Keeping a finger on your bar’s financial pulse is best accomplished through analyzing your cost percentages, or what in bar jargon is referred to as pour cost. It accurately reflects the direct relationship between cost of goods and gross profit margin. Because liquor, beer, wine and non-alcohol beverages sell at substantially different cost percentages, each category must be calculated separately for the process to have significance; the method of deriving pour cost percentage is the same for all four types of products. Perhaps the single constant in the business is that every beverage operator would like to see his or her pour cost lower.
Pour cost is derived by dividing the cost of depleted inventory (cost of goods sold) by the gross sales generated over a given period of time. A liquor pour cost of 18.3%, for example, means that it cost a little more than 18 cents to generate $1 of liquor sales. It also means that the gross profit margin is 81.7%, or just less than 82 cents per $1 of sales. Liquor pour cost is inversely proportional to gross profit margin, meaning for every percentage point liquor pour cost decreases, gross profit margin increases by the same amount.
How often you calculate your bar’s pour cost is an important decision. Some establishments take physical inventories and formulate pour cost daily. Others do so on a weekly, biweekly or monthly basis. The shorter the amount of time between physical audits, the more insight you’ll receive into your business. The higher the operation’s sales volume, the more frequently you should incorporate physical audits. The sooner a problem is uncovered, the sooner it can be dealt with.
Knowing your bar’s cost percentages, however, is only half of the information you’ll need to make informed decisions. The direction pour cost is heading is as important as the actual percentage itself. A pour cost of 18.3% could be cause for elation or alarm depending on its relationship to the bar’s previous performance.
Large fluctuations in pour-cost percentage signal trouble. A swing of one or two points in either direction should trip an alarm. Costs typically shouldn’t deviate more than a point between inventory periods. However, when pour cost increases, an attempt should be made to determine why.
Unless your bar has attained peak performance and efficiency, there’s always room for improvement. Determine what your optimum pour costs should be. Use those as your target percentages, and don’t be content until you hit your mark. The result will be a more profitable operation.
While it’s natural to want to see your bar’s cost percentages as low as possible, there is a point where cost percentages are too low. In other words, a liquor pour cost in the low teens suggests that prices are too high, serving portions are too small, or both. In either case there’s little value for the clientele.
Troubleshooting a Rising Pour Cost
As pour cost increases, profit margins decrease. Rectifying the situation depends on finding the sources of the problem. The following eight items are factors that cause pour costs to rise. No one factor is more or less likely to occur, so it is best to overlook nothing and rely on the process of elimination.
1) Physical inventory inaccuracies. Errors in the physical inventory process will provide misleading results. Common mistakes include: inaccurate audits, overlooked products not being included in the audit, arithmetic errors, understated liquor inventory wholesale costs and inaccurate/understated liquor sales figures. Any error that creates an understated ending inventory figure — making accounting logs appear as if more inventory was depleted than actually occurred — will increase pour cost.
2) Lagging sales prices. Rising wholesale costs will push pour cost steadily upward. At some point, rising costs will necessitate higher drink prices.
3) Poor ordering and receiving procedures. Poor ordering and receiving procedures can drive up pour cost. Inattentive practices include not carefully inspecting liquor shipments or accepting products in the wrong quantity, package size or price.
4) Shift in sales mix percentage. A significant shift in your sales mix percentages can cause pour cost to increase. If premium liquors begin selling at a disproportionate rate relative to the well liquor, pour cost will increase. With few exceptions, premium and super-premium liquor sell at a much higher cost percentage than do well brands. It should be noted that while premium and super-premium liquors may sell at higher cost percentages, they also generate higher profits.
5) Promotional discounting. Certain promotions and special drink offers, such as “two-for-ones” or serving double shots at regular prices during happy hour, double the pour cost for each drink served during the promotion.
6) Drink portioning. Over-pouring drinks also negatively affects pour cost. Increasing a drink’s liquor portion from 1¼ to 1¾ ounces raises its cost and alcohol potency by 40%.
7) Unrecorded spillage, transfers and complimentary drinks. Unrecorded spillage, transfers and complimentary drinks will make a beverage operation appear less efficient and profitable. Each results in inventory being depleted without an offsetting sale, which if not accounted for will cause pour cost to increase.
8) Employee theft. Internal theft — practices such as selling unrecorded drinks, undercharging for drinks and giving away free drinks — will cause pour cost to increase dramatically.
When faced with a rising pour cost, which is the better approach to reverse the situation: try to lower costs or increase sales? In a perfect world, the answer would be both. In reality, the most effective approach is to concentrate on costs before devoting efforts to boosting sales.