Would You Rather See Higher Menu Prices or a Surcharge on Your Bill?
The restaurant industry has notoriously tight margins. “Don’t open a restaurant unless you know what you’re doing” is one of those pieces of advice you’re practically given at birth. Meanwhile, even for people who know what they’re doing, running a full-service restaurant has gotten tougher in many places in recent years thanks to additional costs like increases in minimum wage. So, accepting the assumption that many restaurants need a bit of extra wiggle room to survive, how would you rather see it implemented: higher menu prices or a flat surcharge on your bill?
Though higher menu prices might seem like the obvious answer (does anyone really like surcharges?), many restaurants seem to believe that surcharges are the way to go, keeping menu prices the same. It's sort of like charging $9.99 instead of $10, though consumers might find the difference silly, businesses clearly believe a psychological advantage exists. Recently, a number of states that have seen minimum wage increases—like California, Colorado and New York—have also seen an increase in the number of restaurant surcharges being tacked onto bills, usually in the range of about 3 to 5 percent.
One place you won’t see these kinds of surcharges—at least not yet—is in New York City. Though New York is often cited as one of the most competitive places to run a restaurant in the entire country, it’s also a rare example of a place where such surcharges are banned by law.
But earlier this week, plenty of New York City restaurants—including some of the city’s biggest names like Daniel Humm's Eleven Madison Park, Daniel Boulud's Daniel, and Harlem staple Sylvia's—made it clear that they want this policy changed. Over 100 restaurants signed an open letter addressed to Mayor de Blasio. “[We] implore you to permit our establishments to include an optional surcharge on dining checks,” the letter reads. “Our payrolls and rents have skyrocketed, which has had a catastrophic impact on our businesses and employees. If you want to support local restaurants and staff, allow us the option of using a clearly disclosed surcharge to generate the revenue to simply survive.”
“It’s a consumer perception issue,” Andrew Rigie, executive director of the New York City Hospitality Alliance, told The New York Post. He argued that raising prices is more likely to scare away diners.
But is it? Data can be hard to come by. But Bonnie Riggs, restaurant analyst for the market research giant NPD Group, suggested to the Wall Street Journal last year that when prices go up, at the very least, “consumers often trade down in the types of menu items they order, choosing a sandwich instead of an entree, or they leave off beverages or dessert.” To put it another way, raising prices can cut revenue in other areas.
Of course, using surcharges to increase revenue while keeping prices down begets its own vicious circle: Suddenly prices all look the same but surcharges continue to inch up. And if we reach a point where you’re expected to pay something like a 20 percent tip and a 5 percent surcharge, what are prices really except the beginning of a math problem? At some point, you think diners would catch on and just prefer to pay higher prices and cut out all of these percentages entirely. Yet, in a similar vein, the no-tipping revolution looked like the next big trend, but it certainly hasn’t taken the entire restaurant world by storm.
In the end, it’s a complex issue that even restaurants themselves are struggling to sort out. Just add it to the pile of reasons why people warned you about opening a restaurant.