The Health of Restaurants in Denver and What a 20% Surcharge Would Mean

Background 

The City of Denver is considering encouraging restaurants to add a 20% surcharge to restaurant bills in the city. Depending upon what type of tipper you are, the suggestion could increase the final bill some customers pay to eat out and lead to a redistribution of what was previously tip income. If implemented on a broad scale, the suggestion will impact the amount paid by customers, the distribution of pay for restaurant workers, taxes collected by restaurants in the city, and restaurants’ bottom line, addressed in the following pages.

Key Findings 

• Restaurant sales in the Denver area are struggling, up 1.5% compared to the prior year (November 2024) - weak by historical standards.
•  On an inflation-adjusted basis, restaurant sales in the Denver area are down 5.1% as of November 2024, the most recently available filing data.
• Comparing restaurant sales in the Denver area to other cities, restaurants are weak, with Denver ranking 9th of the 13 cities with relevant data.
• A 20% increase in the price at restaurants in the City of Denver leads to a decline in employment of 4,575 individuals, a drop in GDP of $718 million, and a decline in output (company sales) of $1.231 billion by 2030.
• A 5% increase in price at restaurants (20% surcharge minus 15% drop in tips) leads to a decrease in employment of 1,122 people, a decline in GDP of $176 million, and a decline in output (company sales) of $302 million.

Taxable Food Services and Drinking Places Sales

Denver Restaurants

Restaurants, captured by the NAICS industry classification 722, are struggling, at least when measured by year-over-year change in taxable sales in Denver. As of November 2024, taxable food services and drinking places are up 1.5% compared to the prior year, weak by historical standards (Figure 1). 

On an inflation-adjusted basis, taxable sales are down 5.1% (Figure 1). 

Overall, Denver restaurants are struggling in the competitive industry of food services. 

Figure 1

Denver Restaurants Compared to Other Cities

Is the weakness of the restaurant industry consistent across cities in the state? The answer is generally yes, although restaurants in Denver are struggling more than restaurants in other cities (Figure 2). Of the 13 cities reported by the Colorado Department of Revenue with information on Food Services and Drinking Places, Denver has the 9th place growth rate, ahead of Pueblo (0%), Colorado Springs (0%), Aurora (0.7%), and Centennial (-1%).

Figure 2

Restaurant Prices and Consumer Choice 

Before going into the impact of a 20% surcharge, it is worth noting that, according to Toast, customers in Denver are among the most generous in the country, tipping, on average 19.8% - close to the proposed 20% surcharge.

What would a 20% rise in restaurant prices mean for consumers, workers, and the economy overall in Denver? The impact depends, at least partly, on how consumers respond to the price increase. Two scenarios follow. The first scenario assumes the 20% surcharge flows through restaurants simply a 20% price increase. The second assumes that tips go down approximately 15% and thereby the cost of a trip to a restaurant in Denver goes up approximately 5%.

The Impact of a 20% Rise in Restaurant Prices

The results for the Denver Metro area, shown in Figure 3, indicate the economic impact by 2030 of: 

• A decline in employment of 4,575 people.
•  A drop in GDP of $718 million.
• A drop in output (company sales) of $1.231 billion.

Figure 3

The impact is felt the hardest in the Food Services and Drinking Places sector, accounting for 1,463 of the jobs lost in the Denver Metro area by 2030. The impact on the restaurant sector spills over to other sector, leading to missing jobs in the construction, real estate, professional and scientific, retail trade, and administrative, among others (Figure 4).

Figure 4

The Impact of a 5% Rise in Restaurant Prices

Some may suggest that the 20% surcharge would simply replace most of the tips given to servers today given that Denver customers typically tip 19.8%, on average. To acknowledge this possibility, the scenario presented below assumes a 5% increase in restaurant prices, meaning that tips drop by approximately 15%. 

The results for the Denver Metro area, shown in Figure 5, indicate the economic impact by 2030 of: 

• A decline in employment of 1,122 people.
•  A drop in GDP of $176 million.
• A drop in output (company sales) of $302 million.

Figure 5

The impact is felt the hardest in the Food Services and Drinking Places sector, accounting for 359 of the jobs lost in the Denver Metro area by 2030. The impact on the restaurant sector spills over to other sectors, leading to missing jobs in the construction, real estate, professional and scientific, retail trade, and administrative, among others (Figure 6).

Figure 6