TOGETHER WITH FUNDRISE

AI INVESTING IS HERE

How are you investing in AI?

ICYMI: Fundrise has fully democratized venture capital.

Now, you can get in early, investing in some of the most promising pre-IPO tech companies—including those leading the AI revolution.

No accreditation is required. No membership fees. And the lowest venture investment minimum ever.

TIPFLATION

‘Tips appreciated’

“Tips appreciated,” “Tip Jar,” or “Vacation fund.” ​​Or, just a subtle spin of the iPad around with tip prompts for 15%, 20%, 25%, or…none.

Have you also sensed that business owners are testing the limits of customers’ willingness to tip?

While requests for tips by service workers have increased, actual tipping hasn’t kept pace.

And while customers’ decisions to tip are often based on feelings of gratitude or guilt, small businesses, the backbone of the U.S. economy, have become more dependent on tips than ever.

But it wasn’t always this way. While tipping might have origins in the Roman era, it’s predominantly traced back to medieval Europe, where affluent guests would leave tips for servants as a reward for excellent service.

Conversely, tipping was almost absent in the U.S. before the Civil War, but affluent Americans who visited Europe introduced the custom in the mid-1800s, mimicking European traditions.

Ultimately, tipping became a business strategy for business owners in the coming years.

Today, leaving a tip at restaurants is a widely accepted social norm. The Council of Economic Advisors states that 98% of customers at full-service restaurants leave a tip, making Americans the most generous tippers for restaurant servers globally.

Tips can make up some 60% of servers’ earnings, depending on the type of restaurant, since fine-dining restaurants tend to increase the tips for the workers.

The National Restaurant Association reported that full-service restaurants generated $324 billion in 2022, implying that consumers at these establishments contributed between $35 billion to $60 billion in tips, depending on dine-in sales percentages and tips for various services.

But this estimation doesn’t consider the tips given to pizza delivery drivers or the increasing number of counter-service employees receiving tips.

Tipflation

The prevalence of tipping has significantly increased among small businesses, with 16% now asking for tips, up from 6.2% in 2019. Today, more employees in various sectors receive tips as part of their pay than ever before, contributing to an average 25% increase in service workers’ wages.

This shift was intensified during the pandemic as customers started tipping to appreciate workers taking risks. Businesses, particularly those operating on tight margins, have become reliant on this practice, suggesting that this trend is likely to continue.

Tip requests have extended well beyond the traditional domains of restaurants and bars.

Now, many service businesses, including juice shops, car mechanics, and even plant stores, ask for tips.

What’s interesting is that the tipping trend is most prominent in bars, where workers earning just above the federal minimum wage now receive an average of $13.33 per hour in tips.

Among the 300,000 small and medium-sized businesses analyzed, bar employees earned more tips than other service industries — alcohol makes us all a bit more generous apparently.

Even though many Americans leave tips, many feel obligated to pay extra to workers, even if they’re unsatisfied or believe that an employee’s financial well-being should fundamentally be the business owner’s responsibility.

But why?

Why would businesses prefer employees receive tips instead of raising their wages?

It likely has a lot to do with seasonal fluctuations, resulting in variable employee pay depending on the time of the year.

Businesses pay workers more when it’s busy, and as things slow down, so do wage costs under a tip-based compensation system. That flexibility is great for business owners, but such financial variability is less than ideal for many service workers.

Retaining workers has been challenging in the services sector since the pandemic, particularly in lodging and food service, with a consistent quit rate above 4.9% since July 2021, per a May 2023 report by the U.S. Chamber of Commerce.

The retail trade industry follows closely with a 3.3% quit rate in 2023. According to the Bureau of Labor Statistics, the overall worker quit rate in May 2023 was 2.6%.

Rising frustration

Americans have gotten used to the fact that not only is it appreciated to leave tips, but it’s often expected.

Americans feel certain jobs warrant tips more than others, though, such as workers in food services, beauty services, and hotel services.

National sentiment on this issue is increasingly negative, with complaints about “tipflation” becoming more common.

A May survey by Bankrate involving around 2,400 Americans revealed that consumers tipped less frequently than during the pandemic’s peak.

About 41% of respondents voiced that businesses should prioritize improving employee wages rather than depending heavily on tips, and around a third felt that the tipping culture has become excessive.

All of that has led to discomfort, frustration, and awkwardness for both customers, who feel compelled to pay extra money, and employees, who sense their income substantially depends on the generosity of others.

Dive deeper

To learn more about why businesses can’t stop asking for tips, read this article by CNBC.

See you next time!

Enjoy reading this newsletter? Forward it to a friend.

Was this newsletter forwarded to you? Sign up here.

All the best,

P.S. The Investor’s Podcast Network is excited to launch a subreddit devoted to our fans in discussing financial markets, stock picks, questions for our hosts, and much more!

Join our subreddit r/TheInvestorsPodcast today!