Understanding your business’s COGS (cost of goods or cost of sales) is the key to running a successful restaurant. When it comes to managing beverage costs, there are some distinct nuances to grasp. With margins thinner than ever, managing profitability concerning beer, liquor, wine, and non-alcoholic beverages can represent one of the most significant differentiators between success and being a part of the 25% of restaurants that don’t make it through the first year.
The first step toward managing your restaurant’s beverage costs is to accurately calculate your liquor cost percentage using the pour cost formula (or liquor cost formula).
Pour Cost Formula
Pour Cost Formula: (Beginning Inventory + Purchases – Ending Inventory) / Sales = Pour Cost/Liquor Cost or COGS
Pour Cost Formula Example
BI (Beginning Inventory) = $2,000 - This represents the total stock value of our previous week’s inventory
P (Purchases) = $6,000 - This represents all of the liquor that you purchased during the week
EI (Ending Inventory) = $4,000 - This represents the total stock value of the current weeks’ inventory
Sales (Liquor Sales) = $20,000 - This represents the revenue your business brought in from selling beverages assigned to a liquor sales category
$2,000 + $4,000 - $4,000 / $20,000 = PC $5,000 or 25%
A keen understanding of your liquor cost enables you to ensure that your restaurant is profitable.
Using the example above, we know that for every $1.00 in sales, roughly $0.25 is used to pay for the liquor. This leaves you with $0.75 of gross margin.
To put that in proper perspective; it takes far less to earn the $0.75 on each liquor item sold than it does to earn $0.65-$0.70 for each food menu item sold. In other words, the labor needed to create and deliver a drink is significantly less than the labor required to create and deliver a food item from your menu.
Tip: Because liquor sales contribute to a business’s NET profits more than food sales, focus on creating a profitable happy hour food menu instead of discounting cocktails.
How to Manage Liquor Cost Percentages
While many factors affect liquor cost percentages, shrinkage reduction behind the bar and a proper purchasing strategy are two of the most critical.
Reducing Shrinkage Behind-the-Bar
Implementing the following best practices behind the bar can help reduce shrinkage by keeping track of inventory and preventing theft.
Perform Weekly Bar Inventory. Performing a weekly bar inventory allows you to see variances in inventory levels while making the relationship between your purchasing dollars and sales revenue readily apparent.
Counting Consistency. Always have two people count and record stock each week. This practice not only keeps everyone accountable, it allows inconsistencies in your bottle usage and stock value to be detected. Counting weekly also keeps you aware of equipment issues and helps you to stay on top of maintenance concerns.
Breakage Book (Bottle Book) / Comp Tabs. The Breakage Book, also known as a Bottle Book, is a tool that allows you to readily check usage against sales. This log shows if a team member tends to give away a specific type of alcohol. It also helps to control waste.
Tip: Provide your bartenders with a Comp Tab. Comp Tabs allow bartenders to build a business by creating positive relationships with guests while maintaining control of the amount of product that is being given away.
Taking proactive steps to prevent shrinkage is just one way to keep liquor costs low. An effective purchasing strategy is another one.
Proper Liquor Purchasing Strategy
Use data. Using your COGS to influence your purchasing strategy is a great way of turning data into cost savings.
Weekly Journal. Track your restaurant’s sales and purchases every week in a journal. A Weekly Purchase Journal will help zero in on slow-selling items and make spending cuts accordingly.
Use a Declining Budget Strategy. A Declining Budget is used to manage the relationship between sales (revenue) and the amount spent in relation to those sales and gives you the ability to keep one eye on fluctuations.
For more about using a Declining Budget strategy, see our upcoming post, Using a Declining Budget to Manage Operational Costs.
Actual vs. Potential Cost Percentages
How do you know if your percentages are in line? Many operators simply look at the average pour costs in the industry.
Average Overall Industry Pour Cost: 15%
Daft beer: 20%
Bottled beer: 25%
Wine: between 30% - 40%.
Instead of relying on industry averages, savvy managers compare their own actual cost percentages to their potential cost percentages.
Determining a potential bottled beer cost percentage, for example, is done by dividing a bottle's cost by its selling price. If a beer’s cost is 50 cents per bottle, for example, and is sold for $2.00 per bottle, the potential cost percentage is 25%.
Actual cost percentages are the actual costs incurred divided by the actual sales generated.
If your actual beverage cost percentage is currently at 30%, then gross profit would be 70%. When the actual cost percentage is lowered to 25%, then gross profit increases to 75%. If your operation earns beverage revenues of $100,000 a year, improving revenue & cost controls to help reduce the beverage cost percentage from 30% to 20% will increase gross profits by 10%, which is another $10,000 of additional profits being generated from the same revenue.
Keeping a close watch on your beverage inventory by tracking shrinkage and maintaining an optimal pricing strategy can help mitigate loss, keep cost percentages low, and ultimately achieve profitable results.
By Eileen Strauss
