The Freakonomics of Restaurant Wine Prices

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.

7 thoughts on “The Freakonomics of Restaurant Wine Prices”

  1. The institutionalized robbery of restaurant wine prices is simply a stupid tradition. Rather than treat wine as a luxury item to pad the bill, smart restaurateurs know that more wine-savvy customers are coming in (who’re offended by being ripped off!) and will now price wines more reasonably, and encourage every table to get a bottle; it’s seen as an integral part of the meal.

    What can the consumer do? Complain about high prices, don’t be bashful! More importantly, find, patronize and tell the world about good wine restaurants! And compliment the management on their wine list.

    My local pick: If you’re ever in Monterey, CA, eat at Passionfish in Pacific Grove, a fantastic place not only for the food, but also for their wide, deep and very reasonably priced wine list, and the wine-knowledgeable wait staff. (No I don’t work for them 😉

  2. In Nashville, this is not the case. In analyzing Nashville wine prices, I found an overall negative trend between markups and wine prices, so that higher-priced wines have lower markups, on average. The bigger difference is across restaurants, where the same wine can be twice as much down the street.

  3. That’s interesting, Mike, and a bit more logical if you think of the margin as more of a “per bottle handling cost.” It could be common-sense marketing, too. A couple who might pay $20 for a $5 bottle of wine might balk at paying $80 for a $20 bottle, even if they could afford it.

  4. I am a chef in a restauarant and we are exploring a different pricing strategy with our wine list but I am not sure how it will work out. Most restaurants do mark up wine 2-3 times. Typically higher markup on the cheaper wines and more towards the 2 times markup for more expensive. However that still means that we would be making an $80 profit on an $80 bottle cost.

    We have decided to run an experiement and set a maximum amount that we need/want to make on a bottle such as $30. So, for bottles that cost less than $20, we will do our standard 2.5 times markup. For bottles that cost us over $20, and would garner us a higher than $30 profit, we will just do a flat $30 markup. Thus, the $100 cost bottle is priced at $130.

    Hopefully this will encourage customers to range up into the pricier bottles because of the value.

  5. Here’s something you might not have considered. Supply can dictate price as much as demand. Often more the more expensive wines are ones that the wine buyer can get only a limited supply of, maybe a case or two. If they price the wines more reasonably they will sell out quickly and be gone until the next vintage. Lower priced wines typically have a virtually endless supply for the restaurant. These are the wines they want to blow through. They could price the strictly allocated wines more reasonably, but they wouldn’t stay on the list for very long. Sometimes the wine is more important as a part of the wine list than as a product for sale, and the person responsible for the list might not want it to sell out. Occasionally, the sommelier, wine director, etc. will markup a wine significantly to inhibit sales. The wine is not there to sell at that very high price (though if it does, so much the better) but to round out the list in some way.

  6. People set their limits before going into a restaurant typically. There is very little difference in appeal to a customer at a restaurant, and, oddly enough, historical consumerism has set these wine prices at what they are.

    Living in the Napa Valley, people basically are either willing to pay whatever for a wine they want or pay a price they want for whatever wine. Therefore it really doesn’t matter how much the markup is; if you want something, you’re going to get it.

    It’s also really surprising when you realize how much restaurants have to markup their menus in general to maintain a decent profit margin. It’s not so much poor knowledge of economics that runs restaurants out of business but simply the guessing game that the demand side poses. The world economy doesn’t revolve around the restaurant business like, say, oil or natural resources. Restaurants have to consider city population, traffic, location, demographics, food type, etc. then within that you have to market/advertise, which a lot of restaurants don’t have the start-up capital to do right away.

    At the very least, we know that people want quality and low prices, which, in my above example, shows two different types of customers. So having a restaurant that reaches both of those target audiences is a major plus.But the biggest rule about the restaurant business I find is that you can’t please everybody.

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