One more nit on wine prices at restaurants

MSN has a fluff piece on restaurants and wrote

"At a fine-dining restaurant, the average cost of food is 38% to 42% of the menu price, says Kevin Moll, the CEO and president of National Food Service Advisors. In other words, most restaurants are making roughly 60% on anything they serve."

Now I don't have a problem with that and if the food is really good would be willing to pay more. I was actually surprised the margins were not higher. So why do I pay 300% mark up on wine. This was not discussed in the article. My daughter is doing a graduation lunch for her husband in NYC this weekend. The 3 course lunch is $29, very reasonable. They have an extensive wine list and Druet NV from New Mexico is $45 and I buy it locally for $13.99 per. That is at least 400% of wholesale. Why not raise some food prices and stop raping the wine people. Thank goodness I live in St. Louis and can BYOB good wine from the cellar. Realize I am kicking a dead horse but it is just irritating.
Walt

MSN has a fluff piece on restaurants and wrote

"At a fine-dining restaurant, the average cost of food is 38% to 42% of the menu price, says Kevin Moll, the CEO and president of National Food Service Advisors. In other words, most restaurants are making roughly 60% on anything they serve."

Now I don't have a problem with that and if the food is really good would be willing to pay more. I was actually surprised the margins were not higher. So why do I pay 300% mark up on wine. This was not discussed in the article. My daughter is doing a graduation lunch for her husband in NYC this weekend. The 3 course lunch is $29, very reasonable. They have an extensive wine list and Druet NV from New Mexico is $45 and I buy it locally for $13.99 per. That is at least 400% of wholesale. Why not raise some food prices and stop raping the wine people. Thank goodness I live in St. Louis and can BYOB good wine from the cellar. Realize I am kicking a dead horse but it is just irritating.
Walt

I'll risk being a devil's advocate for a moment:

First, a margin of 60% is equal to a 250% markup, so the markup on wine is larger than food, but not amazingly larger. Second, restaurants have been geared toward making a higher margin on all beverages, not just wine. Have you compared the cost of a Coke/Pepsi to the restaurant price lately?

On the other hand, it is irritating to find something on the wine list you know you could get much cheaper by yourself (one reason some wines are designated on-premises only), and sometimes markups are downright excessive.

Restaurants need to turn a profit and will opt for the strategies that work best for them. Thankfully, some restaurants find that liberal BYO policies or smaller markups can work, and I am happy to support their choices with my cash.

While I'm no fan of high restaurant wine pricing, we need to be a little clearer re "the average cost of food is 38% to 42% of the menu price, ...In other words, most restaurants are making roughly 60% on anything they serve"

That's food cost. But out of that margin (and margin on wine), restaurants need to pay rent, utilities, labor, licenses, professional services, etc. Let's just be clear it doesn't mean owner is pocketing 60% of the cost of the meal. At a certain point of filling tables, with good management you break even on fixed costs. Above that (meal price + beverage price ) minus (labor costs and food cost and wine costs) equals profit.

MSN has a fluff piece on restaurants and wrote

"At a fine-dining restaurant, the average cost of food is 38% to 42% of the menu price, says Kevin Moll, the CEO and president of National Food Service Advisors. In other words, most restaurants are making roughly 60% on anything they serve."

Now I don't have a problem with that and if the food is really good would be willing to pay more. I was actually surprised the margins were not higher. So why do I pay 300% mark up on wine. This was not discussed in the article. My daughter is doing a graduation lunch for her husband in NYC this weekend. The 3 course lunch is $29, very reasonable. They have an extensive wine list and Druet NV from New Mexico is $45 and I buy it locally for $13.99 per. That is at least 400% of wholesale. Why not raise some food prices and stop raping the wine people. Thank goodness I live in St. Louis and can BYOB good wine from the cellar. Realize I am kicking a dead horse but it is just irritating.
Walt

I'll risk being a devil's advocate for a moment:

First, a margin of 60% is equal to a 250% markup, so the markup on wine is larger than food, but not amazingly larger. Second, restaurants have been geared toward making a higher margin on all beverages, not just wine. Have you compared the cost of a Coke/Pepsi to the restaurant price lately?

On the other hand, it is irritating to find something on the wine list you know you could get much cheaper by yourself (one reason some wines are designated on-premises only), and sometimes markups are downright excessive.

Restaurants need to turn a profit and will opt for the strategies that work best for them. Thankfully, some restaurants find that liberal BYO policies or smaller markups can work, and I am happy to support their choices with my cash.

Andrew,
You are correct on 250% vs 400% but think of the overhead on the 250%, kitchen staff, spoilage, storage et al. The wine has storage, no spoilageand not much staff. I know we kick this to death but is just seems like restaurants are missing something. I also vote with my feet and if the policy is wine restrictive I just do not go there.
Walt

http://www.thecrossingatcaseyjones.com/files/file/TheCrossing_WineList.pdf

Just need to step in and defend that not all restaurants follow the same pricing policies. The link is to a local restaurant wine list that is quite diverse and very resonable. For the same $45 you can have a Pierre Peters or if you still want the Gruet it is only $16. If one looks closely there are even wines on the list below local retail.

http://www.thecrossingatcaseyjones.com/files/file/TheCrossing_WineList.pdf

Just need to step in and defend that not all restaurants follow the same pricing policies. The link is to a local restaurant wine list that is quite diverse and very resonable. For the same $45 you can have a Pierre Peters or if you still want the Gruet it is only $16. If one looks closely there are even wines on the list below local retail.

Brian,
That is impressive. Just don't get to MD often but if I ever do!!!!!
Walt

I agree, not all restaurants gouge the wine drinkers.

Local restuarant, steak house called Prime 15 in my hometown of Ringwood, NJ is this way. The food is decent [not spectacular], and the service is okay but getting better.

The wine list, though, is decent and very reasonably priced. Cheaper wines [your Smoking Loons et al] are no more than $12-16. I was surprised to see Poliziano Vino Nobile di Montepulciano "Asinone" 2001 on there for approx. $45... and then they had it on special for $31, better than any price on wine-searcher.

We always get a bottle, even if we don't plan on drinking the whole thing and just bring it home.

In other words, most restaurants are making roughly 60% on anything they serve.


That is terribly misleading. Many math challenged readers will not stop to consider Dale's excellent points; that out of the remaining revenue once food cost is handled, every other expense of the restaurant must be paid.

In my experience, labor cost usually equals or exceeds food cost, so right off the bat, they're not making 60%, they're making 30%. Now the fun starts......advertising, state and local compliance costs, equipment upkeep, utilities, rent, insurance.

So, now how much do you think is left?

[Robin Garr]

That is terribly misleading. Many math challenged readers will not stop to consider Dale's excellent points; that out of the remaining revenue once food cost is handled, every other expense of the restaurant must be paid.

I'm glad you guys posted that ... I was on my way in to do the same.

First, a margin of 60% is equal to a 250% markup, so the markup on wine is larger than food

Actually, by the generally accepted definition of "markup" would have that 150%, not 250%. But I know that's not your main point.

I agree with Dale as well that the mark up on food is not entirely the profit made by the resteranteur. But, never the less, there is a universal tendency to overcharge for wine. Also, I think in some places corkage fee is also prohibitively expensive (anything above $10 per bottle, I think is unreasonable). Of course, sometimes I fork up the corkage fee and have what I want to drink with the meal.

In other words, most restaurants are making roughly 60% on anything they serve.


That is terribly misleading. Many math challenged readers will not stop to consider Dale's excellent points; that out of the remaining revenue once food cost is handled, every other expense of the restaurant must be paid.

In my experience, labor cost usually equals or exceeds food cost, so right off the bat, they're not making 60%, they're making 30%. Now the fun starts......advertising, state and local compliance costs, equipment upkeep, utilities, rent, insurance.

So, now how much do you think is left?

John,
You are missing my point and believe me I do know how to do the math. I understand, and agree that 60% may not be enough but why 400% on wine. With that mark up I NEVER buy wine. 200% on a wine ordered would far exceed 400% of a wine never ordered. Could it be possible that with a more reasonable mark-up and treating wine more like food instead of a cocktail that the overall margin may improve, not to say anything about the more satisfying experience? Maybe I am the exception and so be it but wine, IMHO, if far overprices in the US at restaurants. I certainly didn't mean to suggest that restaurants make a lot of money and not quite sure how you and Robin read that from my post.
Walt

[David M. Bueker]

http://www.thecrossingatcaseyjones.com/files/file/TheCrossing_WineList.pdf

Just need to step in and defend that not all restaurants follow the same pricing policies. The link is to a local restaurant wine list that is quite diverse and very resonable. For the same $45 you can have a Pierre Peters or if you still want the Gruet it is only $16. If one looks closely there are even wines on the list below local retail.

Great list, but I did get a chuckle about Willi Schaefer Riesling being from "Eden Valley."

I think the Mosel Valley is beautiful, but I doubt Adam & Eve came from there.

I guess an Austrailian Riesling used to grace that spot on the list.

I know I try to bring my own wine. I cannot afford to drink a nice California Cabernet Sauvignon when it is $150 on the wine list and $50 in the retail store. Even with a $15 corkage-you do the math!

Sadly, my little suburb lost our great little temple of quality cooking. fantastic food, but a horrible location (a dying, ugly strip mall space where the air conditioner doesn't even work very well). They, for some arcane reason I never fully understood, had never obtained their ABC license, so it was free BYOB! RIP, Fuzed Cafe.

I know I try to bring my own wine. I cannot afford to drink a nice California Cabernet Sauvignon when it is $150 on the wine list and $50 in the retail store. Even with a $15 corkage-you do the math!

Sadly, my little suburb lost our great little temple of quality cooking. fantastic food, but a horrible location (a dying, ugly strip mall space where the air conditioner doesn't even work very well). They, for some arcane reason I never fully understood, had never obtained their ABC license, so it was free BYOB! RIP, Fuzed Cafe.

I feel your pain. I have no problem with $15 corkage. When you start to get over $20 I then put them on my list of "don't eat there"
Walt

With that mark up I NEVER buy wine. 200% on a wine ordered would far exceed 400% of a wine never ordered. Could it be possible that with a more reasonable mark-up and treating wine more like food instead of a cocktail that the overall margin may improve, not to say anything about the more satisfying experience?

Walt,
At the risk of flogging a dead horse: large restaurant markups are a result of several factors, such as the low profit margin that many restaurants have for their food service, the pervasive attitude among many that wine is a luxury and hence can be inflated and the related attitude that wine is not an intrinsic part of the meal. Friends of mine in Europe relate stories of wine-friendly restaurants (not common there either) that charge a set markup on wines rather than a proportional one. So, maybe they charge a set $15 over the retail price of the wine. The result is that there is an incentive to order a more costly wine off the list, knowing that you're getting it closer to retail.

Mark Lipton

John,
You are missing my point

Actually, I was only objecting to that particular line in the article, that I quoted.
Not only do I get your point, but I agree with it.
I always counsel my customers that they will sell more bottles, and bank more dollars, with lower prices than they will with higher ones.
They usually do with that advice the same thing they do with all the rest that I offer - they ignore it.

I buy wine in restaurants, and overpay, all the time, but I don't like it. And I don't often buy the more expensive wines that I otherwise might, but rather stick to the lower end of the wine list, where prices are more in my comfort zone. That's too bad for me, but I guess I will continue to drink my finer bottles at home.

I love the model where restaurants charge $10 or $15 over retail - those are the kinds of places where I am more likely to order multiple bottles with my meal, or look to the higher end of the list.

With that mark up I NEVER buy wine. 200% on a wine ordered would far exceed 400% of a wine never ordered. Could it be possible that with a more reasonable mark-up and treating wine more like food instead of a cocktail that the overall margin may improve, not to say anything about the more satisfying experience?

Walt,
At the risk of flogging a dead horse: large restaurant markups are a result of several factors, such as the low profit margin that many restaurants have for their food service, the pervasive attitude among many that wine is a luxury and hence can be inflated and the related attitude that wine is not an intrinsic part of the meal. Friends of mine in Europe relate stories of wine-friendly restaurants (not common there either) that charge a set markup on wines rather than a proportional one. So, maybe they charge a set $15 over the retail price of the wine. The result is that there is an incentive to order a more costly wine off the list, knowing that you're getting it closer to retail.

Mark Lipton

Mark,
I was going to mention wine prices in Europe but figured that would generate another dead horse. I have found Europe very reasonable, a few $ over retail but this is in Tuscany and smaller European towns not Paris or other larg areas. Their attitude on wine is, and I agree, wine is a food that compliments. Oddly enough I never had a dinner in Tuscany without wine and I also never had a glass of wine unless it was with dinner. I would gladly pay $15 over retail. In the US, if we do not BYOB, I seldom buy wine at a 3-4 times multiple to retail.
Walt

Some restaurateur somewhere must have done a comparison, first by marking wine up the usual two or three times, and later selling it nearer retail prices to see if volume would increase to where profits were higher. I bet it would not, because the typical person I see ordering wine in a restaurant is not wine knowledgeable, and is just doing what he thinks he should do regarding having wine with dinner; i.e., drinking something costing $40, whether he could buy it in a retail store for $15 or not. He probably wouldn't go to a restaurant any more often if the wine prices were cheaper; when he did go back, he would just order better wine for $40 without even realizing he was getting a bargain (and probably not like the wine as well - but that is another subject).

Others, who order the expensive wines, are often on expense accounts and trying to impress someone by big spending. They also don't know much about what they are drinking and just look for anything costing around $200. Wine knowledgeable folks often bring their own bottle and pay a corkage fee, which would be roughly equal to a retail-sized markup.

If my observations are close to being accurate, wine pricing as it normally exists probably makes the most economic sense.

Some restaurateur somewhere must have done a comparison, first by marking wine up the usual two or three times, and later selling it nearer retail prices to see if volume would increase to where profits were higher. I bet it would not, because the typical person I see ordering wine in a restaurant is not wine knowledgeable, and is just doing what he thinks he should do regarding having wine with dinner; i.e., drinking something costing $40, whether he could buy it in a retail store for $15 or not. He probably wouldn't go to a restaurant any more often if the wine prices were cheaper; when he did go back, he would just order better wine for $40 without even realizing he was getting a bargain (and probably not like the wine as well - but that is another subject).

Others, who order the expensive wines, are often on expense accounts and trying to impress someone by big spending. They also don't know much about what they are drinking and just look for anything costing around $200. Wine knowledgeable folks often bring their own bottle and pay a corkage fee, which would be roughly equal to a retail-sized markup.

If my observations are close to being accurate, wine pricing as it normally exists probably makes the most economic sense.

Covert,
I don't want to admit it but I think you are correct. It is not correct for the wine geek like those of us on this forum but probably for the population as a whole. The real problem is the culture of wine. Restaurants think of it as booze because the general public thinks of it as booze. Please feel my pain. If you are ever in St. Louis we will go to a great restaurant with a BYOB corkage of $15 or less and drink some really good juice.
Walt

Add labor to food cost and you have costs of between 60-70%. Then add rent, CAM, insurance, licenses, advertising and other expenses and you will find that the profit margin is very slim. Beverages help take up the slack. Some operations do mark up wines to an extreme and or have a lousy wine selection. I choose to avoid these operations myself.

I am surprised at the high food cost though. It used to be lower.

WARNING: LONG

I have declined to post on this topic in the past primarily because I don't see this as simple an issue as many make it out to be. And its taken me a while to figure out how to make my point.

First, restaurants are not making beaucoup bucks. Most restaurants fail within 3 years of opening regardless of their wine pricing methodology.

I am with everyone that hates seeing wine list prices at 3 times retail, particularly in Ohio where retail is high already. Meshing with the initial point, I am willing to pay a similar markup for the food part of my meal as are most of the posters here. And the reason is very simple. On the one hand, we perceive there is value in what the chef has done in designing the menu and preparing the food. OTOH, we perceive little or no value added by the efforts of the sommelier or whomever in putting together the wine list. Unfortunately, in many restaurants, our perception is accurate. After all, we can walk in to the local wine store and buy most of the bottlings on most wine lists for a lot less money. So where does the restaurant add value? An awful lot don't make any attempt to match the wine list with the menu; even more don't have a fulltime sommelier. So the answer, in many cases, is that the restaurant is not adding much value and a $10 markup is adequate compensation for the value returned.

The opposing point though is economics and it isn't really basic economics. The restaurant's main objective should be to maximize the gross profit on the wine sales. Variable storage costs and spoilage should be minimal so the only variable cost is the wine itself; all other items are fairly fixed. Basic economics tells us that if the price of an item drops, demand increases. So as the restaurateur decreases his markup by decreasing his price, theory tells us unit volume sales will increase. The first key question is what volume increase will make up for the margin decrease. For simplicity's sake an example.....if the restaurateur was selling 100 bottles with a $30 markup, decreasing the markup to $20 will require selling 150 bottles to make the same gross profit. Doable? That is the second key question and probably the most telling.

When the wife and I go to dinner, our normal consumption is 1 bottle. When we go with 2 other couples, 3 bottles. It seems one half bottle per person is our number. If the restaurant dropped its prices significantly, would we drink more with dinner? I think the probability of increased consumption is very low, particularly in any state that does not permit "merlot-to-go." The "lumpiness" of wine sales and the behavioral side (read: negative legal and social consequences from drunkenness) of economics says to me that lower wine prices will not cause existing patrons to consume significantly more at any given dinner seating.

I can think of two other ways for a restaurateur to increase unit volume sales with lower prices. One is to get non-wine-drinking customers to buy. That may work but it also may cannibalize sales of other profitable drinks so that the entire gross profit on the wine sale does not make it to the bottom line which in turns means the needed volume increase is even higher. The second way is to use lower wine prices to increase the number of covers done, dinners served, load factor, whatever you want to call putting more fannies in the seats. At some places this is actually their strategy and we love them for it. But for a big name, popular restaurant, how many empty tables are there? Enough to jump unit wine sales by 50%? I doubt it.

The basic laws of supply and demand come with normally unspoken assumptions. Big ones are that supply and demand are continuous variables, can be tiny or enormous, and are not subject to external influences or constraints. Reality in the restaurant world is that wine contains alcohol and consequently demand is somewhat constrained. Wine is sold not by the ounce (usually) but by the bottle. Reality is that an individual restaurant's ability to supply is limited by the number of tables in the venue and the hours of operation.

I realize the foregoing was rather pedantic. But I'm willing to bet it is a pretty accurate analysis of the situation. Further, I bet most restaurateurs could not explain their pricing decisions in this manner BUT I also bet most successful restaurateurs intuitively know what I laid about above. As a person who has spent most of his work career in the financial side of operating businesses, I learned a while back that operating managers' intuition is often correct while many, many times simplistic number crunching has failed to identify that very basic assumptions do not apply to the situation under analysis. Let's face it...if cutting wine prices led to higher profits for the majority of restaurants, it would have been done by everyone already.

In summary, we drink wine so we want lower prices. We all hate paying high markups on wine because we do not perceive the restaurateur has added value to the product justifying the high price. But the restaurateur is probably doing a good job of getting the highest possible profit out of his wine sales. I'd really like to have someone demonstrate that I am missing the boat on how much volume increase might be possible but I suspect that won't happen. Remember, it would take a large volume increase just to break even.....the restaurateur does not come out ahead unless the volume increase is even greater.

[David M. Bueker]

By the way, the simple solution to all of this was that for the price on one good restaurant bottle I went and took some cooking classes. Now unless I just don't want to cook (happens less frequently than you might think), or I can't make what I'm in the mood for I just cook at home and open great wine.