Cost Reduction

Effectively Implementing COVID Surcharges

As food manufacturing plants around the country shut down because of the coronavirus pandemic, restaurants are choosing to add “COVID surcharges” to their customers’ bills instead of raising menu prices.

Typically around 5 percent, these charges help businesses make up for decreased sales and increased costs caused by local restrictions.

In West Michigan, customers at Goog’s Pub & Grub are being charged an extra dollar per meal to help business owner Brad White pay his bills until the pandemic is over. Goog’s operating costs have skyrocketed, according to White, because he has to staff more labor to handle increased takeout orders, even though his margins on takeout are lower.

“Takeout averages about 82 cents more per meal just to put that meal out cause you’re not just putting it on a plate or tray and washing that again. It’s the silverware, the boxes,” White told Fox17. “When this started, we were running about $50 for a case of burgers and then it was up to $55, $62, $66, $72 last week and they just told me next week it’ll probably be up to $88 a case, so almost double what we were paying.”

While White’s customers didn’t seem to mind the extra fee, customers of Kiko Japanese Steakhouse and Sushi Lounge in West Plains, Missouri were not quite as accepting. Some of them took to the company’s social media pages to let their displeasure be heard, directing some of the attacks at staff members. Instead of letting the abuse continue, owner Billy Yuzar decided to raise menu prices.

“We can take the harassment on our social media, but when they start being ugly to our employees here, it really bothers us,” he said. “This is why we decided to just eat the cost of printing a new menu and adjust it weekly. We will go back to our normal prices once food prices go back to normal.”

This practice is working for some concepts, but it may not be a catchall solution for restaurant revenue problems. So, if your restaurant is in need of some extra financial help, adding a COVID surcharge is an option worth considering. However, there are a few things you should keep in mind:

Transparency is key

Business lawyer Gregory Frank, partner at Frank LLP Class Action Litigators, told The Today Show that the practice of adding a COVID surcharge is perfectly legal since business owners have discretion on how they set their prices.

The key to doing it successfully, Frank adds, is doing it transparently.

“Generally, restaurants are allowed to structure their pricing however they like,” he said. “The important question is whether the restaurants are disclosing to consumers what they are paying before they pay it, so they can make their own informed choices.”

Honesty is the best practice in this situation. Tell your customers if you are going to use the extra revenue to pay for food, cleaning supplies, paycheck protection, etc. They are more likely to be understanding if you are upfront with them.

Avoid Price Gouging

Remember: The goal of the surcharge is to bring in more revenue without alienating your current customer base.

It may be tempting to make every plate served pay for the next two behind it. But, in reality, customers may not be willing to pay such a high markup to continue eating at an establishment.

For the most part, restaurants have charged approximately 5 percent of a bill’s total as a COVID surcharge to cover their food costs. Others have explicitly stated to their customers that the charge is simply to keep paying their employees or their light bill.

When deciding how much to add as a surcharge, consider how the increased prices will look within your target market. If the average plate cost in your neighborhood is $20 and your surcharge will put your costs closer to $25, it’s probably a good idea to decrease the charge.

Incentivize Return Customers

Let’s be frank about one thing: implementing a COVID surcharge increases your risk of losing long-time customers. People don’t want to spend more money on something they see as less valuable than its price. It’s Economics 101.

So, to keep from losing your customer base, you need to reward those who stick by your side through the pandemic and incentivize new ones to become long-term customers.

One way you can do this is to create a loyalty program. Liquor stores often offer discounts based on the dollar amount a customer has spent with the business. A similar program may help convince some customers to pay the higher dish prices now in exchange for a cheaper meal in the future.

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