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Tuesday, August 28, 2007

Wine Inventory Turnover

For the non-accounting readers, I'm going to start out with a simple definition. Inventory turnover equals cost of goods sold divided by average inventory. Our industry is used to turning the food inventory every two weeks (sometimes quicker). With a food inventory turnover of 26, restaurant managers are often unprepared for the much lower wine turnover rate.

I have seen average wine inventory of $400,000 in an operation with $2,000,000 in wine revenue and a 40% cost of sales. This is a turnover rate of 2!

So why is wine turnover so low at many restaurants? The answer lies in the investment in slow movers. These high priced bottles move very slowly since most patrons opt for less pricey bottles. Often wine list managers need to purchase a minimum number of cases per year for the top tier wines. I have seen one vintner who requires a minimum of 5 cases annually to remain on the customer list. My customers do not sell the 5 cases each year. They are willing to grow the inventory knowing the wine will not sell in a 365 day time frame.

You could argue for these bottles to be treated as non-current assets. The issue is how slow the bottles move. In the worst case scenario, I have seen certain bottles which have not sold - ever. Why do the restaurants stock these wines? Perhaps, the perceived quality of the wine list depends on the inclusion of a certain number of slow movers.

Hopefully, the operator with the wine inventory turnover rate of 2 enjoys a decent turnover on the every day wine by the glass selections. If this is accurate, should the restaurant segregate the slow moving trophy wines from the live wine inventory?

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Tuesday, August 21, 2007

Wine Cellar Investments

An article entitled "The Best Restaurants For Wine Lovers" is featured in the current issue of Wine Spectator magazine (with category lists of the 3,955 award winners). The award winners are also featured in the dining guide which is formated by country and region. You can find lots of winners in major American cities. New York has the most winners of any city - 196.

In the same issue, Harvey Steiman points out new trends with an old American favorite titled "The New American Steak House" with a focus on high profile chefs. In his excellent article, he states: "The classic steak-house wine cellar focuses on Cabernet Sauvignon and Bordeaux." Only two of the 48 American winners of the Grand Award were steak houses. Many steak houses are listed in the broader award category named "Award of Excellence" since their inherent focus on reds keeps them from inclusion in the Grand Award list.

Some of the wines which may distinguish a Grand Award winner from an Award of Excellence winner are featured in a August 3, 2007 Wall Street Journal article "First Growths Make Their Debut" written by Dorothy Gaiter and John Brecher. The 2004 first-growth Bordeaux wines are the focus. They mention the significant drop in price for first growth wines in 2004 vs. 2003 (one of the finest vintage years).

Should you invest in these first-growth Bordeaux bottles at an average of $301 per 750 ML?

Unless you are committed to a long term quest for the Grand Award, you may want to spend your $301 on a full case of popular domestic wine. My experience includes 10 clients with significant wine inventories. In every study, the revenue generated by top vintage Bordeaux bottles was minor in relationship to total wine sales. I'm sure many wine shops experience a similar phenomenon. Most of the wine revenue will be generated by popular, more affordable bottles.

Storage of high priced wine is a major issue. The security needs to be the primary focus. Two of my clients had vaults with doors similar to those seen in a bank. In addition to security costs, the storage needs to be climate controlled. If these vintage wines are moved too often or are kept at improper temperature and humidity levels, they will lose their value.

The chairman of the corporation I worked for before starting my company sent a gift to a partner of a firm in New York to thank him for a personal favor. The gift, a case of vintage French Bordeaux, was very generous. Unfortunately, the partner called our New York office to inform us the wine had turned to vinegar.

The wine distributors now offer "six packs" with a selection of vintage bottles to help restaurateurs feature more top rated wines without investing in a full case for each label.

Very few restaurants can justify the investment required to gain entry into the elite Grand Award list. I believe the risk outweighs the potential reward.

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Friday, August 10, 2007

Basic Wine Cost Control

At the heart of wine cost control, a bottle accountability system provides the information needed to properly evaluate results. Too much energy is replicated by top wine professionals. They frequently classify wines by region, color, grape, vintage, vintner, ratings and other critical evaluation criteria. These are the essential elements required to select and categorize the wines.

Once you have chosen a base wine list and send it to food and beverage control, I'd allow a different view. The highest volume of wine sales is found in pouring wines and house wine by the bottle. These wines compete directly with beer and cocktails for profits. Wines sold by the glass should be consistently drinkable and profitable. If you buy a 1.5 liter bottle of wine for $12 and pour 10-five ounce glasses at $6 each, you'd expect a 20% cost percentage.

To the opposite side of the wine spectrum, we find low volume, top vintage boutique bottles purchased in limited quantity and priced to yield a decent dollar markup. Some of my successful clients simply double the price they pay for these bottles. This would imply a 50% cost of goods sold.

Should these two wine classes be mixed on your books?

The pouring wines will turn many times in one year and many of the premier wines won't sell for over a year (sometimes never). Restaurants may store wine for favored clientele. Some restaurants will buy young wine at auction and let it age over many years. These wines do not belong in the same category as the pouring wines.

I recommend four categories: pouring wines, popular bottle wines, premier wines and investment wines. The popular bottles and pouring wines need to be priced to hit a good cost percentage. A $12 dollar bottle should be sold for at least $30 (40%). I recently enjoyed a well paired wine for $30 at my favorite restaurant. The next week, I found the bottle for $9 at the local wine shop (30%). If you help your customers with the pairings, you can charge more per bottle.

Don't fall into the trap of required wine purchases. Let's say you sell a phenomenal cabernet sauvignon for $200 per bottle. If the boutique vintner wants a minimum order of 5 cases per year at $1,200 per case, your cost is $100 per bottle (50%). At year end, you've sold only 1 case. The remaining 4 cases are in inventory at cost. Do you continue to purchase the annual minimum of 5 cases? Over time, this purchase activity will become perilous. Paying $6,000 to a supplier for wine which generates $2,400 in sales is a mistake.

Creating a winning wine list to use as a sales tool is the job of specialists. Too often, I find my customers lamenting the spoilage of expensive vintage wines. These discoveries often occur when the beverage manager leaves the company. The successor manager goes to the cellar and identifies old legacy wines and clears them from the list. Better to move a slow mover for a huge discount than wait for really expensive vinegar.

Restaurant Data Pros

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