Restaurant Wine Prices: They’re Either Too High or Too Low

homskrimThe final panel discussion at this year’s  Professional Wine Writers’ Symposium in the Napa Valley was devoted to restaurant wine lists (students from the Culinary Institute of America’s wine program attended along with the wine writers). “Wine List: Friend or Foe?” was the topic and New York Times critic Eric Asimov was the moderator.

Bottle Shock

There was a lot to talk about because everyone seems to have an opinion or a pet peeve about restaurant wine, but time was limited and when I saw one of the panelists, Andrea Robinson, shortly after she smiled and struck a “wine economist” chord: “I wish we could have talked about price elasticity of demand,” she said.

Price elasticity of demand? Yes! That is how we economists talk about how consumers respond to the prices of different products and it is a fascinating question when it comes to restaurant wine.

The wine world knows Andrea Robinson as a Master Sommelier, wine book author, television presenter and former dean of the French Culinary Institute, but I know her as a keen student of economics and she and I are conspiring to organize an occasional series of Wine Economist columns that explore the fascinating issue of restaurant wines and their prices, which actually began a couple of weeks ago with my piece on “Restaurant Wine Wars and the Curse of the Second Cheapest Wine.”

Warning: Economics Content

You probably studied price elasticity of demand in your Econ 101 class, but in case you are a little rusty about the concept, here is a quick review. Price elasticity of demand is a measure of how responsive a product’s buyers are to changes in price. If the demand is elastic, then a relatively small change in price results in a proportionately greater change in quantity purchased. If the demand is inelastic, on the other hand, that same change in price produces a proportionately smaller change in quantity purchased.

The difference between elastic and inelastic demand is very important, especially when it comes to something like wine in restaurants. If the demand for wine-by-the-glass in  your bistro is elastic,for example,  then lowering the price results in a big enough boost in sales to increase wine revenues. Money from new purchases more than offsets the revenue lost from lower price on the wine you would have sold at the old price. Does that make sense? So lowering price increases wine revenue if the demand is elastic.

If the demand is inelastic, however, then cutting price is a revenue-losing proposition. The small increase in additional sales is more than offset by the money you lose due to lower per unit revenue on existing sales. You would need to raise price (if the competitive environment allows) to increase total revenue.

Oversimplified bottom line: all else being equal lower prices are worth exploring if the demand is elastic, but higher prices may be a better choice if there is an inelastic demand.

They’re Either Too High …

What is the right strategy for restaurant wine? Are wine prices too high as many consumers complain? Or are they too low? This is a surprisingly complicated question if only because there are so many different types of restaurants in different market environments and competitive situations and of course so many wines to choose from, too.

The case is very far from the economist’s ideal of perfect competition. Finding the sweet spot where both diner and restaurant benefit is necessarily pretty difficult and with alcohol revenues so important to restaurant bottom lines, making a strategic error could be costly.

Restaurants are right to worry that they leave money on the table if they price too low, but they should also be concerned about lost customers and sales if prices are too high. If I go to a restaurant and there are bottles of wine on just about every table, I have to think that the wine program is doing something right.

If you ask consumers about restaurant wine prices, most complain about high mark ups. The rule of thumb, for example, is that a glass of wine in a restaurant is priced at the wholesale price of the entire bottle — this strikes many diners as excessive. And the mark-up on bottle wine can be very high, indeed, compared with retail prices.

Or Not High Enough?

But sometimes the problem is that the price isn’t high enough. I visited a local brewpub a few weeks ago where a well-known local chef was making his famous spaghetti sauce for a limited time. The deep red sauce called out for a red wine, so that’s what I asked for even thought my only choice was the seldom-ordered house wine.

It wasn’t an exceptional wine, but it was better than my other choices for that particular meal and when I got the bill I discovered the wine’s cost: $4.75. Gosh, I haven’t paid that little for a glass of wine in years!

At that price there was no way I was going to get the pairing the pasta called out for. If only they’d brought in some better wines and raised the price!  I would buy more wine at the higher price (assuming the higher quality, of course) and dine there more often, too.

The Bargain Wine Curse

This isn’t the only situation I’ve encountered where the wine price isn’t high enough. I spoke at a symposium about Italian wine last year and one session featured a group of sommeliers from high end New York restaurants talking about their trade. One of the panelists explained his job as follows.

The people who come to my famous restaurant, he said, want to have a good time and they want to spend a lot of money on wine. Spending a lot of money on a bottle of wine is part of the luxury dining experience they come for. My role is to make sure that we have a lot of very expensive wines for them to buy. No kidding. That’s what he said and when I thought about it, I decided he might be right for his specific restaurant and its high-roller customers.

The particular focus of the symposium was on wines from the South of Italy and at one point I asked the sommeliers how these wineries could be more successful in the restaurant space? If I was at a winemaking conference I think I would have got an answer about viticulture and winemaking practices and if it was a wine marketing meeting the answer would have looked at branding and positioning.

But instead the answer from one of the somm’s was quite different. If they want to get wine in my restaurant, they have to do something to make it more expensive. Most of the wines are inexpensive and my customers want to spend more than that on wine.

Wow. I guess this explains why the restaurant reviews in the Times sometimes make a note when a wine list features a number of affordable wines, where affordable sometimes means $100 or less depending upon the type of restaurant! Do you suppose there are some diners who avoid restaurants with relatively affordable wines?

It’s Complicated

And so, as the subtitle of my last book suggested, it’s complicated and this is the first in an irregular series of columns that will explore different sides of the wine price question. As you can see, it is not just a question of wine mark-ups but also an issue of which wines are on the menu, since some choices are by their nature cheaper or more expensive.

With Andrea’s encouragement, I am going to put together a couple of columns that look at restaurant wine prices in theory and in practice and report on interesting research done by a Master of Wine.

I would like to test the hypothesis that under certain circumstances a restaurant will benefit from lowering its wine prices either by reducing the mark-up or by intentionally including types of wines that are less expensive (from less famous regions, for example — see Jancis Robinson’s FT column on under-rated wine regions).

I am reaching out to Wine Economist readers for help. I am looking for real world evidence about the impact of different wine price strategies. Can you suggest “natural experiments” that can shed light on this question? Or do you have relevant personal experience as a sommelier, restaurant owner or wine consumer that you’d be willing to share? If so, then please use the comments section below.

 

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Too high or too low? That reminds me of a tune from the 1940s. Enjoy!

20 responses

  1. I love good wine and I feel when I’m paying 2 1/2 to 4 times retail than I just don’t buy it. If I want wine out I also frequent BYOBs. I have 2 wine apps on my IPhone. If I feel a price is fair I buy it if not I buy something less expensive or switch to beer. I’ve never heard of anyone wanting to over pay for expensive wine unless they were rich, uniformed , egotistical or all of the above.

  2. You make me start to think about the sweet spot in terms of diners drinking habits at the particular restaurant (e.g. people only drink 1 glass at lunch vs. 2–3 at dinner). Ideally, the pain of cost is low enough to encourage repeat orders.

  3. One of my jobs as a Sommelier is to find out exactly how much money people are looking to spend on a bottle of wine. From a purely short term sales perspective, I don’t want them to buy the most expensive bottle of wine on the list, I want them to buy the most expensive bottle of wine in the price range they are comfortable with that night. Sometimes people make it easy for you and tell you their price range. Last night I had two separate tables profess to not want to spend a lot of money on wine. For one table that meant $130 or less. For another table that meant $50. At other times, it is less clear, and I have to take my cues from the type of dining situation (business, family, large or small group, ex-college buddy flying in from the East Coast, date night without the kids, etc.) or my knowledge of previous spending habits.

    If you take more of a long term view and you have an ongoing relationship with your guest, I would say it’s important not to always sell wine at the top of their price range. There have to be some good bargains and overlooked gems from time to time as this engenders trust, more frequent visits, and even splurge purchases in the future (if they are willing to spend outside of their price range on the bottom end, then they are willing to spend outside of their price range at the top, too). I think that some research on the dynamics of pricing and purchase history over a sequence of visits would be eye opening for a lot of people.

      • It comes down to experiential selling. Are the customers looking for a special feeling on a special occasion or are they regulars that visit your business on a weekly / monthly basis? The “feeling” the clients want is the same but the approach is different. With the latter group you build trust over time and get them to the “Cheers” attitude where everyone knows their name. The former group has slightly different expectations and may well stretch to a higher price point on the special occasion.

        The joy of dealing with wine is the very real differences in the product being delivered. I sell money as a day job, the value is fixed, and the product is indiscriminate between purveyors. In both cases it’s all about how the client feels on the way home (Or after the 3 day rescission period).

        You can sell the experience at the tasting room or at the restaurant. If the Somm recognizes the value of the experience and asks for input…enjoy the ride and see where they take you. This is where the relationship starts – in the vineyard or at the table…both take effort and some time to maintain.

  4. I think good natural experiments are restaurants that discount their whole wine list on specific days of the week and restaurants that price their wines at a single price of within two or three price brackets.

  5. You’ve opened a real can of worms here Mike!

    First off, here in the UK, somms are only present in a very small percentage of places where people eat and drink. In the area I work in for instance, I can think of 3; and that covers 2 counties.

    Secondly, the industry norm for all types of establishments is a 70% GP. That conveniently works out at 4 x the ex-VAT price (to include 20% VAT selling price).

    Accountants don’t like to see that figure drop, so the few places I’ve encountered (13 years selling wine to the on-trade) who are prepared to try a different track have backtracked when that percentage drops.

    Cash margins, better-quality wines; all the things we try and tell them, just don’t wash.

    Interestingly, as one somm told me, that’s the same margins as the food, but people just don’t mind paying £10 for a burger, £20 for a steak, but baulk at paying more than £20-25 for a bottle of wine.

    These means anything over than an (ex-VAT) cost of £7.50 is top-dollar for most.

    Then consider the number of pubs we have, where alternatives like pints of beer are easily defaulted too, and you have a real problem trying to shift decent wine. In restaurants and hotels, it’s more usual to be drinking wine (and a lack of draught beers adds to this).

    My other half came back from work at a local “gastro-pub” (aka restaurant quality food in a pub environment) tonight. There were 27 covers served; just 3 bottles of wine.

    Says it all; people in the UK do perceive wine as too expensive and aren’t willing to pay for it. And that said, the vast majority are looking for a generic ‘Shiraz/Chardonnay/Sauvignon’ an aren’t remotely interested in anything more.

    Sad but true, and so that 70% GP formula will continue ad nauseam.

    • Thanks, Damien, for an extremely useful and informative comment. Really captures the essence of the situation. Your comment about the food margin is especially interesting! Thanks again.

  6. Mike:
    Great idea for a column and an extended series of columns! Although I can’t think of many right off hand, I know that some restaurants offer discounts on their wine lists periodically either a few times a month or perhaps on Monday or Tuesday nights. Those would be natural hunting grounds for research, but then of course you’ve got to factor in a slow night versus a busier night on a weekend…

    Being in the trade, I know that when I encounter a wine list with reasonable markups, I tend to order better wines. Conversely, when I see high markups, I’ll trade down. Classic elasticity of demand, I suppose!!

    Have fun!
    George

  7. This is a little bit of a weird example, but I’ve always found it very interesting. I’ve interviewed Paul Grieco, who runs the Terroir wine bars (now just one) in New York, a few times. For years, he had a happy hour special on glasses of Sherry: It was free. He just wanted to promote the category.

    He told me that he read something about how Americans don’t actually like or trust free things, so he started charging around $2.50 or $3 for a glass of Sherry. He saw essentially no difference in volume compared to when he was literally giving it away.

    Price inelasticity of demand indeed.

  8. Mike first of all love your work as it really provokes me and my thinking so thank you for that. Being an economist of sorts an agricultural one at least and now a wine importer and wholesaler the debate on pricing is a regular topic of conversation and so is the issue of price elasticity and non elasticity. Many of my listed wines despite their quality and pedigree are slow burn sellers. Why? Well it has nothing to do with the wine but its price, for example I see a well know Baden wine makers Pinot Blanc ( Weissburgunder) into one of Sydney’s leading Asian infused restaurants. They but this as $21.00 wholesale and list for $88.00, ouch a 400% mark up is a killer for a whole range of reasons and given the low level of understanding of German wines in Australia the price really does scare people off especially when they can buy a Village Chablis for around $60.00 am such safer bet. I was speaking with the Som team and they said how slow its sale washy response was the price for this wine was way to high and when listed in the US or Europe in similar styled locations we are looking at about $50-$60.00 which is what I would pay for something of this quality. The price is killing this wine so demand will remain rather inelastic me thinks. I have loads of other examples but just wanted to share this one for now to see if hit the mark. Cheers Leigh

  9. Hi, and thank you for writing about two of my favourite topics – wine and economy!

    I’d love to participate in project of looking into wine list prices as it’s a topic I’ve put, and continue to put, a lot of thought into.

    I run a restaurant in Bergen, Norway called Boha. We have for some time had one of the cheaper restaurant wine lists in Bergen as well as the rest of Norway. However, this hasn’t really resulted in the intended result: that guests buy better wine for the same cost that they’d spend elsewhere. The matter is complex and it’s hard to get to any form of hard facts. Most of the things I’ve learned while managing the wine list (since 2007) and managing the restaurant and bar in it’s entirety (since 2014) are what I’d call uncertain knowledge. I can see some trends, and I can read sales results, but I cannot neccessarily be certain of the causes.

    Here are some of the things I have learned, or think I’ve learned:

    – If your entire wine list is priced lower than most competitors in the same restaurant segment your guests will spend less on wine (even though the cost of the food is more or less the same) unless you provide them with reasons not to do so.

    – Some categories can have higher margins than others. Cheaper wines will generally have a percentage margin that is higher than more expencive wines. In our restaurant this is very true as we have a fixed margin once the cost of the wine (for us) reaches a certain point, while we multiply the cheapest 3-4 wines’ prices by 3,4 (and then add taxes, but when you multiplay that doesn’t matter, but the order matter when we add fixed fees).

    – People are willing to pay a bit more for a category they recognize, in Norway these can vary somewhat, but in our restaurant these are the wines that people will buy based on the name recognition alone, no matter who the producer is or the fact that the markup is higher on these wines (in order of popularity): Chablis (most will be fine with a cheaper Petit Chablis), Barbera (which means from Piedmont here), Valpolicella (we only have a Classico, but that’s not part of the name they recognize), Ripasso (the other Valpolicella), Amarone. After those there’s a large group of names they recognize, but their individual popularity doesn’t stand out as much. As a result we have a somewhat higher margin on those categories than others – they subsidise our inventory.

    – The larger the wine list the more expencive wines people will buy – it seems. I have increased the margins in order to pay for the added cost of having a larger inventory.

    – At a certain price point only a select few categories of wine will sell. Burgundy sells at higher prices than anything else (I understand, I pay more for Burgundy than anything else myself and I can’t really afford it. Also – me being a Burgundy nerd makes selling Burgundy easier). After that top level riesling is probably the most popular followed by Rioja, Barolo and then northern Rhône. Other premieum categories are pretty evenly spread and seem to move in fits and starts (them being Chateuneuf-du-Pape, Bordeaux, American Pinot Noir and Brunello).

    – Wines by the glass will give you better profit margins. We divide the cost of a bottle by 5 to get the cost of a glass – thus assuming we could have as much as 1 glass in waste per bottle opened. We do give a bit of wine to the kitchen, but on average we’re probably able to keep the was as low as 1 glass out of 4 bottles with the exception of Christmas and Easter – when we close for several days and thus give whatever’s open to the kitchen.

    – The “larger list equals sales of higher priced wines” seems to come into play on the by the glass list as well. There’s a wine bar in Oslo (Territoriet) that sells everything by the glass by using Coravin. They divide their bottles in 4 to account for higher losses and add the cost of the gass to each glass they sell using Coravin and they say they sell higher priced glasses this way, and more of them. People love drinking different wines and when they sold DRC by the glass people were not afraid to pay the price for a glass even though it was quite expencive (but DRC is not as expencive here as in the US, but it’s rarer as a result).

    – Having wines that are cheap, but have high QPR does not mean they will sell if their names are unfamiliar. You can keep a few bottles in stock for those that recognize them (I’ve had superb QPR Muscadets, Chinons, Ciros, Douro reds, Entre-deux-Mers and Vinho Verdes on the list – and still do in some cases), but they will sell very slowly even when they are the cheapest or second cheapest wines on the list. What they do, however, is keep people from labeling your wine list as “expencive”. Even though they might actually buy much more expencive wines from the list the inclusion of hard-to-sell cheap wines will mean that people label your wine list as “nicely priced”.

    For reference:
    Boha.no/menyer
    (the wine list isn’t translated, but I’m sure your can figure it out quite easily)

    I see no reason to have a secret markup so here it is:
    Buy-in-price in NOK:
    0 – 110 (*3,4)
    111 – 150 (*3,1)
    151 – 200 (*2,5)
    201 – 299 (+270)
    300 -> (+310)

    Exceptions: Wines that are bought at auction or wines that are allocated (like Fourrier, Roulot, Roumier, Liger-Belair etc.): +400.

    Those are prices without sales tax, but with alcohol tax, which is high; a wine with 12,5% alcohol will have about 44NOK in alcohol taxes added to it. We also have a state monopoly for the off-premise sale of wine who have very reasonable profit margins. This generally means that cheap wine is very expencive in Norway (for most foreigners the cheapest wine is nowhere near being cheap), but that high end wine is not – they cost mostly more or less the same as in other countries and quite often less as the state run monopoly will not add higher profits to a wine just because it’s more sought after. Roulot Bourgogne Blanc is about 20% cheaper here than in the US – as an example. The cases where wine is comparatively the cheapest in Norway will be Burgundy wine.

    • Dear Morten
      Thank you for sharing so much information with us. It is clear that you are very thoughtful and analytical and I appreciate the detailed analysis. Perhaps restaurant managers in other countries will provide equally detailed information.
      I hope to visit Bergen one day (my father’s family had a farm near Haus, which I think it not too far from Bergen). If I do I will be sure to find your restaurant. Thanks again!

  10. Mike, I commented on your article on wine lists also. The reason this is so late is that I was travelling in Portugal and Spain, and the widgits at the right of your latest post attracted me to these two articles. I agree it is is complex…just like whether the tip should be included in the price.
    I like to bring ONE bottle of a wine from my cellar and buy additional from the restaurant list. Use your head though…don’t run down to the store and buy one. Also, it is a good idea to ask if the wine is on the list which is only fair. One night we were in a restaurant and I brought a bottle of 1998 (?) Duckhorn Three Palms Merlot. The server pointed out that it was on the menu…I pointed out that it was the 2004, let him try the wine and we were fine. Coincidentally, Dan Duckhorn was dining in the restaurant that night.
    You are so right, it’s complicated and the important thing is for you to be reasonable and understanding.

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