Most bars are using two main metrics to evaluate their performance: sales volume and liquor cost. Sales volume tells you how many dollars are generated per week by sales behind your bar, and it’s the most fundamental performance metric used by bar owners. However, this metric doesn’t provide you with any information about your margin. In order to determine your margin, you also need to know your liquor cost.
As a result, liquor cost is the next most important performance metric for bars, running closely behind sales volume. Together, these two metrics tell you how much money you’re making (your bar’s gross profit). While liquor cost may seem like a basic metric, it’s actually much more nucanced than you might think once you dig into it....
Of course there are other ingredients/elements that impact the cost of the drinks you produce, including:
However, these items are typically not included in liquor cost calculations since they typically only increase the overall cost of the drink by a small amount. Typically we focus on the cost of the alcohol used to make the drink when we figure out the liquor cost.
Another way to view liquor cost is that it’s the opposite of profit margin. For example, if you spend 20 cents making a drink and sell it for a dollar, your profit margin is 80 cents. The opposite side of this equation (20 cents) is your liquor cost, which is typically calculated as a percentage revenue (in this example, 20%).
It's worth noting also that Liquor cost can be calculated on the product level (i.e. the liquor cost for Bud drafts sold at your bar) as well as on the category level (i.e. the liquor cost for all draft beer products sold at your bar).
There is a pretty wide range for the liquor costs calculated at different bars. It can be as low as 10%. This type of figure is most commonly found at high end clubs and other establishments that are able to sell products at a price point which yields a large profit margin.
But in general, most bars in the industry operate with a liquor cost in the 18-25% range. The actual value of your bar’s liquor cost will be based on a variety of factors specific to your bar. However, with rare exceptions you should be a bit concerned if your liquor cost consistently runs above 25%.
$1 ÷ $5 = .2
However, this calculation is also impacted by a variety of other factors which affect these numbers in the real World. These factors include:
There are essentially 3 different liquor cost figures that you can calculate:
Each of these figures is telling you something entirely different, and it’s important to understand the differences in order to accurately evaluate the performance of your bar.
Theoretical liquor cost is the simplest figure because it doesn’t include the effect of the real world factors listed above (tax, comping, shrinkage, etc.). Instead, this figure is just your bar’s purchase cost of one serving divided by the retail price of that serving. The 20% liquor cost for a bottle of Budweiser calculated in the example above is a great illustration of a theoretical liquor cost.
The main problem with theoretical liquor cost is that it doesn’t account for real world factors which impact this figure. As a result, your actual liquor cost will never be the same as your theoretical liquor cost.
However, this figure is useful in situations where theoretical calculations are needed, such as when you are setting your price point for the products you sell to your customers.
Actual liquor cost accounts for the real world issues listed above which prevent you from making the full profit possible off of every drink served (your theoretical liquor cost). This is the figure that most people arrive at when they calculate the liquor cost for the bar.
The value in calculating actual liquor cost is that this figure is based on the realization that tax is always applied to the cost of a drink and that discounting is a necessary cost of doing business. Therefore, it provides more of a real-life assessment of your bar’s performance.
However, there is a problem with relying solely on actual liquor cost. It becomes very easy to accept this figure as what can be achieved and lose track of the actual value that can be obtained when your bar’s accountability is at optimal levels. Therefore, if you’re only looking at your actual liquor cost, it can be difficult to determine whether your bar’s liquor cost is as low as it can possibly be.
If you take away all of the factors that can’t be controlled (tax, product mix, comping, Happy Hour discounts, etc.) and focus on the effect of missing products, then you can determine what your liquor cost would be in a situation where you had 100% accountability and weren’t missing any product. We call this figure your achievable liquor cost.
The achievable liquor cost figure is unique to Bar-i and other sophisticated inventory services. It’s imperative that you use a sophisticated liquor inventory system when calculating achievable liquor cost because you’re trying to identify what your liquor cost would be if you didn’t waste a single drop of alcohol. To do this, you need to know the exact way every drink was made so that you can determine precisely how many ounces of liquor should have been used in each drink served. This is a much more complicated figure to calculate as it requires having a precise recipe for every button in your POS system.
The primary advantage of calculating your achievable liquor cost is that it factors in bar-specific elements such as tax, product mix, comping and other discounts, but it backs out the effect of the one item you can control – shrinkage. It’s the 100% accountability equivalent that tells you where your liquor cost could be.
If everything poured by your bartenders was rung into the system and charged to customers, you would have 100% accountability. This scenario would allow you to reach your achievable liquor cost.
There are several other benefits associated with calculating your achievable liquor cost:
If you want to identify a realistic liquor cost target to aim for based on the unique specifics of your bar (an accurate achievable liquor cost), you’ll need to use an inventory system that provides down to the serving accuracy. This is the only way you’ll be able to generate the actionable data necessary to maximize your bar’s performance and profitability.
To learn more about how Bar-i can help you maximize profits and improve your bar’s performance, please contact us today to schedule your free consultation. We serve clients nationwide from our offices in Denver, Colorado.