Most Consumers Not Ready to Stop Tipping

NEW YORK, Feb. 2, 2016 /PRNewswire/ -- According to Horizon Media's latest Finger on the Pulse Survey — the agency's proprietary online research community comprised of 3,000 people reflective of the U.S. population — the majority of American consumers are not yet ready to embrace tipping bans, a phenomenon that is becoming increasingly popular in restaurants across the country. Millennials and Generation Z, however, are more open to change.

Tip banning - eliminating tipping in favor of paying servers a higher wage – is a becoming a hot issue as popular restaurant owners likeDanny Meyer of Shake Shack have begun instating the practice in their eateries. The change in practice isn't limited to the coasts. National chains like Joe's Crab Shack as well as independent establishments across the nation have also joined the ranks. This "service included" approach to the bill is already common in other parts of the world, including Europe.

Yet Horizon's latest Opinion Pulse data suggest these restaurants may be getting ahead of U.S. consumers' appetite for change: 81% of adult restaurant-goers are not yet ready to welcome built in tipping. These consumers want status quo -- the decision to tip within their control and dependant on a positive service experience. For over half of these restaurant-goers, the main drawbacks of built in tipping come down to expected effects on service: 55% say they would be forced to pay the same amount no matter how good or bad service is, and 52% say it should be up to them to decide how much to pay for service.

While older consumers are hesitant to embrace the change, Millennials and Gen Z are more ready for a tipping revolution: 29% of people aged 18-34 say tipping is an outdated and unfair practice versus 18% of people aged 35-49 and 13% of people aged 50-64. Just 44% of 18-34 year olds say they are against tip being built into an item price, versus 6 in 10 of the older crowd (61% of 35-49 and 59% of 50-64). But just because they are more forward-thinking on the practice doesn't mean they think the change will happen quickly. In fact, they are more skeptical: 70% of Millennials and Gen Z say they think tipping practices will be the same as they are now in 5 years' time (versus 60% of 35-49 and 53% of 50-64).

"There are real economic and life stage realities at play for the younger crowd," said Kirk Olson, VP, TrendSights at Horizon Media. "Many Millennials still face underemployment and Gen Z-ers who've begun working are often working service jobs dependent on tips. Considering the rising popularity of Bernie Sanders' "living wage" stance among the same group, it makes perfect sense that they show greater interest in seeing tipping evolve," continued Olson.  "They're also more global and connected. They know 'service included' is the way it's done elsewhere and think it would be better for the U.S., even if they're not convinced it will become a reality any time soon."

Regardless of age, those who are interested in switching to a built-in tip structure are passionate about the benefits – primarily as a way to better predict cost; those who prefer built-in tipping are over two and a half times more likely to say the cost of the entire meal would be clearer prior to ordering (70% vs. 26% who want tipping left as is). Fairness is an important motivator as well: 62% of those who welcome built-in tipping say it would ensure the servers earn a fair and liveable wage (vs. 32% who want things to stay as is), and 45% say the current tipping structure is outdated (versus 15% among those who want things to stay as is).

"While the research suggests consumers aren't quite ready to abandon tipping per se, it does portend that in the future convenience will likely trump control," said Rich Simms, EVP, Managing Partner at Horizon Media. "Tomorrow's restaurant-goers may find that not having to think about the tip is a core benefit of the whole transaction. Hospitality brands making the change now may be at the forefront of something that will become standard practice in ten more years."

How much more are they willing to pay per menu item to have tip built in? One third (34%) say they would pay up to 15% more per item, with an additional 1 in 10 saying an increase of 18-25% would be fair in order to change tipping practices.

Finger on the Pulse empowers the agency to connect directly with 3,000 consumers, diving beneath the surface of beliefs and behaviors to uncover critical insights.

About Horizon Media Horizon Media, Inc. is the largest and fastest growing privately held media services agency in the world. The company was founded in 1989, is headquartered in New York and has offices in Los Angeles, San Diego, and Chicago. Horizon Media was chosen as 2011 Independent Media Agency of the Year by Mediapost, 2010 U.S. Media Agency of the Year by Adweek, Brandweek, and Mediaweek as well as by Ad Age and as one of the world's ten most innovative marketing and advertising companies by Fast Company in 2011. In 2012, Bill Koenigsberg, President, CEO and Founder, was honored by Advertising Age as Industry Executive of the Year. Most recently, in 2014, Bill Koenigsberg was named 4As Chair of the Board and is the first person from a media agency to hold this prestigious position in the 100 year history of the 4As, the marketing industry's leading trade association.

The company's mission is "To create the most meaningful brand connections within the lives of people everywhere." By delivering on this mission through a holistic approach to brand marketing, Horizon Media has become one of the largest and fastest-growing media agencies in the industry, with estimated billings of over $5.3 billion and over 1,200 employees.

The company is also a founding member of Columbus Media International, a multi-national partnership of independent media agencies. For more information, please visit horizonmedia.com.

(via PRNewswire)

NYC Restaurants' 'Hospitality Included' Movement

The movement to get rid of tipping in New York City restaurants has been slowly picking up steam since Danny Meyer announced in October that he was going to do away with the practice at his Union Square Hospitality Group’s 13 full-service restaurants in the city.

I mean, restaurants aren’t exactly lining up to upend their business models and try to change the cultures of their servers as well as their customers, but more restaurants are trying it than I would have expected. After all, so far even USHG has only implemented the “Hospitality Included” approach at one of its restaurants, The Modern.

That approach differs from the more common practice of tacking on an automatic service charge. Instead, the actual prices on the menus are raised.

Meyer told me shortly after announcing his plans that he thought raising menu prices was a more honest approach, and also that the New York City Department of Consumer Affairs might frown on such service charges being redistributed to anyone but servers — something his lawyers warned him about.

And the main point of getting rid of tipping is to put that money elsewhere — mainly in the hands of underpaid kitchen staff.

There are other reasons: Creating a more professional working environment for servers, eliminating the discriminatory tipping practices of customers — such as tipping scantily clad female servers more or servers with foreign accents less — and generally allowing restaurant management to regain control of the roughly 20 percent of the restaurant’s income that comes from tips.

Rising costs of doing business has resulted in menu prices going up for years, and as those prices go up, the disparity between what servers make — coming mostly from tips which are mostly a percentage of their customers' bills — and kitchen staff make, has widened, worsening an already not awesome cultural divide between front-of-house and back-of-house, and making it harder to recruit kitchen staff.

These and other issues we’re being considered and discussed before Meyer decided to pull the trigger with The Modern, but since then, other operators have come on board, including Will Guidara and Daniel Humm at Eleven Madison Park (but not at their other restaurant, The Nomad), Andrew Tarlow, who runs five restaurants in Brooklyn (and implemented Hospitality Included at one of them, Roman's, on January 18), Gabriel Stulman of six-unit Happy Cooking Hospitality (he got rid of tipping at one restaurant, Fedora, at the beginning of January), and Nate Adler, who went all in with Hospitality Included on December 14 at his single restaurant, Huertas.

Stulman and Adler recently joined Leah Campbell, from Andrew Tarlow's team, and USHG chief restaurant officer Sabato Sagaria on a panel at Journee, a new club for education and networking among hospitality workers, to discuss what they’d learned.

What they learned is that getting buy-in from their servers wasn’t that hard. Or it might be more appropriate to say that they suspected what they needed to do to get buy-in from servers and they did it. They of course gave them raises to at least $9 per hour, which became the statewide minimum wage this year, anyway, and implemented a revenue-sharing program in which a certain percentage of top-line sales was shared with servers — 8 percent or revenue at The Modern, more at some of the other restaurants. Adler also gave raises to line cooks, who now get $12, and other back-of-house workers to $11, and he implemented revenue sharing across the board. The other panelists are hoping to be able to share revenue with kitchen staff eventually, but they're not doing it yet.

They also have included their servers into the planning process. Sagaria said they laid out a roadmap for career progression for front-of-the-house and back-of-the-house staff. Others have tapped their servers’ motivation to make more money through revenue sharing to brainstorm new money making ideas, which is why Roman's is introducing pizza brunch.

All of the restaurants have implemented the revenue sharing on a weekly basis, and are doing it across the board, so whether the servers are working on a slow Tuesday lunch or a crazy Friday dinner rush, they share equally, based on how many shifts they work.

Adler said that once he explained his plan and reasoning behind it, the servers actually encouraged him to implement it.

But has service gotten worse now that servers don’t have direct and immediate motivation to be gracious and speedy with their customers?

Not according to Sagaria, who has gotten about 1,000 comment cards at The Modern since they got rid of tipping — a staggering number — and they have been largely positive. Furthermore, their Open Table scores on food, experience, service, etc., have gone up in “almost every single category,” he said.

He said Yelpers have been mostly silent about the change, except for the occasional tangential bit of snark, such as, “When the bread came out it wasn't warm, probably because there’s no tipping.”

However, it’s proven a bit more difficult to convince customers that a $25 entrée with the gratuity included is basically the same as a $20 entrée if you need to add a tip.

Stulman said he’s seeing his customers ordering less — skipping appetizers or splitting entrées. Since he raised the price of his steak from $34 to $39, sales have plummeted, even though customers would leave a $6 or $7 tip on that $34 steak, meaning they'd actually be spending less under the new system.

“I think there is a problem with value perception,” he said.

Sagaria said he has seen less of that with food, which he said people order with their stomachs.

“You’re saying, 'O.K., what am I hungry for?’ It’s not ‘Do I want the $40 chicken, or the $30 chicken or the $20 chicken?’”

But wine’s a different story, he said, and people used to buying and $80 wine and tipping $20 balk at buying a $100 bottle without tipping.

He said to try to address that they’re putting their “Hospitality Included” message on every page of the wine list rather than just the front page and table of contents, but Stulman was skeptical.

“Messaging is something we put a ton of effort into,” he said. “When you go to Fedora’s web site, bam! We’ve replaced the first picture with a message that says ‘Gratuity Free.’ We use Resy as our reservations platform. When you go on Resy there is a message right on our restaurant’s message that says ‘Gratuity free. No need to tip.’ When you make a reservation, in your email confirmation, we inform you that the menu prices reflect all service and you do not need to tip. Then, you get a text message 30 minutes before your reservation that reminds you that you have a reservation in half an hour, and that text message says, ‘No tipping.’ When you arrive, we have a wonderful graphic ... on the front and back of our cocktail list. Either side you flip it, you see it. That [gratuity free] logo is on the dinner menu. I, personally, have been the maître d’ for half a dozen of the last dozen shifts. When I seat every guest myself [I tell them] ‘I just want to let you know that we have eliminated tipping at our restaurant and our prices reflect that change. Please, no need to leave anything else.’’

But people still don’t want to buy the steak that used to be a top-selling item.

It’s early days yet, and maybe people will adjust. But there’s a reason $8.95 is a more common menu price than $9. Value perception is a tricky thing, and time will tell if customers will come around.

(via Nation's Restaurant News)

Economic Considerations of Eliminating Tips (Infographic)

 

Is the U.S. restaurant tipping model on its way out? Amid concerns over whether compensation for back-of-the-house and front-of-the-house employees is fair and how the push for raising minimum wage will impact cost-cutting measures, the tip reform movement is stirring up controversy. Earlier this month, Danny Meyer, CEO of Union Square Hospitality Group, made waves in the industry when he called tipping a “broken system” and announced that his restaurants would phase out tipping by January. The pros and cons of this consideration have impact from the board room to the dining room, and servers, cooks, owners and customers have a stake.

But what about the economic impact? Reporting tips for tax purposes is one of the most complex requirements for restaurants and their employees. Here is a look at the potential effects of eliminating tipping:

Owners Adjust for Higher Wages, Lose the Tip Tax Credit

Federal law allows restaurants to pay servers $2.13 per hour with the server’s tips expected to meet or exceed federal minimum wage requirements. Some states — like New York which will have a $15 minimum wage for fast food workers in 2016 —require a higher minimum wage. Additionally, there is a federal income tax credit (IRC 45B) that the restaurant can take for all tips reported by the server in excess of $5.15 per hour. This gives the restaurant an incentive for encouraging their employees to report all their tips. In a non-tipping environment, restaurants would have to pay higher wages and higher employment taxes, but would have a larger deduction for the increased wages and payroll taxes.

The federal FICA tip credit has been a significant benefit for a number of restaurants over the years. Restaurants that are considering changing to a no-tipping policy may be giving up a substantial tax benefit, and need to take that into account when setting menu prices or additional service charges to help finance the increase in non-tipped wages.

Some fine dining establishments who have eliminated tipping have added a service, hospitality or administrative charge, while others have raised menu prices to compensate. It's important to note that service charges do not constitute tips for the purposes of the federal FICA tip credit.

Employees gain predictability, but not guaranteed higher earnings

Servers are required by law to report all tips, but the IRS has suggested that as much as 40 percent of restaurant tips are not reported. If this is true, many employees are paying less income and employment tax than they should in a tipped environment. In a non-tipped establishment, employees receive wages which may or may not be as much as they earn in a tipping situation. Ideally, the non-tipped wage would create more predictability in employees’ income, eliminating the uncertainty associated with fluctuating tips from shift to shift. However, some will do better and some worse under a no-tipping model. Bonuses may be necessary to retain servers.

Calculation: Let’s take a look at a simple example of how the FICA tip tax credit works.

It remains to be seen whether the tip elimination trend will be a mere crest or a tidal wave of change in the restaurant industry. It is clear, however, that the business impact could be substantial, and restaurants would need to adapt practices accordingly. Even if restaurants and employees can thrive on a no-tipping model, how will customers react? Stay tuned to our blog in the weeks ahead as we explore the potential implications for players throughout the industry.

(via Fast Casual)