Americans are spending a whole lot more money on booze in restaurants, and they're not necessarily getting more for it. Two weeks ago NPR released a report that pieces together nearly 30 years of historical data from the U.S. Bureau of Labor Statistics in order to give a picture of not only where Americans spend their money on alcohol, but how prices in restaurants and retail stores have changed since 1982. Brace.
As of 2011, we are spending 40 percent of our booze money in bars and restaurants (up 16 percent since 1982) and 60 percent of it at home. Adjusted for inflation, retail prices have declined 39 percent from 1982 to 2012, while prices on drinks at bars and restaurants have increased 79 percent during that same period of time.
Last week several publications took a stab at why that might be. NPR relates these numbers to a decline in productivity growth at the bar. Basically, without boring all of us to death, they believe that because "? a bartender today can't make drinks any faster than a bartender 30 years ago," there haven't been major productivity gains. And when you don't have productivity gains you have rising prices. (If you have the stamina, here's a lengthy economic study on this theory. Thank me later.)
Josh Barro over at Bloomberg hypothesized that these rising prices at restaurants and bars have to do with falling excise taxes on alcohol and the rising cost of liquor licenses. Since 1982, these taxes have declined by nearly 29 percent, and when "excise taxes fall in real terms, they cause a greater percentage reduction in price for retail alcohol sales than for restaurant and bar sales." Couple that with what Barro believes to be a rising cost of liquor licenses and the numbers make sense.
Both hypotheses have some truth, but they are missing some of the most obvious contributions to falling prices at retail (the internet) and rising prices at restaurants (demand).
The Internet and Retail Pricing
If I had a fax machine and a month, I'd probably be able to get the Bureau of Labor Statistics on the phone and piece together the data to see if there was a point where retail prices began to drop off more rapidly and exactly when that started to happen. If there was such a drop I'd bet that it happened sometime in the early aughts when online wine sales began to take off and retailers began playing the price game not just locally, but nationally.
"When I started back in 2001 the big deal was to rip open the New York Times and see who took out ads and who was charging what for their wines," says Jesse Salazar, the buyer at Manhattan's Union Square Wines. "Price competition was more local then. Now, in the past six years, nothing comes in here that doesn't get a national Wine-searcher rundown before it's priced."
The advent of the internet and price-comparing websites like Wine-searcher.com (which was founded in 1999) or Vinopedia (2010) have perhaps had more of an impact on that 39-percent drop in retail prices than anything else. Both sites allow consumers to compare prices on wine and spirits across, in the case of Wine-searcher, more than 17,000 retailers worldwide. For consumers, the sites have leveled the playing field, which comes at a significant cost to retailers.
In order to compensate, some retailers have resorted to superficially manipulating prices to lure consumers to their sites or stores. In other words, they may list a wine that is no longer available at a price far lower than other retailers to get the consumer to their site, or on the phone, to sell them something else. You've probably heard of this tactic, it's the ages-old bait and switch. This sort of manipulation has brought prices down even further.
If we look solely at how the internet has changed retail, that 39-percent drop makes a lot of sense (Salazar, for one, is quick to definitively say that margins have become much leaner since he first started back in 2001), but what about the 79-percent rise in restaurant and bar prices?
A Shift in Demand, Revenue Focus
Those numbers are a bit more difficult to explain. There are a few obvious changes that have surely contributed to rising prices, like the rising cost of real estate and rents in urban areas. Or the fact that in 1982, sommeliers (and their management-level salaries) barely existed in restaurants. As Americans became more interested in wine and high-end spirits, restaurateurs saw an opportunity to capitalize on their beverage sales, which made for the establishment of the sommelier profession as one with solid pay and real trajectory. These new costs have certainly contributed to rising prices.
"Consumers have become more aware of what wines cost and can shop competitively online," says Richard Coraine, Senior Managing Partner at Union Square Hospitality Group in New York, and a veteran of the restaurant industry. "But when you are in a restaurant you don't have the ability to do that; you are a captive audience for whatever frame you are in for that restaurant and they can charge whatever they want."
In other words, restaurants have the luxury of being impervious, to a large degree, to the sort of price competition we see at the retail level. And, over the course of the last few decades, as restaurants began to gain a more captive audience on the booze front, alcohol started to claim larger percentage of total sales.
"If a restaurateur sees a big percentage of sales coming in via wine then that becomes a target for a price increase," says Coraine. "An operator says, for example, 'Okay, I have a captive audience and I know they want this, so I am going to push the price up on my wine prolgram.'"
It's no wonder then that as people began spending more of their booze money in restaurants and bars that the rise in demand translated to a rise in cost to the consumer. This ultimately led to a fundamental change in the standard mark-up on wine and liquor. Those living in urban areas have now become accustomed to the $14 glass of wine—desensitized might be a better word—and chances are those prices aren't coming down anytime soon.