Stop Blaming the Vendor: Restaurant Junk Fees Are a Management Problem

By Micah MooreStrategic Supply Chain Partners

“Employees explain why costs went up. Business leaders figure out what they’re going to do about it.”

Restaurant customers are pushing back against administrative fees, service charges, credit-card surcharges, operations fees, and other add-ons increasingly appearing on their checks.

And they should.

A recent Fox News story highlighted the issue after a diner at Earls Kitchen + Bar in Denver found a 3% “Admin Fee” added to his bill. The charge itself was only 83 cents, but the reaction wasn't really about 83 cents. It was about what that charge represented: another cost appearing on the customer's check after the purchasing decision had already been made. The story also highlighted concerns that these charges may cause customers to reduce their gratuities. [foxnews.com]

From my professional perspective, the restaurant industry is debating the wrong issue.

The question isn't whether restaurant companies are facing higher costs. Of course they are.

The real question is whether management has the business acumen, purchasing strategy, and operational discipline to manage those costs without turning the customer's receipt into an itemized list of excuses.

And frankly, when I see restaurant companies continually adding miscellaneous fees while blaming suppliers, distributors, credit-card processors, labor, commodities, freight, or inflation, I see a much larger warning sign.

I see a restaurant company that may be in trouble.

Restaurants Are Businesses, Not Victims of Their Vendors

Every business has cost pressures.

Food costs move. Labor costs increase. Insurance changes. Utilities increase. Freight fluctuates. Credit-card processing costs money. Suppliers adjust pricing.

That's business.

The responsibility of restaurant leadership is to manage those variables.

Too often, however, operators respond like employees explaining to their boss why something went wrong:

“Our supplier raised the price.”

“Freight went up.”

“Beef is more expensive.”

“Credit-card fees are killing us.”

“Labor costs are too high.”

Those may all be legitimate explanations for what happened.

But explanations aren't strategies.

Owners, CEOs, CFOs, COOs, and executive teams don't get the luxury of simply identifying why costs increased. Their responsibility is to determine what they're going to do about it.

That means negotiating.

Sourcing.

Benchmarking.

Consolidating purchasing.

Engineering menus.

Managing specifications.

Improving productivity.

Challenging contracts.

Leveraging purchasing volume.

Conducting competitive RFPs.

Analyzing product-level purchasing data.

And, when necessary, intelligently adjusting menu prices.

Passing another percentage onto the guest is not a substitute for doing those things.

Your Suppliers Shouldn't Be Running Your P&L

One of the biggest mistakes I see in the restaurant industry is accepting supplier increases as though they were simply uncontrollable fixed costs.

They aren't always.

That's precisely why professional procurement and supply-chain management exist.

In my original SSCP discussion of junk fees, I argued that fragmented contracting and multiple unbundled supplier charges can create unpredictability and volatility for restaurant operators. The solution isn't simply passing those charges downstream. It's renegotiating, consolidating, benchmarking, and creating greater transparency around the restaurant company's true cost structure. [When Junk...oblem.docx | Word]

If a supplier adds a charge or increases a price, management should be asking:

Why?

Is it justified?

Is the resulting price competitive?

Can it be negotiated?

Can we change the specification?

Are we properly leveraging our purchasing volume?

Should the business competitively bid the category?

The answer cannot continually be:

“Let's just pass it through to the customer.”

That's not strategic procurement.

That's surrendering control of your margin.

The 3% Fee Isn't the Real Problem

That's what makes the current debate so interesting.

In the Denver example reported by Fox News, the disputed “Admin Fee” was 3% of the food-and-beverage subtotal. The article also reported customers saying that these kinds of additional fees could influence how much they leave as a gratuity. [foxnews.com]

Whether that individual restaurant's fee is justified isn't really my point.

My concern is what a pattern of fees can potentially tell us about the underlying business.

When management can't absorb, negotiate, engineer around, or properly price for ordinary operating cost movements, leadership needs to start asking tougher questions.

A restaurant continually inventing new fees may not have a pricing problem.

It may have a management, procurement, margin-management, or business-model problem.

That's considerably more serious.

Run the Restaurant Like a Business

There is a fundamental difference between raising a menu price and adding another fee.

A menu price says:

“This is what our product costs.”

An unexpected charge at the bottom of the receipt risks communicating something very different:

“We couldn't figure out how to manage this cost, so we're passing it directly to you.”

That's exactly the perception restaurant operators should want to avoid.

A Florida restaurant owner interviewed by Fox News said she prefers raising menu prices to reflect actual costs rather than surprising customers with administrative, service, or processing fees. She described an unexpected fee as something customers can see as a “gotcha” and remember and share afterward. [foxnews.com]

I believe there is an important business lesson in that.

If your costs have permanently changed, understand them.

Build them into your financial model.

Determine what the customer is willing to pay.

Engineer the menu.

Fix the supply chain.

Improve purchasing.

Improve productivity.

Then price the product accordingly.

Own the price.

Don't apologize for it.

And don't make your customer decode your P&L at the bottom of their receipt.

Before Charging the Customer More, Look Inside Your Own Business

Before adding another 2%, 3%, or 4% charge to the customer's check, restaurant leadership should ask a much harder question:

Have we actually exhausted the controllable opportunities inside our own business?

Have major purchasing categories been competitively sourced?

Have supplier agreements been challenged and benchmarked?

Does management have visibility into purchasing at the item and location level?

Are specifications unnecessarily expensive?

Are distributors and manufacturers being held accountable?

Is purchasing volume properly leveraged?

Are rebates, allowances, and incentives transparent?

Are restaurants buying outside negotiated programs?

Has menu engineering kept pace with changes in product costs?

Have operational inefficiencies been addressed?

Those are management questions.

And answering them is considerably harder than programming another surcharge into a POS system.

But that's where management earns its seat at the table.

Procurement Is an EBITDA Strategy

This is also where I believe many restaurant organizations fundamentally misunderstand procurement.

Procurement isn't simply buying products cheaper.

Strategic procurement is margin management.

Every unnecessary dollar flowing through the supply chain eventually has to come from somewhere.

The customer.

The restaurant.

The franchisee.

The employee.

Or the bottom line.

Strong restaurant companies don't wait until those dollars reach the customer before trying to address them.

They attack the issue upstream.

They understand what they're buying, what they're paying, who they're buying it from, what the competitive market looks like, and where leverage exists.

They use data and competition to create leverage.

They manage specifications.

They consolidate volume where doing so creates an advantage.

They challenge legacy supplier relationships.

And they use disciplined RFP processes to force the marketplace to compete for their business.

That isn't just procurement.

That's an EBITDA strategy.

Our position at Strategic Supply Chain Partners has been that restaurants should treat pricing and procurement as strategic levers rather than relying on short-term accounting patches. The growing conversation around restaurant fees makes that argument even more relevant. [When Junk...oblem.docx | Word]

Customers Don't Care About Your Excuses

This may sound harsh, but restaurant executives need to understand something fundamental:

Your customer doesn't work for your company.

They shouldn't be expected to understand your distributor agreement.

They don't need to know what happened with freight.

They aren't responsible for your processor negotiations.

They don't manage your commodity contracts.

They don't negotiate your supplier agreements.

They simply want to know:

What does dinner cost?

Give them an honest answer.

There is nothing inherently wrong with raising menu prices when the economics of the business require it. Restaurants must generate adequate margins to operate, reinvest, compensate employees, maintain their facilities, and provide a consistent guest experience.

But there is an important distinction between pricing responsibly and passing management problems through to the customer one fee at a time.

Employees Explain Problems. Business Leaders Solve Them.

This is ultimately the leadership issue for me.

There is an employee mindset and an ownership mindset.

The employee mindset says:

"Here's why our costs increased."

The ownership mindset asks:

"What are we going to do about it?"

Maybe your procurement strategy needs work.

Maybe purchasing lacks visibility.

Maybe supplier agreements haven't been competitively challenged recently enough.

Maybe your specifications need to change.

Maybe your menu isn't properly engineered.

Maybe your pricing strategy needs to change.

Maybe operating productivity hasn't kept pace with costs.

Maybe purchasing volume isn't being leveraged.

Or perhaps the economics of the business itself need to be reconsidered.

Those are uncomfortable questions.

But those are the questions business leaders ask.

Identifying the problem is easy.

Managing it is the job.

My Message to Restaurant CEOs and Owners

If your organization finds itself repeatedly adding fees because vendors, distributors, processors, commodities, or other operating costs increased, stop for a moment.

Don't immediately ask:

“How much of this can we pass through?”

Ask:

“Why can't our organization manage it?”

That's a harder question.

But answering it may uncover considerably more opportunity than another percentage point added to the customer's check.

Your procurement team should be challenging suppliers.

Your finance team should understand the true cost structure.

Your operations team should be managing productivity.

Your culinary team should understand the cost implications of specifications.

Your leadership team should understand where purchasing leverage exists.

And management should know whether the company's suppliers are genuinely competitive.

If you don't know those things, another fee isn't solving the problem.

It's hiding it.

Final Thought

The restaurant industry may not really have a junk-fee problem.

It may have a business-discipline problem.

A restaurant company can't control inflation, commodity markets, interest rates, labor markets, or every supplier increase.

But leadership absolutely controls how aggressively and intelligently the organization responds to those pressures.

Better procurement.

Better contracts.

Better data.

Better specifications.

Better supplier competition.

Better menu engineering.

Better operational discipline.

Better pricing.

Those are business solutions.

Adding another unexplained line item to the customer's receipt and blaming someone upstream isn't.

If your strategy for protecting EBITDA is continually passing someone else's price increase directly to your guest, you're not managing the cost. You're passing the problem downstream.

Eventually, the customer may decide they don't want to pay for your problem.

Run the restaurant like a business.

Manage the supply chain.

Own the price.

And stop making the customer pay for management's excuses.