Perhaps the single constant in the beverage business is that every operator wants his or her pour cost to be lower. “Simply put, when pour cost goes up, profit goes down,” says Jim Meehan, general manager of PDT in Manhattan. “It’s an important financial indicator, but it has serious limitations as an analytical device. What pour cost can’t do is pinpoint where the problems are, which is precisely the type of information operators need to run their businesses profitably.”
The inherent weakness with pour cost analysis is it doesn’t take into consideration that products sell at different mark-ups. Premium and super-premium products sell at a higher cost percentage than do well brands, yet generate significantly more revenue and gross profit. For example, were your staff to begin selling more drinks made with premium brands than well, the bar’s pour cost would increase.
While bartender-related issues are often at the root of the problem, a rising pour cost may also indicate that management is doing a better job of promoting higher profit premium spirits and drinks.
“Operators intuitively understand that gross profit is more important than pour cost, but they sometimes have difficulty putting that knowledge into practice,” observes Ian Foster, regional vice president of Bevinco, an international beverage auditing service. “Its more apparent on the food side, where selling a steak dinner at a $6 profit is more desirable than selling a burger at a profit of $4, despite it having a lower cost percentage. Like the adage goes, you bank dollars, not percentage points.”
What other truths surround this often used, yet often misunderstood measure of profitability? Our experts have rendered their collective experiences into the following principles.
TRUTHS ABOUT POUR COST
MAINTAINING CONTROL — Although it may be tempting to ask for the assistance of your bartenders when taking a physical audit, don’t. It is strictly an upper management function. It’s paramount that the person conducting the audit and calculating the percentages be impartial and objective with no self-interest in the results.
FACTOR OUT VARIABLES — You need to take precautions to ensure that your pour cost calculations do not penalize the staff for normal occurrences. Complimentary drinks go with the territory, so track them and factor out their cost from the ending inventory. The same is true for spillage, waste and inventory transferred from one outlet to another, such as to the kitchen for use in entrees or desserts.
A CALL TO ACTION — Large fluctuations in pour cost percentage signal trouble. A swing of one or two percent in either direction should trip an alarm. Costs typically shouldn’t deviate more than a point between inventory periods. While at times the reason may elude you, the effort will reinforce to the staff your commitment to controlling costs.
HUNTING FOR SHRINKAGE — After auditing the liquor stock, subtract each product’s ending inventory levels from their adjusted beginning inventory figures (which includes purchases). The difference represents the brand’s usage, which should then be compared to the item’s sales. For instance, if 36.5 ounces of Chivas was depleted from inventory, yet the bartenders only recorded sales equal to 20 ounces, what happened to the other 16.5 ounces? Therein lies the definition of shrinkage.
POUR COST INTERVALS — The higher your sales volume, the more frequently you need to take physical audits and calculate your ongoing costs. The more frequently you calculate your pour costs, the more insight you’ll gain into the business. Some operators track their costs on a daily basis.
CONSISTENT METHODOLOGY — Regardless of whether you weigh bottles or ascertain their contents visually, being consistent and accurate are imperative when conducting an audit. Errors and oversights will invalidate the results, and if left uncorrected, they will undermine the next audit by over or understating the value of the beginning inventory.
HOW LOW IS LOW? — While it’s natural to want your pour cost to be low, there’s a point where cost percentages can decrease too low. For instance, a liquor pour cost in the low-teens suggests that drink prices are too high or serving portions are inadequate, or both. In either case it’s bad for business.