The big news in the restaurant world this past week is that Danny Meyer, one of New York City’s most prominent restaurateurs, is going to be abolishing tipping at all his establishments. He discussed the move on CBS.
(He also had an interview on CNBC that covered a lot of the same ground plus a few other points that I will mention below.)
Tipping — at restaurants and in hotels — is something we have covered before. As much as I like the idea of linking pay to performance, I think that tipping is a pretty miserable custom. Meyer touches on some of these points in explaining why he is banning the pourboire. But he also highlights a completely different issue: Attracting and retaining talent.
Specifically, Meyer claims that earnings for servers has risen significantly over the last several decades while kitchen staff have seen their pay move very little. One can point to several reasons for this — or at least for why waiters are earning more. For example, as fine dining establishments have incorporated local produce or sustainably raised meats in the menus, they have raised prices. That means waiters see bigger tips even if the work of serving a particular dish hasn’t changed. Additionally, there has been a general tip creep over time. You might think that 15% is the right amount for tips, but Meyer claims the average tip at his NYC restaurants is 21%.
But higher tips cannot be redistributed among all staff. There are laws that limit who can share in tip earnings, and they generally leave the kitchen staff out in the cold. Of course, that doesn’t explain why kitchen staff wages have not kept up. In a competitive market, if there were a limited supply of restaurant workers and a booming restaurant industry, sous chefs and link cooks should be seeing hefty pay increases. If wages haven’t been rising despite a strong dining scene, one can only surmise that their has been an influx of labor. To be blunt, one suspects that the average New York kitchen speaks a lot more Spanish than it use to.
That gets to Meyer’s contention about the need to attract and retain talent. As Meyer tells it, stagnant wages are catching up to the industry and his restaurants are having a hard time recruiting kitchen staff. Looking at higher minimum wages coming down the pike for fast food place in New York, and that is only going to get worse. Meyer’s plan is to bake the cost of all labor into his menu prices so that he can afford to pay his kitchen staff more. He asserts that a bumping menu prices 21% will leave most servers whole and the average tipping customer whole while letting him pay his kitchen staff more.
Sounds good although I am not sure all those numbers sum up. A 21% premium doesn’t quite leave customers whole since what they would have paid as a gratuity is now subject to a sales tax. For the staff, a 21% premium might result in the same pile of cash to be split between workers and management as the incumbent system but if the whole point is to reallocate who gets what cash, someone has to lose. I’m going to go out on a limb and say it won’t be management. In short, Meyer may be underestimating how much prices must rise in order to cover his higher labor costs.
The other angle on this is that Meyer be making a wager on what is critical for a good high-end dining experience. If the market currently undervalues kitchen staff and overvalues waitstaff, shifting money from the latter to the former may improve his restaurants even if it means losing a few star waiters along the way. Call this the Money Ball argument. By default, the market has let the wages for waiters increase significantly — but that has all come from tips and not necessarily from a calculation of the economic value they bring to the firm. Meyer may win by investing in an undervalued part of the business.
The last question is whether this means the end of tipping at restaurants. I am not sure that is going to happen. Waiters and Meyer’s high-end restaurants may have seen significant gains over the last decade or two but I am dubious that staff at more down-market places have done as well. It is hard to imagine anyone working an Olive Garden getting rich. It is likely that at most restaurants the need to rebalance costs between the front and the back of the house is not as pressing.
There is also the question of whether workers trust management who eliminate tips. This point is raised in Meyer’s interview with CNBC. There are fairly clears rules at the federal and state level about what can happen with tips. But if tips are banned and menu prices are raised, management doesn’t have to share that cash with staff. Customers may think that workers are seeing higher wages, but there is nothing to mandate that. Meyer has staked a lot on this switch, so he has to follow through or his reputation is going to take a serious hit. It is not clear a less prominent restaurateur can credibly make the same move.