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.”
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!