French VAT Cut Boosts Restaurant Trade

(page 2 of 2)

In exchange for the VAT drop, restaurant and café owners have signed a contrat d'avenir (contract for the future) with the French state, pledging to create an additional 40,000 jobs in the next two years. Lagarde says the contract is "based on confidence and the responsibility that restaurants are assuming in price, employment, and quality of service."

lowering menu prices

French eateries that do lower their prices and precisely apply the recommendations put forth by the French Economic Ministry will be allowed to post the official sticker on their window, "A cut in VAT is a cut in prices!" The recommendations urge restaurants to slash prices by 11.8% on at least seven of the following 10 menu items: appetizer, hot dish (meat or fish), plat du jour (daily special), dessert, combo "appetizer + dish," combo "dish + dessert," juice or soda, mineral water, coffee, and tea. The drop in VAT applies only to food, not alcohol.

Establishments will not be obliged to pass on the cuts directly to customers. But so far, 90% of big restaurant chains and 30% of independent eateries have already jumped on board and revamped their menus. Overall, owners are willing to make less money on a dish in exchange for higher traffic volumes. "The restaurant business is very competitive," says Thierry Poupard, a independent Paris consultant in marketing and sales for the restaurant industry. "If one restaurant significantly lowers its prices and the one next door doesn't, guess where the customer will go?"

Many of the larger restaurant chains are using the change to entice new customers with revamped menus. At Léon de Bruxelles, a French chain of 50 restaurants specializing in mussels, the menus proudly display pre-VAT drop prices slashed out with new, cheaper prices printed next to them. A diner can then clearly see that before July 1, a main dish of steak and fries cost $15, whereas now, it's $13.

So far, it is the small, family-owned restaurants which have been hesitant to change their menu pricing. Many instead are using the cut to keep themselves afloat or raise workers' salaries. Since the measure went into effect, only 30% of such smaller restaurants have readjusted their prices to reflect the drop in TVA. "This percentage is substandard," Novelli told French radio station RTL on Aug. 6. "I would be happy if two-thirds of French restaurants lowered their prices."

Leona Liu is a reporter in BusinessWeek's Paris bureau.

Business Exchange

Track and share business topics across the Web.