Some Restaurants Wining For Profit

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.