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Union Square finds success, but with steep learning curve

tip jar

The light usually goes on when customers of Union Square Hospitality Group’s no-tipping restaurants try to slip something to the person who has checked their coats.

“The coat-check person will say, ‘You already took care of me. Why are you buying your coat back?'” says Sabato Sagaria, chief restaurant officer of what is hands-down the industry’s most prominent success with all-inclusive pricing.  Today, eight of the company’s 13 restaurants have switched to Hospitality Included, a model where gratuities are factored into the food and beverage prices and then allocated to the whole staff, not just servers.

But it’s not been a cakewalk, Sagaria acknowledged. “We had grand ambitions that we’d do all of the restaurants by the first of the year,” he recalls of the plan USHG unveiled in November 2015. Instead, the rollout of Hospitality Included has been slowed by the arduous process of adjusting prices on a restaurant-by-restaurant, product-by-product basis.

“It’s been a great learning process,” he says.

“We were really focused on how it worked on the employee side, the effects on the front of the house and the back of the house,” he explains. The surprise: “It’s a complete change in how our managers run their business." 

Old benchmarks of performance no longer held. “If you say, we’re going to be going after 30% food costs, that 30 is now a 20.”

There’s also the rigorous exercise of adjusting prices so the costs of Hospitality Included can be covered without turning off guests.

“Not every item was marked up equally,” Sagaria explains. “It takes us about three to four months to do all the modeling and the analytics, to do some mock pricing. [We have to ask ourselves,] ‘Does there feel like there’s a balance throughout it?’”

During that burn-in period, servers and staff are guaranteed what USHG has computed to be an average income for someone in their capacity. “It allows us to adjust” prices without penalizing employees, says Sagaria.

“There’s definitely an investment that goes into this, when we have that guarantee period,” he continues.  “But this is something we believe is a long-term solution.”

Anecdotal evidence indicates the switch to Hospitality Included has narrowed the compensation gap between servers and kitchen employees, Sagaria says, but he demurred at citing figures about turnover and recruitment. “Once we get to a year-over-year comparison, that’s when we’re going to see a true ability to measure,” he said.

But he’s emphatic in saying the switch was the right thing to do, in part because of the ancillary benefits.

“It’s an opportunity for us to look at our business through a microscope. Now we’re tracking everything more carefully than we did before,” he says. “Now we can course-correct more quickly.”

In addition, “We’ve become much more transparent with our books at all levels, whether that’s having P&L classes with our employees or sharing the numbers,” he says. “That’s an investment on them and their future.” Hospitality Included is technically a profit-sharing model, where everyone gets a share of the restaurants’ revenues. “The more eyes that are fixed on the common goal, the better for the business.

“I wish we had made the change sooner, so we’d have a chance to learn what it involves.”

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