Nathan–I agree that the cost structures are different for a retail establishment and a restaurant, including the reasons you indicate.
But when you talk about fair prices and consumer behavior, we’re really talking about retail establishments. If a retail store is routinely charging $10/bottle more than your local competitors, then that store will have a very tough time attracting and keeping business because retail wine consumers tend to be very price-sensitive. By contrast, restaurant customers tend NOT to be nearly as price sensitive on wine, so any given restaurant has the ability to be more aggressive on pricing versus its restaurant competitors.
Comparing retail vs. restaurant cost structures is apples and oranges. The restaurant also sells food, and most of the costs are devoted to the food, not the wine. And at least in NYC, wine markups tend to run around the same 3x retail at both corner bistros and Michelin 3-stars, which have very different cost structures and business models.
Besides, it’s straightforward econ 101 that the costs don’t directly determine prices, demand does. The only reason wine is heavily marked up is that people will pay for it at those prices. That’s it. The complaints from the restaurants that they have no choice but to rip off the people who don’t know any better because their costs require it is a flat-out fallacy and should be recognized as such.
Really what surprises me is that markups aren’t higher. If people will pay 3x retail, why not 6x, especially for more obscure wines where 99% of the customers have no idea what the actual cost is? I think the only thing holding restaurants back is shame. But one day they will start charging 6x, and when they do you can be sure we’ll be told that they have no choice and the markup reflects their costs.
Corey–I agree that restaurant prices are affected in large part by demand. The reason why some Manhattan restaurants can charge extremely inflated prices for wines is that there’s such an amazing concentration of people with high income and/or high net worth. Unless you have a regular customer base that has the ability and willingness to pay $200 for a wine that usually retails for $50, no business can effectively price wine that way.
Having said that, and even if restaurant consumers are less price-sensitive than retail, there are effective limits. If a nice Sauvignon Blanc typically retails for $20, I strongly doubt we’ll see a day when restaurants can routinely price that bottle for $120 and actually move it. I would only imagine that outcome if the restaurant has such great reviews that people feel they “must” dine there, and if the restaurant effectively bars BYOB. In that model, the restaurant is massively leveraging the demand for the food into extreme pricing on the wine side. Even then, I would expect a lot of diners to opt for beer or cocktails, or even just water.
Corey, the other possibility, particularly on the higher end of the scale, is that the wines don’t sell with great frequency, but the profit on each is so great that the restaurant still thinks it is doing well, and the bean counters are happy because the margins look good. There is clearly a point where markups would be too low, and there would be diminishing returns on greater volume, but I suspect that many places would have higher profits on lower, but still substantial in terms of dollar per bottle, markups. I am also willing to admit that my position is theory, and I’d be happy to be corrected by someone in the industry who actually determined best practices for pricing by expirimenting and then analyzing the data based on profit, not margin.
Like doctors, lawyers, and other professionals, there are many “successful” people in the restaurant business who have enough business acumen to fill a thimble, but who are are way too ignorant to know what they don’t know, and too arrogant to admit it. Many try to compensate for that ignorance by doing what they think other successful competitors do, without crunching the numbers enough to know if that is the right approach for their own business. Following up on Bruce’s point, what works for a place like J-G and its clientele may not work for another place where the food is just as good (or at least it is in the mind of the chef and owner) that doesn’t draw as many price-insensitive customers. But, like no one ever got fired for buying IBM, people find it safe to follow the leader, especially when they don’t understand why their own situation is different.
I realize that I’n painting with a broad brush, and may be describing exceptions and not the rule, but I’ve heard enough people in the restaurant business who focus so obsessively on preserving margins by product class that they forget that no almost nothing else they sell varies as much in unit cost in terms of real dollars per table and where the markup is so transparent to the customer.
Re: Peal & Ash. I ate there about a month ago when I was in town for my daughter’s graduation from NYU. Decent food, nice list. But the noise was ungodly and intolerable, even on a week night. And not just people talking loudly. Hideously loud (and bad) music that I thought was very inappropriate for a restaurant with serious ambitions.
To be fair, I didn’t make the comparison to retail, I was just explaining why they have different mark-ups.
Restaurants base their prices on wholesale, not retail. Some items are priced at market, because if you don’t, they could get vultured (as the Coche Perrieres was at my friends restaurant, someone bought his lone bottle off the list to take back to NY, so rather than having it there for a good customer, of which he has many, someone who will probably never come back again has a wine he gets maybe a bottle of per year).
We do, in fact, base our price on cost and not demand, because demand is unknown. However, we do take a lower margin on more expensive wines because it is the cash flow that really matters and our belief, based on experience, that higher end items will sell better at a lower markup. Charging a 6x mark-up is going to mean that wine sales slow to a crawl, and we are invested (financially and professionally) in the quality and value of our list.
I’m speaking in general terms, not about some one specific restaurant in CO.
In fact I was in a locals restaurant in Napa two weeks ago, they had a limited wine list. I asked the waitress about this and she said the wine list isn’t deep, because a lot of people that come to the restaurant are locals and in the wine industry and just bring their own. The reason they bring their own, they don’t want to pay the mark up.
Sorry for any confusion, I think some restaurants are being short sighted by the amount of markups on their wine list. My opinion only, and I refuse to pay it for the most part.
Thanks for clarifying that, Darren. I thought your comments were directed at Frasca…but I understand them now to be more general.
There are some restaurants here in SantaFe that I refuse to patronize because of their 400%-500% markups. A 200% markup
is more the norm and about as good as we can do.
Still…my rec of Frasca stands…great restaurant.
Tom
FWIW all of Stuhlman’s restaurants have (often very similar) overpriced wine lists. I think that Les Garrigues must be on the BTG list at all his restaurants. With a currently non-drinking wife, I have stopped drinking wine at restaurants unless we are with friends and I can bring a bottle. I’d rather pay $14 for a well-made cocktail that I can’t make at home than for a glass of wine from a $10 bottle.