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Comments - Doug Wregg

Published:  09 February, 2009

When compared to currencies like the euro and the dollar, the value of the pound has crashed over the past few months. Les Caves de Pyrene's Doug Wregg looks at the implications for your wine list.

Have you stopped to think how currency fluctuations affect your wine list? Although few of us in the wine trade have much expertise in the financial markets, it doesn't take a genius to realise that exchange rates can have a big impact on your bottom line. Normally, merchants calculate their annual prices according to the cost of the product from the supplier, while taking a long-term position on exchange rates. When currencies are stable the importer can forecast and guarantee continuity of price and, as a result, restaurants can also plan their own strategy.

To understand the scale of the currency movement it is salutary to recall that two years ago most price lists were predicated on an exchange rate with the pound buying 1.45 euros. By the middle of last year sterling had dipped to 1.30 euros. A couple of weeks ago the buying rate was 1:1. To put this into perspective, the same wine costs about 20% more than it did last year.

Naturally no wine merchant can absorb swingeing currency differentials, but in the current, highly competitive climate many have bent over backwards to respond to the demands of their customers. As a result many have severely damaged their margins. In order to offset this potential loss of revenue several companies were compelled to impose extraordinary currency surcharges in 2008; it was not unusual to see three and even four 'incremental' lists being published.

Already operating at low margins and tied into unrealistic contracts, wine merchants are now really feeling the pinch. Margins have shrunk, belts are being tightened and staff are being laid off. Wine prices will probably have to increase a further 15-20% this year (time will tell) simply to cover the exchange rate deficit (and any additional rises in price from the growers). The only gleam in this dark cloud is that the pound might eventually regain ground against other currencies, with prices being rejigged accordingly.

In the interim, confronted with impending price rises and a shrinking (and more discerning) customer base, restaurateurs need to re-evaluate their pricing strategies. Rather than straining to achieve unrealistic gross profit margins, restaurateurs might attempt to deliver extra value for money by means of creative 'cash mark-ups'. The G.P. (gross profit) that is so beloved of the bean-counter fraternity should be consigned to economic oblivion. As long as the cash margin is protected, the profit will still be more than adequate - it is far better to be busy with lower margins than quiet with a high G.P. And while good cheap wines may soon be a thing of the past, there will always be bin ends, special offers and interesting parcels, and the more restaurants and wine merchants work together to find versatile solutions, the greater the likelihood that those restaurants can retain the goodwill of their customers. Compromising quality is not the answer.

Recessions provide valuable lessons in how to run a business. Those who don't acknowledge the economic reality will go to the wall. Business is not simply about numbers and number-crunching; it is about people, relationships, and partnerships. You can't divorce economics from ethics. Lack of consideration, lack of flexibility and lack of understanding is responsible for the perpetuation of bad business practice. The most successful restaurants are wedded to quality and understand the product that they are delivering; they know the price of everything they sell - and they also know its value.