28 Cents To Rescue an Unsustainable Business Model

The old 80/20 rule – 20% of customers drive 80% of sales – doesn’t apply to restaurants where 20% of customers represent 60% of the trips to eat out and generate 66% of the overall spending according to a study by Cardlytics.

That’s why tourism is so important to restaurants because $1 out of every $3 in food and beverage sales nationwide is visitor generated.  The ratio is even higher in communities such as Durham, North Carolina, which have earned reputations as “foodie” destinations.

The 80/20 rule is more like 60/20 for other visitor-reliant industries as well include shopping, groceries, convenience and gas.

Even with locals though, the study reveals that frequency is not the same as loyalty.  In dining, for example, high frequency customers tend to dine at several favorites, while customers who dine less frequently may use one particular restaurant.

The analysis shows that overall, 56% dine at the same restaurant less than half of the time and 44% dine at the same restaurant more than half of their dining trips out.

There are few more complicated businesses to run, especially the locally-owned, independent restaurants that contribute to making communities distinct.

Even the franchises, which tend to eat away at sense of place by making communities the same, are no piece of cake to run, which may be the reason these businesses seem so prickly when it comes to shouldering their fair share of the cost of creating community visitor appeal.

In Durham, out-of-town franchisees have sought to undermine our billboard ban and ordinances to reduce sign blight.  They invested heavily to defeat a 1% prepared food tax that, in part, would have helped clean up the litter they generate.  Nationwide they are among the first to fuss about the minimum wage or providing affordable healthcare.

I agree with several restaurateurs in Durham who believe that business models in many visitor-related industries that rely on low wages are flawed.  Franchise owners, which an observer recently equated to sharecroppers seem to be the most virulent in opposing to paying a living wage or even increasing the minimum wage.

In late 1967, as a teenager with a newly minted drivers license, one of my sisters went to work part time at a cookie bakery for $1.40 per hour.

Adjusted for inflation though, she was making $11 an hour today.  Back then the minimum wage was enough to lift three people out of poverty, today, it is barely enough for one.

Today’s minimum wage is nearly $4 lower than in 1967.

Several dozen studies now show that increases to the minimum wage have a nominal effect on jobs or prices.  Restaurants are a minor exception.  Researchers have found that for every 10% increase in the minimum wage, there is a 0.7 cents increase in restaurant prices.

So the increase to $10.10 currently under discussion might result in a less than a 28 cent increase in restaurant prices.  Oh my!  I am sure at the margins some economist will find a sliver of a fraction who won’t eat out because of the increase, but that will be overwhelmed by the number who will dine out more because they can afford it.

It reminds me of the brouhaha in New York just as I retired a few years ago from a career in visitor centric economic development, when that city required all cabbies to accept credit cards.  What happened?  Cab revenues went up 13% and tips rose from an average of 10% to 22%.

Now, technology is not only disrupting businesses such as cabs with services such as Uber just as Airbnb is disrupting economy lodging, but it is also now making cash registers and check out lines obsolete as well as changing what we know about tipping.

In fact, the app Square, which allows anyone, including a far greater number of employees in stores and restaurants to check people out, saving time for consumers and employees.

In its fourth year since launch, the company already has enough information to break down tipping rates and participation by state and even down to some large metro areas.

Square gives an individual or business user the ability to set screen buttons with a range of tipping options, and there is evidence it is increasing tipping as a practice and the amount tipped.

The average tip nationwide is 16.1% compared to North Carolina where I live which ranks third among states at 16.7%.  But keep in mind that more than 46% tip nothing at all, a percentage of “stiffers” that climbs to 6-in-10 in some states.

Before getting too judgmental, it is important to note that tipping is a learned behavior.  If you didn’t learn how from your parents, a good guide to follow the example of how people in service industries tip one another.

Tipping in some service industries began as a way to incent service, but unfortunately underwent a sort of “bait and switch” in some business models as an excuse for owners and managers to pay less than minimum wage.

I lean toward a mandatory minimum wage but I know it isn’t a panacea and I can empathize with those who have a distaste for anything mandatory.  But this is an area where the free market is inefficient.

As an alternative, maybe like-minded businesses could also borrow something from the coffee sustainability movement spearheaded from Durham-based Counter Culture and begin to brand themselves as “Fair Pay” or better yet “livable wage” businesses.

Fairness is a shared value among Americans.  It is just that some of us think of fairness as distributive, some of us think of it as proportional and some of us think it should be both.

I agree with many who believe this issue isn’t going to go away.  I also agree that paying a fair minimum or livable wage should not enable or be an excuse to retain disengaged workers.  That is an entirely different and equally important issue.  One is macro, the other micro.

I keep coming back to a study published a few months ago by researchers at Cornell and Stanford entitled, Residential Segregation by Income, 1970 – 2009.  The span begins shortly after my sister took that job for $1.40 at the cookie bakery.

In that span, the percentage of families living in middle class neighborhoods fell from 65% to 42%.  A few moved up, the vast majority fell back to low income and poor areas.

That big a shift is something that should concern all of us.

No Free Lunch – Even For The Restaurant Industry

The restaurant industry hates taxes - unless it’s doing the taxing.

As I give you the following examples to illustrate my point, let me first clarify that I’m a card-carrying foodie. I eat out 10 or more times a week and I’m told I’m a good tipper. I understand that great food and great wait staff go hand in hand. I also spent a lot of time during a now-concluded four-decade career helping to make restaurants sustainable in three different communities.

Here are just three examples, though, of how the restaurant industry through associations, often controlled by chains and franchisees, seems hypocritical when it comes to levies on meals.

• The restaurant industry levies (guilt and social norms are still levies) $44 billion in “tips” each year on diners ranging from 5% to 20% with tip inflation in some cities now reaching 25% even though numerous studies have revealed there is little or no correlation to good service in the minds of either the customers or the wait staff.

• The restaurant industry is also a major source of litter, generating a quarter of all 4-inch-plus litter items. Fast food operations alone are the source of a third of all packaging litter on roadways and this doesn’t count beverage containers or restaurants’ contribution to loading area and dumpster-sourced litter or that found in storm drains -- more than half of it in cities and counties alone, all of which levies billions on the public to clean it up.

• Another example of a hidden tax levied on the public by the restaurant industry is evident in its underwriting of nearly 200,000 outdoor billboards across America (1 in 5,) bucking the the advice of experts specializing in the restaurant industry that restaurants that continue to use outdoor billboards are skipping over much better alternatives.

Restaurants using billboards contribute to the desecration of their communities and states, foster scenic and economic blight (property near a billboard is depreciated as much as $40,000) and generate air and water pollution when roadside vegetation is clear-cut or swathed and even as admitted recently, poisoned, releasing carbon into the atmosphere and unfiltered storm water into ground water.

So what happens when the public attempts to recoup some of these hidden costs by adding a single penny on the dollar to the tab for meals? Remember, it should be of no concern to restaurants because like a tip, it doesn’t affect restaurants costs or revenues.

Restaurant industry hypocrisy was clearly illustrated in 2008 when my adopted hometown of Durham (ranked among the foodiest cities in America,) with active support from locally-owned restaurants, proposed a tiny 1% levy on prepared meals with the revenues to be dedicated to uses that would benefit the community but only in ways that would also, in turn, benefit restaurants.

Unlike similar levies granted other cities including Raleigh, Charlotte and Fayetteville and with no real strings attached and with little or no objection from the restaurant industry, Durham proposed to use the revenues from the 1% meals tax to:

• Increase the 1/3 of all restaurant revenue that comes from tourism.
• Reduce and control and remove litter including the significant contribution of litter via the restaurant industry.
• Fund food-service education and career development programs,
• Fund cultural facilities and organizations, patrons of which are well-proven to generate restaurant revenues.

Win-win-win, right? This was nowhere near the hidden industry-imposed levies I mentioned above and each of the uses were to be dedicated to things that directly benefit restaurants as well.

Wrong! Suddenly, to defeat the measure, tens of thousands of dollars from outside restaurants were funneled through a front created by the same folks who only months later “rebranded” as the Tea Party, a an existing movement that had fallen into public disfavor.

One of the more laughable claims was that the 1% tax on meals in Durham would hurt restaurant business, something that was easily proven invalid by merely looking revenues before and after such a tax was imposed in in Raleigh and Charlotte.

How could this proposed penny on the dollar paid by customers, two-thirds of whom (including commuters) are non-residents of Durham, be harmful to restaurants when the industry blithely passes along customary levies in the ways mentioned above that are a hundred times greater or more.

Fortunately, the I.R.S. is going to look into these groups and I hope they dig down into what was secretly channeled by restaurant chains and possibly the NC Restaurant and Lodging Association through the Americans for Prosperity chapter over in Raleigh during consideration of Durham’s 1% meals proposal which had been enacted in Raleigh with restaurant industry assent or backing and without a whimper from the Koch brothers.

It is also time for honorable restaurant owners to reclaim control of their industry, taking it back from chain-driven associations, while insisting on a more balanced, transparent and fair approach when it comes to levies on meals.

Restaurateurs, especially those run by owner-chefs, often innately grasp the importance of building strong, vibrant communities and they feel an obligation to do their share, especially when the benefits are win-win. They are also unfairly asked far too often by individuals, groups and businesses to provide their product free of charge

As diners, though, we need to make it clear to our favorite restaurants and especially chains, that we know we are paying the hidden fees or “taxes” imposed in part by customs like tipping, litter clean-up, counterproductive marketing practices such as outdoor billboards and by restaurant industry lobbyists.

We need to encourage restaurants to stand up in support of clean air and water, unique sense of place, litter control and removal, tourism promotion and sustainable culture facilities and organizations.

After all, there is no free lunch not even for the restaurant industry.

Why Are We Still Not Able Leave Tips On Debit Transactions?

There are many reasons debit cards are a godsend and not just for people who like me who have “essential tremor” and handwriting is increasingly difficult. Debit transactions passed credit cards in ‘08. By the end of ‘09 I believe there were 36 billion debit transactions compared to 20 billion with credit cards.

It is like writing a check but without the paperwork and it makes tracking expenses much easier. Debits are now accepted for common transactions like fast food places without even a signature.

So I find it increasingly annoying that restaurants and/or debit card issuers haven’t found a way for you to leave a tip. At one restaurant where I often go for breakfast, they finally started letting patrons use debit but then if you ask to leave a tip, they print it out and have you tally and sign anyway.

Seems to me leaving a tip should be as easy as they make it to get cash back. Just have an option that pops up before approving that asks if you want to leave a tip for service and gives you several virtual buttons for 10%, 15%, 20%, 25%. They could even note under 20% “average.”

This would make it easier for the customer, good for the business because of much faster check outs and it would give the uninitiated or cheapskates an education in tipping. Seems like a win-win-win-win.

As fast as things evolve, I’ll bet this begins to happen even as you read this.