Hidden fees: ‘Too many brands are doing things from the spreadsheet but not the heart’

Last month, it was revealed that Ping Pong had scrapped its service charge and replaced it with a discretionary 15% ‘brand charge’ to fund wage rises for its restaurant teams.

More recently, MCA revealed the Sunday app – which allows consumers to pay via mobile – levies a ‘checkout fee’ to use its QR code solution, on top of service charge levied at 13.5%.

The consumer backlash that followed appeared to be primarily driven by the lack of transparency around such charges. Yet the phenomenon has touchpoints across functions in the sector, from staff pay and brand reputation, to the ways CFOs are mitigating cost pressures.

The issue of the ‘hidden’ charge

MCA contributing editor and industry commentator Peter Martin says operators are under pressure and attempting to maximise revenue from each cover – but need to be cautious about doing so transparently.

“People need to know what they’re getting charged,” he tells MCA. “In the case of Sunday, it looks like it wasn’t clear and has therefore led to bad publicity. Personally, I’d be cautious about doing that.”

He points out that there have always been ‘contracts’ of sorts between the operator and customer, in the form of charges for no-shows and cancellations. The difference, however, is that customers have clarity around the charges they’re signing up to.

“It’s about giving people transparency,” he adds.

In a response to MCA, Sunday insisted the fees were clear and transparent, but customers could be forgiven for not spotting them when settling the bill. 

Hospitality Rising founder and consultant Mark McCulloch notes that service charges are a known entity, unlike brand charges. If done right, however, brands can avoid backlash.

“Ping Pong and Sunday have talked about it, but the way of executing it wasn’t ideal,” he tells MCA. “If you put a one-liner in your menu to explain a service charge, that’s enough. With a brand charge, people don’t know what they’re funding…it’s opaque.

“But when you look at brands like Wikipedia, they’re open about asking for £2 donations that will help the business. There’s good ways people have done it.”

COREcruitment MD Krishnan Doyle tells MCA the brand did right by explaining its ‘brand charge’ - even if this admission only came in response to it being picked up by irritated consumers online and reported by MCA and Restaurant.

“Ping Pong have reassured the public saying this new tax will enable the brand to stabilise their employees’ wages and secure new financial investments,” he explains.

He added there has always been a somewhat grey area with service charges, with new legislation soon to require businesses to allocate all proceeds from tips and service charges to their employees, after it was revealed some were not already doing so.

Is it worth the reputational risk?

With labour now comprising c40% of costs for some operators, it is only natural to look for new ways to try to maximise revenue. But commentators agree that it’s preferable to look elsewhere first before introducing new fees and charges.

In the case of Sunday, it is a provider of tech services to the restaurant sector, and is clearly looking for a way to boost profitability as it scales. Yet its close connection to Big Mamma Group has led the negative publicity to carry over to the restaurant business. 

“Is there any other way you can upsell on your menu?” McCulloch asks. “Is there anything else you can do to cover extra costs? Is that £2 worth someone not coming back again?”

“With the negative publicity, it’s a bit counterproductive,” Martin adds. “Operators should look not just at the top line, but also the impact on customers.”

Publicity matters, especially in the age of social media, he continues: “Things move quickly, for better or for worse. Maximise revenue, but don’t lose revenue.”

The effects on reputation may not be equal for all, McCulloch explains. Brands that have built up heritage and reputation with customers over years, or decades, may be able to get away with it.

“There are some brands you really adore, but some don’t have the brand equity to charge this fee.

“It may go unnoticed among that cohort of people who really value your brand. But it will make people think twice about choosing to go to Ping Pong.”

“This has been dreamt up by a CFO, not a marketer…too many brands are doing things from the spreadsheet but not the heart.”

McCulloch reiterates that there needs to be a value exchange, with consumers clear about what they’re funding – and getting in return – for paying an extra fee.

Is it fair to employees?

Doyle emphasises that Ping Pong has raised staff wages by 19% - above the new legal minimum wage by £1/hour – but it is too soon to tell if a ‘brand charge’ will compensate for a potential loss in tips or service charges.

He explains: “Their new strategy’s fairness will depend on how they will manage this delicate transition, how they will communicate with their employees, and how they will ensure that they are fairly and justly compensated for their work aligning with the service industry salaries.”

Operators, therefore, have to be clear with not only their customers but also their staff. Employee dissatisfaction could backfire in the form of higher turnover rates – already a challenge for many in hospitality.

“Consideration should be given to how this change will affect employee satisfaction and morale,” Doyle continues. “Employees should be informed about any changes well in advance and provided with clear explanations of how their compensation might be affected.”

Staff will be forced to deal with complaints as consumers notice extra fees, and it’s worth questioning whether it’s fair for them to bear the brunt, Martin and McCulloch point out.

Will we see more brand charges cropping up?

Speaking from a reputation perspective, McCulloch says he’d be surprised to see more operators jumping on the bandwagon.

Martin and Doyle agree that there are other ways to mitigate costs and maintain employee satisfaction.

“There is no silver bullet,” Martin tells MCA. “It’s about doing your due diligence – looking after staff more generally, through flexibility, looking at retention, plus good scheduling, hiring, training, and onboarding.

“It’s all basic stuff, but when you put it together, you get results.”

Doyle adds: “My most obvious strategy tip would be streamlining and optimising their operations to improve efficiency and reduce costs. From investing in new technologies, reorganising the workflow, or renegotiating suppliers’ contracts to get better deals.

“Secondly, profitability can also be achieved by readjusting their offer, whether this means less items on menus to reduce wastage, redesigning portion sizes or cost-effectively sourcing ingredients.”

One key aspect of reputation building is simply being an inclusive business, he highlights.

“A final point will have to be about how diversity, equity and inclusion can indirectly help in financial gains. By establishing a genuine commitment to diversity and inclusion, companies can attract socially conscious consumers, differentiate themselves from competitors, and increase loyalty.

“This will provide them with a stronger brand reputation, making them more successful.”

Nevertheless, commentators note that once-questioned pricing structures have become accepted over the years. In Italy, for instance, the coperto – a fixed cover charge – applies for each person, while a discretionary but substantial tip is expected from customers in the US.

Another system is dynamic pricing, which has only been recently applicable to the hospitality industry.

“Dynamic pricing happens all the time with flights and hotels, and people accept it because they know that’s how it works,” Martin says. “They’re not used to it happening in this market though.”

“If it becomes this thing everyone does, people will have to put up with it at some point,” McCulloch adds.