and Cash Flow have been squeezed as the minimum wage paid to crew is moving through the mid-teens and $20/hr. is not far away. At the same time, compensation for store level management as well as field supervision is heading higher, especially in light of increased fringe benefits such as health coverage. Higher labor expense has not been offset by any other major expense line, including G&A,. Since restaurant operators have to generate a return on their substantial capital investment, higher back of the house wages, with no major offset,  will have to be offset by higher menu prices.

Aside from full service restaurants, we have commented before that quick service chains are promoting less during the pandemic. Four months ago, I could buy two quarter pounders with cheese for $5.00 and coffee for $1.00. Now one quarter pounder with cheese costs $5.67 and the coffee is $1.29.  Notice that hardly any publicly held restaurant company, as they headline month to month sequential improvement,  is commenting on price and menu mix adjustments year to year. A case in point, and an exception,  is Shake Shack, whose recent 49% recent same store sales decline was accompanied by a 60.1% traffic decline. Those 11 points were due to “an increase of price mix”.

Sounds like inflation to me.

Roger Lipton

Reprinted from New York TImes (7/20/20) – Italics and/or Bold Print have been added

Union Square Hospitality Group, which helped lead the move away from tips, changes course as its restaurants reopen.

One of the country’s best-known restaurateurs, Danny Meyer, announced five years ago that his  Union Square Hospitality Group would gradually eliminate tipping. The group’s decision began an industry wide examination of the age-old practice, but adopting it proved complicated, especially in New York State, where laws governing tip distribution are strict. Still, especially in recent months, many Americans have come to agree with Mr. Meyer that tipping contributes to unequal pay, racism, sexual harassment and power disparities in the industry.

But on Monday, the company reversed course. Mr. Meyer told his staff that Union Square Hospitality would abandon what it calls its “Hospitality Included” policy as its restaurants reopen for outdoor dining, starting on Thursday with the flagship  Union Square Cafe in the Flatiron district and extending to the nearby Gramercy Tavern in the coming weeks. (Some of the group’s other businesses are already open for takeout and delivery, and all will shift to tipped wages immediately.)

Mr. Meyer said in an interview that he still believes that tipping contributes to inequitable pay, wage instability and other problems, and that he is collaborating with the national        One Fair Wage campaign to eliminate it. But as the restaurants begin rehiring today — about 95 percent of the staff has been laid off  since March — he is unwilling to deny any extra compensation that might be available to employees in a time of economic crisis. We don’t know how often people will be eating out, we don’t know what they are going to be willing to pay,” he said. “We do know that guests want to tip generously right now.”

The Hospitality Included model, which eliminated tips in favor of a consistent hourly wage, was adopted over several years as New York State’s minimum wage rose to $15 per  hour. The extra labor costs for the restaurant were reflected in menu prices, which increased by 15 to 20 percent. In theory, at least, the customer’s actual cost per meal would be about the same. Wilma Cespedes-Rivera, a bartender at Blue Smoke, a Union Square Hospitality restaurant in Lower Manhattan, has worked for the company for five years. She said that for servers, the change from tipping to Hospitality Included was painful and many talented colleagues left for other jobs. “People understood that the goal was for a healthier balance,” she said, “but it wasn’t what we signed up for financially.”

In New York State, only employees who spend at least 80 percent of their time interacting with customers — so-called front-of house-workers like bartenders, bussers and servers — can legally receive tips; cooks and kitchen workers (back-of-house employees) cannot.
Especially on weekends, when tabs and tips run higher, the difference in earnings can be stark, and often generates conflict between the two groups. Now that employees like Ms. Cespedes-Rivera will likely again earn more than kitchen workers, Mr. Meyer said, his group will institute a revenue-sharing system for back-of-house employees, and their overall compensation will go up 20 to 25 percent. After Mr. Meyer announced the move to end tipping in 2015, some other industry leaders, including David Chang and Tom Colicchio, tried to follow suit at their restaurants. But for most New York restaurateurs, the experiment did not last; many customers, as well as servers, remain attached to tipping.
Fair pay, like virtually every aspect of the hospitality business, is currently being scrutinized by chefs and owners as they contemplate reopening with reduced capacity, added risks and high costs. Amanda Cohen, who has maintained a no-tipping policy at her Lower East Side restaurant, Dirt Candy, since 2015, said the national movement away from tipping is gaining momentum during the pandemic.  “It’s really changing the way people think about work,” she said. Especially in states where tip sharing and surcharges are allowed, like California, restaurants are coming up with new ways to compensate employees that don’t privilege one group over another. “Every little breakdown in the system helps,” she said.

Although a new law in New York State will end the tipped minimum wage for most workers on Jan. 1, the measure excludes restaurant servers, who can continue to collect tips and be paid a lower hourly wage. In December, Gov. Andrew M. Cuomo’s office described the new law as “the end of the sub-minimum wage,” and announced that the decision was based on findings from the state Department of Labor that tipping is disproportionately harmful to “the lowest-paid workers in our state: women, minorities and immigrants.” Although the law applies to nail salon workers, dog groomers and many others, restaurant workers — the largest group of tipped employees in the state — are exempt.  “Until the law allows all of our workers be paid a fair wage, tips are the only way to make the system work,” Mr. Meyer said.

But for small-scale restaurateurs facing existential challenges, tipping policy is “not high on the list” of priorities, said David Helbraun, a lawyer in Manhattan whose firm represents more than 1,000 restaurants.  He said his clients have one concern these days: cash flow. With restaurants barely operating for the foreseeable future, rent relief (or money from governments to pay it and other costs) is all that matters. “None of the rest of it matters if you can’t pay the rent,” he said.

 

DANNY MEYER ELIMINATED TIPPING  OVER TWO YEARS AGO, WHAT’S THE VERDICT?

In October of 2015, almost two and one half years ago, we wrote an article expressing our doubt that “gratuity included would prove productive. The full article is shown below the following update. While the “jury is still out”, the evidence to date seems to support our prediction.

Coincidentally, the Sixty Minutes TV show did another feature on Danny Meyer just three days ago, basically a “puff piece” (well deserved) on his outstanding success with his full service restaurants and founding of Shake Shack. Within the segment was a discussion of his no-tipping policy, his conviction that the back of the house has to be properly rewarded, and how his new policy would help to accomplish that. He acknowledged that his approach might be “early”, just as when he went to a no smoking policy twenty years ago, ahead of the crowd, but he would persevere in this case as well. He reflected positively on the attitude of the staff, old and new. However, what he did not discuss was the effect on traffic, sales, and profit margins.  As an analyst, we have learned over the years, that when management does not discuss the details, they most often are not supportive of the broad strategy. I had some brief contact with an employee of Union Square Hospitality Group (USHG) a few months ago, and he didn’t argue with my suggestion that profit margins at privately held USHG have probably suffered, if the front of the house is paid pretty much the same, the back of the house gets a raise, and total selling prices (included a standard gratuity) are not increased materially.  (Not all of the USHG restaurants have become gratuity-included.)

An article from eater.com crossed my desk this morning. Apparently, Danny Meyer acknowledged recently, while accepting a Workplace Legacy Award, in Plano, Texas, as being a leader “who demonstrates success in people practices and operations, in addition to benefiting employees, organizations and communities”,  that  30 to 40 percent of his serving staff have left. Presumably, the back of the house staff has been more stable, since they now make about 20 percent more than before. He didn’t discuss sales and traffic trends, or operating margins. Since Union Square Cafe closed and re-opened in a new location in the middle of this two year period,  accurate comparisons are elusive. Personally, I have had two great dining occasions at the new Union Square Cafe, so the “hospitality quotient” has not suffered as far as I can tell.

Danny is sticking to his plan, and  can afford to set a high standard within his own restaurants as well as for the industry as a whole. As I said over two years ago, “There is no one better equipped that Danny Meyer to implement this new policy…”

There has so far been no noticeable trend for other restaurant owners to follow his example. Especially within the current environment, with restaurant operators fighting to maintain traffic and profit margins, we doubt that much will change in this regard. We continue to feel that Meyer’s approach will not attract new customers and could cost at least a few. Hardly any restaurant operator can afford to run the risk losing even a modest number of customers, either because they prefer to control the tipping process, or as a result of major turnover among the serving staff.

October 15, 2015

DANNY MEYER ELIMINATES TIPPING. WELL ADVISED? BE CAREFUL OUT THERE!

The talk of the town and the country, among restaurateurs and diners alike is the no-tipping policy that Danny Meyer is about to embrace in his highly regarded full service locations. No one is more respected in the industry than Meyer, with good reason. He has built a great company within the fine dining sector, in addition to launching the hugely successful Shake Shack fast casual chain. If anyone can spearhead the no-tipping approach, it is he, but we have our doubts. In any event, the outcome will not be known for months or even years. There are three constituencies to satisfy here: the employees, the customers and the management. We list the employees first just because they are the face of the company, and continuously display the corporate culture to the dining public. If they are unhappy with the quality of the food served, the performance of the kitchen, their personal compensation and treatment by corporate management, it will be continuously communicated to the customer base.

I’ve been an analyst, investment banker, investor and adviser relating to the restaurant industry for over three decades. This is one of the more radical (call it “contemplated”) “adjustments” to the labor portion of “prime costs” ( food and labor) that I’ve seen in all that time, indeed the dining out culture that has become ingrained in our lifestyle.
It is important to understand the motivation behind Meyer’s (and some predecessors) move. As Meyer has described, the kitchen staff is paid by salary (or hourly) while the servers can make much more money including tips. The back of the house is of course critical to customer satisfaction, so it has to be discouraging and unfair to the kitchen when the servers are celebrating at the end of a great evening, having made hundreds of dollars, and the kitchen staff has made a fraction of that. It is important to understand that labor laws have for years inserted themselves into the tip allocation process, when tips are pooled; in general protecting the servers whose hourly rate is usually below the minimum wage. Tips can therefore not be allocated (more than nominally) to back of the house employees, leaving their compensation to management by way of salaries and bonuses. Assuming that front of the house tips are pooled among servers and their compensation can’t be cut materially, the change implemented by Danny Meyer’s amounts to a compensation raise for the back of the house, and an increase in overall labor costs.
Considering the second “stakeholders”, the customers: Some customers won’t mind if prices go up 20%-30%, including tips, since they were tipping at least 20% anyway, can afford it, and they really like the food and service. They are customers no matter what, which may especially apply to the restaurants managed by Meyer.  Also, some customers don’t like the burden of the tip decision, so will welcome relief from this responsibility. In our opinion, this contingency is small, however. More important is the group that normally tips at perhaps the 15%-20% range, so this price rise will be a noticeable increase in the cost of dining. While some customers will tolerate it, we believe that a material number will not. Traffic is hard to come by, for all retailers, and wise managements are exceedingly thoughtful before implementing price increases. Our conclusion here: this new policy will not increase traffic, and will likely lose at least a few customers for all but the very strongest operators.

The third contingency is corporate management. Without question, the contemplated change will simplify the labor equation; compensate the back of the house more appropriately which will reduce turnover and training, and the burden of coping with governmental oversight. Operating margins are hard to maintain and management must get an appropriate return on investment if they are to prosper. In a better economy, with stronger sales, margin pressure would not be so substantial, but these days there is only one solution to higher costs, and that is higher prices.

Our bottom line: There is no one better equipped that Danny Meyer to implement this new policy, based on his relationships with employees and customers alike. We feel, however, this policy may hurt even him, over time, in terms of customer traffic. Most other full service restaurant companies would be ill advised to follow his lead, in our opinion. The economy, and the competition, is too unforgiving to tolerate what will amount to a material rise in dining prices. If I owned shares in a publicly held full service restaurant company, which I do not, I would be highly suspect of this change that is relatively radical in a very sensitive environment. In any event, even Danny Meyer intends to phase this approach in over a year or more, so this will take a while to play out. In the meantime, we say to restaurateurs and investors alike: be careful out there!

 

DANNY MEYER, NO TIPPING FOR OVER 2 YEARS NOW, HOW’S IT DOING?

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DANNY MEYER ELIMINATED TIPPING  OVER TWO YEARS AGO, WHAT’S THE VERDICT?

In October of 2015, almost two and one half years ago, we wrote an article expressing our doubt that “gratuity included would prove productive. The full article is shown below the following update. While the “jury is still out”, the evidence to date seems to support our prediction.

Coincidentally, the Sixty Minutes TV show did another feature on Danny Meyer just three days ago, basically a “puff piece” (well deserved) on his outstanding success with his full service restaurants and founding of Shake Shack. Within the segment was a discussion of his no-tipping policy, his conviction that the back of the house has to be properly rewarded, and how his new policy would help to accomplish that. He acknowledged that his approach might be “early”, just as when he went to a no smoking policy twenty years ago, ahead of the crowd, but he would persevere in this case as well. He reflected positively on the attitude of the staff, old and new. However, what he did not discuss was the effect on traffic, sales, and profit margins.  As an analyst, we have learned over the years, that when management does not discuss the details, they most often are not supportive of the broad strategy. I had some brief contact with an employee of Union Square Hospitality Group (USHG) a few months ago, and he didn’t argue with my suggestion that profit margins at privately held USHG have probably suffered, if the front of the house is paid pretty much the same, the back of the house gets a raise, and total selling prices (included a standard gratuity) are not increased materially.  (Not all of the USHG restaurants have become gratuity-included.)

An article from eater.com crossed my desk this morning. Apparently, Danny Meyer acknowledged recently, while accepting a Workplace Legacy Award, in Plano, Texas, as being a leader “who demonstrates success in people practices and operations, in addition to benefiting employees, organizations and communities”,  that  30 to 40 percent of his serving staff have left. Presumably, the back of the house staff has been more stable, since they now make about 20 percent more than before. He didn’t discuss sales and traffic trends, or operating margins. Since Union Square Cafe closed and re-opened in a new location in the middle of this two year period,  accurate comparisons are elusive. Personally, I have had two great dining occasions at the new Union Square Cafe, so the “hospitality quotient” has not suffered as far as I can tell.

Danny is sticking to his plan, and  can afford to set a high standard within his own restaurants as well as for the industry as a whole. As I said over two years ago, “There is no one better equipped that Danny Meyer to implement this new policy…”

There has so far been no noticeable trend for other restaurant owners to follow his example. Especially within the current environment, with restaurant operators fighting to maintain traffic and profit margins, we doubt that much will change in this regard. We continue to feel that Meyer’s approach will not attract new customers and could cost at least a few. Hardly any restaurant operator can afford to run the risk losing even a modest number of customers, either because they prefer to control the tipping process, or as a result of major turnover among the serving staff.

October 15, 2015

DANNY MEYER ELIMINATES TIPPING. WELL ADVISED? BE CAREFUL OUT THERE!

The talk of the town and the country, among restaurateurs and diners alike is the no-tipping policy that Danny Meyer is about to embrace in his highly regarded full service locations. No one is more respected in the industry than Meyer, with good reason. He has built a great company within the fine dining sector, in addition to launching the hugely successful Shake Shack fast casual chain. If anyone can spearhead the no-tipping approach, it is he, but we have our doubts. In any event, the outcome will not be known for months or even years. There are three constituencies to satisfy here: the employees, the customers and the management. We list the employees first just because they are the face of the company, and continuously display the corporate culture to the dining public. If they are unhappy with the quality of the food served, the performance of the kitchen, their personal compensation and treatment by corporate management, it will be continuously communicated to the customer base.

I’ve been an analyst, investment banker, investor and adviser relating to the restaurant industry for over three decades. This is one of the more radical (call it “contemplated”) “adjustments” to the labor portion of “prime costs” ( food and labor) that I’ve seen in all that time, indeed the dining out culture that has become ingrained in our lifestyle.
It is important to understand the motivation behind Meyer’s (and some predecessors) move. As Meyer has described, the kitchen staff is paid by salary (or hourly) while the servers can make much more money including tips. The back of the house is of course critical to customer satisfaction, so it has to be discouraging and unfair to the kitchen when the servers are celebrating at the end of a great evening, having made hundreds of dollars, and the kitchen staff has made a fraction of that. It is important to understand that labor laws have for years inserted themselves into the tip allocation process, when tips are pooled; in general protecting the servers whose hourly rate is usually below the minimum wage. Tips can therefore not be allocated (more than nominally) to back of the house employees, leaving their compensation to management by way of salaries and bonuses. Assuming that front of the house tips are pooled among servers and their compensation can’t be cut materially, the change implemented by Danny Meyer’s amounts to a compensation raise for the back of the house, and an increase in overall labor costs.
Considering the second “stakeholders”, the customers: Some customers won’t mind if prices go up 20%-30%, including tips, since they were tipping at least 20% anyway, can afford it, and they really like the food and service. They are customers no matter what, which may especially apply to the restaurants managed by Meyer.  Also, some customers don’t like the burden of the tip decision, so will welcome relief from this responsibility. In our opinion, this contingency is small, however. More important is the group that normally tips at perhaps the 15%-20% range, so this price rise will be a noticeable increase in the cost of dining. While some customers will tolerate it, we believe that a material number will not. Traffic is hard to come by, for all retailers, and wise managements are exceedingly thoughtful before implementing price increases. Our conclusion here: this new policy will not increase traffic, and will likely lose at least a few customers for all but the very strongest operators.

The third contingency is corporate management. Without question, the contemplated change will simplify the labor equation; compensate the back of the house more appropriately which will reduce turnover and training, and the burden of coping with governmental oversight. Operating margins are hard to maintain and management must get an appropriate return on investment if they are to prosper. In a better economy, with stronger sales, margin pressure would not be so substantial, but these days there is only one solution to higher costs, and that is higher prices.

Our bottom line: There is no one better equipped that Danny Meyer to implement this new policy, based on his relationships with employees and customers alike. We feel, however, this policy may hurt even him, over time, in terms of customer traffic. Most other full service restaurant companies would be ill advised to follow his lead, in our opinion. The economy, and the competition, is too unforgiving to tolerate what will amount to a material rise in dining prices. If I owned shares in a publicly held full service restaurant company, which I do not, I would be highly suspect of this change that is relatively radical in a very sensitive environment. In any event, even Danny Meyer intends to phase this approach in over a year or more, so this will take a while to play out. In the meantime, we say to restaurateurs and investors alike: be careful out there!

 

DANNY MEYER ELIMINATES TIPPING. WELL ADVISED? BE CAREFUL OUT THERE!

articles, , ,

DANNY MEYER ELIMINATES TIPPING. WELL ADVISED? BE CAREFUL OUT THERE!

The talk of the town and the country, among restaurateurs and diners alike is the no-tipping policy that Danny Meyer is about to embrace in his highly regarded full service locations. No one is more respected in the industry than Meyer, with good reason. He has built a great company within the fine dining sector, in addition to launching the hugely successful Shake Shack fast casual chain. If anyone can spearhead the no-tipping approach, it is he, but we have our doubts. In any event, the outcome will not be known for months or even years. There are three constituencies to satisfy here: the employees, the customers and the management. We list the employees first just because they are the face of the company, and continuously display the corporate culture to the dining public. If they are unhappy with the quality of the food served, the performance of the kitchen, their personal compensation and treatment by corporate management, it will be continuously communicated to the customer base.

I’ve been an analyst, investment banker, investor and adviser relating to the restaurant industry for over three decades. This is one of the more radical (call it “contemplated”) “adjustments” to the labor portion of “prime costs” ( food and labor) that I’ve seen in all that time, indeed the dining out culture that has become ingrained in our lifestyle.
It is important to understand the motivation behind Meyer’s (and some predecessors) move. As Meyer has described, the kitchen staff is paid by salary (or hourly) while the servers can make much more money including tips. The back of the house is of course critical to customer satisfaction, so it has to be discouraging and unfair to the kitchen when the servers are celebrating at the end of a great evening, having made hundreds of dollars, and the kitchen staff has made a fraction of that. It is important to understand that labor laws have for years inserted themselves into the tip allocation process, when tips are pooled; in general protecting the servers whose hourly rate is usually below the minimum wage. Tips can therefore not be allocated (more than nominally) to back of the house employees, leaving their compensation to management by way of salaries and bonuses. Assuming that front of the house tips are pooled among servers and their compensation can’t be cut materially, the change implemented by Danny Meyer’s amounts to a compensation raise for the back of the house, and an increase in overall labor costs.
Considering the second “stakeholders”, the customers: Some customers won’t mind if prices go up 20%-30%, including tips, since they were tipping at least 20% anyway, can afford it, and they really like the food and service. They are customers no matter what, which may especially apply to the restaurants managed by Meyer.  Also, some customers don’t like the burden of the tip decision, so will welcome relief from this responsibility. In our opinion, this contingency is small, however. More important is the group that normally tips at perhaps the 15%-20% range, so this price rise will be a noticeable increase in the cost of dining. While some customers will tolerate it, we believe that a material number will not. Traffic is hard to come by, for all retailers, and wise managements are exceedingly thoughtful before implementing price increases. Our conclusion here: this new policy will not increase traffic, and will likely lose at least a few customers for all but the very strongest operators.

The third contingency is corporate management. Without question, the contemplated change will simplify the labor equation; compensate the back of the house more appropriately which will reduce turnover and training, and the burden of coping with governmental oversight. Operating margins are hard to maintain and management must get an appropriate return on investment if they are to prosper. In a better economy, with stronger sales, margin pressure would not be so substantial, but these days there is only one solution to higher costs, and that is higher prices.

Our bottom line: There is no one better equipped that Danny Meyer to implement this new policy, based on his relationships with employees and customers alike. We feel, however, this policy may hurt even him, over time, in terms of customer traffic. Most other full service restaurant companies would be ill advised to follow his lead, in our opinion. The economy, and the competition, is too unforgiving to tolerate what will amount to a material rise in dining prices. If I owned shares in a publicly held full service restaurant company, which I do not, I would be highly suspect of this change that is relatively radical in a very sensitive environment. In any event, even Danny Meyer intends to phase this approach in over a year or more, so this will take a while to play out. In the meantime, we say to restaurateurs and investors alike: be careful out there!