For bars and restaurants, the bar is the engine that powers profits. That's because alcohol often has the largest profit margins, generating the biggest return in dollars from sales. A skilled and savvy bar director is blessed with the Midas touch, turning intoxicating liquid into gold. That's why having a successful beverage program is so important.
In order to ensure success it's crucial that restaurants and bars establish the proper controls to keep things like liquor and pour costs in check. Businesses that don't have a strategy in place to manage costs are all the more likely to end up as another venue with shuttered doors.
To help restaurants and bars tap into success, Backbar has put together this comprehensive guide to managing your bar program's finances.
Here's what you can expect to find in this post:
Liquor cost is an important metric that every bar manager should track. At it's simplest, liquor cost is the price you pay to purchase alcohol from distributors. Liquor cost is also referred to as pour cost and beverage cost.
You'll often see the terms put together as well, like liquor pour cost. We'll use all these terms interchangeably through this guide.
It's important to note that liquor cost refers to more than simply the cost you see totaled on your invoices.
The important number is your pour cost percentage, the ratio of liquor costs compared to your liquor sales. Your liquor pour cost percentage equals the dollars taken out of your gross profits from sales.
It's important to keep your pour cost low, because the higher the cost the less profit you make. And your pour cost percentage is a variable cost you have significant control over, unlike many fixed costs you have less control over for overhead or rent.
Many restaurant and bar operators take a simple, long term view on their liquor costs. You can get a decent understanding of your costs by simply looking at your Cost of Goods Sold, or COGS for a set financial period. The definition of Cost of Goods Sold (COGS) for liquor costs is the direct costs of everything attributable to what it takes to sell drinks. From an accounting perspective, the direct costs are not just the liquor, but mixers, garnishes, consumables (straws, cups, etc...), and anything else that is required directly to make and sell the drink. It is calculated by taking your starting inventory, subtracting your ending inventory and adding any purchases made in between.
COGS = Starting Inventory + Purchases - Ending Inventory
Whether you look at a full year to get your annual costs, or by financial quarter or even month-to-month, you can find useful information by looking at the data in different time increments. It is also helpful to look at the COGS (and pour cost) for different categories of products. For example, in addition to calculating for all alcohol, calculating separately for wine, beer and spirits; and breaking out wine by the glass and by the bottle, and draft beer and bottled beer. We'll dive into that further on in the cost.
This is a pretty common question we hear at Backbar. And it's a good one.
There are a few things to consider when dealing with liquor cost. But one simple, big picture method to find pour costs, which is how many restaurant and bar operators do it, is to look at the annual sales performance of their venue. Here's how you would calculate that:
|Cost of Goods Sold||= Liquor Cost Percentage|
Here's an example.
If in a year, your bar sold $10,000 worth of alcohol inventory, and that inventory generated $50,000 of sales, then your beverage cost percentage is 20 percent. Which means 80 percent of your alcohol sales are gross profits.
10,000 / 50,000 = .2 or 20 percent
Understanding your liquor cost is very important to understanding the performance and profitability of your restaurant or bar. However liquor costs don't give the whole picture. They take into account the profitability of inventory you are selling, but what about dead stock that you bought, but isn't selling? Understanding liquor costs also help maximize gross profit margin percentage, but not necessarily your gross profits themselves, and in the end you want to maximize the dollars, not percentage.
A shortcut way to get an estimate of your liquor costs by including all inventory purchased as a cost (instead of a fixed asset) is to just utilize your total purchases within a period divided by the total sales. This estimate will be better over a longer time period like a year (one month is likely too short unless your monthly purchases and sales are very consistent).
|Purchases||= Liquor Cost Percentage|
While the formula above can give you a quick estimate including all your purchases (even if not yet sold), there are better ways to get an understanding of your inventory utilization. One of the most important metrics is Inventory Turnover which tells you how many times you have sold and replaced your inventory within a specific time period. This is a measure of how efficient you are using your inventory (and thus how efficiently you are using your cash). In general, a higher inventory turnover is better, signaling you don't have a lot of money tied up in inventory that isn't selling. One red flag to watch out for though if your inventory turnover is too high, is that it can also be an indication that you aren't buying enough products and you are running out of stock, either losing potential sales in the process or making customers unhappy. The formula for calculating Inventory Turnover is:
|COGS||= Inventory Turnover|
Average Inventory Value
In the above formula, Average Inventory Value is simply the average of inventory between the starting and ending inventory dates used to calculate COGS. A different way to look at utilization of inventory is to calculate Inventory Turnover Days, which is a measure of how many days products sit in inventory before being sold. The shorter the better. To calculate this, simply take the number of days between inventory periods and divide by the Inventory Turnover.
|# Days in Period||= Avg Days in Inventory|
It's helpful to calculate your liquor costs and inventory turnover so you can understand the full picture of your costs and how efficient you are buying and selling products to maximize your gross profit margin. You can then focus on how to improve those profit margins by finding lower price points to purchase at, increasing the price you sell products at, or focusing marketing and sales efforts on the products that yield the highest margins.
As mentioned in the previous section, it is helpful to calculate these metrics not only for all alcohol sales combined, but also for various product categories and drink types (glass vs. bottle, keg vs. can/bottle, wine vs. beer vs. spirits).
We mentioned that the above formula for liquor cost percentage is a big picture way to approach calculating costs. But another important element of costs is to find the cost per ounce for the liquor you purchase as you will need this for pricing.
Because you don't always sell liquor, wine, and draft beer in their original whole containers, knowing your cost per ounce will help you accurately price your drinks so you can make the desired margins.
Here's the formula for finding cost per ounce of liquor:
|Container Cost||= Cost per Ounce|
Ounces per Container
For an example, let's use Belvedere vodka. If your bar stocks Belvedere in 750ml bottles, and you pay $20 per bottle then here is your cost per ounce:
$20 / 25.4oz = 79 cents
So one ounce of Belvedere costs you .79 cents. If you do a 2 oz pour for a shot, then a shot of Belvedere costs $1.58
This can also be done for wine or draft beer. You just have to determine the number of ounces in your bottle or container. Here's a quick guide with the volume in ounces for common bottle and keg sizes.
Knowing that you can go granular when looking at pour costs, like looking at your cost per ounce, it's important to point out that you can (and should) look at your pour costs by different types of alcohol. Your costs and potential profits for wine and beer will be different, and both those drink types will have different costs than your spirits.
So it's important to track your costs and margins by drink types so you know which drinks perform the best at your bar. And be sure to consider mixed drinks with spirits as well, because the cost of the mixed drink not only comes from the alcohol, but all other ingredients as well. You can even look at individual products to see which items are your best performers.
Another common question is what is the average liquor cost for bars and restaurants? It's great to work with industry benchmarks, but the average pour cost across the U.S. isn't always helpful. That's because there are unique factors that must be taken into account for every venue.
Pour costs or liquor costs are based on your direct costs and gross margin, but different establishments may have significantly different indirect and/or fixed costs that aren't including in pour costs. Rent in New York City is much higher than rent in rural Nebraska. So two bars with the same pour cost, may have drastically different net profits.
But as a starting point, industry averages can help you find the right path to determine how your bar or restaurants' beverage costs compare, and where you can improve. The industry average for total beverage programs is somewhere between 18 - 24 percent. Below is a breakdown of average pour costs across different drink types.
In the above infographic, we see that different drink types yield different average costs. That's just one reason industry benchmarks shouldn't be used exclusively as a ballast for determining where your beverage cost should land. Another reason, as mentioned earlier, is that pour costs are a measure of margin, not profits. As you can see above, pour costs for wine tend to be much higher than beer. But would you rather sell a table a $200 bottle of wine at a 40% pour cost, or 4 glasses of $8 beer at a 20% pour cost? Obviously you'd make far more in profits doing the former.
Different establishments will have different pour costs. A wine bar is likely to have higher costs than a college bar serving mixed drinks with cheap liquor. So it's important to recognize that while industry average liquor costs can serve as a guide, don't read into them too much.
If you've read this far, you'll have picked up on a major theme of this post: liquor cost plays a big role in your profits. But so far, we've looked at profit from the perspective of a bar's costs, but not necessarily the prices they charge for menu items and bar selections.
A beverage program's gross profit margin is the inverse of their beverage costs. Your 20 percent cost is an 80 percent margin. Which is pretty good. And as it relates to businesses outside of the hospitality industry (especially retail businesses where margins are in the range of 25-50%), an 80 percent gross margin is really high.
And that's why we started this post saying how a bar program is the engine that powers profits.
If you take a holistic approach to restaurant profits, you'll see that its quite costly to run a restaurant.
Two of the major factors affecting restaurants are food and labor costs. And looking at these numbers highlights just how important a successful bar program is.
The average food cost for restaurants can run between 28 to 35 percent, leaving a 72 to 65 percent gross profit margin. About 10 percent higher on average than liquor costs. If you couple that with labor costs, which can run anywhere between 22 percent and 40 percent, then a big chunk of sales goes into staffing and food, resulting in a much lower net profit margin than liquor.
Generally, the labor required to prepare and cook food is much higher than the labor required to pour wine or mix a cocktail, especially because kitchen employees earn hourly rates and don't rely on tips to subsidize income. So the labor impact on food is significant.
Generating the money to staff a restaurant and pay labor puts a lot of responsibility on a bar program, so it's key that liquor costs are low and beverage margins are high.
There are a lot of things to consider when pricing drinks, but there is an easy way to establish a baseline for pricing to hit your target margins.
We'll continue to use an 80 percent gross margin as our goal for these examples.
Let's again use the Belvedere vodka example from above. We found that a 750ml bottle of Belvedere costs $20, and the cost per ounce is 79 cents. If we want to yield 80 percent on all Belvedere vodka sold, then we can use the cost per ounce to determine the price that we should charge. Here's the formula for finding your pricing:
|Cost per Ounce||= Drink Price|
Desired Pour cost
So, we'll do .79 / 0.20 = $3.95
Because we want our Belvedere cost to be 20 percent, which is 1/5 of 100 percent, we want to mark up the menu price 5x to hit our margin. The formula can be re-written as:
Cost per Ounce x Desired Markup = Drink Price
The average industry liquor costs infographic from above shows that different drink types have different average costs, so they also have different average margins. You'll have to find the right margins for different areas of your beverage program that make sense for your bar or restaurant.
Pricing wine has a lot of variation compared to other types of alcohol. From the goldmine of glass pours to markups on bottles, there is a lot to consider when pricing wine. And wine cost is important, both for you and the consumer. A 2015 survey from Wine Business found that 72 percent of customers said price is the most important factor when making wine purchasing decision.
Most wine drinkers have had the experience of seeing a wine they're familiar with in a restaurant menu that costs $45 on the menu but retails for $15 in the local wine shop.
Industry standards for wine bottle markups are generally said to be around 2.5x to 3x the wholesale price a restaurant purchases the wine for. But don't be surprised to find some restaurants with 4x markups on bottles.
While 2.5x and 3x markups on wine bottles seems low compared to pricing spirits, consider the small amount of labor involved with selling and opening a bottle of wine. It's a lot simpler than mixing a 5-ingredient cocktail, and even easier then opening up 2 or 3 beers during the course of a meal.
Also consider that wines generally sell at a higher price than other drink types, so while the gross margin will be lower, the gross profit can still be higher. And in the end, gross profit is almost always more important.
Take for example selling 10 specialty cocktails at $10 each with a margin of 80%. You would end up making a gross profit of 10 x $10 x 80% = $80
Now imagine you sold one bottle of wine for $160 at a margin of 50%. You still end up making the same profit of $80. Except it likely took the server two minutes to find, open and pour the bottle of wine compared to 10 minutes for bartenders to make ten separate drinks. In this case which is better, wine at a 50% margin or cocktails at an 80% margin. Obviously, you want to serve the wine all day.
Premium Wines and Economy Wines
Another element of wine pricing to consider is that the markups you charge on a bottle will be dependent on the cost of the bottle.
A premium wine, one that is more expensive, will probably have a smaller markup than a more affordable wine. This is because, as noted above, profits increase with price even at lower margins. You don't want to price out your guests from premium wines, so having a graduated pricing structure is a good strategy. From a psychological perspective, guests may think it is unfair for you to make the same margin on a premium wine as an economy wine, when the labor going into providing both is relatively the same.
You can even set pricing tiers to assign markups too. For example:
Wine Bottle Markup Pricing Tiers
$0 - $20 = 3.5x Markup
$21-$40 = 3x Markup
$41-$80 = 2.5x Markup
$81 - $150 = 2x Markup
$151+ = 1.5x Markup
A State by State Case
Make sure you're familiar with your state laws regarding wine and liquor, because some states, like Utah, have restrictions on how much a bottle can be marked up.
A wine by the glass program can generate big profits, particularly for restaurants. It's not uncommon for restaurants to charge the wholesale cost of a bottle for a glass of wine. This also reduces the risk of glass pours in general, because if no other customer orders the same wine before the opened bottle needs to be tossed, at least you've recovered your cost on the first purchase opening the bottle.
Glass pours also appeal to a wider audience of people who may not want to commit to a full bottle, either because they don't have the time to consume a bottle, are dining with a non-wine drinker, or maybe they want a glass with lunch but have errands to take care of later. That's why glass pours are crucial for a successful wine program.
When thinking of wine, France and Italy come to mind. But there is a growing wine market with wines being produced around the world.
Looking for high value wines from countries up-and-coming wine production like Argentina, Croatia, or even Spain (whose wine exports are growing) can provide you with great wines for a lower cost per bottle.
Because cost is a big factor in wine consumers buying decisions, you must walk a fine line with wine pricing. That's why finding high value wines from your vendors is important.
Here's an example:
Charging $15 for a glass pour of wine sounds attractive up front. But what if you charged $12 for a glass pour that resulted more sales volume?
Customers are more likely to order two glasses of wine at $12 than they are likely to order a second glass at $15. Especially if the demographics of your restaurant skew towards the late 20s to early 30s crowd. These consumers, millennials, seek a balance between value and experience.
Selling a Spanish Tempranillo at $12 dollars is more attractive to many customers than a $14-$15 glass pour. It's important to try a variety of price points and offer a selection at varying price points and find what works best for your restaurant or bar. In recent years, the price of wines by the glass have been increasing, especially in upscale restaurants where the list may have glass pours as high as $30 or more per glass. Part of this is attributed to the increased popularity of wine preservation systems and devices like the Coravin, where wines stay drinkable longer.
Beer isn't expensive, but it can yield pretty good margins. Especially with draft programs. So it's important to consider how you use your draft and bottle lists.
We saw earlier that draft beer can yield around 80 percent gross margins on average, while bottled beer clocks in slightly lower at around 75 percent.
But that's not the only difference. Draft beers also give you more options in terms of serving size, and make for great drink specials. You also have the advantage of rotating draft options which can keep your beer menu fresh and allow more flexibility with your beer program.
An important thing to consider when pricing beer for your menu is the size of the keg. We listed the different keg sizes above, so you can still do the cost per ounce option to find out what you should be charging for draft options.
Make sure to consider the keg size and yield when pricing options. It's also important to stock different sized glassware for beers. This will give you the flexibility to serve different sizes of beers and price accordingly.
In the U.S. a pint is 16oz. And I'm sure you've seen the 22oz or 24oz glasses served at chain restaurants and airport bars. Or at the other end of the spectrum, your local craft beer bar probably has a few tulip glasses and 10oz. goblets for serving high alcohol stouts. Having different sized beer glasses gives you more control over your pour costs.
The nice thing about bottle, or canned beer, is that it's easy to price. You can find your margins easily, and every bottle is the same.
One advantage that bottled or canned beer has on draft beer is there is less spillage or waste. Draft beer pours can be tricky, with too much head coming out of the tap, an over pour that a careless bartender spills out into the drain before serving, or the last bits of a keg that don't ever make it to a glass. There also isn't the hassle and cost of cleaning and maintaining draft lines.
Bottle beer costs and margins are consistent, which is something of value in the chaos of running a restaurant.
Beer pricing is pretty straightforward. You should be able to say within the 75 to 80 percent margin. But because beer lists tend to be more generic (even with the craft beer explosion) you will want to stay competitively priced with your local competition.
By stopping into other bars and checking out their prices, you can find a good indication of what your customer base expects to pay.
Using the per ounce costing calculation from the previous section you can quickly find out your pricing for the base spirit of your cocktail. But there are other ingredients to consider when pricing cocktails.
If you're making a fresh juice like pineapple juice, you will have to do some testing to see how much juice you get on average from a single pineapple. With fresh produce, there will always be some variance in how much juice each item yields, so an average amount is your best bet.
Account for the cost of each individual item, or the cost of produce purchased in bulk like lemons and apples, and find out your juice cost in the same manner you find out your liquor cost.
For example, if 8 pineapples yield 2 quarts of pineapple juice, and each pineapple costs $1.00, then 2 quarts, or 64 oz. of pineapple juice costs you $8.00.
So, use the liquor cost formula from above and take 8 / 64 = .125, or 12.5 cents per ounce of juice.
Say you use 1 oz. of pineapple juice in your cocktail, then you would add 12.5 cents to the pour cost of your cocktail. Still pretty simple, right?
Your customers are definitely an ingredient in your bar or restaurant's success. Understanding what your customer base is willing to pay for a drink will help guide the types of cocktails you put on your menu. If your bar caters to the beer and shot crowd, then a $12.00 cocktail might be laughed at.
Shooting for a 20 percent pour cost is a pretty safe bet. But some cocktails are more expensive to make than others, and applying a 20 percent cost to those cocktails might make them too expensive for your customers to purchase. It's important to take this into account when pricing high-end cocktails.
For these cocktails, a higher pour cost in the 30 percent range can be acceptable. Influential bartender and blogger Jeffrey Morganthaler referred to these cocktails as loss leaders in a blog on pour costs.
This is a good way to think about it, and it means that a cocktail sold at a higher-than-average pour cost can be balanced by another cocktail sold at lower pour cost.
A complex cocktail is a good way to tell customers that they can come to your bar to try something new and exciting. It boosts the appeal of your bar, without hurting your bottom line too much.
Conversely, the complexity of a cocktail may also impact the time and skill needed to make it. A vodka soda can be made in 15 seconds (allowing you to make 240 of them in an hour). A six ingredient specialty cocktail may take two minutes to make (allowing you to make only 30 of them in an hour). Should both drinks have the same pour cost? Arguably no, because if your drinks take longer to make, you need more labor to serve your customers.
Menu engineering promotes the idea of not strictly relying on margins like pour cost to price and build your menu. It argues that there are other factors to take into consideration when pricing drinks or food, and a successful menu should take other variables into account.
Spirits, like draft beer, maintain some of the lower liquor costs out of any alcoholic beverage segment. The benefit of spirits over draft beer is that they often sell at a higher dollar value so you benefit from the combination of large margins and high price points.
Industry liquor cost standard for spirits is 18% – 20%.
High volume in spirits is one of the reasons that night clubs can generate some of the highest profits in the hospitality industry. That and features like bottle service, for which night clubs can sell liquor bottles with mark ups of 200% or more!
With spirits like whiskey or vodka, most drinkers will order them in cocktails or mixed drinks. Or even if they drink the spirits alone, they might call for rocks or ask for a double. All of these factors can changing the servings of spirits in a drink and the pour cost for making that drinks.
For example, if someone orders whiskey on the rocks, you'll want to adjust your portion and pricing. Standard pour size for a rocks pour is usually an additional .5oz up from the normal volume served for a neat pour of a spirit. So if your normal neat pour is 1.5oz., your rocks would be 2oz. Make sure to account for this with a modifier button in your point-of-sale system with an up charge associated with it.
Make sure you charge appropriately for spirit modifiers that change pour size of a drink.
Outside of your costs to purchase liquor and other alcohol, there are a good number of factors that can impact your costs and profit margins. Liquor costs generally only consider direct costs, not your fixed costs, which vary wildly from establishment to establishment. Remember to consider your bar or restaurant in a holistic way to find out how you should price your drinks to assure profitability for your bar program and restaurant.
Real Estate Costs
The rent on your venue is one of the biggest factors to impact your net profits. An area with competitive property costs, ie., areas that are more expensive like major cities and densely populated areas will have to adjust their pricing philosophy to match the cost of real estate.
It's no secret that the food scene across the United States has matured significantly. From sourcing local and high quality ingredients to more complex dishes, the cost of food production has risen in restaurants. For bars with simple menus or taverns that only serve alcohol, food costs profits aren't as impactful on profits as they are for restaurants looking to land high profile chefs or awards like Michelin stars or James Beard nominations.
Smaller restaurants that can manage with smaller staffs will have much lower labor costs than larger restaurants, or even fine dining restaurants that require larger staffs to meet the expectations of world class service. Consider the staffing needs for your restaurants when considering the profit margins you aim for.
It's important to track waste and consider where you're losing money on liquor. Whether it's poor staff training that results in spillage, or complimentary drinks to make up for bad service, make sure you account for the loss of product, especially in the kitchen. But even in the bar, employees that drink on the job or give out free drinks to friends have a negative impact on the bottom line of a business. Minimizing waste ensures you get the right returns on purchases.