Will the recession force restaurants to slash wine prices?

Wine, beer, and other potent potables.
Oct. 31 2008 11:59 AM

Good News About the Recession!

Maybe restaurants will finally slash their exorbitant, ridiculous wine prices.

Oenophiles are divided over lots of issues—the merits of red Burgundies, the virtues of new oak, the utility of Riedel glasses—but they all seem to agree that restaurant wine prices are, on the whole, abusively high. In the just-released seventh edition of Parker'sWine Buyer's Guide, critic Robert Parker blasts restaurants that charge exorbitant markups; he says this practice reinforces "the mistaken notion that wine is only for the elite and superrich" and urges consumers to shun establishments that engage in it. (Bizarrely, Page Six ran an item last month about Parker's broadside; evidently, it was a very slow gossip day.) Extortionate markups do send a regrettable message, but it is nothing that a deep recession can't cure. In the current economic climate, gouging on wine is not just unsporting but suicidal. Restaurants looking for strategies to survive the downturn ought to begin by cutting the prices on their wines.

Restaurant wine service is an eternally fraught subject. Conflicting opinions have even been slipped into the pages of Slate. Last January, I wrote an article praising American sommeliers; five months later, an indignant Christopher Hitchens demanded to know why such creatures even exist. In denouncing sommeliers, Hitchens hit on an essential point: Restaurants want you to drink as much wine as possible. Not only that: The more you spend on a bottle, the happier they are. They will sometimes even sacrifice a bit of the profit they might earn from solids in order to get clients to pony up for liquids. In a profile last year in The New Yorker, British chef Gordon Ramsay admitted that he kept food prices at his newly opened Manhattan restaurant lower than they needed to be as a way of enticing customers to go crazy on wine.

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The emphasis on wine has a simple explanation: Wine sales are the lifeblood of many restaurants. Ronn Wiegand, a Napa, Calif.-based restaurant consultant who holds the rare Master of Wine degree, says that wine accounts for 10 percent to 15 percent of total sales for casual restaurants and as much as 60 percent at fancier establishments. Restaurants generally have low profit margins and thus need to slap markups on pretty much everything they put on the table. But a $250 Bordeaux is obviously going to make a far greater contribution to the bottom line than a turnip, which is why restaurants invest so heavily in their wine programs—not just filling their cellars with excellent rieslings and syrahs but also providing competent sommeliers, good stemware, excellent storage, and other amenities. For decades now, markups of 2.5 to three times the wholesale price have been the industry norm. According to Wiegand, such multiples are an economic necessity for most restaurants; anything less and they may have trouble sustaining themselves. But not every wine on the list has to be marked up at the same rate. So long as the average cost per bottle is in the 2.5-to-three-times-wholesale range, list prices for individual wines need not follow any formula. And, in fact, most restaurants that take wine seriously use a system of progressive markups: They generally slap the biggest markups on inexpensive wines and the lowest ones on pricy bottles (the idea being that the closer an expensive wine is to its retail price, the more apt the customer will be to bite).

Indeed, as individual bottlings go, it is a pricing free-for-all, something the Wall Street Journal discovered when it set out to make sense of wine list economics. The Journal recently ran an article titled "Cracking the Code of Restaurant Wine Pricing," which found that wine prices can swing dramatically even within the same neighborhood. There was, for instance, the 1999 Dom Pérignon that was selling for $155 at the Legal Sea Foods in Washington; the same champagne was fetching $250 at the McCormick & Schmick's just up the road. Even within the same family of restaurants, prices can differ substantially from one location to the next; the article noted that the 2005 Duckhorn merlot was listed for $96 at the Ruth's Chris steakhouse in Dallas but was going for $160 at the Ruth's Chris in Pittsburgh. Why all the discrepancies? Wholesale costs vary from city to city, restaurants sometimes get great deals on particular wines, and they often set prices according to the competition they face, the quantities they expect to sell, and the image they wish to project.

However, it is also the case that many restaurants price wine simply according to what they think they can get away with. The Journal article mentioned Las Vegas several times. Restaurant wine prices in Las Vegas are notoriously high, which is not surprising: The city is a magnet for spendthrifts who understand that money brought to Vegas stays in Vegas and that getting soaked is part of the experience. Last year, Food & Wine's Lettie Teague noted that Las Vegas and Miami had some of the stiffest markups of any American cities and suggested that one reason for this is that they are principally tourist destinations, which means restaurants have little incentive to use wine prices to cultivate loyalty or encourage repeat visits; chances are, they are going to see a customer only once, and they thus want to squeeze as much out of him or her as possible. New York is also known for its lofty wine prices, but the huge markups there have primarily been a function of Wall Street's profligacy: There was almost no limit to what traders and bankers were willing to fork out for wine, and many restaurants were only too happy to test their limits. It was the same story in London, where the markups became, if anything, even more egregious—and the clients hardly blanched. In an incident in 2002 that made headlines around the world, a group of bankers spent $63,000 on wine during a dinner at Petrus, a London restaurant owned by Gordon Ramsay. (Most of them were fired.)

Now that investment banks have been sucked into a black hole of their own making, restaurants in London and New York are already beginning to suffer. Two London eateries owned by another top British chef, Tom Aikens, went bust earlier this month, and these are likely to be only the first of many casualties. Restaurants always take a pounding during economic downturns, and that is certainly true now. S & A Restaurant Corp., which owned both the Bennigan's and Steak and Ale chains, went bankrupt in July, and companies like Ruth's Chris, McCormick & Schmick's, and Morton's are all struggling.

The easy profits are over, and restaurants hoping to weather the recession ought to think about dialing back their wine prices. Kevin Zraly, a New York-area wine educator who helped pioneer the use of progressive markups when he oversaw wine service at Manhattan's Windows on the World, says that at this point, restaurants just need to fill seats and should scale back their wine markups as a way of attracting diners. "Wine is a tool to get people into restaurants, and in this economy, wine prices need to be dropped to do that," he says. "We had adjustable-rate mortgages, now we need adjustable-rate wines." He also says that restaurants that allow customers to bring their own wines but charge relatively high corkage fees should think about reducing the amount they charge for BYOB. Zraly believes $20 per bottle is a reasonable tariff.

Some restaurants have long taken an unorthodox approach to wine sales—by allowing free BYOB, for example, or by charging slender markups. Landmarc, a popular New York restaurant, prices wines at just above retail and makes up the difference on volume. Richard Betts, the wine director at the Little Nell in Aspen, Colo., instituted an across-the-board 30 percent price cut in wine prices in 2001 and says the restaurant's seven-figure annual wine sales are now double what they were then. Betts says that people who previously would order only one bottle of wine with dinner began ordering two, there were more repeat guests, and favorable publicity brought scores of new ones to the restaurant. Now that fat markups are likely to become a customer repellant, other restaurants will ideally be tempted to experiment with their wine policies. Given the grim economic outlook, slashing wine prices probably won't be enough to save many establishments, but they might as well die trying.

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