Restaurant Surcharge, Bitter Taste (2017 Apr)

by Barry A. Liebling

The restaurant business is tough. Proprietors know that there is a limit to how much they can charge for a meal. If they raise their prices too much their target customers will go elsewhere or forgo the restaurant experience altogether. And the cost of running a successful restaurant is escalating in many states due – in part- to the rising legal minimum wage. According to the Wall Street Journal a large number of restaurants in high-minimum-wage states (including Arizona, California, Colorado, and New York) are adding a surcharge to customers’ checks to reimburse the establishment for the higher cost of labor.

The surcharge is an expression of frustration and defiance against government-mandated increased costs. Still, the policy of explicitly putting a surcharge on the check is not likely to help the restaurateur’s cause. Consider what is behind the decision and how it will affect the key players.

Owners know they need to raise the price of a meal if their labor costs go up, they run their business as before, and they intend to maintain their profits. And they also know that many customers will be turned off if they see a bump in the menu. So they are wagering that if they keep the menu prices the same and add a surcharge at the end customers will be mollified. This is a highly unlikely scenario.

Nearly all customers will notice (some people notice nothing) that the total price of the meal has increased. So the big difference between simply raising the prices and adding a surcharge is that it is more difficult for the diner to anticipate how much the meal will cost. The old convention for calculating the price of a meal is to consider the amount for the food, the sales tax, and the tip. Now the surcharge has to be added – not a large burden but still an extra step.

Now bear in mind that diners are not homogenous. They have diverse attitudes toward the mandated minimum wage. Progressive leftists generally favor having the government adjust wages upward for working people. When they see the surcharge they will think that the restaurant owner is not being fair. Of course the proprietor should pay his workers more, but the owner should absorb the cost by taking in lower profits. To a leftist, business owners have sacred duties to their employees and to “the public” but should think of their own welfare last -if at all. When they see the surcharge they are likely to conclude that the proprietor is just being greedy and is taking a political position in opposition to “enlightened progressive” policies.

People who are not onboard with leftist politics will note that the surcharge relates to real increased costs for the restaurant. But so what? The meal still has a larger tab, and no matter who is to blame, higher prices mean it is time to shop around for alternatives. Non-political people are more interested in having a good meal at a reasonable price than in participating in a debate about how much the government should decide workers’ pay.

A number of readers responded to the Wall Street Journal article by asserting that they view the surcharge as a substitute for a tip. Several wrote that when they see the added item on the bill they will subtract that amount from the gratuity they leave for the food server. This outcome is certainly not the intention of restaurant owners.

Consider what will happen if surcharges become widespread in restaurants. An eatery that wants to stand out (in a good way) can advertise itself as serving excellent food “with no added surcharge.” This announcement will be attractive to diners who appreciate businesses that communicate to them in a straightforward manner. The appeal is similar to dining establishments that say “tax included” on their menus (they are still uncommon).

So what should proprietors do in reaction to government-imposed higher costs? If they want to make a statement expressing their disapproval they ought to do it directly. Have a section on the menu that says something like, “because of government mandated regulations the cost of doing business has increased which is why we raised our prices.”

Alternatively, restaurateurs can find ways of being more efficient and deliver their comestibles more economically. Where I live in New York City, some McDonald’s and other casual eateries have already installed touch-screen kiosks that automatically take orders. This allows the establishment to operate with fewer employees. Notice that using automation to bring down costs is a rational move when the price of labor goes up. And it is a consequence that those who tout government meddling refuse to acknowledge.

*** See other entries at in “Monthly Columns.” ***

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