When the old model doesn’t work, change the model

Ask any restaurateur what the top three industry challenges are today and the likely answer will be: “labor, labor and labor.”

Minimum wages are climbing to $15 per hour and businesses are struggling to cope with already thin margins.

In Palo Alto, Calif., for example, where the $12 per hour minimum wage is scheduled to reach $15 per hour in January 2019, restaurants like La Bodeguita del Medio say they’re taking a loss.

“I don’t want to say labor is killing us, but it’s killing our profitability, said co-owner Michael Ekwall. “We just don’t think we can raise our prices that much. We haven’t tested the waters, but we’re taking a loss right now.” 

Add to that an ongoing labor shortage heightened by low unemployment. 

Wages, particularly for kitchen staff, have grown way beyond minimum levels, as restaurants struggle to compete for top talent. In some markets, restaurants are losing good workers to tech companies and the growing marijuana industry, where hourly workers can earn as much as $22 per hour. 

“We just can’t compete. If we put an ad on Craigslist for a server or kitchen worker, at one point we’d get 100 responses in a day. Now we might not even get one response,” said Ekwall.

So what are restaurant operators doing about it? 

They’re changing the business model. 

A growing number of operators in markets across the country are experimenting with new ways of doing business.

They’re debating models in which tipping is eliminated, for example, revenue is shared, or additional sales charges or fees are tacked onto the bill to help balance pay more equitably between front- and back-of-the-house workers. Some are simplifying operations with a shift to limited service. 

There isn’t one right answer for all businesses. But these pioneers hope to be on the forefront of what they predict will be a sea change ahead for the restaurant industry. 

“For the last decade, it’s really been about where food is coming from and chefs have been doing a lot to deal with that and change the economy,” said Joe Grafton, partner with consulting group Rethink Restaurants, based in Boston. “We think labor is next.” 

Here are six ways restaurant operators are reworking the model to solve their labor problem.

1. ADMINISTRATIVE FEES

Hoping to address the disparity in pay between the front- and back of the house, some restaurants across the country have begun charging administrative fees in addition to the tip.

Generally around 2 percent to 3 percent of the final bill, such fees are typically designated for boosting the pay of workers who are not legally allowed to participate in tip pools.

In Boston, Keith Harmon, co-owner of the restaurants Tres Gatos, Centre Street Café and Casa Verde, introduced a “hospitality administrative fee,” or HAF, in late 2015.

Group, prix fixe and event dining will include a 15-percent service charge and a 7-percent HAF. All other diners now pay a flat 3-percent HAF, in addition to any tip they may wish to leave.

The fees allowed the restaurants to increase kitchen staff base pay by an additional $1 per hour, with the excess beyond that distributed evenly according to hours worked at the close of each month. 

Initially, the group faced some negative responses in social media, with guests calling the charge a “yuppie tax” and “socialist bull----.”

Harmon and business partners David Doyle and Mari Perez-Alers, however, attempted to be as transparent as possible about the experiment, posting an open letter to the restaurant community on the group’s website and on restaurant menus. http://www.tresgatosjp.com/openletter/ 

In the group’s restaurants, they explained, tipped workers make 2.2 times to 2.6 times more than non-tipped.

“We feel the wage problem can no longer be ignored,” they wrote. “How can we as owners tolerate a scenario whereby half of our team’s compensation is about 60-percent lower than the other half’s? We’re tired of feeling like our kitchen staff are second-class citizens.  We’re tired of knowing that they would be financially better off bussing tables or working at a chain restaurant. We need to hitch (at least part of) their star to top-line revenue if we want to correct the disparity.”

After the first full year, average wages for kitchen workers increased about $2.87 per hour, Harmon said, which added about $5,948 per year to back-of-the-house salaries on average. 

Servers actually saw a 2.5 percent increase in tips, he added, and team engagement has improved in all aspects of the operation. And no guests refused to pay the fee. The restaurants recorded roughly 18 negative comments by guests about the fee, among roughly 160,000 people served. 

When asked if the switch lowered labor costs overall for the restaurants, Harmon said, “Yes and no.”

The restaurants saw higher payroll taxes on the additional wages paid. However, sales have grown by about 10 percent, which Harmon attributes to a more engaged team, both kitchen and service staff working to build sales. 

And turnover has also dropped “dramatically,” he said, resulting in less spending on hiring and retraining 

“Our main product is an emotional feeling, and that feeling starts with the people that are running the restaurants, the servers, the cooks, the managers” “It has made us more competitive in the labor market and increased morale.”

 “As a compensation piece, this is a game changer,” he added. “It becomes a great way to talk to potential hires.”

2. OPEN-BOOK MANAGEMENT AND PROFIT SHARING

Siblings, Irene, Andrew and Mei Li launched the food truck Mei Mei Street Kitchen in 2012, offering Chinese-American dishes like seared cumin lamb dumplings and Brussels dan dan noodles with pork belly. A year later, the trio opened a brick-and-mortar location called Mei Mei Restaurant in Boston with a hybrid model of both full table service and counter ordering.

The restaurant has been a hit. Irene Li earlier this year was named a James Beard Award semi-finalist for the third year in a row.

Mei Mei Restaurant began with a traditional business model, said Irene. But in May the owners are reinventing their restaurant using the philosophy of open-book management and profit sharing. 

The first step is opening the restaurant’s financial books to the entire staff, said Irene. 

Working with consulting group Rethink Restaurants, based in Boston, Mei Mei will begin training everyone— from dishwasher to cook to server — about the fundamentals of restaurant financials so they know how to understand those books, said Irene. The restaurant plans to tap state workforce grants to help pay for that training. 

Mei Mei’s employees will learn how to write a budget and an annual plan, and how to read a profit-and-loss statement, she said. “Everyone on the team will learn how to think like a business owner.” 

At the same time, the restaurant will shift to a profit-sharing plan, in which a portion of the profit margin will be share equally by all employees, according to hours worked. Top-level managers will earn the same from the profit pool as dishwashers, said Irene. 

“The management team decided we wanted this to be completely fair and transparent, and the only way we could do that is if we share equally,” she said. 

What that portion is was yet to be decided at press time. “We want the profit share to offer anywhere from a 5- to 10-percent income bump” on top of base wages, she said. 

Tipped workers will still collect tips, but back-of-the-house workers will have more incentive to contribute to the success of the business, she said. 

The goal wasn’t necessarily reducing labor costs, or addressing the front-of-house/back-of-house disparity. But Irene said they expect the new business model to address both problems. 

Servers will still get the benefit of tips, but kitchen workers, who tend to work longer hours, will likely benefit more from the profit-share, since it’s based on hours.

 “Really it’s about getting everyone on the same team,” she said.

Fundamentally, the goal was improving the overall business.

“I did this because I needed more help,” she said. “I know my front-line people have a ton of knowledge and information that I need to be able to harness appropriately to make this a better business. And, secondly, I want to create jobs for people who are looking to go somewhere and have a career.”

It will help the restaurant attract top talent, she contended. “The role of a dishwasher doesn’t typically have a lot of mobility or training opportunities, but we’re looking to hire people coming into the industry because they’re passionate about it.

“We’re asking for more than just someone coming in and being a drone and doing what they’re told,” she added. “They’re going to have to contribute and think critically about their work. We hope it will help us hire folks who really want to go somewhere, and bring that ambition to work.”

3. RETHINKING THE MODEL

When Jeff Mazza opened New England Seafood Company in Chicago in 2011, it was first a lobster shack and fish market. 

But the concept was so embraced by the city, guests began demanding more. Mazza said the venue evolved over the years into more of a full-service restaurant, adding a liquor license and hiring a “high-priced” chef and general manager.

“At the beginning of this year, we looked at it and said, ‘What are we doing? Where are we going? Labor is so high.’ So we decided to go back to what we were doing in the beginning,” said Mazza.

In April, the 38-seat restaurant turned back to its original limited-service model. 

Gone were the chef and general manager, along with two servers. 

The number of menu offerings were slashed to focus on the top sellers, like the famous lobster roll sandwiches, fish and chips and chowder — dishes Mazza knew his line cooks could execute well and consistently. Entrees like a grilled swordfish with rice and vegetables were cut. 

“We’re going back to being a real casual lobster shack,” he said. “That’s who we are, so we’re going back to basics.”

With the return to roots, Mazza hopes to bring his labor costs down to 20 percent of sales, from what was 25 percent as a more full-service restaurant.

But changing the model is only part of the solution to his labor cost problem. Mazza also pledged to be more diligent about watching the labor line. 

“It’s a constant battle of monitoring,” he said. “I’ve seen first hand, it’s the little things, like someone clocking in and then going downstairs to take a half hour to get ready. It’s about being more mindful.” 

4. REVENUE SHARING

In Cambridge, Mass., the contemporary Jewish deli Mamaleh’s debuted in 2006, co-owned by Alon Munzer, who also is a partner in the nearby restaurant State Park. 

Munzer said he and his partners wanted to offer higher pay for the kitchen staff to attract the best talent. Hourly workers there are already are paid above the minimum wage of $11 per hour, but Munzer said the restaurant was still losing staff and the cycle of hiring and retraining has been costly.

“Staffing is really challenging here, and that seems to be true nationwide,” he said. “It’s the restaurant industry. We try to run as professionally as possible, but we lose cooks to other people who say, ‘I’ll pay you more dollars an hour in cash.’ It can be a bit of a seedy business.”

Around the region, they saw other restaurants using an administrative fee. Mamaleh’s, however, decided to take a slightly different approach.

In late March, the restaurant increased its menu prices by five percent. That increase, which was only on food, is now distributed at the end of each month to kitchen staff, from the chefs to dishwashers, on top of their base salaries.

Unlike an administrative fee, which is listed separately on guest checks, the increase was invisible to guests. But internally, the goal is to motivate kitchen staff to improve sales. 

“It’s directly related to sales,” said Munzer. “It used to be that the busier the night, the more money the front of the house made. Everybody was working harder, but the kitchen wasn’t compensated.”

Under the new model, he said, “Everybody makes more money.” Servers are happy because they still collect tips. And, because those tips are based on sales, their pay went up also.

The first monthly distribution had not been allotted by press time, so Munzer couldn’t yet say how kitchen pay was impacted. He’s hoping to see $2 to $3 more per hour for kitchen workers.

Guests, meanwhile, have not reacted negatively to the menu price increase, he said.

At State Park, where the model was also implemented, the price of schnitzel made with pork cheek increased from $18 to $18.95, for example.

5. SERVICE CHARGE/SALES COMMISSION

With the minimum wage hitting $15 per hour for some workers in Seattle this year, El Gaucho Hospitality in March implemented a service charge at its flagship restaurants there, El Gaucho and Aqua by El Gaucho.

The 20-percent charge is added automatically to a la carte checks, and tips are “accepted but not expected,” said Chad Mackay, the group’s president and chief operating officer, in a blog post explaining the move to guests. Guests also now get free valet parking at the two restaurants, along with free shuttle service to and from area hotels. 

Fundamentally, the goal is to set the restaurant group up for long-term success, he said. The model will be rolled out to the group’s restaurants in Portland, Ore., later this year, and eventually to all five restaurants throughout the Pacific Northwest. 

“We had this stream of money coming through our restaurants that never showed up on the [profit-and-loss statement] and for us it was about 21 percent of revenues that flowed through as tips or service charge,” he said. “What this really allows us to do is know where the money’s going and where it should go.” 

El Gaucho had already made the commitment to pay back-of-the-house staff well beyond the minimum, he said. “In Seattle, you’re well above the $16 to $17 per hour range for pantry, and for highly skilled grill workers, it’s $20 plus.” 

The company has long added a service charge for private dining, he said, so it was not an unfamiliar concept to staff. 

Servers earn an hourly base wage plus a 13-percent commission on sales, and they can keep all of any tips left in addition to the service charge.

About 15 percent to 20 percent of guests still tip beyond the service charge, said Mackay. “So they’re making more than they ever had before,” he said, generally averaging between $35 and $45 per hour.

But, for El Gaucho, it wasn’t about the front- and back-of-the-house disparity, said Mackay. 

“Some people worry about the wage disparity, but that’s the wrong conversation to have. To me, it’s how the labor model will work going forward,” he said. “The kitchen should know what they’re making. They shouldn’t have to rely on service staff. They want income predictability. 

“Don’t make your servers the demons,” he added. “They’re the ones who drive your sales revenue.”

The company, which has more than 400 employees, already offered health insurance, paid sick leave and a 401(k), generous benefits by industry standards.

It’s about providing a solid career path to attract the best talent and drive results, a shift that will be necessary for survival across the industry, Mackay said.

“Get used to it,” he said. “You gotta pay the people.” 

6. HOSPITALITY INCLUDED

In Portland, Ore., the restaurants Little Bird Bistro and Le Pigeon have eliminated tipping altogether.

The move first began in mid 2016 at Le Pigeon, and then was expanded to Little Bird at the beginning of 2017. Co-owner Andrew Fortgang said the decision to go gratuity-free was really a result of traveling in Europe and seeing how it worked there. 

But it also helped address the disparity between front- and back-of-the-house pay rates, he said. 

“We knew we couldn’t make it equal,” he said. “But we wanted to have a model in which we’re still paying the front of the house well and are competitive with other restaurants around us, but also paying the back of the house a little more.” 

At the two restaurants, guest checks have no line for adding tips. Menu prices at the restaurants increased roughly 18 percent to 20 percent.

That allowed the restaurants to increase pay for kitchen workers, who were already earning more than minimum wage, by an additional $1.50 to $2.50 per hour, depending on seniority. 

Servers receive a higher hourly wage, plus a share in revenues based on sales. Fortgang said tips used to account for about 75 percent of server pay under the old model, now the balance between hourly wages and revenue share is about 50/50. 

The upside for servers, however, is their pay rate is more consistent. 

“We started in the summer at Le Pigeon, when we’re super busy. And the first thing servers saw was smaller paychecks and they were nervous,” he said. “But by the time September rolled around, when business typically drops, their paychecks didn’t change that much. That really changed the tide.”

Overall, Fortgang said the resulting increase in sales has covered the increase in labor, as expected. 

“So far, it’s going great,” he said. “Our priorities were keeping the restaurants financially successful, while taking care of employees and guests. 

“I think it’s in everyone’s long-term benefit to do it,” he added. “People run on small margins and it’s scary to think long term when you’re looking at your short term numbers. But we hope people will look at us and say, ‘It worked; we’re going to try it.’”

Contact Lisa Jennings at [email protected]

Follow her on Twitter: @livetodineout

CORRECTION: An earlier version of this story mischaracterized which member of the Li family was nominated for a James Beard Award.