# Question of the Day: What’s Up With Restaurant Wine Prices?

Yesterday, we posted a Q&A with economist and all-around smart guy Steve Landsburg, who addresses a lot of everyday riddles in his writing. Sometime in the next few days, we’ll be posting excerpts from the economist Robert Frank‘s new book The Economic Naturalist. So far, I am loving Frank’s book. It poses a series of questions about small, real-world riddles, most of them asked over the years by his students. The questions are great, and so are the answers.

So, in tribute to the Landsburg/Frank school of everyday questions, let me pass along this e-mail from a reader named Martin Seebach. Maybe you can answer his question:

Every few months I like to take my girlfriend out to a higher-end restaurant and have a nice dinner. While the price of food items seems to be closely related to cost of food in the dish (e.g. , a 12-ounce steak dinner is maybe 30% more expensive than the 6-ounce dinner, not double or more, as both include the same side dishes and sauce), 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.

Am I not seeing something here?

How true do you find Seebach’s observation, and how do you explain it?

I do believe that a high wine price is, to a certain kind of customer, a valuable signal to your dining partner/s that you are (a) knowledgable about something as important as wine; and (b) able and willing to spend a lot of money on something that will (c) impress the partner/s.

If you have any time on your hands, you may want to poke around on this wine economic site, or on this fine wine blog, or, if you’re really bored at work, the Journal of Wine Economics.

UPDATE: Here’s what Frank has to say on the topic, from his book Microeconomics & Behavior:

Similar pricing strategies affect recovery of the costs of variety in virtually every industry. Consider again the restaurant industry. In a city in which most people have cars, which is to say in virtually every city, the cheapest way to provide restaurant meals would be to have a single restaurant with only one item on the menu … But people don’t want the same meal every night, any more than they all want the same kind of car …

How are the extra costs of all this variety apportioned? Most restaurants price the different items on their menus in differing multiples of marginal cost. Alcoholic beverages, desserts, and coffee, in particular, are almost always priced at several times marginal cost, whereas the markup on most entrees is much smaller.

#### sophistry

Since this is a high end restaurant.... there is probably a fatter tail in the right hand distribution of patron's willingness to pay for high end wine and the restaurant was simply trying to profit maximize on that.

#### kah

One thing is that isn't true that the price of food items is always closely related to cost of food in the dish. It is related to what the customer will pay for food in the dish.

Customers evaluate the value of food by a lot of metrics other than what the raw ingredients cost. The case of weighed quantities of meat is a rare one, because it cues the customer to focus on raw ingredients.

Customers will pay a whole lot for something made with cheap ingredients that is inconvenient to prepare at home. For example, the raw ingredients of pumpkin ravioli with sage butter sauce are extremely cheap, but customers will pay a lot for that dish because it is tasty yet inconvenient to prepare at home. If you don't get it at the restaurant, you'll likely never get it at all.

Perhaps the same is true for expensive wines - customers feel that if they don't get them at the restaurant, they'll never get them at all because it is inconvenient to establish a good relationship with a wine merchant and educate themselves about wine.

#### econ2econ

Most restaurants don't make much profit on the entrees. They make it on the upsells (appetizers, drinks, desserts). Take the chain restaurant staple, the BloominAwesomeOnionCactus thing. It's an onion. And flour. And cheap vegetable oil. And they charge you at least \$6 for it.

I don't claim to know anything about the wine market (other than I like to drink it), but it does seem like good impressions are one of the main drivers in demand for a really high end wine, whether it be a date or a big client. As for my own dining budget, the upcharges for wine make me appreciate Chicago's BYOBs that much more.

#### chappy8

I agree with #1 that it is simply a willingness to pay thing. I must also say that it is a cultural thing. My experience from my travels in Europe is that there is much, much less mark-up on restaurant wine (and alcohol generally). I think wine is viewed much more as a luxury good in the United States.

#### prosa

From a man's point of view, selecting the wine in a restaurant is like walking through a minefield, at least early in a dating relationship. One mis-step can result in disaster.

Order a wine that's too inexpensive, and the woman may think you are a cheapskate ("Night Train Express? How wonderfully generous of you!" [end sarcasm]) Order a wine that's too expensive, and she'll think you're just trying to score ("Chateau Lafite-Rothschild? I'll bet I know what you want for 'dessert' tonight, big boy!") And most of all, you have to avoid sounding like a wine snob ("A full-bodied taste with subtle oak and vanilla undertones, coupled with a robust black cherry aftertaste? How, how creative of you!" [end sarcasm, the repeat]) It's scarcely worth the trouble.

#### buddingeconomist

The markup probably is progressive, although the prices that you suggest (\$50, \$60 and \$70) would in fact lead to a regressive markup. I view this kind of high regressive pricing by the restaurant in two ways:

Firstly, it is a form of price discrimination; people who know about wine or who are well off will go for the more expensive bottles, thereby earning the restaurant more profit due to the progressive markup strategy. This way the markup on cheaper bottles can be lower, and so the restaurant doesn't deter those who can't afford expensive wine. We must remember that this restaurant isn't making gigantic profits every night, it has to cover it's costs, and one way to do this is price discriminate. If, as you suggest, the markup on wine wasn't progressive then the restaurant would be in a less efficient situation, not making extra profits from the rich, and losing out from those who can't afford it!

Secondly, we need to address the high price of wine in relation to food. Why markup wine so much more than food? It seems like some sort of tax on drinking to me. No matter how expensive the food is, people will probably order the same amount (3 courses) and will therefore spend the same amount of time at the table. However, imagine if wine were cheaper, people would most likely drink more of it which would lead to more time drinking, finishing off glasses after the meal and also lengthy table conversations because of drunkenness.

So the high pricing of wine in my view is a very clever profit maximisation strategy! We were indeed missing something.

#### sindam

I recently ate at a restaurant whose wine list provided an explanation for why they were able to offer their wine at low markups. They said that they chose to do without a sommelier and to use inexpensive stemware (not Reidl) so that they could keep their wine more affordable, and so that their customers could enjoy a better bottle of wine with their food. I bought it. I also bought two bottles of wine!

#### econ2econ

The more time a party sits at a table, the less revenue for the restaurant, though. The more expensive the restaurant, the less this may be true, but just recalling my restaurant working days, table turnover was very important. Which is why in your less-classy restaurants, there is an obvious rushed feeling in the service.

#### jonathank

Complicated question. One point not mentioned yet is that research shows enjoyment is not objective but perceptual; food and wine taste better if the consumer's perceptions are managed. Identical food and wine served in differing ambiences, for example, are rated differently for quality not of the dining experience but of the actual food and actual wine quality. Other research shows that consumers report higher belief in quality if they pay more for the food and wine.

Paying more manages the diner's perceptions. If you choose to pay more, you choose to have a bigger, more memorable evening, one that your perceptions will rate as being better. This idea fits more situations than the one where you're trying to impress someone because you're always trying to impress yourself.

It's a mistake to believe that people can objectively measure the quality of food or drink. Studies repeatedly show that consumers can't tell the difference between expensive wine and cheap wine. Some people are better at it but research shows expert perceptions are easily fooled and can be managed.

#### buddingeconomist

Sorry, In the second sentence there I meant to write "high, progressive pricing by the restaurant obviously". Also to illustrate my point about the progressive markup:

\$17 wholesale price - 200% markup - ~\$51 restaurant price
\$23 wholesale price - 200% markup - ~\$70 restaurant price

So to just keep the markup progressive, and take advantage of price discrimination, that extra \$6 that the restaurant pays for the bottle, translates into \$18 for you to pay.

#### furiousball

which is why i like nice restaurants that allow BYOB

#### bertrecords

I agree with #4. In Europe, when you buy wine, you are buying wine. In the U.S., they sell prestige.

I suggest Martin Seebach visit Dixies on Grand in St. Paul, Minnesota on a Wednesday after 10 p.m. for the half price bottles of wine and all around flavorful food.

#### talldean

You're making the assumption that folks buy wine at restaurants primarily to impress someone who doesn't know them fully.

That seems faulty logic, or at the very least, an unproven link.

#### Singletoned

In England the wine with the highest percentage markup tends to be the second cheapest, because no one wants to buy the cheapest wine, but few people care enough to go much higher than the second cheapest.

#### ocmpoma

In general, any alcohol purchased at a restaurant has a higher markup than the food, especially considering the lack of preparation required for drinks. As for wine, I can see inventory as an issue. Unlike beer, which moves faster, and unlike hard liquor, which is consumed in smaller quantities and therefore requires less inventory, wine most likely doesn't move fast in the US and takes up space, thus, I think that of the three "types" of alcohol, wine might carry the highest inventory costs. The higher-end the wine, the slower it sells and the more inventory cost it would carry.

#### microcars

one thing left out of this equation is what the restaurants actually have to pay for their wine.
If you think they pay retail or less, think again.
In Chicago for example, restaurants and bars MUST buy their spirits from an "authorized" distributor and there are only a couple of them (and until recently they were both owned by the same "family" if I recall...). They can and do charge what they want, so the restaurants can't just go to the liquor store and buy several cases of wine at a discount and resell them.
When I go to lunch today, I will ask my friend who owns the restaurant how he calculates the price of his wines.

#### Cliff

In your post, you assume that the cost of a 12 oz steak is proportional in cost to the 16 oz steak. The problem is that raw food cost doesn't include the labor involved. Cooking a 12 oz steak doesn't take any higher amount of labor than cooking a 16 oz steak, so part of that reduced mark up has to do with labor costs. Whereas with a bottle of wine the true cost of the bottle of wine is the raw cost, because you don't have to pay a chef for preparation.

Food is marked up heavily too. If you compare how much you could buy the ingredients to how much the price is on the menu it is a large gap.

#### mwpowers

I have read a fair amount on this topic and have to say that there seem to be a myriad of reasons why wine has such a huge markup in restaurants, many already mentioned. But storage issues are also an important factor. Restaurants need to have space to store wine and the 12 bottle cases are not small. Whites need to be chilled and reds should also be brought down to about 55 degrees before serving. The extra rent needs to be figured into the cost. Also, spoilage and corked bottles can also factor in. Wine doesn't preserve well after being opened, so most restaurants won't keep an open bottle for more than a day. Even the preservation methods that some use really don't help all that much. Estimates of corked bottles usually are around 5% (though most customers might not recognize a corked bottle if they bought one), but on the higher end wines, the person ordering will probably sense it. Also, restaurants are usually willing to replace a bottle of wine if the customer doesn't find it satisfactory. When we're talking about \$150 (pre-markup) Bordeaus and Grand Cru Burgundies, this can add up.

#### iahawkijake

>The Chicago "family" authorized liquor distributor...
The same family who also owns a once beloved city hockey franchise...
The same franchise that from 1999 - 2004 (the latest that I could easily acquire attendance figures), has experienced a radical decline in average attendance (yearly)...average taken from 1991 - 2004. Average over this 14 year period = just over 17k per event. 1999-2004 being:
1999 = 16.2k
2000 = 14.9k
2001 = 15.5k
2002 = 14.6k
2003 = 13.2k

Hmmmmm...
Of course that's only as good as the website I pulled these figures from.

Getting back to the restraunt/wine price discussion.

While I put myself through college by working many a shift in Chicago restraunts. I understood that the #1 factor of restraunt profitability comes from the volume of repeat business. The most expensive customer is the one who doesn't return to the establishment.

I like this question as I find myself in a similar position. I would most likely return to an establishment that offers a 15-20% lower price on spirits.