Who hasn't experienced an instance of poor service at a restaurant that ruined an otherwise good meal? And whether we withheld a tip or felt compelled to still leave something, the episode left a bad taste in our mouth and the restaurant was poorer for it, particularly if we vowed to never return as a result.
While poor customer service seems rampant across all service industries, there are few businesses where the financial nexus between company and customer is as apparent as it is in restaurants. After all, you're not able to determine a level of compensation for the department-store customer-service rep as you are when paying for your meal.
That's led the tipping economy to be seen as an antiquated model, one that's actually fairly uncommon in many foreign countries. It's also a view that may lead to a revolution in restaurant operations.
The start of something big
Ignite Restaurant Group's (NASDAQ:IRG) Joe's Crab Shack chain recently announced it would be moving to a no-tipping policy at 18 of its 131 restaurants with the pay of its servers being raised from $2.13 per hour to $14 per hour to compensate the staff. By doing so, it becomes the first national casual-dining restaurant chain to eliminate the practice.
Not that eliminating tips hasn't been tried at other restaurants. A number of high-end eateries have enacted no-tip rules, and last month the movement gained a lot of attention when celebrity chef Danny Meyer said his 13 Union Square Hospitality Group restaurants would end tipping.
Although the purpose of a no-tip policy isn't to improve service -- Meyer, for example, argues it's simply a far more equitable pay system (and he attempted to eliminate tips before in the 1990s, too) -- it's hoped an outgrowth of being better compensated will inspire pride in a job and improve staff morale.
The group Raise the Minimum Wage, which advocates for a national $15-per-hour rate, points to a 2003 study that found that of employers at San Francisco International Airport that increased hourly worker pay 55% to a "living wage" of $10 an hour, 35% reported an increase in employee work performance, 47% a jump in morale, and 45% an improvement in customer service.
A rewarding experience
While tipping seems to be falling out of favor, there's been a rationale behind the practice. Restaurant operators saved on labor costs, ambitious workers could make more money than they otherwise would (most of which would largely go unreported to the IRS), and customers could reward those servers who provided outstanding service.
Of course, it's all become rather institutionalized now, and even servers balked at the idea when Union Square's Meyer tried to implement it previously. There's also the fear that without any incentive to provide better service, the quality of service given will degrade further.
Worse, eliminating tips is not without a cost. Since the pay of employees is being increased, restaurants are raising their prices to pay for it. Where Joe's Crab Shack says the higher prices are typically less than the 20% customers were leaving for a tip, Meyer's restaurants are raising menu prices beyond the cost of the wage increase because " we're also trying to right what has been a labor of wrong, and that's going to cost a couple more points on top of that."
He admits it's risky, but still believes it's the right move to make, for his servers, his restaurants, and ultimately for the customer, too.
Ignite Restaurants it's already seeing the experiment gain traction at the restaurant where it has been tested the longest. That's critical, because comparable-restaurant sales at Joe's have been on a long, steady slide down and this past quarter fell 6.6% from last year and are down 5% year to date, the same rate they fell last year.
If successful at Joe's Crab Shack and at the Union Square chains, it's possible it will expand to other restaurants, but does anyone think by eliminating tipping, your restaurant experience will improve as a result? More importantly, are you willing to pay more for the chance to not leave a tip?
Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.