The Lowdown on Restaurant Markups

The inside story on why and how restaurants price their wines.


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 The scene is all too familiar: glancing through a restaurant’s wine list you spot a Napa Cab you saw in a wine shop for $30; it’s listed at $80.

In a recent survey of consumers’ wine-buying habits in restaurants, Julie Brosterman, CEO of WomenWine.com, found that 70% of respondents felt restaurant wine prices were too high. “People are savvier about wine markups than they used to be,” Brosterman says. “They know retail prices, and they can look up wine prices on their Blackberrys while sitting in the restaurant.”

“Wine is a good profit item,” reads one restaurant management textbook. “It will average approximately the same cost of sales as food, but the labor and operating costs needed to present it are substantially less,” observes another.

Industry-wide markups average two and a half to three times wholesale cost, says Randy Caparoso, a restaurant wine consultant at Wine List Consulting Unlimited. A bottle priced at $10 wholesale might sell for $15 retail, but $25 to $30 in a restaurant. “Everyone knows you pay more in restaurants than at retail, but what really aggravates a lot of consumers is how wacky prices can be. A bottle may be $25 at one restaurant, $15 at another, and $40 at a third.”

So what really goes into wine prices, and why are they all over the map? Let’s dissect some of the factors.

State laws and taxes. Each state has its own alcohol laws and taxes that can affect the price of wine. Utah restaurants are required to buy wine from state-run liquor stores at retail price instead of wholesale price. Taxes are steep in some states—Tennessee tacks on a 15% tax hike for on-premise sales, for example—and fairly low in others.

Wholesale costs. Again, those Byzantine state laws make pricing a maze. In some states, wholesalers are required to price wine fairly to all restaurant customers; in others, large chain restaurants and those with bigger buying power are able to negotiate better wholesale prices.

Restaurant operational costs. “A neighborhood restaurant where you’re greeted at the door by the owner who also seats you, takes your order and cooks your food has two to three times lower overall expenses than a restaurant with fresh flowers, valets, five chefs and an army of waiters,” Caparoso says. “Wine is a commodity, a costed good. It’s the same as buying a pair of shoes. The nicer the store, the higher the cost of the shoes.”

Position on the list. Most lists follow a graduated markup, with the highest markups on the cheapest wines, and lower markups on higher-end wines. A $10 wholesale wine may be marked up to $30, but a $50 wine might be just $80.

Whim. Mike Shor, an economics professor at Vanderbilt University, did a personal study analyzing wine prices at 38 Nashville restaurants, rating the restaurants according to markups. “I teach a class in pricing, and a couple of restaurants I’ve been to have ridiculous wine prices,” he explains. “I wanted to see if that was true or just a feeling I had.”

His findings: markups varied widely. Some adhered to industry standards, but at least one merited this description from Shor: “If you search long enough, you may find a wine price that is merely insulting.”

Trevor Hertrich, a wine buyer for a large retail store in Denver and a former restaurant sommelier and wine program manager, says high markups are a matter of convention rather than good business planning. “To me, it’s more about the bottom line and selling more at a lower margin.”

Hertrich maintains that there is a magic number where a good restaurant wine manager can do a lower markup, sell more wine and make the same amount of profit. “If you pay $50 for a mid-range Burgundy, you can put it on the list for $200 and wait six months for someone to buy it, or you can charge $125 and sell it right away,” he says. “Meanwhile you’ve already paid for it and you have to store it.”

The good news is that restaurants are beginning to get the memo. Ten years ago, Caparoso says, wine markups were even higher, but that prices are moving down towards two times wholesale cost.

“Prices are coming down in response to consumer feedback. You couldn’t do that 15–20 years ago because not enough wine was drunk to make it worthwhile,” he says.

Ultimately, though, Caparoso begs wine lovers to stop comparing restaurant wine prices with retail. “You have an army of people serving you and cooking for you and washing your dishes. They aren’t doing it for free.”

Here are some ideas on how to get the best value from the wine list:
Spend more for a better value. Most lists have higher markups on the cheapest wines and lower markups on high-end wines, so often the more you spend, the better wine you’re getting for the money.

Order mid-list. The second-least-expensive wine on the list is often marked up the most. Why? “People don’t want to look cheap, so they order the second cheapest wine,” Shor says. Go one or two bottles higher for a better deal.

Beware brand names. Popular brand names always get the full markup because they sell no matter what, Caparoso says. “The restaurant is kind of punishing you for being a creature of habit.”

Be adventurous. “If there’s a wine I really want on the list but don’t think a lot of people will order, I put an even lower markup on it,” says Jay Frein, wine manager at Margot Café in Nashville, which had the best value wine prices in Shor’s study.
 

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