Why do restaurants mark up wine so much, and why doesn’t the percentage markup taper off as the wine gets more expensive? This is the question raised in the Freakonomics blog in Question of the Day: What’s Up With Restaurant Wine Prices?:
…the markup on wine is extremely high, and progressive.
Depending on the place, wine by the bottle has at least a 200% markup, and that markup seems to be constant as the base-cost of the wine rises. This means that I will typically choose the $50 bottle over the $70 bottle, and definitely over the $120 bottle, even though the difference in base cost to the restaurant is maybe only $7 and $25. Had they offered me the bottles at $50, $60 and $75, I might have bought one of the more expensive ones, and (a) made the restaurant a larger profit at almost the exact same cost (not counting the added cost of having the more expensive inventory); and (b) been much happier, drinking the better wine, and more likely to come back.
We’ve wondered about this strategy as well. Rather than automatically tripling or even quadrupling the price of every bottle of wine in inventory, why not use a graduated approach? I.e., we can see the need for a hefty markup on a bottle that the restaurant gets for, say, $5 in case lots – after all, if you triple the price, the dollar margin is a mere $10 – and that bottle needs to be stored, opened, etc. just like a more costly bottle. But does it make sense to triple the cost of a $50 bottle? Might there be a point at which margin is maximized by a lower price to the customer resulting in more sales? For example, that $150 bottle might linger on the menu and get little traffic – at $90, it might sell many more bottles and still produce $40 in dollar margin each time.
The Freakonomics blog doesn’t have all the answers on this one, although the author points out that buying an expensive wine is often a status move (as in impressing your date) rather than an economic decision. There’s quite a bit of commentary on the post expressing alternate points of view.
One of the commenters at Freakonomics, jfwells, has a simple explanation for a flat markup policy: “My father is a restauranteur and I would venture to guess that the reason for a flat 200% mark-up on the wine is probably tradition more than anything else. Sure, they could calculate out how much more they could sell if they had a different scale of markups for different price ranges, but they are in the food business for a reason. They aren’t economists. Heck, most restauranteurs aren’t even very good business people. Half of all restaurants (non chain) go out of business in the first year.” That’s probably not too far from the truth (though I’d hope the national casual dining and fine dining chains actually WOULD employ an economist or two, at least on a consulting basis).
Because of high wine markups, we like the idea behind Philadelphia’s BYOB restaurants. We’d also like to see restaurants experiment with lower wine pricing to encourage more diners to drink wine. Often, even by-the-glass prices seem out of touch with reality. A restaurant may charge as much for a glass of low-end Aussie Shiraz, for example, as for a Bombay Sapphire martini. And quite a few casual dining chains seem to push all kinds of beer specials, but almost never run a wine promotion. Restaurants might be surprised at how much they could boost wine sales with a little effort to make wine affordable.