California is an expensive state for businesses — no one disputes that. One recent study found that we have higher overall business costs (wages, taxes, energy) than every other state.
I’m not here to challenge this, or to make the usual love-it-or-leave-it argument when it comes to whiny complaints from wealthy business leaders (hi, Elon!).
Rather, I want to call attention once again to the growing practice of businesses inflicting price hikes on customers without looking like they’re raising prices.
A reader named Dave shared with me a screenshot of his recent online transaction with a Pizza Hut restaurant in Venice. Attached to his $8.99 order for pasta and breadsticks was a 76-cent “service charge.”
Clicking the link for “more info,” Dave was informed that “the service fee partially offsets the increased cost of operations in the state of California.”
This is separate from Pizza Hut’s delivery charge and separate from state and local taxes. It’s a fee explicitly passing along part of the restaurant’s cost of doing business in California to its California customers.
And make no mistake: Pizza Hut and all other companies have every right to do that. First you recover your basic business expenses, then you set prices high enough to earn a fair profit. That’s capitalism.
But that’s not what’s happening here.
This is sheer dishonesty. It’s a company — one of many — trying to pull a fast one on customers by imposing a stealth price hike in the form of an added fee, rather than charging a list price that reflects actual business costs.
“It’s called ‘drip pricing,’” said Joseph K. Goodman, an associate professor of marketing at Ohio State University.
“Most consumers find this strategy unfair, as one might expect,” he told me. “They think they’re getting something at a price and then feel cheated. The brand basically broke its promise.”
Mark Bergen, a marketing professor at the University of Minnesota, said sneaky surcharges are becoming more commonplace as businesses seek to boost revenue without looking like they’re doing just that.
“This is definitely a growing practice across industries that consumers should be aware of when making their purchase decisions,” he said.
Businesses use various ploys to justify dubious surcharges. I recently wrote about how the paint company Sherwin-Williams was imposing a 4% “supply chain charge” to recoup higher pandemic-related shipping costs.
In May I wrote about Frontier Communications making internet customers pay a $6.99 monthly “infrastructure” surcharge on top of a service price that can run $80 a month.
Again, I don’t begrudge companies passing along their business costs to customers. That’s to be expected. Nor is there anything unusual about list prices differing from one region or state to another.
What to my mind is a deceptive practice is passing along business costs in a manner that hides them from customers until the point of sale, when many people are already committed to the transaction.
Sneaky surcharges also deny consumers the opportunity to effectively comparison shop. You can’t compare prices when you’re being denied essential information such as, you know, the actual price.
Pizza Hut has been smacking Southern California customers with a “service charge” since 2017 — well before the pandemic and current supply issues.
The chain is owned by Yum Brands, which also oversees the KFC and Taco Bell chains.
A Yum spokesperson, stipulating that I not use his name, said Pizza Hut franchisees “are responsible for setting their own menu prices, delivery fees and service charges.”
“One of our California franchisees implements a service fee in certain Pizza Hut branded restaurants in California at this time,” the spokesperson acknowledged, adding that the service charge represents “a percentage of the bill.”
Based on Dave’s service charge for pasta and breadsticks, that percentage is 8.5%.
And when Yum innocently says the fee is imposed by “one of our California franshisees” in “certain” restaurants, it’s actually referring to the state’s largest franchisee and the third-largest nationwide.
Orange-based American West Restaurant Group, affiliated with Sterling Investment Partners, operates about 250 Pizza Hut restaurants in Los Angeles, Orange, Riverside, San Bernardino and Ventura counties — roughly 70% of Pizza Huts in the region, according to Yum.
I called a half-dozen Pizza Huts throughout Los Angeles. Every one of them charged the service fee, which an employee at one location said runs about $1.27 for a large pizza.
“It’s my least favorite thing, explaining to people about the service charge,” the employee said. “Nobody likes it.”
Jerry Ardizzone, chief executive of American West Restaurant Group, said in a statement provided by Yum that his company’s top priority is “serving our customers great tasting food at a great value.”
“The service fee we charge is consistent with business and local market conditions, and we clearly communicate the fee to our customers during online ordering, via in-store signage and during customer-employee interactions,” he said.
Z. John Zhang, a marketing professor at the University of Pennsylvania, said businesses know what they’re doing when they play the added-fee game.
“Consumers will make buying decisions based mostly on price, and every firm has a strong incentive to quote a lower price to arouse the purchasing interest from a discerning customer and hopefully lock him or her in,” he told me.
Added fees only make sense from the consumer’s perspective, Zhang said, if people have some control over the situation. For example, an airline may charge more to check a bag, but you can always choose to travel light.
In Pizza Hut’s case, Zhang observed, “it appears that customers cannot waive the fees in any way” (they can’t).
Section 17200 of the California Business and Professions Code states that “unfair competition shall mean and include any unlawful, unfair or fraudulent business act or practice, and unfair, deceptive, untrue or misleading advertising.”
I’m no lawyer, but it seems to me that when a good has one price on the shelf or menu, but another, higher price at the cash register (not including taxes and government fees), that’s potentially deceptive or misleading marketing.
A spokesperson for California Atty. Gen. Rob Bonta said only that “we’re committed to upholding California’s consumer protection laws, including laws that prohibit businesses from failing to disclose service charges or other fees.”
Goodman at Ohio State University said imposing sneaky surcharges is ultimately self-defeating for businesses such as Pizza Hut.
“It might help sales at first,” he noted. “But if consumers are not expecting it, then they just won’t come back, and next time will go to Domino’s or some other competitor.”
Dave bears that out. He said he canceled his order for pasta and breadsticks after spotting Pizza Hut’s added fee.
Which is to say, by trying to squeeze an extra 76 cents from a customer, the restaurant lost a nearly $9 sale.
That’s an expensive way to do business.