August 16, 2007
I'm not yet finished with my copy of Tyler Cowen's Discovering Your Inner Economist (it's very good, though!), so maybe this is included deeper into the book. But given that Cowen upholds that expensive drinks subsidizes food, particularly at fine restaurants where they make hefty margins off wine, etc, do we have any data on what the average mark-up is? If it's high, presumably the most cost-effective strategy be to forego drinking in fine establishments -- what you can't get at home is such fine cooking, and this way it's being subsidized for you. If it's relatively modest, there's certainly some added utility, even if it's partly imagined, to pairing a nice meal with good drink, so maybe it's worth it.
August 16, 2007 | Permalink
"forego drinking in fine establishments"
You're kidding, right?
Posted by: ostap | Aug 16, 2007 10:16:23 AM
This is pretty standard behavior in my cohort. Water or iced tea at the restaurant, wine at home. Unless you're with a special friend. In my experience the mark-up on a middle of the road bottle of wine is at least 200-300% over single bottle retail at my neighborhood liquor store. Plus the restaurant is buying them in cases from a distributor, so probably even more of a mark-up over their cost.
Posted by: justin | Aug 16, 2007 10:21:04 AM
The margin for wine is 100% or more vs. retail.
I actually often use a variation on this strategy. We will often bring a really good bottle of wine to a nice restaurant. The corkage fee is rarely much more than $15 (which of course is pure profit for the restaurant), but if we really splurge on the wine, we end up spending say $55 on a $40 bottle of wine rather than the $80-90 on the same bottle for the restaurant to provide it.
Posted by: Steve | Aug 16, 2007 10:24:24 AM
Here in Denmark they multiply the price they pay by 4-4½ according to a waiter I know.
Posted by: Mike in Denmark | Aug 16, 2007 10:34:10 AM
100%? More like 300-400% by the time it reaches the table.
There can be an educational component to this though: a server at a good restaurant should be able to suggest a pairing that you might not come up with on your own. Some establishments offer a slew of small plates/wines for you to experience together.
Posted by: DukeJ | Aug 16, 2007 10:38:42 AM
What do you mean the utility is "partly imagined"? Can one imagine that one is having a better time than one is actually having? This seems like some kind of objectivity falllacy.
Posted by: Chris Schoen | Aug 16, 2007 10:39:06 AM
I work at such a Fine Establishment, and our typical markup is between 300 and 400 percent -- if you buy by the glass, you can be sure the first glass out of the bottle covers (or mostly covers) the cost to the restaurant of that bottle. For very expensive wines, the markup might be more like 100% (say, wines that cost us over $100).
It's not pure profit, though. We have to store and maintain an extensive wine cellar (every back-of-house square foot in a restaurant has a cost in lost dining space), train and equip staff, replace broken wine glasses to the tune of a couple hundred dollars a month, etc.
We don't, incidentally, charge a corkage fee. Philly's big on BYOB.
Posted by: Josh | Aug 16, 2007 10:46:23 AM
When I tended bar and waited tables in Miami, in the early 1980's, a bottle of recent-vintage Dom Perignon went for $170; you could buy the same thing at the liquor store for about $60, and if you bought it at the Duty Free on your way out of the US, or at the state-run liquor store in Montreal, say, it cost about $45.
We marked up hard liquor in a huge way, and waitresses were encouraged to push wine and booze because there was virtually no labor--but lots of cake--involved. In the time it took a chef, me, and a busboy to create, serve, and clean up after a dinner entree, the bartender could whip up countless pricey cocktails and uncork at least a few $500+-bottles from the cellar.
Posted by: litbrit | Aug 16, 2007 10:49:27 AM
which restaurant, josh
Posted by: Atrios | Aug 16, 2007 10:50:05 AM
I was about to fire off a missive about how, even though I am a decently-paid professional, even I realize that getting drinks at a restaurant is a ripoff, and I won't even bother to buy soda, much less wine, unless it's a special occasion with a special person, because I'm there to enjoy the food and the company. It's about the food, not the drinks.
Then I remembered all the money I've spent on beer at the Brickskeller over the past month, despite the fact that the ostensible reason for going was because I wanted to get dinner.
Posted by: Tyro | Aug 16, 2007 10:51:22 AM
Derek's, out in Manayunk. Used to be Sonoma.
Posted by: Josh | Aug 16, 2007 10:53:38 AM
Ezra must be the King of the Qualifier. The final sentence contains- by my count- seven qualifiers to one declarative with- and this is a neat point- an implied declarative that only comes in to play if you accept the qualifier as a declarative.
It's enough to drive a man to drink.
Posted by: serial catowner | Aug 16, 2007 10:54:21 AM
The Brickskeller (Monk's or Nodding Head may be the closest Philly equivalent) is an excellent example -- I certainly don't have the time, expertise, or motivation to make several hundred beers available at my house. And their staff is well trained. I'd say the value-add there is pretty clear, as long as you don't go on Mondays when they've run down their inventory ahead of the Tuesday delivery.
Posted by: Josh | Aug 16, 2007 10:56:40 AM
Philly undercuts everything I've heard about how restaurants make their money. Much of the city's eateries are BYO, yet the food is just as good as elsewhere without being more expensive. I'm not sure how it works -- cheaper rents?
Posted by: Tom | Aug 16, 2007 12:13:12 PM
In his Windows on the World wine book, Kevin Zraly says his rule of thumb is to sell a glass of wine for what the whole bottle costs him. He estimates that you can get 5 to 6 glasses per bottle, so we're talking about an extremely healthy mark-up here -- 500 to 600%.
But Ezra, in terms of drinking strategy, you've got it backwards. You don't necessarily want to avoid drinking in fine establishments. What you do instead is BYOB to one of those amazing, dirt-cheap ethnic restaurants with no liquor license. Any decent city will have dozens of these. The benefit you get is twofold: 1) a meal for which the tastiness to cheapness ratio cannot be beat, and 2) the opportunity to buy your own bottle of really nice wine, for a fraction of what it would have cost to buy in a restaurant.
I really like this strategy because I love good wine, and few things annoy me more than paying $10 a glass for wine that is mediocre at best and pure plonk at worst. Plus, the cheap ethnic dives also tend to be my favorite places to eat. Currently my favorite is Yassa, a great little South Side Senegalese place here in Chicago. The food is amazing, the service is warm and friendly, and they don't even charge a corkage fee!
Posted by: Kathy G. | Aug 16, 2007 12:59:02 PM
Well, the takeaway here would be that you can certainly brew and dispense a superior beer at home cheaper than you can buy a good beer outside the home.
But you knew that already.
Posted by: serial catowner | Aug 16, 2007 1:01:49 PM
I'm with Kathy G. Some of my best meals have been from tiny ethnic restaurants (thai, indian, etc) that let you BYOB.
Also, anyone can prepare gourmet meals themselves at home. It just takes a bit of practice, and that's fun. By doing this you can avoid restaurants altogether, enjoying food you made yourself and booze you bought (relatively) cheap in the comfort of your own home. Plus no driving.
Just cook locally grown foods at home is my suggestion.
Posted by: just sayin | Aug 16, 2007 1:37:13 PM
I thought everybody knew that liquor sales cross-subsidize food sales, no matter how large or small the restaurant is. The fact that Ezra (apparently) didn't is exactly the Achilles' heel of rational choice theory. People don't have the information they need to be rational.
Posted by: Stuart Eugene Thiel | Aug 16, 2007 2:12:36 PM
do gas stations make more profits selling gas or cigarettes?
Posted by: ken | Aug 16, 2007 2:47:29 PM
When did the word "uphold" start being used in the way Ezra uses it here? It strikes me as really weird. You can "uphold the principle that X" or data can "uphold the theory that X," but I never thought a person could just "uphold that X." But I've seen it used that way several times recently, whether by Ezra or not I don't know. I'm not much of a prescriptivist about language, so I'm not complaining, just wondering.
Posted by: Christopher M | Aug 16, 2007 3:59:09 PM
Ah, youth. I realized this years ago. I'm amazed people are still just figuring this out.
Posted by: weboy | Aug 16, 2007 4:03:38 PM
Water has an even bigger markup, especially at the very posh restaurants that have a reverse osmosis machine out the back and put filtered/carbonated water in thick custom-designed bottles.
In strict anecdotal terms, all those stories that come around at corporate bonus time about a bunch of braying stockbrokers spending tens of thousands at a posh restaurant -- in themselves, a kind of free Veblenian advertising -- reflect the staggering markup on already-expensive vintage wine.
In general, restaurants seem to be careful to avoid selecting wines for their lists, especially at the 'house' end, from well-known producers. I have recognised high-end wines (c. $75/bottle retail, 100% markup), and lower-end wines (c. $7/bottle, 300% markup) but you rarely see a Yellow Tail or (furtively crosses self) Gallo wine on a restaurant menu. Asymmetry of information = dumb choices.
I can understand the utility of paying per-glass for a rare treat -- perhaps a single malt, or better still a vintage port, since port doesn't keep once opened. But if you do that, you're still often better off going to a high-end bar than a restaurant. But yeah, BYO. Even at $15 corkage, you're usually onto a winner.
do gas stations make more profits selling gas or cigarettes?
Depends on the location: if you're nearer an interstate and get lots of drive-through traffic, you can be more expensive at the pump than the places that locals use. But soda and snacks are true markup heaven.
Posted by: pseudonymous in nc | Aug 16, 2007 6:40:53 PM
Here's and article on wine markups and geography:
And another, on BYOB:
Posted by: K | Aug 17, 2007 11:25:07 AM
When I've seen a wine I know the store price of on a restaurant menu, I've generally found it was about 4x what it cost/would have cost me in the store.
That said, a nice bottle of wine that matches the food well, not only has its own utility but also multiplies that of the food, so it's often worth doing. I've wanted to try bringing my own wine to restaurants, but have typically lacked the guts or foresight to call in advance and see if it was an option. Which is too bad, because I own a few nice bottles of wine I'd like to drink, but I can't cook well enough to make a meal worth having them with, so it would be much better for me to take them to a restaurant.
Posted by: sara | Aug 17, 2007 5:23:21 PM
It doesn't disprove rational choice theory, it's merely an example of price discrimination.
Posted by: Chris | Aug 20, 2007 1:15:00 PM
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