For many bars, liquor cost is the primary metric used to evaluate performance. Unfortunately, liquor cost isn’t a very useful tool for assessing performance, and this is oneof the main reasons why 15-20% shrinkage is the normin the bar industry.
The main problem with liquor cost as a metric is that it’s not granular. When you calculate liquor cost, you’re essentially lumping the performance of many different products into a single figure, making it difficult to determine the actual performance of each individual product. When you’re unable to identify which products are underperforming, it’s virtually impossible to take the necessary steps to reduce shrinkage, lower your liquor costs, and improve your profitability.
You shouldn’t be happy with 15-20% shrinkage at your bar. If this is your consistent level of performance, you’re throwing money away for no reason, especially when it’s relatively easy to significantly reduce this figure by creating greater accountability using a more sophisticated liquor inventory system that compares what was rung in to what was actually poured.
Combat Shrinkage with Greater Accountability
There are powerful forces at work which keep shrinkage levels relatively high in many bars:
- Desire to please – Bars are a customer service environment, and this creates a situation where your bartenders often pour heavy drinks in an attempt to make their customers happy. While this may be great for your customers, it’s bad for business.
- Customer encouragement – Customers like getting strong cocktails and free drinks, so there’s an implicit encouragement from the customer that compels your bar staff to engage in actions that contribute to shrinkage.
- Tipping effect – Free drinks and heavy pours typically lead to better tips, which make your bartenders more money. The ability to boost tips has a very powerful effect on the behaviors and actions of many bartenders.
- Lack of feedback – Most bars aren’t measuring the average portion size of drinks and whether pours are being made correctly.
All of these factors contribute to the industry norm of 15-20% shrinkage. However, you can combat these forces with greater accountability.
Accountability refers to the act of precisely comparing what was sold vs. what was poured in order to measure loss on every product. For example, if you sold 80 bottles of Budweiser but actually served 100 bottles to your customers, your accountability score would be 80%. This score reflects the fact that you’re missing 20 bottles (or 20% of what was sold).
You can determine an accountability score for all products served at your bar – bottled beer, draft beer, liquor, and wine – in the same manner. The score for each product represents the number sold per 100 served.
When you use Bar-i’s full service liquor inventory system or our Speed Count Pro system, we’ll provide you with a detailed report every inventory period that contains:
- Accountability scores for every product served at your bar
- An overall accountability score representing the aggregate of each individual accountability score
This data will help you identify which products are being over-poured and/or given way so that you can make the necessary changes to reduce shrinkage and maximize profitability.
Difference between Actual Liquor Cost and Achievable Liquor Cost
If you’re not using a sophisticated liquor inventory system that tracks the performance of every product at your bar, your actual liquor cost is most likely significantly higher than your achievable liquor cost. Achievable liquor cost is defined as what YOUR liquor cost would be with no missing product (in other words, with 100% accountability).
The reason achievable liquor cost is defined as YOUR liquor cost is because it factors in a variety of elements that are specific to your bar, including:
- Purchase price
- Price you charge customers for drinks
- Product mix
- Promotions and specials
Achievable liquor cost considers all of the factors listed above to determine what your liquor cost would be with no shrinkage. This is critical information that most bar owners don’t have. It’s the ideal situation that you should always strive for.
In many ways, achievable liquor cost debunks the common assertion held by many bar owners that “My liquor cost is in line.” Unless you know what your achievable liquor cost is, you don’t know if your liquor cost is in line. If you’re only calculating your actual liquor cost every inventory period, you won’t have this information.
How is Liquor Cost Related to Accountability?
Based on our experience working with hundreds of bars in 8 different states, we’ve noticed a consistent trend regarding the relationship between liquor cost and accountability:
5% accountability = 1% on your liquor cost
The average bar we work with typically starts out with an 80% accountability score (in other words, 20% shrinkage). If every 5% of product that is missing equates to a 1% boost in your liquor cost, it means that your actual liquor cost 4% higher than it should be if you were to reach your achievable liquor cost.
Why should I Care about Accountability Scores and Achievable Liquor Cost?
Right about now, you may be thinking, “I didn’t sign up for a math lesson. Why should a really care about all this mumbo jumbo?”
The reason you should care about all of this is because you can make more money if you track your bar’s performance in order to improve accountability and lower your liquor cost. And ultimately, the goal of owning a bar is to make money.
If you’ve been using liquor cost as your primary performance metric, your accountability score is almost certainly below 90%, and it’s most likely in the 80-85% range. Let’s be realistic and shoot for 95% accountability since a small degree of shrinkage is always likely to occur. But 95% is a reasonable goal that you should consistently be able to achieve if you’re carefully tracking the performance of your bar.
Increasing accountability from 80% to 95% will lower your liquor cost by 3%. A bar with modest sales of $40,000/month will save $1,200 a month in purchase costs for liquor products. If you’re using Bar-i’s Speed Count Pro, our least expensive inventory service that provides accountability data, you’ll spend $300/month on the service. This would yield a 400% ROI every month, and this is factoring in modest bar sales.
If you own a high volume bar that does well over $40,000 in sales per month, you’ll save even more money for a minimal monetary investment that will simultaneously simplify and streamline your bar inventory process.
As a bar owner, you should certainly care about putting an additional $900 or more in your pocket every month, especially if it required minimal effort on your part to save this money.
If you would like to learn more about how our bar inventory services can streamline your operations and maximize your profits, please contact Bar-i today to schedule a free consultation. We serve clients nationwide from our offices in Denver, Colorado.