Stealthy business

What your lunch bill tells you about margin management

Tipping culture in the UK hit the headlines a couple of weeks ago with the story that restaurant chain Ping Pong had replaced the service charge on its bills with a 15% ‘brand charge’ just a few months before the law begins to mandate that all service charge fees should go to staff.

There is an assertion in the chain’s PR response to this story about some money being available for staff bonuses, but overall the story has been taken by customers (with some justification) as an indication that the business is trying to circumvent the law by finding a different description for the service charge which allows it to keep most of the money for itself. The reaction on social media and on review sites like Tripadvisor has been vocal, to say the least.

As luck would have it, on the day the story broke I had lunch in another chain restaurant and had a different, much more subtle experience that got me thinking about the Ping Pong story and what it might mean for other consumer brands. It was only several minutes after sitting down at our table and starting to choose our food that it occurred to me that we had been given the a la carte evening menus and not the (shorter, cheaper) lunch menus. When we asked, the lunch menus were provided without any fuss and we proceeded to have a lovely meal, but looking around I noticed that our experience was not an aberration. It is hard to avoid the conclusion that this chain has decided to switch to using the ALC menu as a default at lunchtime in order to up the spend of those customers who don’t notice.

We can put these experiences alongside other phenomena like shrink-flation, subtle altering of product specifications etc as examples of businesses trying to cope with really challenging economic times by finding ways to eke out a bit more spend or a slightly higher gross margin, ideally without customers noticing too much. In broad terms, we can think of this broad category of actions as ‘stealth charging’.

How should we feel about this kind of business practice? As consumers, the answer is simple - to the extent that we notice this kind of thing, we don’t like it. Just look at the consumer response as clothing and footwear retailers have begun to charge for online returns, for example. It is very hard to argue the principle that you should be able to have things delivered to your house and be able to send them back again at no cost at all, but because that was the norm established in the early years of e-commerce the evolution to the (on the face of it quite reasonable) practice of charging has met with significant resistance.

Sometimes that resistance is, as in the example above, simply an objection to being charged or inconvenienced in a new way. In other cases, however, it can be more deeply rooted - the objection to the Ping Pong ‘brand charge’, for example, is less about what consumers are being charged and more about their solidarity with the employees who served them and their outrage at any sense that those workers are being short-changed.

Here, then, is the challenge for any of us leading consumer businesses through this tough economy (and notwithstanding rising real wages and slowly improving consumer confidence, it remains a tough economy for the traders I talk to). If you are going to have to take some action to either increase your charges or in some way change your product or service in order to improve your margin, how do you do so in a way that is likely to stick? How do you avoid the ‘brand charge’ backlash? Here are a couple of thoughts:

Consider carefully how ‘stealthy’ you are really being

I recall a meal a few years ago, just as we were emerging from lockdowns, in a restaurant I’d been to many times but which was clearly struggling. They had obviously attempted to ‘shrink-flate’ their way out of trouble by removing ingredients, reducing portions and artfully spreading food out on the plate to hide the change. It didn’t work, the meal was obviously inferior to previous experiences and, perhaps unsurprisingly, the strategy didn’t work - customers stopped going, and that chain no longer exists.

In a world where people can communicate their views to each other as never before and where social media often creates a kind of rolling ‘live review’ of your brand, you need to be very careful if you assume that you can pull the wool over anyone’s eyes. Just consider the motor insurers, who have responded to margin challenges by going back to their old ways and charging existing customers much more than new ones - the behaviour is widely discussed and will be backfiring badly. (I’ve just renewed mine and was offered a 40% lower price when the same brand thought I was a new customer).

Make changes you can justify

If you are going to introduce a new charge, a minimum price, a product change or some other initiative designed to protect your margins, challenge yourself with the thought experiment of explaining the change to your mum, to a customer or to an enquiring journalist. If the explanation broadly makes sense and seems justified by what is going on in the world then even if customers don’t particularly like a change they will probably accept it over time. People are not stupid, and they know that (for example) many input costs have gone up and that retailers and restaurants are trading on very thin margins, and so changes which are trying to cope with that sound, if not welcome, then at least justifiable. Trying to pickpocket your own staff by taking their tips for yourself, perhaps less so!

Have an eye on where your industry is going

It is obviously easier to make a change in your pricing or service offering stick if most of your competitors are doing the same thing. As with clothing retailers charging for returns, if one or two take a lead then it becomes easier for others to do the same. If you are a small brand, then, there is some advantage in being a ‘fast follower’ of these kind of changes. And if you are a market leader, then making changes that others in your industry are more likely to follow will be smarter than heading out on your own with a policy change that no-one else will match.

In conclusion - to stealth, or not to stealth?

It is easy, of course, to write a consumer piece decrying any increase in pricing or reduction in product spec as bad. Indeed, many such changes are, especially if they fail the tests we’ve discussed in this piece.

At the same time, though, there is no getting away from the fact that many retail and hospitality businesses are having to respond to tough times by managing their pricing and margins carefully. The trick, then, is to do that in a way that doesn’t cause too much adverse customer reaction - and getting that right is a challenge which may provide existential for many familiar brands on our High Streets.