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Why Getting Rid of Tipping in Full Service Restaurants is Stupid

Chef Instructing Trainee In Restaurant Kitchen

Full-service restaurants are unique in American business in that the incentive systems for service employees are perfectly aligned with the goals of the business.

It is an amazing sight to see employees working to benefit themselves and simultaneously benefitting the owners and managers of the establishment. Allow me to explain.

Servers in restaurants make a small minimum wage, mostly for taxes, and tips. Those tips are a percentage of their sales and that percentage in my experience can range from 10 to 30%. I was a really good server, and when I was on, I could easily make 30% per table, though 20% is the norm and occasionally you would get less than that.

Screenshot 2015-08-09 08.41.41

When a server is compensated by tips, they are driven by their personal benefit to provide great service to their guests in the hopes of making a higher tip percentage. Maximizing the servers personal revenue per shift and the ROI for their time.

The servers are also incentivized to make recommendations and to upsell their guests to enhance the guests experience and to get the maximum check value on each table. In my experience if you sell the table too much food or super expensive items that they weren’t expecting it can hurt your tip percentage as the guest feels that they have been taken advantage of or scammed.

Servers also get paid on volume. Meaning that a server on a busy shift wants to turn each table as many times as they can without rushing their guests out of the restaurant. Once again there is a fine line between pushing someone out the door, which if the guest feels rushed could affect the server’s tip percentage vs. being very efficient at delivering the check and processing payment so the guest leaves and the server can get another party at that table.

To sum up servers are incentivized to deliver great service, to maximize check value without going overboard, and to move customers in and out of the restaurant as quickly as the guest allows. When servers work toward these incentives, they maximize their earnings for that shift.

The restaurant owners benefit from servers that take great care of guests, increase sales by upselling, and move guests efficiently through the restaurant maximizing throughput and sales each meal period.

Both groups incentives are properly aligned with each other, and they both win and lose together.

Another point that needs to be made is that both teams lose together as well.

If servers provide horrible service and guests stop coming both the servers and owners of the restaurant will suffer. The owners will suffer more as the servers will eventually leave and the owners will be stuck with a business that has become known for bad service.

If the owners don’t do a good job of delivering a great product the servers and the owners will suffer because people won’t come to the restaurant, sales will be down, and the servers won’t make as much money.

In this relationship the servers and owners once again are linked at the hip.

There are other employees in the restaurant that are directly compensated off of the servers earnings. Bussers, bartenders, food runners, and sometimes hosts are all affected by server tips. When I was a waiter at P.F. Chang’s this is how we distributed our tips:

Total tips for night $200:

  • Busser: 15 to 20% or $40 – a busser usually served 2 to 3 servers, and I always tipped 20% because a busser can bury a server, or make it hard for the server to turn tables. It was important to me to make sure that I took care of my busser.
  • Food Runner: 10% or $20
  • Bartender: 1% Sales or $10
  • Bartenders and food runners, if there are more than one working, pool their tips from the servers and distribute amongst the team that was working that shift and are paid a higher minimum wage.

A lot of these cities are proposing a $15 minimum wage and getting rid of tips. When I was working as a server on a good Friday night, I planned on making $120 to $140 net in 5 to 6 hours. At $15 an hour and a 6-hour shift you are making $40 less a shift than you would have been if you were working for tips.

I’ve read an article that we blogged about in the spring that was pro no tips where the servers said they liked the paycheck but that they were making less money. I don’t know of a great server that would trade working for tips for an hourly wage because they know that they will make less money.

Another argument that is being put forth by people who don’t like tips is in regards to BOH staff: cooks, dishwashers, prep cooks, etc..

These are completely different jobs and have different risk levels and different rewards. A cook is guaranteed a higher base wage each hour of each shift. A cook gets paid their full wages for the hours they work if the restaurant is slow or busy. Therefore, a cook or BOH employee assumes no risk or variance in their wages shifts to shift.

An FOH staff member: server, busser, a bartender is completely dependent upon the level of business and their service for tips. The FOH staff assumes a large amount of personal risk and opportunity cost each day that they go to work.

I can’t tell you how many times I was sent home early because the restaurant wasn’t busy. Each shift the restaurant staffs themselves anticipating being very busy and if the business isn’t there the manager’s cut staff and send people home early.

What is amazing about sending people home early is that it isn’t looked at as a bad thing by most restaurant employees. I would say that schedule flexibility is one of the main reasons people chose to work in the hospitality industry.

Managers ask the staff who would like to go home early, and there are usually volunteers who have something else they want to do and they leave and the people who need money stay.

In my experience if you get cut and sent home early too often you will probably go and look for another job at a different restaurant.

The argument that BOH employees aren’t treated fairly because of tipping is wrong. Salary is based on upon risk and reward and in my experience working in both the BOH and FOH it isn’t an issue for the employees working those jobs.

Also, we live in a free country, and we are all employed at will, nobody is forced to work anywhere or in any position people choose their jobs and employees and can quit at any time.

What happens if we get rid of tipping across the board?

When you work for an hourly wage, your incentives change and, therefore, your behavior will change as well.

In the examples above we discussed how servers are incentivized to take great care of their guests because that level of service will influence their tip percentage. That incentive no longer exists because the level of personal service you give doesn’t directly affect your wages.

You can make the case that a bad server who gives bad service will eventually be fired.

We discussed how servers were incentivized to upsell and make recommendations to increase the check to a level that will enhance the customers experience without going overboard. That incentive is now gone because the one thing that we didn’t mention earlier is that upselling and making recommendations requires more work of the server.  The server has to think, react, ask questions, put themselves out there if the recommendation isn’t liked, deliver more food, and do more work.  It is much easier to be an order taker and not do any of that stuff.

On an hourly wage system, you are not incentivized to do more work. Hourly workers that don’t get compensated by output are incentivized to do the least amount of work per hour.  An example: why would you go through the hassle of selling a bottle of wine, presenting it, opening it, letting the guest taste it, and then serving it if it doesn’t directly enhance your bottom line.  If a server is in the rush and they have to do a wine service it can take a couple of minutes and can throw them deeper into the weeds.  Why tipped servers sell bottles of wine today is because a $30 bottle can enhance your tips by 5 to $6 dollars for that table.

Enjoy these excerpt from Office Space the Movie

Peter Gibbons: The thing is, Bob, it’s not that I’m lazy, it’s that I just don’t care.
Bob Porter: Don’t… don’t care?
Peter Gibbons: It’s a problem of motivation, all right? Now if I work my ass off and Initech ships a few extra units, I don’t see another dime, so where’s the motivation?

Finally, we discussed that servers working for tips are incentivized to turn tables quickly to maximize their tips per shift. This incentive is removed as turning tables is once again more work for a server with no reward. The server that is paid an hourly wage only incentive is to stay on the clock as long as possible per shift to maximize their personal revenue.

If you think that I’m making this stuff up, or I’m overly dramatic, eat at a restaurant in France or any other country where the service staff is paid hourly and not by tips. There is a reason that French waiters are stereotyped for horrible service it is because they majority of them deliver horrible service. The service in other countries doesn’t compare to the level of service that we get every day in the America.  Check out this blog from a Frenchman about service.

These are my predictions for the industry if we move to no tipping policies:

  1. Restaurant owners that move to a no tipping policy will make less money than they did when they had employees that were compensated with tips.
  2. Servers who work for an hourly wage will make less money than they did when they worked for tips.
  3. Full-service restaurants that are less expensive will have a harder time with no tips than more expensive fine dining restaurants because they are more dependent on volume than price premium.
  4. Americans will enjoy worse service in restaurants that don’t have tips then they will in restaurants where tipping is still the norm.

At the end of the day, the American full-service restaurant is a highly successful social experiment that demonstrates that when you have alignment of incentives and goals employees and ownership can win together.

One last thought:  why do you get better service at Nordstroms then Macy’s when the job is exactly the same?  My guess is that the Nordstrom employee gets a % of their sales.

Is Tipping Near Extinction?

I’ve noticed a ton of press recently about restaurants going moving to an all inclusive menu or no tipping policy. Back in February we posted a blog, Time to End Tips?, on the topic and it got heated to say the least in the comments and on our social media channels. Click here to read that blog.

It’s now 7 months later and a lot of the changes mentioned in the original blog are starting to happen. ie minimum wage increases are being implemented in cities all over the country. The Affordable Care Act isn’t going anywhere either.

It seems that most of the restaurants that are testing out the no tipping policies tend to be on the higher end as far as price. Haven’t seen anything on a low to mid tier full service restaurant trying it out yet. This is probably due to the fact that a price increase can be absorbed easier at the higher end establishments.

There are a couple of different scenarios I’ve read about:

  1. Just a blatant price increase and explaining that the gratuity is included in the price
  2. An added service charge of 18-20% added to the bill. This is essentially an auto gratuity that in the past was typically reserved for large parties
  3. In both those scenarios they are paying their servers anywhere from $15-$25/hr

Some of the feedback from the restaurant owners/managers seem to be similar:

  • Most would like to do away with tipping because of the government mandated paperwork that is required for reporting. Would certainly make their lives easier from a bookkeeping standpoint.
  • They feel they can more “fairly” distribute money between the BOH and FOH if a “service charge” were added to every check
  • I saw one scenario where they added an 18% service charge, but that wasn’t enough so they bumped it up to 20% and still had to dip into owners profits to cover the additional costs for labor
  • A few tried it, but the backlash from the customers forced them to change back. The perception was that they were too expensive even though when you include a tip at the end it would be the same. But when you go to your favorite restaurant and the filet was $35 last time and now it’s $42, in your mind that’s a big jump and I don’t think you automatically make the connection that you aren’t tipping.
  • In one scenario they had to keep the tip line on the check even though they explained that tip was included because some customers complained that they couldn’t leave a tip even if they wanted to, unless it was cash of course.

In the near term it’s going to hit the industry pretty hard, but over time the market will correct itself this new way will become the norm. A big issue with the no tipping policy is that server goals and the operator goals are not aligned.

When servers make basically all their money on tips it’s in their best interest to provide great service and serve as many guests as possible while doing so. This aligns perfectly with the operators goals. But when the server is paid a straight hourly wage regardless of how many guests they serve or how good/bad the service there’s no incentive to do otherwise.

Why try to get another table turn in before your shift ends? It’s a lot easier if your tables camp and all you have to do is stay on top of water and coffee refills. If a guest is complaining that the food is taking too long there’s no reason to go to the kitchen and hound the expo for their food. Why deal with it? This does not align well with the operators goals at all.

Now that is assuming that the industry shifts in this new direction while management keeps managing to the old way. There’s going to have to be fundamental changes to managing restaurants to align the staff with the overall goals of the owner/operator. But there’s going to be a learning curve and I think that’s going to be a tough time for the industry.

Would love to hear any comments, concerns, ideas, etc.

Same Store Sales Increase in August

Driven by Fast Casual, the restaurant industry posted strong same store sales in August according to the Black Box Intelligence report.  Here are some of the stats from the Nation’s Restaurant News article:

  • 1.7% increase in same store sales in August
  • YTD same store sales up 2.2%
  • The industry can post it’s 5th straight quarter of same store sales growth this quarter
  • Average monthly growth has been 2.2% since last year
  • While traffic growth is still negative, it has been improving over the last few months
  • Top region in August was California with a 3.5% increase in same store sales and only .5% decrease in traffic
  • The NY/NJ region was the worst with a 1.3% decline in sales and 3.1% decline in traffic

We talked about this a few weeks ago, but job growth still remains strong across the board for the restaurant industry, despite some of the increases in minimum wage.

I have copied the full NRN article below:

The restaurant industry posted another relatively strong month in August, as both same-store sales and traffic growth improved over July, according to data reported by TDn2K’s Black Box Intelligence through The Restaurant Industry Snapshot, based on weekly sales from over 22,000 restaurant units and 120 brands representing $55 billion dollars in annual revenue.

Source: Black Box Intelligence, August 2015

Same-store sales rose 1.7 percent in August, a 0.1-percent improvement. With these latest results, the industry is on track to post its fifth consecutive quarter of positive same-store sales growth during the third quarter, the first time this has occurred in the last three years. Meanwhile, year-to-date same-store sales have risen 2.2 percent, consistent with Black Box Intelligence’s prediction for 2015.

“There are three factors that should be encouraging for the restaurant industry”, said Victor Fernandez, executive director of insights and knowledge for TDn2K. “First, we have been experiencing consistent, positive same-store sales growth since August 2014. The last time we had a comparable run in terms of consecutive months of positive sales growth was in the period of 2011 through early 2012. Furthermore, every month since August of last year has posted same-store sales growth above 1 percent; the average for the period has been a significant 2.2-percent growth in sales year-over-year. Second, although same-store traffic growth continues to be negative and remains the top concern for the industry, we have now reported three consecutive months in which traffic results have been improving. This also means that the growth in sales for the industry for the last couple of months has been relying less on increases in average guest checks and more on improving guest retention. Finally, on a two-year sales growth basis, this quarter is surpassing the first two quarters of 2015 with a +2.8-percent for the first two months of Q3 compared to +2.0 percent in Q1 and a +1.8 percent in Q2. This would represent the second-best quarter on a two-year basis since Q1 of 2012.”

Same-store traffic fell 1.1 percent during August, which represents a 0.1-percent improvement compared with July. Per person average guest check grew by 2.7 percent and 2.8 percent during August and July, respectively. This represents a shift from the average 3.4-percent growth in guest checks reported for all months during the first two quarters of the year.

The fundamentals in the economy continue to remain favorable for continued growth in restaurant sales: the labor market, even if showing some signs of slowing down from the growth rates posted in recent months, continues to add jobs. Income and consumer spending rose in July, according to the latest published numbers. Finally, despite short-term fluctuations in consumer sentiment, consumers are more optimistic today than they were a year ago.

“There has been some concern expressed due to the sharp drops and volatility in the stock market in recent days,” Fernandez said. “However, we believe that at least in the next couple of months, the effect of these fluctuations will not affect restaurant spending much. Most consumers perceive these changes as affecting their long-term wealth and not necessarily their disposable income today. However, if the underlying concerns regarding the global economy are real and sustained, then they could become a concern for the industry.”

Source: Black Box Intelligence, August 2015

The best performing region during August was California, with same-store sales growth of 3.5 percent and a traffic decrease of 0.5 percent. Considering the difference in check average for California, it appears the price increases taken to offset minimum wage increases are part of the equation behind this strong same-store sales number. However, the traffic also suggests that the California consumer has a strong appetite to dine out.

For the second consecutive month, the worst performing region in the country was New York-New Jersey, with a 1.3-percent decline in same-store sales and a 3.1-percent drop in traffic growth.

August was also a good month at the market level. One hundred thirty-seven, or 71 percent, of the 193 DMAs currently tracked weekly by Black Box Intelligence posted positive growth in their same-store sales during the month.

Improving economic conditions have boosted sales, but are also tied to a tightening labor market in which recruiting and retention have once again become major challenges for restaurants. Job growth accelerated at restaurant chains during July, according to TDn2K’s People Report. During the month, the restaurant chain industry’s number of jobs grew by 4.4 percent year-over-year, while the past twelve months averaged 3.4 percent.

In addition to the pressures of recruiting enough new employees, restaurant companies also continue to face increasing turnover rates at both the restaurant management and hourly employee levels. Rolling 12-month hourly employee turnover increased again during July. The industry has now experienced 23 consecutive months of rising turnover rates. Restaurant management turnover, which had been increasing steadily during 11 of the last 12 months, stabilized during July and remained at the same rate as in June. Flat turnover notwithstanding, turnover rates at all position levels within restaurants are at very high levels not reported since before the recession.

According to TDn2K’s White Box Social Intelligence, of the three key guest satisfaction attributes tracked (“food”, “service” and “intent to return”) from a sample of 6.6 million social media mentions during August, the conversation tends to center around food when consumers talk about restaurant brands online. Seventy-eight percent of posts mentioned food during this month. The second most commonly mentioned attribute continues to be service, at 16 percent of all social media mentions.

When consumers mentioned restaurant brands online during August, the attribute generating  the highest percentage of positive mentions was “intent to return,” with 39 percent of all of mentions, a significant 7-percent growth in the percentage of mentions that were positive when compared with July. As a comparison, about 31 percent of food mentions and 18 percent of service mentions were positive during August.

TDn2K (Transforming Data into Knowledge) is the parent company of People Report, Black Box Intelligence and White Box Social Intelligence. People Report provides service-sector human capital and workforce analytics for its members on a monthly basis. Black Box Intelligence provides weekly financial and market level data for the restaurant industry. White Box Social Intelligence delivers unparalleled consumer insights and reveals online brand health. Together they report on over 32,000 restaurant units, over 1 million employees and $55 billion in sales. They are also the producers of two leading restaurant industry conferences: Summer Brand Camp and the Global Best Practices Conference, each held annually in Dallas.

Staffing Challenges in North Jersey

An article over the weekend in The Record interviews a few folks in the restaurant industry in norther New Jersey about some of the challenges they are facing around finding and keeping employees. It’s not just isolated to one specific function, but all employees in all departments that are becoming increasingly more difficult to staff.

According to the individuals referenced in the article the reasons are spread across the board. Here are some of the points made:

  • Supply and demand – there seems to be more jobs available so there are other options to restaurants
  • It’s hard work – long hours and on your feet the whole time, plus in the front of the house you need to deal with some unpleasant people from time to time. So with other options available potential employees opting for something a little easier
  • The pay isn’t necessarily great. If you are a server or a bartender you can do decent depending on where you work, but it’s still long hours
  • A slow down in immigration since the recession may have contributed as 11% of Hispanics are employed by hotels and restaurants

A natural response to a labor shortage is “pay more”. Not that easy in the restaurant industry as profits are very thin already. 4-6% according to the article. Payroll already accounts for 24% of net profits.

At this point there’s just no wiggle room without a price increase to consumers. It’s coming because soon minimum wage hikes will take care of the pay increase for restaurant owners. There will be no choice other than raise prices.

I have copied the full article below:

Long before the first lunch customer walks through the door, cooks at Grissini in Englewood Cliffs are hard at work.

Angelo Chimbo’s hands are a blur as he flicks at baby carrots with a red peeler. Behind him, Ismael Rodrigues feeds sheets of golden dough into a pasta machine, where it is cut into narrow tagliatelle. And chef Giuseppe Lentini deftly slices bits of fat off deep-pink hunks of filet mignon.

Workers like these are the “backbone” of the restaurant industry, said maitre d’ Michael De Vincenzi.

But chefs, as well as the waiters and waitresses who deliver their creations to the table, are becoming harder to find. According to a recent survey by the National Restaurant Association, more than half of restaurant owners find it a challenge to find and keep good workers.

A lot of it is simply supply and demand.

Americans eat out more these days, spending 43 cents of every food dollar away from home, according to the U.S. Department of Agriculture.

“The economy is good, and people are spending more money than ever in the hospitality industry. We’re living in an area that’s saturated with restaurants,” said Michael Latour of Latour, a 17-year-old French restaurant in Ridgewood. “There aren’t enough workers to support them all.”

Restaurants can be lively, creative and glamorous places to work — for cooks who are passionate about food, and for extroverts who enjoy dealing with the public in the dining room. But the industry is defined by long hours, low pay and high pressure. And an improving job market means that workers have other options.

Even restaurant owners and managers will acknowledge the challenges of the work.

“If you’re a chef at a restaurant like mine, you’ve got to work six days a week, lunch and dinner,” said Tony Del Gatto, who owns the Westmount Country Club in Woodland Park, in addition to the 90-seat Grissini. “What kind of home life can you have?”

“It’s at least a 12-hour day,” said De Vincenzi. “You have to be born to do this work.”

Recently at Latour, waiter Ricardo DaSilva of Union, a 21-year-old student at Seton Hall University, started his day at 11 a.m., before the lunch crowd arrived, and expected to stay until the last dinner customer left — probably around 10 p.m.

During those long shifts, staff members are on their feet, whether they’re chefs or waiters. Inside the kitchen, the pace can be frenetic; the space, hot and crowded.

“It’s 100 degrees sometimes in the kitchen,” Latour said.

In the dining room, the heat sometimes comes from unhappy customers who expect a server to make things right.

And the pay scales are low.

According to the National Restaurant Association, median wages nationwide for restaurant workers range from a low of $8 an hour for dishwashers to a high of $19.35 for bartenders. Chefs are paid a median $12 an hour and waiters and waitresses about $16, with tips.

“People come out of the Culinary Institute of America with a lot of debt, and they’re not paying it off at $12 an hour,” said Christine Nunn, chef and co-owner of Picnic on the Square in Ridgewood. She has kept most of her kitchen staff through her tenure in three restaurants, but she’s looking for servers.

On a recent busy night, short of servers, Nunn had to work in the dining room. “I was hosting, I was bussing tables, I was pouring water,” she said.

Immigration a factor

Other analysts have pointed to a slowdown in immigration to the U.S. since the recession, because immigrants traditionally make up a significant share of restaurant workers. According to the U.S. Bureau of Labor Statistics, 11 percent of Hispanic workers are employed in hotels and restaurants.

Another issue in North Jersey is that workers who live in less affluent areas sometimes struggle to find transportation to restaurant jobs in the suburbs.

According to the National Restaurant Association, 318,800 people in New Jersey, and about 14 million nationwide, work in restaurants. The industry has been adding jobs faster than the economy as a whole, according to the association.

The shortage of workers has forced restaurant operators to spend more time recruiting and training new employees, and to ask current employees to take on extra tasks — for example, a busboy substituting for a line cook when needed.

So, if there’s a shortage of workers, why don’t restaurants just bump up the paychecks?

The answer: They can’t afford to.

Profit margins average 4 percent to 6 percent at restaurants, according to the restaurant association. Payroll amounts to about 24 percent of restaurants’ net profits, a percentage that hasn’t changed much over the years, according to Sageworks, a financial analysis company.

“They work on a very thin profit margin,” said Dave Cohen, coordinator of the hotel-restaurant hospitality program at Bergen Community College. “You’re not putting 50 cents on the dollar into your pocket in the restaurant business.”

You might expect the Food Network’s shows about celebrity chefs would draw more people to the industry, but restaurant owners complain they paint an unrealistic picture.

No fast track

“Everybody thinks they can go to culinary school and immediately be a Food Network star,” said Nunn from Picnic on the Square. “Even with a degree, you take that $12-an-hour job and work 50 or 60 hours a week so you really learn how to be a chef.”

Cohen said that some culinary graduates would rather work in catering or even in supermarkets, which have shorter, more predictable hours.

Still, those who choose restaurants say they like the fast pace, the interaction with colleagues and customers and, in the case of chefs, the chance to work creatively with food.

“It’s a very expressive thing; it’s a reflection of your passion for food,” Latour said.

De Vincenzi, the maitre d’, was asked whether he likes his job better when the restaurant is quiet or crowded.

“Packed,” he said. “I want to be busy. I want it to be hectic. I like the stress. It’s all adrenaline.” He once thought of becoming an accountant, but after one day of a summer internship in college, he knew he didn’t want to sit at a desk.

Many restaurant workers are students looking for part-time work and flexible hours. The restaurant industry employs 1.5 million teenagers between 16 and 19 — or one-third of all working teens in the nation, according to the restaurant association’s figures.

Da Silva, the Latour waiter, said he is an extrovert who likes to talk to customers. The philosophy student said every customer “has something to teach you.”

“They’ll say something that catches your attention,” he said.

Other restaurant workers also say the relationship with diners is one of the best parts of the job. Victor Molina of West New York, a waiter who has worked for 10 years at Grissini, said he is gratified that some of the restaurant’s regulars ask for him by name.

“They know you and they trust you,” he said.

Email: lynn@northjersey.comTwitter: @KathleenLynn3

Slower Restaurant Employment Growth in San Fran & Seattle

A preliminary look into employment data by Forbes Contributor Stephen Bronars points to slower employment growth since the minimum wage increases in San Francisco and Seattle.

In the article Higher Minimum Wages in San Francisco and Seattle Mean Fewer Restaurant Jobs takes a look at year over year quarterly changes in employment averages. Here are some of the points he makes regarding his choice of data to use:

  • The minimum wage laws apply to cities but Bureau of Labor Statistics (BLS) employment data are available for Metropolitan Divisions
  • This is more problematic in Seattle where three out of four jobs in the metro division are outside the city limits, while two thirds of restaurant jobs in the San Francisco metro division are in the city
  • In addition, the monthly data are not seasonally adjusted and subject to a substantial margin of error

I have copied the full article with charts below and it’s also linked above, but Stephen concludes the following, acknowledging that more analysis will be needed as more data becomes available:

  • Had restaurant employment in San Francisco grown at the same rate as in the rest of the U.S., there would be 2,520 more restaurant jobs in the San Francisco metro division
  • Had restaurant employment in Seattle grown at the same rate as in the rest of the U.S., there would be 1,175-1,490 more restaurant jobs in the Seattle metro division

Last year Seattle decided to increase its minimum wage to $15 per hour over several years. The first increase to $11 per hour, for large employers, became effective on April 15th. Last fall San Francisco also adopted a plan to increase its minimum wage to $15 over the next few years and the first increase to $12.25 per hour became effective on May 1st. Because many restaurant workers earn less than the new minimum wages, most economists expect restaurant employment to decline in these cities as competition encourages restaurants to economize on labor costs.

Earlier this month Mark Perry, of the American Enterprise Institute, observed that job creation in Seattle’s restaurant industry stalled in 2015, perhaps due to the minimum wage hike. Last week Erik Sherman, a Forbes contributor, took issue with Perry’s interpretation of the data and purported to show that employment in San Francisco’s restaurant industry has grown since its minimum wage increase.

In this post I take a closer look at restaurant industry employment in San Francisco and Seattle. Before turning to the data it is important to understand its limitations. The minimum wage laws apply to cities but Bureau of Labor Statistics (BLS) employment data are available for Metropolitan Divisions.[1] This is more problematic in Seattle where three out of four jobs in the metro division are outside the city limits, while two thirds of restaurant jobs in the San Francisco metro division are in the city.[2] In addition, the monthly data are not seasonally adjusted and subject to a substantial margin of error. For this reason I focus on year-over-year changes in quarterly employment averages. I find that food service job growth slowed in Seattle since the minimum wage increase. In San Francisco, where more detailed data are available, there has been slower job growth in restaurants, but caterers and food trucks are growing more rapidly after the minimum wage increase.

Outsourced Meals

About 40 percent of the typical household’s food budget is for meals away from home and this increases to 46 percent for households in the top income quintile (from the Consumer Expenditure Survey). The “Food Services and Drinking Places” industry is prominent in San Francisco and Seattle; it accounts for about 10 percent of private sector jobs in San Francisco and 7 percent in Seattle. This is not surprising because San Francisco and Seattle are among the wealthiest cities in the U.S.[3]

Higher minimum wages will cause restaurants to economize on labor costs and hire fewer employees even in relatively wealthy cities. Competition will encourage food service companies to find less labor intensive methods of delivering prepared meals to their customers. For example, customers placing orders on computer tablets can reduce the demand for food servers.

San Francisco: Slowing Job Growth in Brick and Mortar Restaurants

The following table presents annual percentage changes in second quarter employment in several restaurant categories in the San Francisco metro division as well as the remainder of the U.S., and in San Francisco outside the food services industry. The table shows a slowdown in job growth in brick and mortar restaurants in the past year.[4] The all restaurants industry group, which includes full service and limited service restaurants, snack bars, and cafeterias, saw job growth of only 0.31% in the past year. Restaurant employment grew much less rapidly than in other sectors in San Francisco in the past year. In addition, had restaurant employment grown at the same rate as in the rest of the U.S., there would be 2,520 more restaurant jobs in the San Francisco metro division.

Click here for chart in full article

There has, however, been rapid employment growth (33.5% in the past year or 2,800 jobs) in the Special Food Services industry, which includes caterers and food trucks. This continues a recent trend; employment at caterers and food trucks has more than doubled since 2011. Although caterers and food trucks accounted for less than 10% of food services jobs in San Francisco in 2014, they accounted for more than 60% of job growth in food services over the past year so that overall growth in food service jobs slowed by 1.7% in the past year.

Declining Food Service Employment in Seattle

The most detailed BLS employment data reported for the Seattle metro division is for the “Food Services and Drinking Places” industry group.[5] The following table presents annual changes in second quarter employment for “Food Services and Drinking Places” in the Seattle metro division and the rest of the U.S., and private sector employment in the Seattle metro division outside the food services industry.[6]

Click here for chart in full article 

The table demonstrates that employment in the food services industry in the Seattle metro division grew more slowly than in other regions of the U.S. and more slowly than in other industries in Seattle. Depending on the alternative benchmark used there are 1,175 to 1,490 fewer food service jobs than there would have been had employment grown at the same rate as elsewhere.

Tentative Conclusions

While results based on preliminary and noisy data should be interpreted with caution, and more detailed studies will be required as city minimum wages increase even more, higher minimum wages appear to be disrupting the restaurant industry in San Francisco and Seattle and causing a reduction in jobs. In San Francisco minimum wages might be diverting customers to caterers and food trucks, perhaps because they are better equipped to adjust to higher labor costs. The first wave of minimum wage increases appears to have led to the loss of over 1,100 food service jobs in the Seattle metro division and over 2,500 restaurant jobs in the San Francisco metro division. These estimates are likely to be conservative, especially in Seattle, because many jobs in the metro division are outside the city limits and not subject to the minimum wage increase.

*This is a guest post by Stephen Bronars, Partner at Edgeworth Economics, Ph.D. in Economics from the University of Chicago. His opinions are his own.

[1] The San Francisco metropolitan includes San Francisco and San Mateo Counties but excludes Alameda, Marin and Contra Costa Counties and the city of Oakland. The Seattle metropolitan division includes King County and Snohomish County but excludes Pierce County and the city of Tacoma.

[2] The Seattle calculation is based on the BLS LAUS data and the San Francisco calculation is based on County Business Patterns.

[3] According to the Quarterly Census of Employment and Wages, San Francisco County ranks fifth and King County, Washington ranks sixteenth among the 340 largest counties in the U.S., ranked by median earnings

[4] The San Francisco minimum wage was set at $8.50 in 2004 and indexed to inflation. The increase from 2014 to 2015 was $1.51 compared to $0.32, $0.31 and $0.19 in previous years.

[5] This includes full service restaurants, limited service restaurants, cafeterias, snack and non-alcoholic beverage bars, drinking places, food service contractors, mobile food services and caterers.

[6] The Washington state minimum wage increased by $0.37, $0.15 and $0.13 per hour between 2011 and 2014, and the Seattle minimum wage increase from 2014 to 2015 was $1.68 per hour.

Will Minimum Wage Increases Accelerate the Robot Invasion?

There’s an interesting article in the Washington Post, “Minimum-wage offensive could speed arrival of robot-powered restaurants”, suggesting that $15/hr minimum wage will accelerate the move to robots in restaurants.

It mentions that shedding labor in the restaurant industry isn’t a new phenomenon. According to the article in the late 60’s a McDonald’s would have 70-80 employees vs. 30-40 now. Pre-packaged food/ingredients, smarter/more efficient kitchen technology over the years has allowed restaurants to cut down on labor, but there hasn’t traditionally been a lot of talk about cutting FOH staff as there is now.

With the mobile technology revolution FOH staff is very much on the chopping block. Kiosks and tablets at the table offer customers very convenient options for ordering and settling up at the end. Of course some establishments clientele will require a knowledgeable human being to answer questions, suggest pairings based on tastes, etc.  Specifically higher end full service restaurants. But most of the fast casual and quick service brands could absolutely move to more technology and not miss a beat. And matter of fact probably run better.

The thing with technology is that it will do whatever you program it to do. That’s good and bad at the same time because it will only do what you tell it to do. They won’t be very quick on their feet if you know what I mean. But they will never forget to up-sell. Ziosk is very popular right now for a reason.

Robots are coming whether we like it or not and I feel they would be coming regardless of minimum wage. There are other benefits of a robot other than wage ie. no human resource issues, always on time, no taxes, etc. As the article mentions there will always be a need for human labor, but their roles will change to more of a management role and ensuring that the robots are running properly. It’ll be more of a technical position, but also being able to pitch in and help as needed.

It’s going to be interesting to watch what happens over the next few years. I have copied the full Washington Post article below:

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Crowded. That’s how Ed Rensi remembers what life was like working at McDonald’s in 1966. There were about double the number of people working in the store — 70 or 80, as opposed to the 30 or 40 there today — because preparing the food just took a lot more doing.

“When I first started at McDonald’s making 85 cents an hour, everything we made was by hand,” Rensi said — from cutting the shortcakes to stirring syrups into the milk for shakes. Over the years, though, ingredients started to arrive packaged and pre-mixed, ready to be heated up, bagged and handed out the window.

“More and more of the labor was pushed back up the chain,” said Rensi, who went on to become chief executive of the company in the 1990s. The company kept employing more grill cooks and cashiers as it expanded, but each one of them accounted for more of each store’s revenue as more sophisticated cooking techniques allowed each to become more productive.

The industry could be ready for another jolt as a ballot initiative to raise the minimum wage to $15 an hour nears in the District and as other campaigns to boost wages gain traction around the country. About 30 percent of the restaurant industry’s costs come from salaries, so burger-flipping robots — or at least super-fast ovens that expedite the process — become that much more cost-competitive if the current federal minimum wage of $7.25 an hour is doubled.

“The problem with the ­minimum-wage offensive is that it throws the accounting of the restaurant industry totally upside down,” said Harold Miller, vice president of franchise development for Persona Pizzeria, who also consults for other chains. “My position is: Pay your people properly, keep them longer, treat them right, and robots are going to be helpful in doing that, because it will help the restaurateur survive.”

Many chains are already at work looking for ingenious ways to take humans out of the picture, threatening workers in an industry that employs 2.4 million wait staffers, nearly 3 million cooks and food preparers and many of the nation’s 3.3 million cashiers.

‘Why wait?’

The advent of fast-food chains may have ushered in an era of new efficiencies, but the industry as a whole has largely been resistant to cuts in labor. According to the Bureau of Labor Statistics, since 1987, labor productivity in ­limited-service restaurants has grown at a rate of only 0.3 percent per year, which is low compared with most other industries.

The market research company IBISWorld has calculated that the average number of employees at fast-food restaurants declined by fewer than two people over the past decade, from 17.16 employees to 15.28. And restaurants tend to rely more on labor than other food outlets: According to the National Restaurant Association, dining establishments average $84,000 in sales per worker, compared with $304,000 for grocery stores and $855,000 for gas stations.

The avalanche of rising costs is why franchisers are aggressively looking for technology that can allow them to produce more food faster with higher quality and lower waste. Dave Brewer is chief operating officer with Middleby Corp., which owns dozens of kitchen equipment brands, and is constantly developing new ways to optimize performance and minimize cost.

“The miracle is, the wage increase is driving the interest,” Brewer said. “But the innovation and the automation, they’re going after it even before the wages go up. Why wait?”

All that innovation helps restaurants streamline other parts of their operations — and draw more customers. Electronic menus can be constantly updated so that items that are out of stock can be removed. Connecting the point of the sale to the oven’s operating system allows precise amounts of food to be cooked, which helps cut down on costs. Other inventions save energy, reduce maintenance and better dispose of grease. On the digital side, restaurants are working on apps that include reward systems and location tracking that prompt customers to eat with them more frequently.

It’s possible that new inventions could start to eliminate positions faster than they have in the past.

The labor-saving technology that has so far been rolled out most extensively — kiosk and ­tablet-based ordering — could be used to replace cashiers and the part of the wait staff’s job that involves taking orders and bringing checks. Olive Garden said earlier this year that it would roll out the Ziosk system at all its restaurants, which means that all a server has to do is bring out the food.

Robots can even help cut down on the need for high-skilled workers such as sushi chefs. A number of high-end restaurants use machines for rolling rice out on sheets of nori, a relatively menial task that takes lots of time. Even though sushi chefs tend to make more than $15 an hour, they could be on the chopping block if servers need to make $15 an hour, too.

Of course, it’s possible to imagine all kinds of dramatic productivity enhancements. Persona ­Pizzeria’s Miller predicts that drone delivery systems will eventually get rid of the need to come into a restaurant at all, for example. Brewer has a bold prediction: He thinks that all the automation working its way into restaurants could eventually cut staffing levels in half. The remaining employees would just need to learn how to operate the machines and fix things when they break.

“You don’t want a $15-an-hour person doing something that the person who makes $7 an hour can do,” Brewer said. “It’s not downgrading the employees. It’s that the employees become managers of a bunch of different systems. They’ll become smarter and smarter.”

The value of a human touch

Not everybody, however, agrees that machines could make that much of a dent in labor costs. Implementing new systems is expensive, and mistakes can be devastating. And for some concepts, it’s possible that the presence of employees is actually a restaurant’s competitive advantage. Compared with grocery stores and gas stations, many people come to restaurants exactly because they want some human interaction.

Andy Wiederhorn, chief executive of Fatburger — who is testing tablet systems in his sit-down chain, Buffalo’s Cafe — doubts improvements in technology are going to be enough to keep up with the mandated wage increases, especially when actual people can be his best sales tool.

“I think that tablets have a place at the table, but it’s pretty hard to ask questions, get suggestions from a tablet. I don’t think they replace a server, they make a server more efficient,” Wiederhorn said. “We’re selling hamburgers shakes and fries, and [customers] want to talk to somebody and say, ‘Here’s how I want it.’ So I think in the hospitality industry, to assume that technology will take the place of workers is a false assumption.”

That’s why some restaurants have tiptoed in the direction of increased automation, rather than sprinted, even as minimum-wage hikes loom.

“Because the industry remains overall an industry of hospitality, their challenge remains how to remain high-touch in a high-tech environment,” said Hudson Riehle, the National Restaurant Association’s senior vice president for research and knowledge. If they’re not careful, restaurants could jettison the one thing that kept people coming through the doors.

“Being a service industry, and the need to deliver a personalized experience, means that many of the restaurant operators focus on ensuring that the overall customer experience remains competitive,” Riehle said.

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Over 29k Restaurant Jobs added Across Segments in July

A press release from the National Restaurant Association today reported that the restaurant industry added 29,300 (seasonally adjusted) jobs in July. This is the 17th time in the last 18 months that the industry posted job growth of 20,000 or more. Here are some more stats from the article:

  • The industry is on pace to post job growth in excess of 3.5% for the 4th consecutive year – this hasn’t happened since the mid 80’s
  • Foodservice contractors led the way during the first half of the year, adding jobs at a robust 6.8
  • Snack and nonalcoholic beverage bars added jobs at a healthy 6.6 percent
  • The catering and mobile food service segment has continued its steady expansion in 2015, with employment growing at a strong 6.2 percent
  • Quickservice restaurants added jobs at a solid 3.8 percent
  • The fullservice segment expanded payrolls at a 3.5 percent rate

I have copied the full press release below:

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Restaurant industry employment continued its upward trajectory in July, adding at least 20,000 jobs for the 17th time in the last 18 months.  The industry is on pace to post job growth of at least 3.5 percent for the fourth consecutive year – a streak that hasn’t happened since the mid-1980s, according to the NRA’s chief economist Bruce Grindy.  His Economist’s Notebook commentary and analysis appears regularly onRestaurant.org and Restaurant TrendMapper.

Over 29k Restaurant Jobs added Across Segments in JulyWashington, DC  (Restaurant News Release)  Restaurant industry job growth remained steady and solid in July, according to preliminary figures from theBureau of Labor Statistics (BLS).  Eating and drinking places added a net 29,300 jobs in July on a seasonally-adjusted basis, marking the 17th time in the last 18 months in which the industry added at least 20,000 jobs.

The recent gains put the restaurant industry on track to add jobs at a strong 3.7 percent rate in 2015.  This would represent the fourth consecutive year with restaurant job growth of at least 3.5 percent – a streak that hasn’t happened since the mid-1980s.

Within the restaurant industry, job growth has been broad-based in 2015.  Foodservice contractors led the way during the first half of the year, adding jobs at a robust 6.8 percent rate on a year-to-date basis through June.  In addition, this segment’s solid 2015 growth is following an even stronger 7.7 percent payroll expansion in 2014.

Snack and nonalcoholic beverage bars – including coffee, donut and ice cream shops – added jobs at a healthy 6.6 percent rate during the first half of 2015.  If this pace continues, it would represent the fourth consecutive year in which snack and nonalcoholic beverage bars posted job growth of at least 5 percent.

The catering and mobile food service segment has continued its steady expansion in 2015, with employment growing at a strong 6.2 percent on a year-to-date basis through June.

Quickservice restaurants added jobs at a solid 3.8 percent rate during the first half of 2015, while the fullservice segment expanded payrolls at a 3.5 percent rate.

Over 29k Restaurant Jobs added Across Segments in July

Founded in 1919, the National Restaurant Association is the leading business association for the restaurant industry, which comprises 1 million restaurant and foodservice outlets and a workforce of 14 million employees. We represent the industry in Washington, D.C., and advocate on its behalf. We operate the industry’s largest trade show (NRA Show May 21-24, 2016, in Chicago); leading food safety training and certification program (ServSafe); unique career-building high school program (the NRAEF’s ProStart); as well as the Kids LiveWell program promoting healthful kids’ menu options. For more information, visit Restaurant.org and find us on Twitter @WeRRestaurantsFacebook and YouTube.

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Chain Restaurants Close 2014 With Sales Growth

A nice positive article from FSR Magazine to start off 2015 as it relates to a growth in sales for chain restaurants. Here are a couple of the highlights:

  • December recorded the best same store sales in three years at 3.1%
  • The fourth quarter registered the best same-store sales results reported in six years of Black Box Intelligence tracking at 2.5%
  • Aggregate growth of 0.8 percent for 2014 vs. -0.1 percent posted in 2013 by the industry
  • Excluding this first quarter, same-store sales grew at an average 1.3 percent during the rest of the year
  • Traffic grew by 0.6 percent during December, the best month for the industry since February 2012
  • The increases in same-store traffic mirror the jumps in same-store sales, meaning that it was a true improvement in sales fueled by attracting more guests into restaurants, and not just the effect of rising prices
  • The improvement in sales has been widespread across the country with all 11 regions posting positive same-store sales during the fourth quarter, which has not happened in any other quarter over the last three years

Read the full article here. Hopefully this is a sign of good things to come in 2015. Only time will tell for sure.

The NRA’s Response to the State of the Union Address

Please take a look at the National Restaurant Association’s Official Response to the State of the Union Address.  I would like to add two personal notes to this story.

I started my working life at age 14 at a Jerry’s Subs and Pizza in Columbia MD.  I think it is fair to say that at the time I wasn’t the most productive or highly skilled employee, I was uncoordinated and goofy.  I would never have made that first paycheck or been able to get that first job at Jerry’s if they couldn’t afford to hire and train me.

In 2008,  I managed the Franchise Assistance Program at a large sandwich chain.  My job was to offer business coaching and assistance to franchisees who were struggling.  Remember how franchise chains work.  When you see the Subway in your local strip center, it isn’t owned by the Subway corporation with it’s billions of dollars in revenues and resources; it is owned by one of your neighbors.

Please click here to read the NRA’s Official Response to the State of the Union Address.

 

My name is Tommy Yionoulis and I’m a restaurant and software guy.  If you like what you read, please follow OpsAnalitica on LinkedIn and follow our blog.

 

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