The Relentless Rise of Restaurant Wine Margins – Wine-Searcher

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Social Wine and Tapas was a restaurant designed for the current age.

Trading heavily on the popularity of sharing small plates, it offered unpretentious service and a surfeit of esoteric wine choices tailor-made to seduce any self-respecting hipster. After a successful opening in central London in 2015, the restaurant seemed destined to thrive.

And yet, last year, the staff were told to pack their bags. Social Wine and Tapas became the latest casualty of London’s notoriously cut-throat and competitive dining scene. Several other leading restaurants – including Michelin-starred Mayfair restaurant The Square – also ceased to be. At first glance, there was no pattern to link the closures, no common thread which tied the failures of these liquidated venues together. Or was there?

I suspect the outrageous, greedy and downright absurd wine mark-ups may have been a contributing factor; in the case of Social Wine and Tapas, they were almost comical. Restaurant critic Andy Hayler first alerted me to the avaricious prices being touted at the restaurant, in a damning review he wrote some years back. As he rightly observed: “The mark-ups were hefty even by the demanding standards of central London. Niepoort Coche from Douro 2013 was £235 for a wine with a retail price of £76.”

He continued: “Usually wine lists price less-popular areas more gently to encourage sales: Rioja Alta 904 1985 is a lovely wine and retails at £167 yet here was listed at £495. De Fargues 1998 was a baffling £460 for a bottle that has an average retail price of £41. This was not a fluke: the 1995 vintage of the same wine was £490 yet it currently retails at £62.”

My own experience at the restaurant in 2018 confirmed that this was not journalist hyperbole. The pricing structure was seemingly designed to sell gallons of tap water. Ditto the Square and other venues I visited in 2019. The food was often excellent, but the wine mark-ups insulted the intelligence of their audience.

Of course, sommeliers charging exorbitant prices for wine is hardly 21st-Century news. Paris is a city full of extortionate wine mark-ups – there is a small firmament of consumers who will pay almost any price. Le Cinq, famously eviscerated by critic Jay Rayner, is just one of many examples.

Diners losing patience

However, there is evidence to suggest that tolerance for restaurant wine rip-offs is waning – excluding the three-Michelin set. Wine is an indulgence, a luxury that is rarely considered an overwhelming priority. Consumers, for the most part, expect reasonable value and will vote with their feet if they sense avarice.

The catalyst for this shift has surely been the digitization and democratization of information. Tech-savvy drinkers can now easily verify whether they’re receiving value or being stiffed with just one swipe (there’s even an app for that). Restaurant/retail price comparisons are quickly accessible in an era where the smartphone is rarely left at home. Unlike 20 years ago, the sommelier has no where to hide. Unfortunately the same logic rarely applies to the off-trade; only very anal-retentive drinkers will compare retail costs with the original ex-cellar price.

“The informed restaurant consumer is the smart one,” agrees Raj Vaidya, head sommelier at Daniel Boulud’s two-Michelin-starred restaurant in New York.

“I’ve observed guests using their phones to compare prices many times and it makes sense. Yet I’d like to point out that when drinking in a restaurant one must remember that such businesses do in fact sell only two things generally – food and booze. Everything else one experiences in the restaurant, from the air conditioning to the most expensive overhead – staff – costs the restaurant money and nets zero revenue. There is such a thing as an egregious mark-up, but rather than criticizing the mark-up by itself per se, one should look at the whole package of the experience on offer, and consider if the value is to be found there, in the total package.”

Zach Jones, wine director of Pacific Standard Time in Chicago adds: “Restaurants have many more operational costs than retail stores do, hence a different scale of pricing. I know no guest dining out would want to hear that explanation but it’s the simple truth.”

From the US to Hong Kong, the sommelier’s justification is always the same: restaurant overheads are enormous and we need to recuperate the costs somehow. They also enjoy pointing out that wine is an optional purchase – “simply drink our rip-off bottled water instead”, they could exclaim.

Somms can hit the sweet spot by finding wines that offer both good value and a healthy return.

© Shutterstock
| Somms can hit the sweet spot by finding wines that offer both good value and a healthy return.

There is no question that running a fine-dining restaurant is a ludicrously expensive businesses. Many venues cease trading every year simply due to the unsustainable running costs. A certain level of mark-up is a necessary profit driver. Moreover, sommeliers do not typically force wine purchases at gunpoint. They simply sulk if you abstain.

Balancing business and bad feeling

Yet the arguments in favor of charging four or five times the retail price are bogus and highly disingenuous. In theory, wine is an optional part of dining out. But in reality, the vast majority of foodies consider the booze first: you want to set the mood for the evening with a bottle of wine. Only the deranged excitedly anticipate drinking water or fruit juice. It’s an integral part of the experience and being screwed leaves a bitter, nasty taste in the mouth.

Moreover, restaurant consumers are not charity donors. If the restaurant is struggling to cover its costs, why should the consumer suffer? If the business model is inherently financially unsustainable, attempting to plug the gap by charging rip-off prices will only anger (most) patrons and discourage wine sales. Consumers are not there to subsidize the financial burdens of running a restaurant. Charging five times the retail price isn’t about keeping the business afloat, it’s about greed.

“This is especially prevalent in London but with rent, rates and wages at such high levels, restaurants need to do this just to keep afloat. Maintaining margin is key to success but I dare say some restaurants get greedy,” notes Ted Sandbach, owner of the Oxford Wine Company.

I accept that restaurant rip-offs will never completely die a death, certainly in the fine-dining sector. But increasing scrutiny of a wine list’s relative value has greedy sommeliers on the run. Equally, there are plenty of upmarket restaurants that maintain a balanced approach to mark-ups, by offering relative value at the top end.

“I use a sliding scale, which takes into consideration rarity and novelty, age, potential and overall quality,” says Vaidya.

“When I find a deal while buying and sourcing, I like to pass that along to the guests. I often make less than two-times markup or 100 percent profit on wines in excess of $500.”

Today, most restaurants can only survive in an era of heightened scrutiny when sommeliers get the wine pricing right. The best restaurants offer intelligent lists with reasonable mark-ups and more value at the top end. Aside from the “anything goes” three-Michelin extravaganzas, who are often immune to commonsense.

Different strokes

As exhibit A, allow me to present Pacific Standard Time in Chicago. Although wine director Zach Jones justifies the inflated prices with an obvious reference to operating costs, a quick glance at the list reveals a fair approach to wine mark-ups, and a list compiled with flair.

“Sometimes you find an obscure or challenging wine that you are passionate about and, in the interest of getting it onto tables, you don’t mark it up as much as you normally would. Sometimes you find a great deal on a wine that you know has high value and you increase the mark-up. There’s a give and take, I guess,” argues Jones.

“Glass pours often have the highest margin of markup, so they compensate for the smaller margin on other wines. Our ‘sweet spot’ is generally between $70 and $100 on our bottle list, so we find wines which fit this range while producing a great cost margin. Then we can build around that core accordingly.”

Similarly, the Oxford Wine Cafes do not insult their guests’ intelligence. “We aim to make 70 percent plus on the everyday wines and will drop to 50 percent on some Champagne and icon wines. You can always discount down but we don’t get complaints about pricing to my knowledge,” explains Sandbach.

Meanwhile, restaurants in major urban areas with obviously higher overheads, continue to demand at 300 percent in excess of the retail price. Is that reasonable? Many would argue not, although sommeliers can always refer to the established cliché that consumers would prefer cheaper food and more expensive wine, the latter being an optional purchase.

“At Acquerello, we generally employ a San Francisco standard three-times markup. The list offers over 2000 selections ranging from $45 to $4495 per bottle. Most of the more expensive wines are difficult or impossible to replace, so we feel comfortable keeping the three-times markup across the board,” explains Gianpaolo Paterlini, wine director at 1760 and Acquerello Restaurants.

But in a small but rather magnificent act of defiance, the best restaurants in the US and UK offer consumers both exciting wines and judicious mark-ups, particularly at the higher end. They are to be applauded. Nevertheless, the majority of restaurants in the major cities refuse to trade down from threetimes the retail price, which is either subjectively still a rip-off or a fair chance to recuperate the considerable overheads of running an upmarket restaurant. I will concede that friends and family are less likely to notice if the meal, wine and service are exceptionally good.

And so we return to the shrinking but still-existing firmament of rip-off merchants. Charging four, five or even six times the retail price, they hide behind fatuous arguments about having to supplement their cutlery outlay and blanquette refurbishments. But profits can still be made and sales are encouraged at the industry standard of times three.

In one sense, it is regrettable when restaurants such as Social Wine and Tapas have to close. People’s livelihoods are put at risk, talent goes to waste.

Yet I will shed no tears if more restaurants of a similar ilk go under. There’s no excusing an avaricious and intelligence-insulting mentality that, while historically tolerated, deserves to die a death.

Source: Thanks