A new era of fees for restaurants... Do you raise menu prices or add a service charge?

A not-so-new trend of adding service charges in restaurants is emerging more widespread these days. The question remains... should you directly charge the guest in the form of a fee for business operations (i.e. rising food prices, increasing the minimum wage, etc.)? Or, should you just raise your menu prices?

In an interview with NBC’s Today show, Michelle Korsmo, President and CEO of the National Restaurant Association, recognizes that we are in a competitive industry— when customers decide where to eat, price factors into their choices.

As the restaurant industry embarks on adding service charges, some are concerned that it will adversely affect the server’s tip. However, we have found that in most cases where restaurants are adding services charges, the customer still adds a tip.

There are several factors why restaurants need to consider adding a temporary service fee. The most obvious is the rising food cost. Every time a food delivery comes to your restaurant, costs go up. A lot of restaurant owners are hesitant to raise menu prices, so a service charge becomes the quick fix solution.

In some cases, the rising costs are not temporary, such as health insurance, or other employee benefits, higher wages due to higher minimum wage that entry-level employees are demanding due to the low unemployment rate and lack of available workers. For these costs, increasing menu prices would be a more sustainable approach. This increases costs for operators across the board and has a drastic impact on the bottom-line long term.

“Restaurants’ total food costs as a percentage of sales are higher than they were prior to the initial COVID outbreak in 2020,” says Hudson Riehle, Senior Vice President of Research at the National Restaurant Association. Wholesale food prices have gone up nearly 18% in the past 12 months, the largest yearly increase in nearly five decades. Though, menu prices have only risen 7.2%, according to data from the Association.

Careful consideration is important when looking at this issue; it needs to be addressed to ensure the viability and profitability of your food service operation. Consider all options, and talk with your staff, vendors, and key customers about your options. A knee-jerk reaction may have fatal consequences.

Once your decision has been made, train your managers and staff on why you decided to either raise menu prices or add a temporary service fee. Craft an honest and consistent statement when communicating it to your customers, and consider adding a statement to your website or menu informing your guests in advance.

Lastly, in South Carolina, service fees are taxable for state and local option taxes. This does not include the additional hospitality tax if your local community has imposed the “prepared food” tax. Be sure to program your POS system to appropriately charge the correct tax on the check.