From tipping to AI, a new era for restaurants

DANNY MEYER: I don’t think a tip should ever be mandatory. I think that as a customer, you should leave a tip if you feel like that person truly added value to your experience.

Back when it was a tip jar, there was a small amount of confusion attached to it.

It wasn’t a screen stuffed in your face that you knew the cashier was going to flip back around. What I would like is, instead of having the choice of 5 percent, 10 percent, 20 percent, or the fourth button, “You’re a schmuck for leaving nothing,” if there were actual behaviors connected to those numbers. Twenty percent would be “You actually made my day,” 5 percent would be “You accurately fulfilled the order,” and 0 percent might be a frowning face.

BOB SAFIAN: That’s Danny Meyer, world-renowned restaurateur, founder and executive chairman of Union Square Hospitality Group, and founder and board chair of Shake Shack.

Danny’s been on the show a bunch of times before, always with strong insights that extend beyond the restaurant industry. This time we start with a hot topic on media channels: tipping. We also delve into how the hospitality world has changed post-pandemic, dining culture and food delivery, a new twist in his management approach, plus investments he’s made into AI that might surprise you. And his best advice for getting a table at hard-to-land places. It’s a full-course meal, so let’s dig in. I’m Bob Safian, and this is Rapid Response.

[THEME MUSIC]

SAFIAN: I’m Bob Safian. I’m here with Danny Meyer, restaurateur, investor, founder of Union Square Hospitality, chairman of Shake Shack, and probably the most frequent guest I’ve had on Rapid Response. Danny, it’s great to have you back on the show.

MEYER: I hope I don’t mess up a good thing. We are going to do our best.

Copy LinkThe state of tipping in the U.S

SAFIAN: I wanted to start today by asking you about tipping. We’ve seen a lot of headlines on tipping fatigue and guilt tipping. And you have been, at times, sort of a lightning rod about the culture of tipping.

At one point pre-pandemic, you stopped tipping in your restaurants. How hot is the tipping discussion today in the industry for your customers, for your staff, for your peers?

MEYER: I think, interestingly, that tipping is almost more of an interesting issue to talk about externally than it is internally. I think that, in general, restaurant professionals are okay with the system as it is. I’ve learned that the hard way by eliminating tipping for six years and realizing that very, very few other restaurateurs wanted to join us.

It’s a very, very difficult thing to do. It’s deeply embedded in American culture to tip when you go to restaurants. Uniquely American, I would say, and this has been the case really for 160 years or so when tipping first started happening in restaurants and train cars as a way to not pay any actual salary to porters in trains or waiters, who were largely African American back then.

And the thinking was that it’s not slavery because we’re going to get our patrons to pay a tip instead of us paying them a salary. Well, that’s kind of an amazing economic boon for an entire industry if you think about it. It’s almost as if you paid for all the manufacturing and none of the sales and merchandising, which is what waiters do.

Meanwhile, the restaurant and the restaurant profession have gotten away with actually having synthetic pricing on their menus because we’re not really charging you for everything.

We’re just charging you for part of it, and then you’re going to pay for the balance. So it hasn’t worked in a lot of different ways. Probably historically the biggest way it has not worked is that in many, if not most, states in the country, including our state, New York, tips may not be shared between waiters and cooks.

SAFIAN: Legally, they’re not allowed to.

MEYER: Legally they’re not allowed to, and if they do, the restaurant is on the hook and can be liable for all kinds of damages, which can be really, really huge.

Copy LinkWhy Danny Meyer banned tipping

SAFIAN: I remember when you banned tipping, part of it was to try to even out that front-of-house, back-of-house sort of tension, right?

MEYER: That’s exactly right. You guys talk about inflation all the time; you’ve seen it in the restaurant business.

And what does that mean? That means that waiters — I’m happy for waiters — are essentially making more money than they’ve ever made by waiting tables. But cooks, who may not legally accept tips — the disparity between the two has only grown.

You may say, “Why don’t you just pay your cooks more money?” And we have, and we do. As a matter of fact, when we reinstituted tipping, not only did we raise the compensation for our cooks, but we also pay our cooks a percentage of sales every single day so that they too can make more money.

But I don’t think we should have to do that. I think it should be legal for tips to be shared. You see a growing disparity between what people in the dining room can earn and what people who cook your food can earn.

And it’s not fair. Like if it were a football team, it wouldn’t be fair to pay your offense 60 percent more than you pay your defense. I don’t think halftime would be a pleasant place to be.

Copy LinkShould tipping be mandatory?

SAFIAN: I saw somewhere that you said that you don’t think a tip is needed for a cup of coffee or fast casual takeout, which are places like Shake Shack and Daily Provisions, which are two of your businesses. Does that create any tension for you in this?

MEYER: Well, I think what I said was taken out of context. What I said was, I don’t think a tip should ever be mandatory. I think that, as a customer, a paying customer, you should leave a tip if you feel like that person truly added value to your experience. When you’re sitting down in a restaurant for a one-and-a-half or two-hour meal or sometimes more, you actually have an opportunity to develop a rapport with your server and vice versa.

And I think that the server has an opportunity to do really thoughtful things for you. And I think for most people, it’s not only expected to leave a tip in that situation, but it’s actually a pleasure. It’s a pleasure. The word ‘gratuity’ is connected to gratitude. And I think it’s a pleasure to express gratitude.

If you have a very quick experience, it’s harder to have developed a relationship where you feel like that person made your day.

I think the challenge has been that for fast casual restaurants or quick serve restaurants, I would call them, their margins have also been compressed dramatically.

They can’t keep raising the hourly rate over and over and over without raising their menu prices to the point that people go, “You’ve got to be kidding me.” So with technology, since so many of these places now have a little touchpad, which is how you pay, right?

You use your Apple Pay or whatever it is, or your credit card, swipe it, and it’s really easy to flip that screen around, and it’s really easy for that to be the tech version of the tip jar. And back when it was a tip jar, it had a small amount of confusion attached to it.

I didn’t really want to put change in there or extra dollars in there. I would if the person did something thoughtful for me, but it was kind of easier to do it when you felt like it and felt like it was warranted. And it was also easier to not do it because it wasn’t a screen stuffed in your face that you knew the cashier was going to flip back around and see what you did afterwards.

I think it has, in fact, caused a certain amount of discomfort for patrons.

Copy LinkAttaching written behaviors to tipping options

What I would like is instead of having the choice of 5 percent, 10 percent, 20 percent or the fourth button, which feels like, “You’re a schmuck for leaving nothing,” which is kind of how it feels. I mean, that’s invisible, but that’s kind of how it feels. I think it would be amazing if there were actual behaviors connected to those numbers. So, for example, 20 percent would be “You actually made my day,” and 5 percent would be “You accurately fulfilled the order,” and 0 percent might be “You didn’t smile at me once. I was just another transaction along the way.” But I feel like if there were some words that attached to behaviors.

SAFIAN: So that, so that I, as a customer, would have some understanding about why or what I’m getting for my tip, as opposed to just feeling a little bit pressured into it.

MEYER: Yes, and furthermore, what that would do, hopefully, would be, as a manager or leader, it would give me the opportunity to encourage even better hospitality from my team because I would be able to collect all the data.

And I could actually see who and when we are delivering the most happiness because that is the thing that restaurants and restaurant patrons have in common. We want you to leave a little happier than however you felt when you came in.

And if we’re doing nothing to add to that other than taking your money, I guess we made you happier if the product is really good. But what if we made you emotionally feel better while you were doing it?

I don’t think it would be an awful system if it actually correlated to real behaviors that then, as a leader, I could say we’re trending either the right way or the wrong way. But really think about this because we’re in the business of making people feel better.

Copy LinkHow the restaurant industry is doing post pandemic

SAFIAN: I’m curious how healthy you feel the restaurant industry is right now. We talked a lot during the pandemic about your worries about where it was going to go or what might happen.

MEYER: It’s almost like the wind blowing through in a big way. And a bunch of the leaves fell off or some of the trees got knocked down.

But there always seems to be green shoots ready to sprout. The new restaurants, especially those that have opened subsequent to the pandemic, I would say are some of the best and most exciting vintages that I’ve seen since getting into this business.

And for a lot of reasons. Number one, leases that were signed pre-pandemic by any of us were signed with a set of expectations that are no longer true.

How many people come to the city to do business? How many international tourists do we get? All that stuff shifted dramatically, but if you signed a lease after the pandemic, you knew what the shifting landscape was. And so you had a much more accurate foundation for the business you have going forward.

The other things are that, and you know this from the conversations we were having during the pandemic, it was exhausting going through the trials and tribulations of laying people off, hiring people back, laying people off again, closing your restaurant, opening it, closing the restaurant again, depending on which strain of COVID we got.

And I think that the new breed of restaurants that open after the pandemic came in with a full head of steam and they hadn’t had to go through all that stuff.

A lot of them designed their restaurants with more outdoor space. If you can get an extra 10, 15, 20 seats, that can make an enormous difference in your business.

So for a whole host of reasons, I think the restaurant industry is healthier now. I think there’s probably fewer restaurants today than there were going into the pandemic. Therefore, the resulting restaurants can capture a little bit more of the market share. And that’s been a good comeback.

Copy LinkWhy restaurants do — and do not — use delivery services

SAFIAN: I’m curious how the booming ordering of food for delivery has impacted the industry. DoorDash, Grubhub, Postmates and so on, they provide access to customers, but they also sort of cut into margins and can change the model a little bit?

MEYER: I remember the early days after the pandemic and we just wanted every penny of revenue we could possibly get. But it just didn’t feel good when Bob had made a reservation to have a real conversation, dining experience at Gramercy Tavern or Union Square Cafe, to have to jostle with a guy with a big red canvas backpack as he was just trying to be greeted by the maitre d’.

It just kind of took some of the romance out of dining out. So we stopped doing that altogether.

Now, as far as fast casual, fine casual, you could look at it as something that cuts into your margins. Not only does the restaurant have to pay a pretty good chunk of change to the aggregator, the delivery company, but there’s also the packaging, etc., that that goes out the door, and that’s a real cost that adds up over time.

So why do restaurants do it? Because it’s profitable business. Because they don’t take reservations, you’re not necessarily fighting with someone who had an expectation that at eight o’clock they were going to be seated.

A very different game.

SAFIAN: Danny makes business trends and decisions sound so logical, doesn’t he? And yet he’s also the first one to acknowledge the uncertainties. What he knows is that we need to focus on things we can control, like how we treat customers. And that we need to be on the lookout for ways we can do better. Coming up, Danny talks about a new wrinkle in his management approach, plus his investments in AI, his best tip for getting a table at a hot restaurant, and more. Stay with us.

[AD BREAK]

SAFIAN: Before the break, restaurateur Danny Meyer took us inside the dynamics of tipping, for customers and for staff. Now he shares a new strategy he’s using to run his restaurant group, how he’s investing in AI, why he wouldn’t be right for Shark Tank, and more. Let’s jump back in.

Copy LinkDanny Meyer on stepping down as CEO

SAFIAN: When we last had you on the show, you’d passed off the CEO mantle to Chip Wade. I’m just curious how it’s been. What’s gone the way you expected and what hasn’t?

MEYER: We did something at the very beginning that I think has worked really, really well, which is, we call it DCI. And we were very clear: Here are the very few topics where Danny still has the ultimate decision. That’s the D. Here are the topics where Danny needs Chip to consult with him. It’s truly a joint decision. Here are the many, many more topics where it’s Chip’s decision, but Danny just wants to be informed. That’s the I. So DCI: decide, consult, inform, and it’s been a really good framework for us.

Copy LinkThe AI tools that Danny Meyer is exploring

SAFIAN: One of the reasons you made this shift was to have some time for your investment business. How do you decide where to go? How much is veering into AI, and what about the current obsessions with AI and what it can do?

MEYER: I think a lot of them are. There’s two that come to my mind immediately that are really built on a foundation of AI. One is called Prezi Taste, and I’ll try to describe it. It’s not facial recognition, but it counts exactly how many people are in line. And it is a predictive model to tell the kitchen how many orders of whatever it is they should be getting ahead of and starting to fire. It’s already proving to be a money saver. What restaurants do, which is really sad, is when it gets to be crunch time, the tendency is to cook too much food in advance. The worst thing in the world is to get cold french fries. French fries are so good when they’re hot and so not good when they’re cold. And so that’s, I’m just giving you an example of that. So the restaurant will just cook too many orders to get ahead of things so that they don’t get in trouble for being late.

They cook too many orders. That means one of two problems. That means the customer got cold fries or they have to throw out the fries. So what Prezi Taste, for example, does is they’re using machine learning to tell the kitchen in advance, here’s how much you should be cooking. So that’s one.

The other is Converse Now, which is voice-activated order-taking. And in that case, they can know who you are. They can know from voice recognition if you’ve ever ordered before. They’re getting to the point that in a drive-thru, they can read your license plate and see what your orders have been.

And it can actually suggestively sell way, way better than humans ever do. The order accuracy has been fantastic, but the check average has gone up as a result of doing it much more quickly.

SAFIAN: Do you worry about the privacy aspects of that, of sort of tracking your customers in that way? And I guess what the impact is on the hospitality, if there’s less human engagement.

MEYER: I don’t worry about it because I’ve been tracking our guests manually forever. I’d like to think that if you come into one of our full-service, fine-dining restaurants, Gramercy Tavern, Shisiamo, Manhattan, whatever, I would like to think that they would remember the last time you were there.

They would know exactly what you ordered, what your favorite table was. So I love the fact that in an environment where we don’t have reservations and therefore we don’t have the same means by which to say, “Welcome back, Bob,” that there’s other ways we could say, “Welcome back, Bob.” And as far as the human aspect of it, my belief is that the best tech is the tech that advances touch.

And if it’s just about replacing human beings, that’s not good. You still need someone to hand Bob his food with a big smile on their face. I’m not going to be hiring robots to do that. So I look at it as a tool, but I don’t look at it as replacing human beings.

Copy LinkDanny Meyer on his investment strategy

SAFIAN: Danny, I could see you being on Shark Tank on television, but maybe you don’t want to go in that early. I don’t know, would that appeal to you?

MEYER: One of the hardest things for me when we started was that our mandate was to invest pretty much at the series B stage. It was challenging when every bone in my body said, “I’m a founder, and I love trying to sniff out ideas early on, try to sniff out great leadership early on.” We made a choice—and I think it was the right choice—that if you’re a really, really, really early investor, you’re going to have a lot more strikeouts. You’re not going to have as high of a batting average. You may hit some really, really lofty home runs, but we opted to go in a different direction. Invest in the tree that’s already planted its roots, so it’s not going to get knocked over in a modest storm. And I’ve pretty much gotten comfortable with that. It’s hard. What we do though is that if we see something early, we get to know the people. We can give advice to people and take our chances there. If they’re going to grow, they’re going to need money somehow at some point.

Copy LinkExcitement for the future of food & business

SAFIAN: You and I have talked about so many moments over the years—tough moments, joyous moments through the worst of COVID, the best of the rebound.

Sometimes you’ve said you’re optimistic. Other times you’ve been more nuanced and use the word “hopeful.” I’m curious where your soul and your spirit is right now.

MEYER: My soul is excited, and I’m excited for a lot of reasons. I absolutely love what we are learning about how to scale culture in business. It used to be my belief, which was probably incorrect, that the surest way to kill culture was to grow or diminish culture or to dilute culture.

And I think we’ve learned a lot. One of the businesses that we’re in right now that’s growing like a weed is called Hospitality Quotient. There are more businesses than ever, more organizations than ever, that are looking to understand how, in addition to the thing they do very, very well or the thing they make very well as a company, how can they attach a culture that makes more great people want to work there and more customers want to do business there.

We are finding that our business called Hospitality Quotient is having a very, very robust moment. We’ve just recently launched a digital version of that, which is called HQ Plus, so that people can participate without coming to New York to take these classes — they can do it digitally. So I’m very excited about that. I’m also really excited about Daily Provisions, which we now have six of. We had two, I think, the last time you and I spoke. So it’s still a tiny company, but we now have six. They’re all in New York. I would say by the next three or four months, we’ll have nine.

Copy LinkHow Danny Meyer chooses which businesses to scale

SAFIAN: And the trade-off between culture and scale — when you look at Daily Provisions, you’re like, “Oh yeah, someday could be as many as there are Shake Shacks, and Shake Shack will have 10 times as many outlets as it has now,” or are some of these brands like, “No, it’s not that kind of business.”

MEYER: I think you hit the nail on the head. Look at Gramercy Tavern. It turned 30 years old this year. We have one Gramercy Tavern. That’s fine. Union Square Cafe—next year, 2025—it will be its 40th birthday. We have one Union Square Cafe. There are some businesses that, like wines, I think, are single-vineyard wines, single-vineyard restaurants.

And I’m totally okay with that. They have terroir; they taste like where they are. But every now and then, there’s a business that is not necessarily about where you planted the first one, as much as it is something that has broader appeal. Both Shake Shack and Daily Provisions were accidents.

I didn’t sit in a room one day and say, “I know what I want to do. I want to open a great burger and frozen custard place.” And I didn’t wake up one day and say, “I want to open an all-day neighborhood kitchen.” They were both actually happy accidents connected to doing stuff for our community.

Shake Shack was meant to start as a hot dog cart to raise money for Madison Square Park. Daily Provisions was because we needed a new place for Union Square Cafe to move. And it happened to come with an extra 500 square feet that we didn’t need for Union Square Cafe. So we said, “Let’s create a gift for the community.”

And you know what? Sometimes you get lucky. And if communities are falling in love with something, in a weird way, you’re doing nobody any favors to hold it back.

Copy LinkDanny’s secret to getting a reservation

SAFIAN: Well, Danny, this has been great as always. Is there anything that I haven’t asked you about that I should have?

MEYER: How can I get a reservation at Ci Siamo?

SAFIAN: Do you have a quick answer for that? Other than me saying, “Danny, help me out.”

MEYER: I actually do. Here’s what I would tell anybody in this case. The single best thing you can do is remember that restaurants are people too. And people who are in my industry tend to be a self-selected group of people who are happier themselves when they make people feel better.

They want to please you. So what I would do with any restaurant that’s tough to get into, not just Ci Siamo, is if that restaurant serves food at their bar, which we do, I would go have dinner at the bar, no reservation. If you don’t like it, then we got nothing to talk about. But assuming you love it, which I hope you will, I would tell the bartender, “I can’t wait to come back. Can you help me? Can you introduce me to the person who takes reservations here? Can you introduce me to the chef?” You meet either one of those people, the chef or the person at the front desk, and after you’ve told them how much you love it and you’ve already been there, you’re going to get your table.

SAFIAN: It works. It works nine out of 10 times. It’s so simple. And yet, of course, it’s about people, right?

MEYER: We love that!

SAFIAN: Danny, this has been great as always. Thanks for coming back, playing these games with me.

MEYER: Okay, Bob. Thank you.

SAFIAN: Each time Danny is on this show, I learn new things — about restaurants, about operating a customer-focused business, about resilience. I also learn more about the mindset of leadership. I’m struck this time around by his mood and tone. He’s more calm than during our pandemic-era discussions, certainly less restless. And yet there’s still an edge. It’s a characteristic that the best leaders exhibit. Even if the economic environment may be more forgiving, you have to keep looking for ways to improve, keep testing yourself, and questioning your assumptions. Whether it’s wasted french fries or happy accidents, openness can lead to opportunity. Maybe I’ll bring this up to the bartender the next time I’m sitting at the bar at one of Danny’s restaurants. I hope it will be memorable enough to earn me that next reservation. I’m Bob Safian. Thanks for listening.