At a time when consumers are cutting back on unnecessary costs, one obvious victim stands out: wine heavily marked up by restaurants. Reuters has a sort of rambling article today about how two major restaurant chains, Morton's Steakhouse and California Pizza Kitchen, are bucking the trend of purchasing less wine and increasing their inventories. As someone who enjoys wine more than he should, I find this strategy interesting from a longer-term perspective, but wonder if restaurants have the right approach to capitalize on its wine-loving customers under current economic conditions.
Buy Now, Profit Later
First, let's consider the Reuters article's focus. It uses two anecdotal examples to support its headline, "U.S. restaurants turn to wine for sustenance." I guess that's technically right, since they found more than one restaurant doing this, but I found the general claim to be a tad misleading. In reality, most restaurants are scaling back their purchases of wine, because their customers are overwhelmingly choosing not to splurge on it.
Yet, the two restaurants it mentions are stocking up on wine. Presumably, they believe they'll be able to sell it, but I wonder if this is also a broader economic play. Currently, vineyards have excess inventory, since sales are down. As a result, prices should be unusually low. That could lead to some very good wine bargains, especially for bulk buyers.
And along with those deals, keep in mind that many economists expect moderate inflation over the next several years. Increasing your wine inventory is kind of like a commodity investment, a common hedge for inflation. For this reason, stocking up on wine in the near-term could be a smart strategy for restaurants, whether they sell it immediately or not. Wine as a sort of investment seems even more sensible since it often appreciates with age.
Profiting Now
Of course, it would be nice if there were a way to have wine sales help to pad poor revenue during this difficult economic time in the restaurant business. So how are their customers currently behaving? Reuters says:
A Morton's diner, who once looked for wines well above the $100 mark, such as Screaming Eagle, Colgin Cellars or Harlan, is now more likely to seek $70 to $80 wines, said Tylor Field, Morton's vice president of wine and spirits. And more customers are ordering wine by the glass rather than the bottle.
And that's what you would expect. True wine lovers aren't going to stop drinking entirely, but if cutting expenses, they're going to care a lot more about price when purchasing bottles. As for those who like wine but can live without a whole bottle -- which is a much greater portion of people -- a glass or two will do. Even though wine-by-the-glass is a worse value, the aggregate expense can be less if only consuming a few glasses.
So what's the right strategy -- should restaurants focus on glass or bottle sales? I think there are ways to profit more from both.
First, for anyone unfamiliar with the restaurant wine game, let me provide an example of how the markups work:
I found the menu of one of my favorite reasonably-priced, but good, local restaurants online, Harry's Tap Room. One wine they offer by the glass and bottle is Cline, "Ancient Vine" Zinfandel, 2007. According to the vineyard's website, it sells the 2008 vintage for $18/bottle. Harry's resells it for $9/glass or $33/bottle. Assuming that the 2007 vintage was the same price as the 2008 (which is likely approximately true), then that's an 83% mark-up if you're buying a bottle or a 125% markup if you're buying a glass (assuming 4.5 glasses per bottle). Of course, the markups are likely even higher than that, since restaurants have distributors that get the wine for even cheaper. And more expensive restaurants often mark up their wines even more.
So here's what I'd do: First, offer fewer wines by the glass, but for a larger distribution of prices. That way, you can appeal to all types of wine drinkers who don't want a whole bottle. Have a $7 glass, a $12 glass and an $18 glass for red and white, for example. Fewer options means you probably won't have as many half-drunk bottles, but a broader spectrum means more consumers will bite. Keep the markup just as high, or even raise it a little. Even if I'm paying 150%, I'll still prefer a glass or two if my table doesn't want a whole bottle.
From the bottle perspective, buy fewer expensive bottles and more low-to-mid-range bottles. And here's the key part: lower the markup for all bottles, but lower it even more for the more expensive bottles. Would you rather sell a $13 bottle marked up to $26 (100%) or a $30 bottle marked up to $50 (66%)? The latter provides more profit, despite the lower markup. Moreover, savvy wine drinkers who used to purchase more expensive bottles would notice this improved value and splurge on the better bottle.
I've been pretty surprised how rarely I've noticed wine lists and prices changing at restaurants as a response to the recession. When consumer's spending habits change, business should respond. I guess the restaurant business might just be more set in its ways than other industries, but it could benefit from thinking outside the box at a time like this.
Naa, I don't see that as the way to a better balance sheet, or, a better income statement down the road.
First, you have to buy the stuff, so that either ties up credit or eats up cash. With the economy the way it is, depleting cash, or, increasing your payables isn't the smartest thing to do right now.
Second, you have to have the floor space to store the stuff. So while you might be stocking up to replenish your shelves, I doubt you'll go rent a warehouse to store palets of it. That's more money out the door, and floor space taking up inventory isn't generating current sales revenues.
Third, year-end is fast approaching, and in most local jurisdictions there is a property tax on inventory. More cash to pay out.
Lastly, it could turn in the bottle. Yeah, I know, the food dude will tell you that a good bottle will last forever under proper storage conditions. Have you been in the storage room of your local resturant?
All this leads up to cash out the door for an item of inventory that'll cost you to get, deprive you of the opportunity cost of that purchase money, cost you to store, be taxed as of January 1st, and may spoil before it gets sold. There has to be some mighty big expected profit margins to be had to recoup the expense of buying early.
Most restaurants (I bet is ~ 95% or more) do not store wine in temperature controlled rooms, they stash it in a back room next to the water heater, along with the liquor and toilet paper.
CPK and Morton's should never buy wine ahead, mostly because most of the wines that they sell (similar to most restaurants) are not age worthy. A bottle of Chianti or Cabernet that they sell for $60 might have cost them $15 or $18, and it's meant to be consumed within the year, not in five years.
Buying wine for ageing makes sense only for costly wines that age well - think wines that retail for over $50 and are probably over $150 on most wine lists. Even this is highly risky for the non -expert, that bottle of $100 Barolo may or may not be worth more in 5 years than it is today. A recent Wine Spectator article discussed expensive California Syrah that has lost something like 2/3 of it's value in the collector market over time.
Restaurant wine markups are another story. Check the website or call before you go in and ask for prices on some popular wines. One of my favorite indicator wines is Veuve Cliquot non vintage Brut, which has a wholesale cost of around $35- $40. See how much that is sold for and that will give you and idea of what the other markups are. Most wines sold in restaurants need no special glassware, no wine steward, no special handling or decanting, it's questionable what justifies tripling the cost and selling a $12 wine for $40 or more.
A few quick comments in response. First, I assumed that restaurants this would apply to had the cash to spend. Clearly, it makes no sense to stock up on wine by using credit.
Second, yes -- if you don't have room and the proper conditions to store the wine, then yes, stocking up on wine is probably a bad idea. Additional storage costs could outweigh any potential gain.
I think that the kinds of restaurants I was picturing possibly gaining from this strategy would mostly be the higher-end chains, like Morton's, who may have been accumulating a cushion of cash and have pretty good storage facilities. The struggling NYC hole-in-the wall certainly shouldn’t be stocking up on wine.
Lastly, I agree that not all wines are supposed to age. But I wasn't really talking about holding these wines for 10 years, more like 3-5. That way you can deplete the inventory you had gathered up once the economy begins growing again. At that time wine prices will have recovered, and we'll probably have had some inflation. I have come across very few wines that retail above $17/bottle that aren't still good or better after holding for that period of time, particularly reds. And the strategy would definitely work best with the pricier wines, which would more likely benefit from aging.