By Paul S. Hewitt
Wine inventory is different from food inventory in one very important aspect. Wine turns over a lot slower than food. In other words, it stays on the shelf longer. While food must be sold quickly, or it perishes, wine often improves with age.
The size and composition of a wine list depends on the type and style of restaurant. Higher priced, fine dining restaurants tend to have larger wine lists and include higher priced wines, while casual dining restaurants feature a smaller selection of reasonably priced labels that appeal to a larger audience.
We usually categorize wines by varietals, countries and price, and often show the wines by-the-glass separately. This is helpful for the customer trying to make a selection, but it is much less useful to the owner/manager. There are at least four different categories of wine, and each has its own unique profit profile and implications for analyzing costs.
Two words: Spoilage and Over-pouring.
Most restaurants provide a reasonable selection of wines that are offered by-the-glass, especially those operations that have a separate bar. The customer benefits by being able to try new wines, without having to buy the whole bottle, and individuals in a party are not locked in to drinking the same wine.
Cocktails and glasses of wine are similar, in that they both involve a serving of alcohol from a bottle. The difference is that the remaining contents of the wine bottle start to spoil as soon as the bottle is opened. Such wines have a much higher spoilage factor than wines that are only offered by the bottle. As the number of wines by-the-glass increases, the spoilage increases. All open bottles of wine should be re-corked quickly and consideration should be given to employing a wine keeping system to minimize spoilage.
Offering higher priced wines by-the-glass can be risky. These wines tend to be ordered less often than the lower priced glass offerings. More open bottles will become tainted. The amount of wine that remains unsold from each bottle will tend to be higher, and of course, the cost of the tainted wine will be higher. Often, an excellent alternative to offering high priced wines by-the-glass is to offer half-bottles instead. Most patrons that choose high priced glasses of wine are not price conscious. It is a fairly easy up-sell to move them to a particularly good half-bottle, which often sells for about twice the cost of a good glass of wine. It can be an especially good choice if two people wish to enjoy the same wine. This concept allows the restaurant to improve its wine offerings without suffering high spoilage costs.
Each pourable wine has a “recipe” for serving. It is a simple one, but it is still a recipe, expressing the portion as 5 or 6 ounces of a particular wine. I generally don’t generalize, but in this case I will. All bartenders over-pour wines by-the-glass. Maybe not every single one, but on average, they all over-pour. Your job as the owner or manager of a restaurant is to minimize the amount of over-pouring. You do this through proper training and strong supervision.
Many restaurants sell a high volume of wines by-the-glass. A small amount of over-pouring results in very significant losses over the course of a year, and these losses fall straight to the bottom-line.
These wines tend to have similar gross margin percentages, so mix changes will not have much of an effect on margins for this category.
Customers like variety, so they have as many choices as possible. While these wines do not involve losses from over-pouring, there is a greater potential for theft, as they sit on the shelf for a longer period of time. Many of these lower volume bottles are more likely to be “corked” or otherwise tainted, especially if they are improperly stored.
The owner/manager needs to balance the customer’s desire for selection with the inventory cost. Each wine added to the wine list requires an investment in the stock of wine. Many wines, especially those purchased from agents, must be purchased in case lots. If you’re lucky, a case will only be six bottles. Most are in cases of 12. These types of wines, with costs ranging between $10 and $25 per bottle involve an investment of $120 to $300 for each wine on the list. Given the number of varietals, countries and price ranges, the inventory cost can be very significant, and with a greater number of wine bottles comes a higher risk of theft.
These wines tend to have similar mark-up percentages, so changes in the sales mix within this group will not affect overall margins significantly.
Many wine lists include a few higher priced wines that appeal to well-heeled clientele and wine aficionados. These are important for attracting and keeping such clients, but again, they come at a high cost. These wines can involve individual inventory investments in the hundreds of dollars. Such wines are more likely to become tainted, because they will sit on a shelf for much longer periods than will the regular wines.
Corked wines may be returned to the vendor for credit, but “cooked” wines (tainted from improper storage) are your cost and can take a hit out of the bottom-line. If one bottle of wine is tainted through improper storage, there are likely many more that were stored nearby. One mistake can have a very large cost.
These wines will have a wide range of mark-up percentages. Generally, the higher priced the wine, the lower the mark-up percentage. However, investment wines that enter the wine menu may have higher mark-up percentages. Measuring the theoretical wine cost for these wines requires that the sales mix be taken into account.
These wines are similar to the premium wines, except that they are purchased for ageing. The expectation is that the wines will improve with cellaring and become rarer commodities, which will command higher prices and greatly enhanced profit margins.
The higher priced the wine and the greater importance of ageing means an even larger investment in wine storage. Typically, these wines require a constant, climate-controlled environment. Failing to maintain a proper storage environment may turn a potentially great wine into expensive vinegar.
Some of these wines are held in storage for years before becoming drinkable. It is especially important to maintain proper security, so that there is no “shrinkage” during the ageing process. These wines will be included in the inventory, but will not have any impact on the wine gross margin until they start selling, at which time they should be treated like premium wines.
Grouping all wines together to analyze mark-ups will not be particularly useful. Spoilage and over-pouring in pouring wines will be hidden by the volume of bottle sales. Changes in the sales mix of all categories and within the premium wine sub-category will distort the mark-up percentage from one period to the next. If you don’t take the sales mix into account, cost problems are likely to go unnoticed and continue to be problems. Investment wines should be excluded from the cost analysis until they are put on the wine list and made available for sale.
Paul Hewitt has been involved in the restaurant business for over 20 years, both as a chartered accountant advising restaurateurs and as an owner operator. He has two blogs http://canadianrestaurateur.wordpress.com/ and http://cdnbartaxadvisor.wordpress.com/ with useful information about restaurant operations and taxes.