Average Liquor Cost (Part 2)

This is my second post on the subject of average liquor cost for bars. The first post made some attempt to nail down what the average liquor cost is for various bars depending on the type of establishment. Overall I argued that the whole concept of average liquor cost is somewhat of an oversimplification since so many factor affect a bar’s liquor cost. Rather than aiming at an industry average liquor cost, I think bars should be trying to actively manage all the factors that affect their liquor cost and find a balance between driving volume through good value and making a good margin of their bar sales. Trying to do that is much smarter than trying to beat an average!Many times when I speak with bar owners and managers they comment that they are overall satisfied with where their liquor costs are. Many times those liquor costs are in the low twenties or even the high teens (liquor costs in the range of 19-22% seem common). Yesterday I completed a liquor inventory audit for a client who has been using our liquor inventory system for over year. The bar has a prime location and serves a fantastic and relatively high end menu. Amongst the local bars I’d certainly say it’s one of the cooler places with a more modern and minimalist vibe than many bars in Colorado. When I completed the audit and checked their overall liquor cost I noted that their overall liquor cost was 14.7% (I must clarify that this didn’t include the wines which they only sell by the bottle so it was draft, bottles, liquor and wines by the glass). What does this incredibly low liquor cost tell us about average liquor cost at bars? Again I’d say it simply says that aiming at an average is limiting. I completed another liquor inventory audit today and the bar was running a 24% overall liquor cost. This is on the higher end of what most of our clients have however this bar is very successful and easily exceeds $100,000 in liquor sales each month.

My overall point is that aiming at a particular average liquor cost is too simple of a strategy. Both of these bars are successful and while their liquor costs are very different, what they have in common is that they have carefully designed a business offering around their unique locations and clientele. The second bar is in a more price sensitive market where you can buy $2 draft beers all day everyday. While they haven’t fallen into the trap of simply trying to compete on price, they have targeted their offering according to a shrewd assessment of their audience. They offer an overall experience that people are willing to pay a little more for. The first bar is in a prime location in a town which has many visitors with plenty of money to spend. While $10 specialty cocktails aren’t for everyone, bar number one is in a location where there is an audience that appreciates the finer things. The fact that they are able to add value to their product through inventive mixology is ultimately how they can run such a low liquor cost. Another important factor in common at both of these bars is using a liquor inventory system which allows them to precisely track the performance of individual products. In both cases implementing an effective liquor inventory system has contributed by reducing their inventory shrinkage down to a few percentage points.