Overview

At the end of the financial year the wine slice of a restaurant’s turnover should have been skilfully engineered such that it contributes a decent amount of profit towards the running of the business.  It is necessary to keep a close eye (usually monthly) on the figures and implement change where needed.  The big question is how does the buyer make the correct amount of profit from the wines on the list?

The Big Picture - Marginal Calls

There are two distinct styles of margin that can be employed when costing wines:-

• Cash Margin

This suggests that a fixed amount of cash is added to the ex GST cost price of a bottle then GST is added to the total amount giving the selling price of the bottle.

To calculate a cash margin:

• Ex GST cost price of bottle
• Add cash margin of $10.00 (for example)
• Add GST @ (cost plus cash margin x 1.1)
• = Selling price of bottle on list

This style of margin will guarantee a minimum cash profit per bottle on every bottle of wine sold. It will soon become obvious that as one moves up the wine list in price, bottles become better value to the customer.

• Percentage Margin

Here, a percentage margin or gross profit percentage (GP) will be decided upon by the buyer and every wine will be costed in the same way. That is, a fixed percentage margin is applied across the whole range.

To calculate a percentage margin:

• Ex GST cost price of bottle
• Add GP% of 70% (ex-GST cost divide by 0.03)
  (N.B. 10% GP divide by 0.9; 20% divide by 0.8; 30% divide by 0.7 etc.....)
• Add GST @ 10% ($10.00 x 1.1)
• = Selling price of bottle on list

These methods of setting a margin, or a combination of the two, are used by all restaurateurs.  Lower cost wines often utilise a fixed gross profit of say 70% and some of the more expensive wines will be priced according to a fixed cash margin of say $40.00.  Whichever method you decide to use, make sure that ultimately the “sales mix” yields the correct amount of budgeted profit for your restaurant.

Profit is Sanity; Turnover is Vanity

The month end GP% can be worked out using the following equation:

• Opening Stock(OS) - the total amount, at cost price, of the stock on the 1st day of the month before service and any deliveries that day;
• Closing Stock (CS) - the total amount, at cost price, of the stock on the last day of the month after service and any deliveries;
• Sales(S) - the total amount of wine sales - usually taken from the till printout;
• Purchases(P) - the total amount of wine purchased during the month;
• (all figures used are ex GST).

OS + P - CS = Usage (U)

Gross Profit is calculated by {(S-U) /S} x 100%

Rigorously ensuring that you have maintained your monthly projected GP is the best way to monitor your profitability, and perhaps the only way to anticipate potential problems.

Balancing Equations

The relationship between sales, cost of sales, value of stock holding; rate of stock turn and average gross profit margin will all help to reveal the fundamental truth of all commercial activity: the only good business is a profitable business. They are also key indicators that will all provide sign posts that help you know how you are travelling throughout your financial year, and most importantly, clearly signal if you are drifting off-track on your route to profitability.

Casual Dining Experience in Australia

A Case In Point - Louise Radman, Sommelier – Hyatt Regency, Adelaide

“A good wine list has to be targeted – you need to consider the preferences of the local market, current trends, what your competition is offering, and where your venue is pitched – whether it’s fine dining, themed or café style. You need to decide on the length and style of your list, whether it will be a large list that requires you to hold and cellar stock, or a smaller list that is constantly changing and frees up the cashflow.

It is important to recognise the wine list is both a control and a marketing tool. You have to know how to work out costings and calculate your sales price to incorporate the profit requirements of the business. In general if a wine is quite expensive it will have a lesser mark-up, because even though you may be making less percentage-wise, you are often banking a greater dollar amount than you are on the cheaper wines. Ideally, you should make a better percentage on wines that you sell in large volumes.

It’s definitely possible to trade consumers up, and the greatest way of doing that is through staff education. If your staff understand the costs involved in making a quality wine and they can explain the provenance and characters of the wine, they are more likely to feel confident in up-selling to the consumer.”

Sommelier, Louise Radman

Summary

The wine list can be a strong contributor to an operation's overall profitability, but only if the product-service mix is right. This means being able to provide accurate and consistent delivery of predetermined margin contributions from key areas – house wines, fast-sellers and top-end movers. The easiest way to monitor the collective contribution of these different products is through a required average gross profit margin.