Liquor cost management is an important factor impacting the profitability of your bar. If you are able to reduce your liquor cost, you will improve your profit margin on the drinks you sell. Therefore, it is in your best interests to engage in some form of liquor cost management in order to determine the ideal level that will maximize your profits.
There are many different elements which impact your liquor cost, including:
• Purchase price
• Product mix
Effective liquor cost management requires you to optimize each of these elements. But in order to do that, you must first understand how these elements affect your liquor cost.
The price you charge for each drink will significantly impact your liquor cost. The higher the price of each drink, the lower your liquor cost. If your goal is simply to have the lowest possible liquor cost, then charging more for each drink would be a good way to achieve your desired outcome. However, your ultimate goal should be to maximize your profits, not have the lowest possible liquor cost. In order to achieve this goal, you will need to make strategic decisions regarding your pricing.
It is important to understand the tradeoff between margin and volume. Having higher priced drinks may lower your liquor cost, but it may also drive customers to more affordably-priced bars in town. A really low liquor cost doesn’t do you much good if you aren’t selling many drinks. By lowering your prices, you are more likely to increase your sales volume. Your goal is to determine the right price point to balance sales volume and liquor cost in order to maximize profitability. This is an example where managing your profits requires a more holistic approach than simple liquor cost management.
In general, you have limited control over your purchase price since it is set by your liquor distributors. However, this does not mean you should ignore purchase price. Always be on the lookout for case discounts which may lower your purchase price. In addition, if you can negotiate a better price with your liquor reps, you will save money on the products you sell. These tricks can help you lower your purchase price, ultimately reducing your liquor cost. Remember that effective liquor cost management requires trying to maximize each separate component.
The portion size you give your customers will significantly impact your liquor cost. For example, using a 1.25 oz. pour size instead of a 1.5 oz. pour size will result in 1/6 less liquor in each drink. This will make your liquor cost 1/6 lower.
Either of these pour sizes is perfectly fine to use as your standard. But as with pricing, you must make a conscious, strategic decision about which size will best maximize your profits.
Promotions such as Happy Hour deals, drink specials, or giving away free drinks can be a great way to attract customers to your bar. Just keep in mind that these discounts will raise your liquor cost. As with pricing and portioning, you must make strategic decisions with your promotions to ensure they help improve the profitability of your bar.
It is best to choose promotions that will bring new business to your bar instead of ones that simply offer existing customers cheaper drinks. Promotions that attract new customers will increase your sales volume and therefore your profits, while ones that fail to bring in new business will simply increase your liquor cost without boosting profits.
The term product mix refers to the different categories of products offered at your bar. These can include:
• Bottled beer
• Draft beer
Your liquor cost is a blended average of the costs of all the different products sold within a given category. For example, Coors often has a lower cost than Sierra Nevada. Therefore, if you sell more Sierra Nevada than Coors one week, your liquor cost will be higher than if you sold more Coors than Sierra Nevada.
Shrinkage refers to the amount of product that gets wasted or given away. It can have a significant impact on your liquor cost. If you are over-pouring drinks, wasting beer, or giving away a large number of drinks to customers, you are not hitting your intended cost goals for these drinks. Therefore, it is important to take steps to minimize shrinkage at your bar as much as possible. This element of liquor cost management is often overlooked despite the fact it can have very significant impact on your profits.
In the next blog, we will discuss ways in which you can use these elements to improve your liquor cost management.
For tips on how to streamline your processes or to schedule a free consultation, please contact Bar-i today or call 303-219-0916. We provide services to bars nationwide from our offices in Denver, Colorado.