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Understanding Beverage Cost Percentages

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The unfortunate reality of operating a bar is dealing with the negative affect on profits due to shrinkage. In particular, bar operations are likely to have lost potential profits due to careless draft beer pouring by bartenders, unauthorized giveaways, over-pouring liquor shots to boost tips, cash skimming and outright product theft. Joseph Thompson with Stock-Taker, a beverage auditing company in Atlanta, Georgia, has determined that the average bar is missing more than 25 percent of their liquor, wine and beer profits.

Bar owners typically evaluate their establishments based on their "cost of goods" percentage — more commonly referred to as “pour cost”. Pour cost is calculated by simply adding up the cost of the product used and dividing it by the cost of the product sold. For example, if a bar depleted $5,000 of liquor in January and had liquor sales in January of $25,000, their liquor pour cost for January would be 20% ($5,000 ÷ $25,000). A pour cost of 20% indicates that every dollar of sales generated, cost the establishment 20 cents.

The main problem with pour cost is deciding what to compare it against. How do you know if your percentages are in line? Most operators simply look at the average pour costs in the industry or at their previous annual cost percentages. On that basis, most operators are happy if their liquor pour cost is around 15%, draft beer in the neighborhood of 20%, bottled beer close to 25% and wine between 30% - 40%. But even if a bar’s cost percentages come close to these arbitrary targets, they may still be too high.

Managers should compare their ACTUAL cost percentages to their POTENTIAL (or optimal) cost percentages. Potential cost percentages are determined by taking into account an operation's selling prices, purchasing costs, and sales mix. When calculating a potential liquor cost percentage, the desired liquor shot size needs to be considered. When determining potential draft beer cost percentages, the sales mix of each draft beer container used (mugs, glasses, pitchers) has to be figured into the calculation. Use our Potential Cost Calculators to help you determine what the optimal liquor, draft & bottle beer cost percentages are for your establishment. Click Here

Determining an operation's potential bottled beer cost percentage is just a matter of dividing a bottle's cost by it's selling price. For example, if Budweiser costs an establishment 50˘ per bottle and is sold for $2.00 per bottle, then the potential cost percentage is $.50/$2.00 = .25 = 25%.
Actual cost percentages are the actual costs incurred (taken from distributor’s invoices) divided by the actual sales generated (taken from the cash registers.)

So what does all this mean? If an establishment’s 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%. Let's assume a bar operation earns beverage revenues of $200,000 a year. By improving revenue & cost controls to help reduce the beverage cost percentage from 30% to 20%, gross profits will increase 10%, which is another $20,000 of additional profits being generated from the same revenue!

Look at our PRODUCT SHOWCASE for profit-enhancing products designed for the bar industry. If you need help calculating your establishment's potential cost percentages, call The Bar Profit Guys at (800) 285-2337 or (404) 262-2337 and they will help you determine your establishment's potential cost percentages over the phone!