“Get ready for higher restaurant prices!” blazes the headline of a recent Bloomberg report. Now, that’s a scary thought. A nation, shell-shocked by the continuing recession, is already reeling from the high cost of dining out. Many have reacted by doing more entertaining and dining at home and less in restaurants.

A National Restaurant Association survey of its members reveals that fewer operators expect business to be better in 2012 (64%) than in 2011 (70%).  A large 67% of them anticipate raising their menu prices in 2012 to reflect rapidly increasing food costs. And, 88% of them feel their profits will stay the same or increase over 2011.

All of that adds up to very bad news for wine lovers!

The price and cost indices shown in the graph offer a telling portrayal of price inflation since 1999 of food and wine prices. To assist in this analysis, each of the indices has been recalculated to a base value of 100.0 in 1999. Values were for non-seasonally-adjusted averages at mid-year (July). These are the price sectors and their related indices:

Wine Cost and Price TrendsWinery prices:  The Producer Price Index – Wineries (PPI – W), red line.  The inflation trend of wines sold by wineries. PPI-W reflects direct sales through the tasting room and wine clubs, winery sales direct to retail outlets where such sales do not go through a distributor, and “Winery FOB” sales to wine distributors.

All prices: Represented by the Consumer Price Index, All Items, All Urban Consumers, All-City Average (CPI), black line.  The trend for all goods and services purchased by consumers, at mid-year intervals.

Wine consumed at home: The Consumer Price Index, Wine Consumed at Home (CPI-WCH), purple line  is self-explanatory. Since most wine consumed at home is purchased at supermarkets and wine shops, this is a good indicator for the retail shelf price also.

Wine in restaurants: The Consumer Price Index, Wine Consumed Away from Home (CPI-WCAH), blue line, shows the inflationary trend for wine served in restaurants, hotels and resorts.

Food in restaurants: is represented by the Consumer Price Index, Food Consumed Away from Home (CPI-FCAH) green line.  This indicator also includes fast food outlets, like pizza and hamburgers but, they reflect trends in food costs, too, just like the sit-down full-service establishments.

General inflation:  For another comparison, the Inverse Purchasing Power of the dollar, thin gray line, is shown to represent general inflation of all things, or its reciprocal, the deflation of the dollar’s purchasing power. It is a more accurate reflection of general inflation than the CPI.

Observations

  • Prices for Food items at restaurants behaved similarly to Food at home and CPI-All Items in 1999-2008. In fact, the relationship was so tight that we have not tried to show the trend for CPI-Food at Home. Thereafter, starting in 2009, restaurant food continued at roughly its historical rate, while CPI-All Items dropped significantly.
  • When CPI-All Items is plotted alongside the Inverse of Purchasing Power of the Dollar, the two trends proceed in virtual lockstep except in one year, 2008.
  • Price escalation of Wine served in restaurants was in a class by itself. Approximately, restaurant wine prices inflated at twice the rates of CPI-Wine at Home and winery FOB prices.
  • Restaurant food prices inflated 27 percent faster than winery prices.
  • Restaurant wine prices grew at 43 percent more than winery FOB prices.

I’m going to side with the wineries on this one.

The 1999-2012 trends are summarized thus:

Price Trend

Has the restaurant trade been contributing to its own sales problems?

All of the restaurateurs’ protestations notwithstanding, it is apparent to this analyst that most restaurants are pursuing a very devious pricing strategy. On one hand, they are holding food item pricing down so as not to discourage patrons from returning to their establishments. On the other hand, they are relying on exorbitant wine pricing to make up the difference in order to produce an acceptable overall profit.

The practice stinks! It leaves wineries with a black eye. And, it detracts from wine consumer adventurism in trying new wines.

The wine print media and internet websites are loaded with articles lately, excusing restaurants for their need to charge high wine prices. The explanations range from the high cost of glassware and cellar storage to sommelier service. We read prognostications that restaurant prices will have to increase in 2012 because of high inflation in food costs exceeding six percent per year.

What? Where have they been? Food costs have already increased dramatically. Farmers have seen fertilizer and chemical costs jump along with the cost of petroleum. Everyone in the food chain has been impacted by the high cost of gasoline and diesel. What doesn’t have to be transported these days?

The costs of glassware apply to foods as well as to wines, although the former may be less than the latter in the finest restaurants. Cellaring costs really apply only to the best upscale establishments, too. Come on now, do restaurants in the quality range of Outback Steakhouse, P.F. Chang’s and McCormick & Schmick’s really need to carry red wines older than four years and whites older than 2-3 years. That’s where the largest part of the wine-consuming diners play in most of the country.

As to the high cost of sommelier service, it is my opinion that a lot of it can be deleted without harming the dining experience. Some of it is so haughty as to be offensive. I tried to sit quietly through a decanting where an officious sommelier held the neck of the bottle directly in the candle flame. As a professional winemaker, I know that is not good for the wine’s quality. Even though I am usually a mellow guy in the presence of such wine fol-du-rol, I did not sit silent, but demanded that the sommelier stop immediately.  He didn’t take it well.

Getting back to the wine pricing issue, perhaps an example will facilitate understanding. Let’s analyze how wine gets priced through the distribution channels. Start with a $15.00/bottle wine 1999:

Wine Markups

The supermarket price is taken as the normal list price, the one that is charged in winery tasting rooms and shown in the wine press. The markups shown are “typical.” The rates vary from state-to-state because of state laws and state excise tax rates. Some states allow distributors to offer volume discounts to retailers, which changes the effective markup on selling price.

Many retailers deal in “post-off” pricing. Under the system, intended to boost sales of a specific wine, The winery offers a “posted-off” price to distributors for a specific period, usually a month. In turn, the distributor may help by, say, dropping its markup to retailers to 20 percent instead of 25 percent. The name “post off” is derived from the fact that, in most states, wineries have to “post” their prices with the state liquor authority, usually in effect for 30 days. The practice has been distorted in recent years, so the winery can claim a higher normal price for the wine than the one offered by the supermarket. It may be done in some markets where wine prices are depressed, but more often, it is done to save the winery from having to drop their “front line” price, which might be detrimental to the winery’s reputation.

There have been some examples of up-pricing by a supermarket chain so as to offer a discounted price that is the same as the previous month’s normal price. This practice is really tacky when the stores just put the new price sticker over the old sticker, and the new sticker can be peeled off. For example, say last month’s price was $15.00. The retailer wants to claim a new, 20% discount. The new sticker price is $18.75. Subtract 20% and what do you have? $15.00! “Why, those customers are too dumb to wise up,” right?

Now, let’s structure a typical 1999 restaurant bill. 

Hypothetical Markup Practices

The 2012 Sector CPI value is the 1999 values inflated by the separate sector CPIs in order to show what they would be this year if they increased by the national average rate for each sector. The results look “typical” for 2012.

In the Trade Markups column, food items are the same as in the previous column, but the wine is priced according to markup practices that are typical in the business. It starts with the winery FOB, same as the preceding column, and a 28% markup by the distributor. Somewhere since 1999, restaurants seem to have gone from 2.5 times laid-in cost to 2.8-3.5 times retail shelf price, the amount depending upon the price of the wine. That makes a huge difference. Higher priced wines may be marked up at only 2.8 times retail, for example, while the lowest-priced wines are marked up at 3.5-4 times retail price.

The result of those markups yields a whopping price of $62.00 for the wine! Ouch!! There really is no excuse for such pricing. I dined recently at a couple of upscale restaurant. Those prices seem fairly representative.

The Legal Sea Foods Restaurant chain on the East Coast has a more enlightened pricing policy. According to Sandy Block, MW, who directs their wine program:

[quote]In my opinion restaurants have gotten wine pricing all wrong. There is no reason diners should pay through the nose to enjoy something delicious. This is one of the reasons I came to work at Legal Sea Foods five years ago and it remains a pillar of our philosophy: we want wine to add, not detract, from the overall experience. There’s less chance this will happen if you feel you’re being overcharged. It may require a bit of effort to source and find value but it’s something we’re committed to. No “re-strategizing” here. If wine enhances a meal and great pricing makes people happier so that they’ll return more often, we stand behind what we’ve always done: trying really hard to give you the best prices you’ll find anywhere.[/quote]

-Legal Sea Foods website

So, the policy at Legal Sea Foods is to seek out wines that are great values. Mr. Block doesn’t address the subject of markup.

Other writers are more adamant about reforming restaurant pricing policies. Some even call for outright boycott. Something I do not want to do is hurt the wineries. They are not the villains in this issue. Bringing in your own bottle doesn’t work, either. The restaurant will just charge you a “corkage fee” that allows the restaurant to make the same profit they would make if the bottle came from their own holdings. Perhaps selective boycott would be better. Reward the establishments that are not abusive and avoid those who price too high.

Above all, it is smart to avoid buying wines by the glass. Those prices are also excessive. Restaurants offer the excuse that, once opened, the wine may decline before the whole bottle is emptied, forcing them to dump the remnants. Come on now! In this day of technological advance, devices to blanket the wine, in bottle, with nitrogen are readily available. Get smart, people!

Sources consulted

  • “America’s Biggest Rip-offs, Wine at restaurants – 500% markup;” CNN Money website http://money.cnn.com/galleries/2010/news/1001/gallery.americas_biggest_ripoffs/5.html
  • Consumer Price Index and Producer Price Index; Bureau of Labor Statistics, U.S. Department of Labor. http://www.bls.gov/cpi/  and http://www.bls.gov/ppi/
  • “Cracking the Code of Restaurant Pricing;: Juliet Chung; Wall Street Journal website. http://online.wsj.com/articles/SB12187569559442607.html
  • “Get Ready for Higher Restaurant Prices;” Anna-Louise Jackson and Anthony Feld; Bloomberg website; October 8, 2011; http://www.bloomberg.com/news/2011-10-28/restaurants-lift-prices-to-catch-food-at-home-inflation-retai…
  • “High-End Wines Had Great First Quarter;” Jim Gordon; Wines & Vines magazine, San Rafael, CA; http://www.winesandvines.com/sections/printout_article.cfm?article=headline&content=99322
  • “How Much Is That Wine In The Restaurant?” WellHeeled website; January 11, 2010;http://www.wellheeledblog.com/2010/01/11/wine-high-markups-restaurants
  • “Is eating out cheaper than cooking?:” MSN Money website; January 19, 2012; As grocery prices go up and restaurants struggle to hold the line on menu price
  • “Outlook 2012: Operators expect better sales, profit;” NRN Restaurant Operator Survey; Sarah E. Lockyer; Nation’s Restaurant News; January 6, 2012
  •  http://nrn.com/article/outlook-2012-operators-expect-better-sales-profit#ixzz1sKGY0Bkq“Restaurant Pricing;” The Internet Guide to Wine; Brad & Dri Brown http://www.winetrail.com/restaurantpricing.html
  •  “The Lowdown on Restaurant Markups, The inside story on why and how restaurants price their wines;” Wine Enthusiast Magazine; Gretchen Roberts; May 7, 2010.
  • “Wine Pricing;” Legal Sea Foods (restaurants) website http://www.legalseafoods.com/index.cfm/page/Wine-Pricing/cdid/42773/pid/44537