The Price of Profit
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Hey Team,
This week I’m going back to my roots and writing you a newsletter inspired by a tweet. It’s about balancing profits down the supply chain, and wondering who makes the most money from a bottle of wine.
How Much Does a Restaurant Make?
Let’s start with £20 per bottle, let’s call it a pretty solid bottle of Spanish Tempranillo, not from Rioja, but elsewhere in Northern Spain.
For what it’s worth, let’s use this one from a restaurant in Norwich, selling Tempranillo Blend, Cal y Canto, La Mancha, Spain. Their wine list price is £20. Which is startlingly inexpensive, although it is the cheapest red wine on the list*.
The average mark-up in a restaurant is probably running around 70% GP. It’s available from retailers for around £6.50 (Cambridge Wine Merchants, by the case of 12)
So, after VAT (deduct 20%), they’ve probably paid in the region of £4.75 for the bottle, so they’re making approximately a £12 cash GP along the way.
Which isn’t bad considering you as the customer has paid £20, did you expect the restaurant to be keeping half of that?
Did You Leave a Tip, or Pay a Service Charge?
I can’t see the restaurant adds on a service charge, so there’s the small detail of a sensible wage to pay their staff too.
Many staff in the hospitality industry are on the UK National Minimum Wage, their tips or share of service charges toping up their wages going some way towards a reasonable ‘living wage’.
That team of staff needs a building to work in which is expensive, plus hopefully one with electricity and water and menus and chairs and tables and whatnot.
The restaurant also get charged a percentage fee for each card transaction when you pay your £20, plus the wine list was on a website that had an email address that doesn’t come for free either.
All told, from that £10 profit, there’s not a great deal of net profit left at the end of dinner service.
How Much Does an Wholesaler Make?
This is an easier one to fathom. Importers and wholesalers build themselves a nice pretty PDF of all the wines they want to sell and then restaurants come knocking.
All they have to do is pop a tidy little 15% mark-up on their costs and they’re laughing all the way to the bank.
If only it were that simple.
If your wholesaler imports wine, there’s a huge burden of logistics, plus import taxes (we’ll get to that), warehousing costs and delivery costs. On top of that, paying for the goods upfront, paying a team of sales and admin staff, plus the cashflow burden of 30 days credit to most of their customers**.
Wholesalers deal with lots of businesses, and they fight hard to build relationships and invest time in staff training, printing costs for wine lists, tasting samples for new listings, events and marketing. In fact, the day-today of a wholesaler is one long hustle for a pretty thin slither of the profits.
On that £4.75 that “Hypothetical Norwich Restaurant” paid***, using our guide at 15% mark up, that’s about 50p per bottle of profit for the wholesaler.
But, the Government!
OK, here we go.
This is where the UK really comes into it’s own. Wine Duty. The UK Gov charges the third highest rate of duty in Europe at £26.78 per case of 12.
Currently**** it’s £2.23 per bottle in duty, after vat. Which means on a £20 bottle of wine, you’re paying VAT on the duty in there too.
How Much does the Winery End Up With?
OK, so from £20 we’re down to £4.25
Let us assume that wholesaler is taking on operational costs as an overhead, but has included the logistical costs in the cost of goods.
How much does it cost to ship and store wine?
Depending on your scale it can range from 5p per bottle for shipping (Tesco), 10p per bottle (Medium Importer), right though to £2 per bottle, if you’re occasionally shipping a single pallet of something.
A single pallet, post Brexit, is £350 up from £120 pre-Brexit, + £125 in Brexity Paperwork, so around £475 (+vat) for 600 bottles of wine. Pretty close to £1 per bottle. Those costs go down considerably as you increase the number of pallets you’re shipping.
My best estimates on the volume of wine required to ship into the UK for a wine like this will be pretty high, at least 10 pallets per shipment bringing the logistical cost per bottle down to around a post-Brexit, 25p per bottle.
Storage, around 20p per case, per week, so around 50p per bottle, assuming you’re storing it for 12 weeks.
Let’s go ahead and deduct the 75p in logistics, transport and storage, as well as the £2.23 in duty, and we’re left with around £1.25, or €1,50 to the winery.
Is This Sustainable For Anyone?
Yep, that £20 bottle of wine in that nice restaurant that’s won the awards, they paid about £4.75 for it, and after the Wholesaler, the Gov and the Transporter took their bit, or added on their costs, the winery ends up with €1,50.
Sounds a bit meagre doesn’t it.
It’s impossible however to bemoan anyone making a profit down the line, people have to run businesses for all the wine to be available, it needs importing, that costs money, it needs to be put on a shelf, typed onto a wine list, delivered to a restaurant, sold by their staff.
Everything costs money, and prices need to be kept stable.
Have you seen the average bulk wine prices in Spain? They’re as low as €0.33 per litre, which puts that €1.50 at a pretty decent price, but it still feels wrong, doesn’t it?
Should we care more about the ridiculously high rate of taxes that the Gov charge? Would that bring down the retail prices in the UK? Would a decrease in UK wine duty sustainably contribute to our Spanish winemaker friends taking a larger share of the profits?
What do you think?
dk
* This is a real restaurant, but I’ve decided not to name them.
** Cashflow is often in-effect tighter for wholesalers. When you pay for your meal at the end of it, the restaurant have the cash in the bank the next day, yet they get usually 30 days to pay their wholesaler. So, they’ve got your £20 in the bank as cashflow for the next month. Whereas, a wholesaler will maybe get 60 days from picking up 1200 bottles of wine, often unlikely that they’ve sold it all before they’ve paid for it.
*** Again, remember this is an estimate and a largely hypothetical scenario.
**** Go to the Further Reading bit below to see how they’re about to make Wine Duty even worse.
Indie Insider: Reserve Wines, with Nic Rezzouk
Indie Insider profiles and showcases the brilliant Indie Wine Merchant scene in the UK.
Indie Insider is a new thing from me, talking to people from within the Indie trade about what they do, how they do it, and why it works for them.
Further Reading
The Government’s Wine Duty Reform is a conceptual disaster, but in all likelihood they’ll plough ahead with it anyway. It might be cheaper to send a pallet of Tempranillo to Rwanda and fly your customers there to drink it.
Government’s proposals to overhaul alcohol taxation
From Sarah Butler in The Guardian, from Sept 2021.
Restaurant owners will be banned from taking customer tips and service charge payments from workers under legislation being introduced by the government five years after a ban was first proposed.