Everything You Need to Know About Surcharges – and Why They Matter for Restaurants

Che Fico Alimentari | Credit: Albert Law

In August, with his hit San Francisco restaurants Che Fico and Che Fico Alimentari closed during the pandemic, chef David Nayfeld made a plan for reopening. Exhausted and overworked from years in professional kitchens followed by coronavirus crisis mode, he slowed down enough to take a long, hard look at the typical restaurant business model and had a realization, he says: “As an operator of one of the most popular restaurants in the country right now, I’m barely making enough to get by.”

Che Fico:

Che Fico Alimentari:

Nayfeld vowed that when he and partner Matt Brewer welcomed diners back to the restaurants, they would raise menu prices between 30 percent and 40 percent and introduce two new surcharges: a 15 percent “labor” or “dine-in” charge to cover the staff and supplies that indoor service require, and a 3 percent “disposables” charge to pay for packaging and carbon offsets.

“Once restaurants reopen (if they reopen), we need to pass along a greater percentage of our costs to the guest,” Nayfeld wrote in an op-ed for the San Francisco Chronicle. Still, he wondered, “If we give guests the information, will they continue to support us?”

David Nayfeld

David Nayfeld at Che Fico | Photo Credit: Che Fico

The surcharge issue has become increasingly relevant in recent months, as some diners have noticed a new COVID-19 charge at the bottom of their restaurant bills. Still, Nayfeld’s question of public support remains to be answered. 

A recent survey of OpenTable diners showed that they’re feeling generous in the current moment: 48 percent said they were willing to leave a tip amount that’s 5 percent or more than the normal tip they left before COVID-19. That said, they are selective about what kinds of surcharges they’ll pay: 51 percent said they were not willing to pay a surcharge for contactless payment on a dine-in meal.

Often, pushback occurs because diners feel blindsided by a charge they didn’t anticipate or that’s too vague to understand. But with restaurants struggling to make ends meet through the pandemic and beyond, the likelihood of more of these charges popping up is high. To better understand, dig in to the why and how of surcharges below — why they exist, how they’re used, and what they mean for restaurants today.

Why do restaurants need surcharges?

Surcharges have made headlines again in the COVID-19 era, as restaurants have been forced to adapt to new restrictions and realities. For example, Chicago restaurants, including Harold’s Chicken and concepts within the Lettuce Entertain You group (think RPM Steak and Mon Ami Gabi), added surcharges to offset the costs of higher food prices and PPE for employees.

RPM Steak:

Mon Ami Gabi:

That’s because shutdowns to processing plants and other companies disrupted the food supply chain, leading to shortages and inflated food costs. Add to that the costs of shutting down and reopening, of PPE and sanitation, of new menus and outdoor patios — all while being forced to limit capacity to untenable levels — and the financial burden becomes astronomical.

In a typical restaurant, restaurateurs get their income from pre-tax and -tip meal totals to cover all of their costs, including wages, rent, overhead, and food. When that sum isn’t enough — and often it isn’t, as diner sentiment toward prices hasn’t caught up with rising rents, food cost, and wages — operators have to make adjustments. 

“There is zero transparency to consumers on what running a restaurant actually costs,” says Nayfeld. “That has to be at the forefront of any conversation [about pricing and surcharges].”

Depending on a restaurant’s location and values, the cost of business can vary dramatically, he explains. For example, Che Fico hires local printers to make its custom T-shirts, buys vegetables from farmers who practice sustainable crop rotation, and sources meat from producers who prioritize animal welfare.

“I could get the same T-shirt from China, but I wouldn’t be supporting the local economy.” Nayfeld says. “When you look at our pricing, none of that is transparent to the guest.”

Real estate costs play a significant role, too. Say a restaurant signs a lease, and 10 years later the building sells, the tax base having risen 500 percent. Often, those taxes are passed on to the tenant. “How do you explain that to a guest – ‘occupancy cost?’” Nayfeld asks.

Antipasti from Che Fico | Credit: Albert Law

All of these costs have to result in a higher-price product in order for restaurants to survive, he explains. In response, restaurants around the country have adopted transparent surcharges more in recent years. Some businesses adopted a 1 percent “Restore California” charge to help combat climate change through better farming practices. At award-winning Boston enoteca Coppa, a 3 percent fair wage and wellness provision is added to every check to ensure a better wage for non-tipped workers, and at Los Angeles’s popular A.O.C., a 5 percent charge covers the cost of health care benefits for full-time employees. Other restaurants, such as Atlanta’s 8ARM, charge percentage fees to distribute to employees in lieu of accepting tips.

Coppa:

A.O.C.:

The charges continue to create controversy as a concept unfamiliar to diners, though, leading many restaurateurs to backpedal on the policies. Others are reluctant to raise menu prices as an alternative despite the consumer pushback, both because higher prices may turn off diners and because those prices can’t fully illustrate how their costs are allocated (more on that below). That’s where surcharges come in.

But why not just raise menu prices?

Adding surcharges onto bills are flexible in a way that menu prices aren’t — a restaurant may adopt surcharges in the long term or temporarily, depending on the reason. For example, a zero-waste restaurant might add a permanent fee to make composting, gardening, and preserving possible for a community that shares those values. Alternatively, fees like the COVID-19 charges are meant to pose immediate solutions to sudden and unforeseen circumstances, including inflated food prices and business interruptions.

For Nayfeld, surcharges can also offer more of the transparency needed to communicate his restaurants’ story and values to diners. He sees “service charge” as a “murky term, and slightly misleading,” he says, while specific labels such as “labor” and “disposables” show people what they’re paying for. He also plans to print cards that articulate exactly what the charges cover and distribute them to diners upon request.

“People think it’s meant to be a gratuity or tip — sometimes it is, but sometimes it’s not,” he says. (For his restaurants, it’s not.)

For surcharges to succeed, visibility and communication are key, attorneys have said. Diners are less inclined to object to fees they know are coming, so restaurants that clearly post the charges on their website, social media accounts, and in-store signage will likely see the least pushback.

As some diners and critics have asked, why not just raise menu prices instead of adding a blanket fee? Often, the answer comes down to competition and optics. Restaurants may worry that they risk alienating regulars with higher food and drink prices, causing them to lose customers. It’s not an unfounded fear: Only 37 percent of respondents in an OpenTable survey said they were willing to pay more for what they eat and drink to help restaurants offset additional costs incurred due to COVID-19.

And in temporary situations, it may not be worth adjusting the whole menu if restaurants expect the crisis to pass. Plus, as in Nayfeld’s case, a line item that explicitly details how they are spending money can provide visibility into a restaurant’s values and operations in a way that a blanket $23 menu item can’t.

That’s where surcharges can be a boon for consumers, too: Beyond the menu price, you can see that restaurants are directing profits to a cause or organization you support. For some people, that might provide an extra incentive to spend money with that restaurant.

Why should you embrace surcharges?

Che Fico’s margherita pizza | Credit: Krescent Carasso

Like Nayfeld, some operators hope that the current crisis can bring attention to financial issues that have long plagued restaurants, including issues of equal pay between the front and back of the house and benefits for hospitality workers.

Before reopening, Bonanno Concepts, which operates Denver favorites such as Mizuna and Osteria Marco, eliminated tipping and added a 22 percent surcharge to all bills. “If there was ever a time to implement dramatic, positive change, this is it,” co-owner Jacqueline Bonanno told 303 Magazine. “Small restaurants aren’t trying to profit from this pandemic — they’re trying to survive it.”

Nayfeld has a young daughter, and he worries about child care and one day being able to put her through college. He worries about other restaurant workers, too, especially those not represented in the tip pool. He wants to pay them more, create a higher hourly base for the service team, and offer more lifestyle benefits, including investing tools, health care initiatives, and family care. “Those are all things we are looking at now and trying to provide to our team,” he says. 

Ultimately, he hopes rethinking pricing and charges will narrow the vast wage gap he sees between his staff and diners in San Francisco, where office workers often earn as much as four times as people in retail.

“The majority of people who eat in our restaurant are [in white-collar jobs],” he says. “The obvious answer is that the consumer can afford to take on a little bit more.”