How will restaurants respond to the economic downturn?

Here's an interesting article from Slate arguing that restaurants need to retool their current business plans in the face of an economic downturn. Here's the current situation:

The emphasis on wine has a simple explanation: Wine sales are the lifeblood of many restaurants. Ronn Wiegand, a Napa, Calif.-based restaurant consultant who holds the rare Master of Wine degree, says that wine accounts for 10 percent to 15 percent of total sales for casual restaurants and as much as 60 percent at fancier establishments. Restaurants generally have low profit margins and thus need to slap markups on pretty much everything they put on the table. But a $250 Bordeaux is obviously going to make a far greater contribution to the bottom line than a turnip. . . . For decades now, markups of 2.5 to three times the wholesale price have been the industry norm. According to Wiegand, such multiples are an economic necessity for most restaurants; anything less and they may have trouble sustaining themselves. But not every wine on the list has to be marked up at the same rate. So long as the average cost per bottle is in the 2.5-to-three-times-wholesale range, list prices for individual wines need not follow any formula. And, in fact, most restaurants that take wine seriously use a system of progressive markups: They generally slap the biggest markups on inexpensive wines and the lowest ones on pricy bottles (the idea being that the closer an expensive wine is to its retail price, the more apt the customer will be to bite).

But with consumers pulling back on their spending, some retooling is needed:

The easy profits are over, and restaurants hoping to weather the recession ought to think about dialing back their wine prices. Kevin Zraly, a New York-area wine educator who helped pioneer the use of progressive markups when he oversaw wine service at Manhattan's Windows on the World, says that at this point, restaurants just need to fill seats and should scale back their wine markups as a way of attracting diners. "Wine is a tool to get people into restaurants, and in this economy, wine prices need to be dropped to do that," he says. "We had adjustable-rate mortgages, now we need adjustable-rate wines." He also says that restaurants that allow customers to bring their own wines but charge relatively high corkage fees should think about reducing the amount they charge for BYOB. Zraly believes $20 per bottle is a reasonable tariff.

Restaurants that charge $35+ for corkage and sell their wine for 3x-retail will get eviscerated. There is no bigger turn-off to going to a restaurant, seeing a bottle of wine that is already overpriced at $50 retail, offered for $100+ on the wine list. And when the natural impulse is to save more, consumers will become even more reluctant to purchase such insanely priced bottles. In short, the restaurant sector is another part of the wine sector that is due for some shaking up in the current climate. The bubble's over....

Beaulieu Vineyard Georges de Latour Private Reserve Cabernet Sauvignon 1977

Just amazing. Shows a lovely red color, with rose-colored touches at the rim. Dried cherries and sweet, delicious tobacco on the nose. The palate still has a lot of fruit and, while the tannins have mostly faded away, it has excellent body. Just an amazing wine. Four out of five stars -- and drink up now!

Be Friends Villages Bourgonge 2005

Light red color shifting to salmon at the rim. The wine had bright cherry notes and spices on the nose. The palate is light -- little tannins, and soda-like acidity. Two and a half out of five stars.

Alpha Omega Late Harvest 2006

Straw to light gold in color with low rim variation and slow legs. Pineapple, peach, and honey on the nose. Nutmeg and caramel flavors coat the mouth, giving a creamy texture with a little spice on the finish. Unfortunately, the acidity could be a little more pronounced. Three and a half out of five stars (though this wine s on the pricier side).

Pax Richards Family Vineyards Syrah 2004

Rich, powerful blueberry and raspberry fruit meld with smokey bacon on the nose. That same fruit covers the palate, along with some chalky tannins that show this wine's potential to age. Finally, at 15+% alcohol, this wine amazingly shows no heat. Four out of five stars.

E. Guigal Cotes du Rhone 2005

The future Mrs. H. and I have been continuing our search for great value wines to serve at the wedding. I think I found a winner for the dinner.

Lush dark fruits and blackberry on the nose combine with a touch of earthiness that melds into rich, creamy mocha on the palate. The tannins are just perfect for a wine that would match a delicious steak entree. At $14 a bottle, this makes for a great value. Three and a half stars out of five (with a half star for value).

Wine and the downturn.

The Wine Economist has two interesting posts on the impact of the economic downturn on the wine market here and here.

On how the current credit freeze will impact wineries' ability to obtain the funding they need throughout the year:

Even if the Treasury rescue plan is a success, I still believe that credit will be much tighter for the next three years (some of my colleagues think it will take even longer to work though the credit cycle). This will have serious effects because so much of the real economy has become dependent upon ready credit to finance business operations and to fund customer purchases. Winegrowers are obvious potential victims of this trend. Winegrowing is a risky business with special credit needs and an overall credit freeze could have serious effects that may extend all the way from the price and availability of the grapes themselves to the value of vineyard properties. Retailers and distributors may also need to scale back their operations to match their reduced access to credit.

Second, there are already signs of the "hollow middle" being, er, hollowed out:

There is a lot of turbulence in the middle of the Wine Wall ($4-$10), which is the heart of the market in some respects. Microdata harvested from grocery store loyalty card programs suggests that buyers really are trading down from $7.99 to $5.99, for example. Since the cost of making the distributing a $5.99 wine is not $2 less than a $7.99 wine, trading down has a big effect on producer and retailer profits. Wine may be recession proof if you look only at overall volumes, which have held up pretty well for the industry as a whole, but don’t expect revenues and profits to tell the same sanguine story.

Finally, spending patterns may be seeing a shift:

So while some people will trade down to lower price, others will trade over — to a different idea of wine that allows them to spend less without feeling like they are giving up their lifestyle. I’m still serious about wine, their choices say, but I don’t take my self so seriously all the time. I like to have fun with wine and so I’m buying wine that reflects this fact now.

Here at House H., wine spending has dropped tremendously over the past few months. There are a number of first tier wines that I am passing on now (e.g., Penfolds Grange, the 2005 Leoville-Barton) as that same budget could be spent on more wine and for less. Value has become the watch-word, with wine that I find well-made but over-priced being pushed to the side (e.g., Grgich Hills Cabernet and Chardonnay). Focus has shifted toward a combination of short-term consumption with a smaller portion dedicated for long-term aging. In all, it makes for an interesting phase during which to maintain a collection!

Alpha Omega Sauvignon Blanc 2007

The lovely future Mrs. H. invited her sister over tonight, and we all opened the only bottle of this wine we had (darn -- the winery is sold out!). Perfect wine for a relatively warm night.

Yummy passion fruit, mango, and meyer lemon. The passion fruit and mango continues on the palate, with nice acidity that isn't tart. Delicious, and great with a light meal. Three stars out of five, and drink within the next two years.

Note: the future Mrs. H. was not a big fan of this wine, preferring the Grgich Hills Fume Blanc instead.

Alpha Omega Unfiltered Chardonnay "Beth" 2007

Lustrous gold color with strong pear and peach on the nose. The palate adds even more white fruit. Generally full-bodied. Very pleasant wine, and would be even better with food. Three and a half out of five stars.

Avoid elitism.

This blog post provides an excellent summary of why I canceled my subscription to Wine Spectator:

The one thing I can come up with, at least from my California point of view, is that there’s a body of opinion in this State that Wine Spectator is arrogant. This isn’t to say that the magazine’s personalities in California aren’t nice people. It’s just a perception that Wine Spectator has been a little too elitist, too hilfalutin for its own good.

Scroll down in the same post for a reply from Wine Spectator (which I think was focused more at the issue of the Restaurant Reviews than the charge of elitist).