The Service Charge Fix Is In

A friend of mine went to a local restaurant to pick up a To-Go order recently and snapped a picture of this sign.

The growing trend in the restaurant industry of adding service charges to the guest check is getting out of control. It began with a handful or restaurants placing a 3% or 4% “wellness” charge on orders prior to the Covid outbreak to offset mandated health insurance costs. Then the great pandemic happened, and governments far and wide used the Covid club to decimate restaurants. As restaurants, at least the ones not shared-sacrificed out of business, attempted to pull themselves out of the economic abyss of forced closures and reduced seating, they started grabbing at any revenue source to aid their recoveries. Many restaurants continued this unfortunate trend by adding fees to their guest’s checks. Customers grumbled a bit at the charges but generally paid the tokenish service fees as they felt genuine sympathy for how Covid related policies hurt their favorite restaurants. I remember saying at the time that no good will come to our industry with this reimagined fee-based model.

Now we are seeing the results of my dire predictions. Instead of the initial 3% to 4% nominal fee, some restaurants are now placing a 15% service charge on a To-Go orders! This action is absurd and is a pure money grab, nothing more! Where does this uncontainable service charge trend stop? 18%?  20%?  25%? For the sake of the vitality and integrity of our restaurant industry, these service charge add-on fees must stop!

Placing a Benefit & Equity “tax" on a restaurant order is the business of inefficient governments not inefficient restaurant operators! As the sign says, "Pursuant to Minnesota Statute 177.23, Subd. 9, this is not a gratuity." Indeed, it is not, the whole amount collected from these service charges goes to the house! Even the State of Minnesota knows that this is merely an add on charge that goes to the restaurant not the employees, thus they force a sales tax on this, “I don’t know how to price my menu” 15% service charge! Yes, that's right, in Minnesota, the mandatory service charges are taxed at 6.875% or, as in the case of this Minneapolis restaurant, 8.025%.

So let's do the math on $50.00 To-Go order from this store.

Food subtotal $50.00
15% Service Charge = $7.50
MN Sales tax on $57.50 = $4.62
($.62 is the tax on the 15% Service charge)

Total cost for $50.00 To-Go order is $62.12 or 24.25% higher than the prices posted on the website!

Restaurants that play the service charge game are intellectually and mathematically lazy. Intellectually bereft because of they assume their customers don’t care and will return regardless of add-on fees. Mathematically lacking because they don’t put the effort into understanding their true costs and pricing their menus accordingly. This means restaurants charging an add-on fee, especially a service charge that claims to benefit their employees, are at best dishonest and at worse outright deceitful. When I buy a hamburger and fries, I get a hamburger and fries. If the restaurant sends out a different item, I send it back or don’t pay for it. We consumers demand that we get what we pay for. If I am forced to buy "Benefits & Equity" (whatever the hell that is), I want to see my benefits and equity, or at least proof from the restaurant that my forced service charged fee benefits the employees as the sign infers!

Yet, in Minnesota, this service charge fee just goes to the bottom line. The restaurant operator may use it to offset wages and benefits, or they may use the funds the lease a new Mercedes or Cayman Island condo. I understand what employee benefits are and that they have a real cost, but God help me, I do not know how an operator proves they spent money on equity?
 
I know that commodity and labor costs are going up. I recognize that we are in a real strange market right now and that restaurant operators are scared to adjust menu prices accordingly. They fear chasing precious customers away with higher prices. However, I believe the truth will set them free. Most customers would rather see the menu price increases reflecting the true retail price based on current economic conditions than to be deceived by a sales-taxed service charge tacked onto the bill at the end of a dining experience.

Finally, from a pure restaurant management point of view, adding a service charge to an existing menu item verses simply raising menu prices is a "one trick pony!" What are operators going to do next quarter when $5.00, or perhaps $6.00 per gallon gasoline prices once again drive-up commodities due to higher delivery costs? Raise the service charge percentage? Add a truck charge to the cost of a hamburger and fries?

I call on all restaurant operators to stop this service charge madness immediately. Please don't let our beloved industry turn into the travel industry. Just imagine if restaurants treated our customers like the airlines. We would charge them for their experience when they make the reservation not when they dine. We would charge the customer for a seat when they arrived (up-charge for a window table.) We would charge the customer for a reservation change. We would add extra fuel and environmental charges to the bill. We would charge children adult meal prices. And, if a customer complains about all the BS charges, we will send the chef out from the kitchen to forcibly remove the customer from their seat, call the local authorities to have them arrested and place them on a “no-dine” list!

Restaurants are special places. We celebrate life's moments in restaurants. Baby showers, first dates, engagements, weddings, and promotions are just a few events enjoyed in restaurants. And restaurants are not just for life’s celebrations, we are there for the tragedies as well, or at least our bartender’s attentive ears are there for those “crying in my beer” moments!!

Restaurant operators don't turn our beloved industry into the travel industry, where everyone goes on a website and inputs their location and dining desires and lets the computer spit out the available tables and hamburger prices. Don't let the dining experience resemble a standby flight at LaGuardia on the way to a sales tax audit. Honestly, I personally could not stay in an industry that self-sabotages by service charging our guests to the point that they just don't care about the quality of their dining experiences. I don’t want to work in an environment where our guests simply look to be sold on price!

Restaurant operators, please don't fall prey to what looks like an easy way out, learn how to price your menus according to current costs. Your customers will reward you for your honest approach and you will sleep well knowing that you have a correct and sustainable business model.

Bruce L. Nelson is a life-long restaurant operator and Autor of Restaurant Management, the Myth, the Magic, the Math