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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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4 comments:

Terry said...

Joe,

Really good points. We are a smallish fine dining restaurant on the Eastern Shore of Maryland, and the pressure to maintain a high-quality wine list with slow turnover has been a challenge. Our by-the-glass selection has done very well and find that the majority of the bottle wines we sell are in the $30-$45 range: nowhere near the prices of the French Grand Crus and our California collector cabernet sauvignons. But, I don't think that we could take the trophy wines off of the wine list without losing the reputation that comes from having a 1970 Chateau Mouton Rothschild on the list. BTW: Got my Opus One allocation letter yesterday...so your blog is VERY timely.

Joe Dunbar said...

Terry,
Thanks for the insight! Great comment. Do you treat the investment as a form of promotion? If the trophy bottles attract customers, its a good investment.

Joe

eric said...

nice post...i can easily find restaurant averages/benchmarks for things like food cost, payroll, sale/sq ft, etc. where can i find averages/benchmarks for wine turnover?

Joe Dunbar said...

Eric,
Wine turnover numbers would be tough to locate but not impossible. If you focused on a public company with food and beverage data in their balance sheet and income statement, you could mine the information.

Joe

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