Magic Mark Ups - Travesties and Honest Practice
The one benefit of a recession, said a wine merchant to me in 1991, is that good businesses emerge from it stronger, pared down and more efficient. Failure, he expounded further, is nature’s way of culling mediocrity. The amateurs, the transients, the get-rich-quick merchants are most likely to be found out as their enterprises are constructed on a whim and a prayer. (Unfortunately, so are some sustainable businesses who have the bad luck to be caught up in the melee).
Business, over the years, has become about business as short term gain - only collect as EM Forster did not write - rather than creating loyalty and enduring friendship. As the collapse of the banking industry has amply demonstrated, short-termism is baseless and to be deplored. Successful enterprises require strong underpinnings, which involves building good will. For historical reasons the relationships between restaurants and their suppliers have become unbalanced.
During the boom period it became so ridiculously easy to raise capital for quick expansion that some restaurants became bloated and lazy and began to lose sight not only of the fundamentals of hospitality but also the tenets of constructing a viable business. Notwithstanding the obvious proposition that a business, for example, should grow within its means, the belief that it was necessary to grow quickly at all costs, created a series of unwarranted assumptions in the way commerce could be negotiated between restaurateurs and their suppliers. The former would look for the best deals, ranging from heavy discounts and extended credit terms to retrospectives, free stock and even to cash gifts and holidays. Since wine merchants didn’t want to bite the hand that would eventually pay them they were content to go along with what was a patently lopsided arrangement. In short, the wine merchants and other suppliers were subsidising the success (or otherwise) of restaurants, whilst the intense competition to gain or retain business meant that their own profit margins were being damaged.
Accountants, bless them, are employed either to protect or ratchet up the gps. This entails pushing the supplier for greater discounts, trying to prevent price rises, deferring payment and a host of other weasel tricks. For the true beancounter a net strong gp is actually more important than a busy restaurant because economic variables can be understood, managed and monitored. Truly, these people know the cost of everything and the value of nothing. The typical business spreadsheet is the classic example of financial wish fulfilment. A spreadsheet posits theoretical profit and loss scenarios according to purchase and selling prices, but does not take the psychological temperature of customers, nor does it factor in macro-economics (recession and depression). There is a “tip-over point” in the fortunes of every restaurant when customers perceive it as poor value for money, a qualitative rather than a quantitative judgement. In the flexible economy you may build your house on stone, but you should still be prepared for shifting sands.
The GP, qua brute GP, has long been the consolation of bean counters and the bane of wine drinkers. Restaurateurs, fancying themselves as entrepreneurs, enamoured by the notion of exponential growth, also began to recite the mantra about hitting their “GPs”. Wine was given punitive mark-ups, and, over the years, the scale of the margin increased steadily from 65% to 70%, until now it is not unusual to see 75% and 78% averages.
So, bottles of wine are routinely and shamefully marked up four or five times and people don’t bat an eyelid. But they will. Wine is already taxed to the hilt, and every time there is a price rise, restaurants use it as an excuse to increase their net profit margin. Because they are so adamant about maintaining a consistently elevated GP, a wine which has increased by, say, £1, can and will be marked up by £3.50 (a net extra cash profit of £2.50). Meanwhile, other restaurants search for cheaper wines to hit their rigged price points. Until buyers perceive that glass ceilings on prices are just that - ceilings which must be shattered - wine lists will become all the poorer as choice steadily diminishes.
These regressive approaches are counterintuitive in a recession when it is crucial to get people through the door and to convey value for money, whether you own a bar, café or Michelin starred restaurant. In the real world of real bums on real seats, real people are deciding where to spend their hard earned. Perception is everything and I could give an unhealthy roll call of places where value and quality is subservient to the bottom line. If you insult a customer once, you insult them forever. The main problem with multiplying axiomatically by a fixed margin is that you end with a price that bears no relation to the real value of the wine. It is therefore commonplace to see massive differentials between restaurants for the same wine according to who has applied a rigorous gp and who has applied a variable or cash mark up.
Wine buying, especially for groups and larger establishments, has become formulaic. The product is often sourced to fit the margin. As prices naturally rise, this inevitably leads, as I have said, to a diminution of quality. When you purchase food for a restaurant you can be creative by looking at cheaper but equally delicious cuts of meat or other types of fish. You can buy seasonally which also helps with cost. You can eliminate wastage with carefully planned menus. Cheap wine is cheap for a damned good reason; remove the duty from the equation and the cheap wines are almost invariably mass-produced, anaemic and dreary. You wouldn’t go to a restaurant to eat a battery farmed chicken, nor should you pay over the odds for mediocre, industrial wine.
The equitable solution is for restaurants to apply a cash margin to wines on the list. This might be £10, £15 or £20. It might be a fixed or variable cash margin. Several benefits would accrue. Firstly, the value of the wine would be clear. Secondly, more expensive wines would be affordable to a more customers, incentivising them to spend more money on better wines which, in turn, would create a culture of interesting and informed wine drinking. Attractive pricing in turn allows for greater rotation of stock which ensures better cash flow. There are plenty of good examples where cash margins are used effectively, and it is no coincidence that these are currently amongst the busiest restaurants in London.
Now that we are in a recession it is an opportunity to re-establish good practice. Restaurateurs can either squeeze suppliers for better deals (perhaps squeeze them into oblivion) or take some responsibility at last. If they use recession as an opportunity to reinvigorate their lists by critically examining their margins and employing clever initiatives to upsell, I commend them. The morality of business is to survive virtuously, to build solid foundations for the future and to be a link in the chain between happy customers and happy suppliers.