Price Hikes and Recession Busters

Yes, it’s the “R” word. The effect of the economic downturn is already being felt severely in the wine trade with a succession of restaurants and small retailers going into liquidation and bad debt reaching an historic high. Some anecdotal evidence to illustrate the scale of recession: Major (high profile) restaurant groups have been struggling to pay September invoices and have had their lines of credit cut. Anglo Overseas bonded warehouse has gone into administration and stock from various wine merchants was frozen. A delivery driver for a big company had three deliveries (one of which was a single case of cooking wine). A top London restaurant reported business 30% down on last January.

To compound the difficulties the recession coincides with inflationary pressures, namely the virtual collapse of the pound against the euro and dollar over the past year.

How do such currency fluctuations affect the wine trade? Normally, merchants calculate their annual prices according to the cost of the product from the supplier, meanwhile taking a long term position on exchange rates. When currencies are stable the importer can forecast and guarantee continuity of price, and restaurants can also correspondingly plan their particular strategy for six months or even a year.

Naturally, no wine merchant can absorb swingeing currency differentials, but in the current highly competitive climate many have bent over backwards to respond to the (often overbearing) demands of their customers, and, as a result, severely damaged their margins.  In 2008 several companies were compelled to impose extraordinary currency surcharges to offset the potential loss of revenue; it was not unusual to see three and even four “incremental” lists brought out. To understand the scale of the currency movement it is salutary to recall that two years ago most price lists were predicated on an exchange rate with the pound buying 1.45 euros. By the middle of last year sterling had dipped to 1.30. A couple of weeks ago the buying rate was 1:1. To put this into perspective, the same wine costs about 20% more than it did last year.

Already operating at low margins and tied into unrealistic contracts, wine merchants have inevitably begun to feel the pinch. Margins have shrunk, belts are being tightened and staff are being laid off. Wine prices will probably have to increase a further 15% this year (time will tell) simply to cover the exchange rate deficit (and any additional rises from the growers). The only gleam in this dark cloud is that the currency might eventually regain some of its considerable losses and selling prices rejigged accordingly.

Confronted with impending price rises and a shrinking (and more discerning) customer base, restaurateurs will have to fundamentally re-evaluate their pricing strategies.  If wholesome food can be delivered at wholesome prices, why shouldn’t wholesome wines? Rather than straining to achieve unrealistic gross profit margins restaurateurs might attempt to deliver extra value-for-money by means of creative “cash mark-ups”. The G.P. (gross profit) as it is colloquially known, so beloved of the beancounter fraternity, should be consigned to economic oblivion. As long as the cash margin is protected the profit will still be more than adequate and it is infinitely better for restaurants to be busy with lower margins than quiet with a high g.p. Whilst good cheap wines may soon be a thing of the past, there will always be bin ends, special offers and interesting parcels, and the more that restaurants and wine merchants work together to find versatile solutions the greater the likelihood that those restaurants can retain the goodwill of their customers. Compromising quality is not the answer.

Recessions provide valuable lessons in how to run a business. Those who don’t acknowledge the economic reality will go to the wall. Business is not simply about numbers and number-crunching; it is about people, relationships, and partnerships. You can’t divorce economics from ethics.  Lack of consideration, lack of flexibility, lack of understanding is responsible for the perpetuation of bad business practice. The most successful restaurants are wedded to quality and understand the product that they are delivering; they know the price of everything they sell, and they also know its value.